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General Motors – A Question of Leadership

April 17, 2014
Investing, Investments
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Full disclosure, I wrote favorably about the longer-term outlook for General Motors shares just a few months ago, here. That was in January, with shares trading at just over $41.

Since then, they’ve taken a bath. As of close of business on April 11, GM shares were trading at $31.93 – a loss of 21 percent year-to-date – buffeted by the twin gales of falling equity prices across the board and a string of nasty recalls that put a crimp on earnings projections for the quarter and for the year. Recalls of faulty ignition switches that killed perhaps 13 people could cost the company about $1.3 billion.

The current optics are bad, too. It’s never good for a company to see its CEO on camera testifying before a Congressional committee at a table with green tablecloths and a pitcher of water. That’s precisely the image the public had of the GM brand last week, as CEO Mary Barra took her turn sitting on the Capitol Grill, dissembling and doing the “I was not aware” routine (while the late night comics pointed and laughed.)

It was one of the greatest moments in Ford history.

Financial speed bump

Fitch ratings upheld GM’s BB+ debt rating, late Friday. “We believe the company’s cash flow and cash position will allow it to meet these challenges,” Fitch said in a statement. Meanwhile, GM shares can be snapped up near their lowest prices in a year.

Overall, the 1.3 billion estimated recall costs are a tiny fraction of GM’s overall available cash reserves: About $19 billion. Most of that reserve was in cash and cash equivalents. So financially speaking, this is little more than a speed bump for the manufacturing giant.

Morally speaking, however, it’s a stickier situation. What’s at stake is the integrity of the GM senior management, and especially Mary Barra – the insider and engineering veteran elevated to GM’s top slot.

Congressional investigators have been leaking documents that tend to undercut the public testimony of GM senior engineers and managers. The key now is to what extent GM’s management and board is willing to hold its people accountable – a set of people that could well include the embattled CEO.

Writing in Autoblog, Pete Bigelow reports that emails released by Congressional sources show that Mary Barra may have been aware of issues regarding power steering and ignition switches as early as 2011 – though that would still be well after the problem was first becoming apparent in the field, back in 2001. Unfortunately, it also contradicts sworn testimony she gave before Congress this week – that she did not know about the ignition switch problem until January of this year.

Bloomberg News is describing the situation at GM as “a culture of denial.” If there is any truth to that statement, Mary Barra (promoted from the ranks as the first female head of a major car company,) is likely to be seen as a product of that culture and a participant in it.

Investigators ran into stonewalling

To its credit, GM management ordered an internal investigation into the engineering problems. However, the investigation was assigned to a relatively junior engineer – Brian Stouffer, who didn’t have the managerial heat and gravitas to smash through a wave of resistance. Stouffer apparently didn’t get the backing he needed from the top, for whatever reason.

It wasn’t just internal investigators who ran into stonewalling: Federal safety investigators were also frustrated with GM’s chronic intransigence, finally firing off an email to Carmen Benavides, the GM Director of Product Investigations, saying, “The general perception is that GM is slow to communicate, slow to act,”

“Several prominent Democrats are calling on the Attorney General to go after GM for a criminal cover-up. This isn’t an ordinary recall.”

GM does have a layer of liability protection – at least with regard to financial responsibility for deaths and injuries prior to the reorganization and bankruptcy of 2009. When the bankruptcy occurred, the “new” GM was relieved of much of its liability toward creditors of the “old” GM. That’s how bankruptcy works, in theory.

But the five Democrats are raising an argument that because of the cover-up, the court was never briefed on the potential liability arising from the faulty ignitions. The argument is that excluding the potential liability from the settlement consisted of a fraud on the bankruptcy court. If the legal reasoning is upheld (and there is precedent for it,) some provisions of the bankruptcy could be voided, and the liability protections of bankruptcy pierced.

I regard that issue, if limited to the current recall in question, as relatively minor. GM has the liquidity and financial capacity to deal with the problem easily, from a cash flow standpoint.

A test of managerial integrity

The much bigger issue is the integrity of the management and the internal culture of the company – which is extremely difficult for any longtime insider, such as Barra, to turn around.

So far, the company has thrown two engineers under the bus. The guy who led the investigation that got nowhere retired after 29 years – still a low-level engineer. They should have sent someone with some rank after the problem, but didn’t. They didn’t take it seriously, internally. Until there is some more accountability on the part of GM (and I’m not talking throwing a couple of engineers to the wolves,) it’s an executive problem at this point. I currently don’t have much confidence in GM’s new CEO. I can tell when a leader is taking the bull by the horns, and when they are trying to dodge and dissemble. This smells like dodging and dissembling.

I believe it is potentially a compelling value, but I don’t trust the people in charge at the moment. They need a Lee Iacocca or General Patton. Instead, they are getting a mediocre performance that you would expect of a technocrat department manager – not the leader and standard bearer and Chief Ethical Officer for the company, which is the CEO’s job.

It even spells it out, in case it’s not entirely clear.

It’s very simple, but the simplest things are often very difficult for fallible and imperfect people to do. If it were easy, everyone would be doing it.

So far, we’re not seeing it from Barra and the rest of the GM executive team, but GM is big enough (and can compensate enough) to get the very best. GM shareholders should insist on better.