The Exchange

What GM must do to avoid Toyota’s legal stumbles

The Exchange

Out with the old, in with the new.

Just as the government is wrapping up four years of litigation with Toyota, it’s embarking on a similar tussle with General Motors (GM). The Toyota litigation stems from a series of recalls that began in 2009, on account of sticky gas pedals and unsecured floor mats that led to unintended acceleration in several models, and at least five deaths. In addition to the costly recalls, the Justice Dept. mounted a criminal inquiry focused on Toyota withholding safety data from regulators. Toyota has now agreed to settle those charges for $1.2 billion, ending the criminal probe but not private lawsuits against the company.

General Motors is now where Toyota was in 2009. It has recalled 1.6 million vehicles from model years 2003 to 2007 because of faulty ignition switches that have been linked to 12 fatalities in 31 crashes, and an unknown number of injuries. GM knew of the problem as early as 2001, yet went 13 years before initiating a recall. GM CEO Mary Barra, on the job since January, said she only learned of the problem this year, and promptly ordered the recall. But that doesn’t absolve GM of criminal liability or other types of charges, which it may ultimately face.

Under Barra, GM has been more forthright about safety problems than Toyota was back in 2009. But GM could still end up embroiled in litigation for years — and it’s in a weaker position than Toyota was in 2009, making a proper handling of the crisis even more important for GM. Toyota was one of the auto industry’s strongest brands when controversy struck in 2009, which cushioned the impact of bad publicity. GM, by contrast, is still rebuilding its image after declaring bankruptcy in 2009 and accepting a deeply unpopular federal bailout.

Here are three things GM must do to avoid prolonged negative fallout from the recalls:

Explain what happened. It’s still unclear why GM didn’t order a recall or take some other kind of decisive action when it began to realize ignition switches in Chevrolet Cobalts, Pontiac G5s and several other models could inadvertently turn from “on” to “off” with the car running, cutting power to steering, braking and airbag systems. This is where criminal liability could lie if there’s evidence GM withheld important safety data from regulators or neglected to fix dangerous cars while knowing there was a problem. The Justice Dept. hasn’t decided to press charges yet but has begun an inquiry. Both houses of Congress and the National Highway Traffic Safety Administration have also begun investigations, making it likely troubling details about the problem will continue to emerge.

Reveal who was responsible. If GM made a corporate decision not to order a recall, then somebody at a senior level was responsible for that decision. Barra is a GM lifer — in her 30th year at the company — and fingering the responsible parties will test whether her loyalty rests with customers or with GM colleagues. GM has a bit of an out on this matter, since its bankruptcy filing assigns all liability for accidents that occurred before July 10, 2009 to the “old GM” left behind to settle GM’s debts for pennies on the dollar. Invoking this liability shield could protect the new GM from financial penalties but also harm its standing with taxpayers who financed the bailout — and took a $10 billion loss on the deal. Another possible twist is that the liability shield could be invalidated if criminal charges materialize. However it shakes out, accountability will be vitally important if GM wants to convince car buyers it’s really new and improved.

Make customers whole. Would you buy a used Cobalt or G5, knowing about this problem? You might, as long as the seller could provide evidence the faulty ignition switch had been replaced. But you’d probably still demand a discount given the defective taint. The whole group of vehicles seems sure to suffer devaluation on account of the ignition recall, which means a class-action suit is sure to follow. GM has already offered a $500 rebate on a new GM vehicle to anybody who owns one of the recalled models, but that seems a bit cheeky. It might be better if GM offered some kind of compensation not linked to its own products. The real goal ought to be persuading the public that GM took care of its customers instead of invoking technicalities or cutting corners.

GM may very well find a way to extricate itself from prolonged legal wrangling and the attendant bad publicity. But the tough part is still to come, as company lawyers build a case for keeping mum and fighting back. Overcoming that would be a challenge for even the most determined CEO.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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