GM Faces More Tests After Documents Show Culture of Denial

Apr 14, 2014 4:51 pm ET

(Updates with closing share price in fifth paragraph. For more on the small-car recalls, see TOP EXT9 <GO>.)

April 14 (Bloomberg) -- The hundreds of pages of documents released by lawmakers last week shed new light on General Motors Co.’s more than decade-long failure to respond to auto-safety complaints, underscoring the struggle ahead for Chief Executive Officer Mary Barra as she seeks to refocus on the company’s new fleet of cars.

The CEO, who has spent most of her three months as the first female leader of a major automaker dealing with fallout from the recall, still awaits two key internal reports that will examine how to compensate victims and assess blame. On April 24, Barra may report GM’s first quarterly loss in four years as the Detroit-based company absorbs the cost to recall almost 7 million cars and trucks worldwide for several defects.

“The question people are starting to ask, reasonably, is will she ever be seen as anyone but the CEO who was in charge of a GM saddled with problems and fatalities, even though the company she took over at the time was really about the best it’s ever been.” Karl Brauer, a senior analyst at car information company Kelley Blue Book, said in an interview. “That’s really the most unfortunate thing for her, she’s going to be so tied to this circumstance.”

Barra’s ability to lead the automaker out of the recall morass, which has already cut profit by $1.3 billion, will be predicated on the GM lifer remaining above the fray and inculpable for the practices she’s trying to root out and eliminate. Since President Barack Obama ousted then GM CEO Rick Wagoner in 2009 and guided it through a $50-billion bankruptcy, the new leadership has stressed the automaker’s break with the past culture.

Stock Drop

The company’s shares rose 1.9 percent to $32.55 at the close in New York. The shares have dropped 8.5 percent since Feb. 12, the day before the first recall was announced and fell about 4 percent on April 11 as the documents were released and reports highlighted Barra receiving an e-mail about a separate safety investigation.

Friday’s decline was the biggest drop since March 11, when Bloomberg News first reported that the U.S. Justice Department was investigating the recall. Standard & Poor’s Corp. said April 10 that recall costs made it more likely that GM’s credit ratings would be raised in 2015 instead of this year.

Joseph C. Amaturo, a New York-based analyst with Buckingham Research Group, today maintained his buy rating on the automaker’s shares, as well as his earnings estimates for next year.

Analyst’s Optimism

“Our estimates for 2015 remain unchanged on the assumption that the recall-related charges are not likely to recur,” he wrote in an investor note.

Amaturo is forecasting $5.20 a share for GM in 2015, according to data compiled by Bloomberg. That compares with an average estimate of $4.77 from 15 analysts, according to the data.

GM said separately today it is looking for a new head of communications after announcing that Selim Bingol is leaving the company to pursue other options. John Quattrone is replacing Melissa Howell as the company’s head of human resources, GM also said.

The most damaging e-mail for Barra among the documents released by Congress on April 11 may turn out to be a July 2013 correspondence to GM’s top safety executives from Frank Borris, the head of the U.S. National Highway Traffic Safety Administration’s Office of Defects Investigation. GM is “slow to communicate, slow to act, and, at times, requires additional effort of ODI that we do not feel is necessary with some of your peers,” he wrote.

Rapid Reaction

The note got a rapid reaction from senior GM executives, including Mike Robinson, vice president of sustainability and global regulatory affairs.

“This note from NHTSA, both the content and the tone, comes like a bolt out of the blue,” Robinson said.“We need to address this immediately and I would like to discuss. We worked way too hard to earn a reputation as the best, and we are not going to let this slide.”

The communication from Borris came four years after GM began remaking its corporate culture and six months before Barra took over.

“It really focuses on the endemic problem of the company and the way the company has been managed,” Maryann Keller, a veteran auto analyst who has written two books on GM, said in a telephone interview. “It puts even more onus on Mary Barra and whoever she selects as her team to transform this company because otherwise it’s just going to careen from one crisis to another.”

Decades of Culture

Dan Akerson, Barra’s predecessor, had complained that in some ways GM’s quick trip through bankruptcy wasn’t long enough to make all of the culture change that GM needed.

“To correct systemic issues that permeated the company for 10 years, 20 years and 30 years, it’s taken awhile to do that,” Akerson told analysts and investors in June.

Barra, who took the helm on Jan. 15 as the fourth CEO since bankruptcy, already testified before House and Senate committees April 1 and April 2. Upcoming for Barra is a review by lawyer Kenneth Feinberg, who determined compensation for survivors of the 9/11 and Boston Marathon terrorist attacks, on what GM should do for victims of the crashes. The automaker is currently shielded from paying claims for accidents prior to July 2009 as part of its bankruptcy terms.

She’s also been asked to return to Congress to discuss the results of an internal GM report on who knew what and when by Jenner & Block LLC Chairman Anton Valukas, the former U.S. prosecutor. He also studied the causes of the 2008 bankruptcy of Lehman Brothers Holdings Inc., which kicked off the global financial crisis. Barra told the Senate committee on April 2 that it might be 45 to 60 days before the report is complete.

Repairs Begin

The automaker has said it’s starting to get parts to dealerships to fix the recalled vehicles and the success of that effort will be another key measurement for Barra’s leadership, said Kelley’s Brauer. That recall may take as long as eight months to complete and GM has to hope it has no major “hiccups” that keep it on the front pages, he said.

It’s also likely Barra will be answering questions about the recall this week at the New York auto show, rather than talking about a new Corvette and other great models they will introduce, Brauer said.

“You have to wonder if they’ll be able to get their product message out,” he said.

GM has said it plans 15 new or refreshed vehicles in the U.S. this year and 19 in China.

Congress, federal regulators and the U.S. Justice Department are all investigating why it took GM more than a decade to recall 2.59 million cars with faulty ignition switches that allowed the key to fall out of the “on” position, shutting off the engine and disabling air bags.

Slow Reaction

Barra, who has said GM failed to act quickly enough and apologized for the deaths, has suspended two engineers identified in the documents as contributing to the delay of the recall. She’s also appointed the first vice president of global vehicle safety and pledged to get higher-level executives involved in the recall process, sooner.

GM has said it first detected the flaw in 2001 in a Saturn Ion and considered it fixed. The company said the flaw re- emerged in Saturn models and the 2005 Cobalt and it considered and rejected several fixes. The National Highway Traffic Safety Administration first asked GM in 2007 about problems with the switch that was finally recalled in February, according to the documents.

Barra has to be ready for a marathon crisis and shouldn’t expect any relief, soon, said Davia Temin of Temin & Co., a crisis-management firm in New York.

“What the CEO has to learn in a crisis of this magnitude is that it just keeps on coming, barrage after barrage,” she said. “The best analogy is probably to war. People do win wars, but they also get battle fatigue.”

--With assistance from Jeff Plungis in Washington.