At first glance, what could be more different than General Motors and the emerging growth and lower middle market companies that our firm, Newport Board Group, serves?
GM is a huge global company that in good times and bad is squarely in the public eye, especially since its taxpayer-funded bailout. The entrepreneurial companies we serve often have high aspirations--to grow globally and disrupt existing industries and create new ones. But their problems occur well outside the public eye. GM’s board is made up of business luminaries. If a private company has a board, it often is made up of the founder and investors (though increasingly complemented by outside directors with fresh expertise and perspective, demonstrating to prospective investors and acquirers that the founder/CEO is open to advice and direction.)
But—a closer look suggests that middle market companies can take important lessons from the debacle at GM.
Important Lessons that Middle Market Companies Can Learn from GM's Mistakes
What Happened
On May 29, 2014, the Board of Directors for General Motors received a report on ignition switch recalls related to manufacturing of Chevrolet Cobalts, among other vehicles. The defective switch had been approved by the company as far back as 2002 despite being described by the engineer who designed it as “the switch from hell.” The Report said:
“In the fall of 2002, [GM] personnel made a decision that would lead to catastrophic results – a GM engineer chose to use an ignition switch in certain cars that was so far below GM’s own specifications that it failed to keep the car powered on…resulting in moving stalls on the highway…. [F]rom the switch’s inception to approximately 2006, various engineering groups and committees considered ways to resolve the problem…sophisticated engineers with responsibility to provide consumers with safe and reliable automobiles did not understand one of the most fundamental consequences of the switch failing and the car stalling: the airbags would not deploy.”
GM has identified dozens of frontal impact crashes, including the deaths of more than a dozen people, in which the airbags failed to deploy likely due to the defective switch. The Report noted that during this time company personnel showed no sense of urgency to uncover the defect.
For many years, GM has sold more cars worldwide than any other manufacturer. In 2013 it had revenues of $155 billion and profits of almost $4 billion, selling nearly 10 million vehicles. It employs some of the most capable engineers, lawyers and executives to be found anywhere. How did they not connect the dots between the defective ignition switch and the failure of airbags to deploy?
GM has terminated more than two dozen employees, including engineers, lawyers and managers—but no top executives.
Takeaways for Private Company Boards of Directors
The Report notes that a critical factor in the delay and lack of urgency of GM personnel was “their failure to understand, quite simply, how [their] car was built.” It certainly wasn’t due to lack of resources. Many GM personnel were involved, some looking for the root causes of the issues. It is tempting to conclude that the problem was that GM is a huge, dysfunctional bureaucracy and that some of its personnel were incompetent. The evidence suggests otherwise: GM had extraordinarily competent and committed people who simply whiffed.
Companies with 100 or even 10 employees are not immune to the risk that they will whiff in the face of risks that threaten the life of their company. They should take the following lessons from the GM experience.
Cultivate the right kind of employee loyalty
At GM people who recognized the switch problem were unwilling to speak up, assert a different perspective than higher-ups and play “devil’s advocate.” Smart companies of whatever size insist on real loyalty from their employees. A loyal employee is one who has a positive, can-do attitude about the company and its future and has a bias toward constructive words and actions. The wrong kind of loyal employee is one who is prepared, for whatever reason, to hide problems that could harm customers and threaten the company’s reputation and future.
Don’t allow functions to become silos
It appears that many people in GM’s engineering and legal groups knew about the switch problems but failed to forward information about it to division and corporate management. They may have been misled by the idea that “it’s not our problem so we don’t have to fix it.” They may have forgotten that functions like engineering and legal exist to serve the company as a whole, not to act as private “fiefdoms.” As smaller companies grow and add personnel in areas like HR and IT they must be sure that these folks understand all the ways that they impact the company—positively and negatively. Boards must have risk management processes that enable the top team to recognize potential risks that can arise within these functions—and mitigate them.
Let bad news travel fast
Mistakes are embarrassing; that’s why they may be covered up. Companies with a positive culture encourage their employees to share problems and errors quickly—so they can be corrected. Company politics that thrive on finger pointing and blame shifting are fatal to building a strong organization. In some cases there may be a single culprit, who might even get fired, but usually the cause of the problem is more widespread and complex. Fixing the problem pragmatically, with a minimum of acrimony and finger pointing, will increase the chances that the next problem will be reported promptly.
If you are the CEO or board member of a company with, say, 25 employees, your customers, employees and community would like to know that you understand the lessons of what went wrong at GM--and are prepared to prevent such problems happening at your company. Are you?
About the Author
Larry Aldrich is Managing Director of Newport Board Group’s Arizona practice. He can be contacted here.
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