GM to Pay Record $35 Million Fine Over Handling of Recall

Photographer: Joshua Lott/Getty Images

The General Motors headquarters on April 1, 2014 in Detroit. Close

The General Motors headquarters on April 1, 2014 in Detroit.

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Photographer: Joshua Lott/Getty Images

The General Motors headquarters on April 1, 2014 in Detroit.

General Motors Co. (GM) will pay a record $35 million fine as part of the U.S. government’s investigation into how it handled the recall of 2.59 million small cars over faulty ignition switches, the Transportation Department said.

GM’s agreement with regulators includes “significant and wide-ranging internal changes” to how it reviews safety issues and decides on recalls, the department said in a statement.

“GM did not act and did not alert us in a timely manner,” U.S. Transportation Secretary Anthony Foxx told reporters today at a news conference. “What GM did was break the law. They failed to meet their public-safety obligations.”

The National Highway Traffic Safety Administration has been investigating why it took the largest U.S. automaker years to address engineering concerns and consumer complaints about engine stalling dating from 2004. At least 13 fatalities have been linked to the defect, which can deactivate air bags.

Related: GM Recalls Bring 2014 Total to Record 11.2 Million in May

“General Motors’ decision making, structure and process stood in the way of safety at a time when air bags were failing to work properly in millions of GM products,” NHTSA Acting Administrator David Friedman said today in Washington. “Our investigation also found that General Motors was training employees in ways that could’ve compounded these problems.”

Photographer: Jeff Kowalsky/Bloomberg

Keys hang from the ignition during a service recall for a General Motors Co. (GM) 2005 Saturn Ion at Liberty Chevrolet in New Hudson, Michigan. Close

Keys hang from the ignition during a service recall for a General Motors Co. (GM) 2005... Read More

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Photographer: Jeff Kowalsky/Bloomberg

Keys hang from the ignition during a service recall for a General Motors Co. (GM) 2005 Saturn Ion at Liberty Chevrolet in New Hudson, Michigan.

The record fine “was a given,” Clarence Ditlow, executive director of the Center for Auto Safety, a Washington-based advocacy group, said today in a telephone interview. “The only thing that was left to be decided was when they were going to impose the penalty.”

‘Stronger Company’

GM confirmed in an e-mailed statement that it had reached an agreement with NHTSA and said it has begun working with the agency to review processes and policies to avoid future recalls of this nature.

“We have learned a great deal from this recall,” Chief Executive Officer Mary Barra said today in a statement. “We will now focus on the goal of becoming an industry leader in safety. We will emerge from this situation a stronger company.”

GM has said heavy key rings or jarring can cause ignition switches on some cars to slip out of the “on” position, cutting off power and deactivating air bags.

GM shares slid 1 percent to $34 at the close in New York. They have dropped 17 percent this year.

GM hasn’t fully complied with an extensive request for information by the regulator. Since April 3, the company has been accruing fines of $7,000 per day. GM said it was waiting for an internal investigation to be complete before answering some of NHTSA’s questions.

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Forced Changes

In addition to the fine, the regulators are requiring changes to GM’s culture that led to questions about its handling of the recall, which is still the subject of investigations by Congress and the U.S. Justice Department.

While Friedman said he didn’t have any records of Barra being briefed on the ignition-switch issues, other company executives and employees were aware: Some were notified by a supplier in 2009, and by 2012 communication among the automaker’s staff was “very explicit about an unreasonable risk to safety.”

GM’s slow reaction to the safety complaints reflected systemic failures throughout the company, from its organization to the sharing of information, Friedman said.

“GM engineers knew about the defect, GM investigators knew about the defect, GM lawyers knew about the defect, but GM did not act to protect Americans from that defect,” Friedman said. “The fact that GM took so long to report this defect says something was very wrong with the company’s values.”

‘Defect, Dangerous’

GM’s training materials “explicitly discouraged” employees from using words like “defect, dangerous, safety related and many more essential terms for engineers and investigators to clearly communicate up the chain when they suspect a problem,” Friedman said.

Even before the ignition-switch recall, some within NHTSA were complaining about GM dragging its heels responding to safety concerns. Documents released in April by a congressional panel reviewing the recall pointed to a history of contentiousness between GM and its regulator that continued beyond the automaker’s bailout by U.S. taxpayers.

In July 2013, less than a year before GM’s recall, the head of NHTSA’s Office of Defects Investigation, Frank Borris, complained to Carmen Benavides, who was then GM’s director of product investigations. “The general perception is that 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,” Borris said.

Consent Order

The consent order that GM agreed to laid out a list of things the company must do from submitting a written list each month of every vehicle-safety issue under consideration to monthly meetings with the agency for a year. GM also agreed to quarterly meetings to discuss the implementation of the requirements of the agreement. Jeff Boyer, as the vice president of global vehicle safety, and other named executives are to be there unless there are “compelling circumstances.”

GM agreed to improve its analytics to better identify safety issues, to establish a way for employees to quickly report concerns, and to change its training to “disavow statements diluting the safety message.” GM also agreed to give NHTSA by June 30 a “full and complete copy of the report” that GM expects Jenner & Block LLC Chairman Anton Valukas to complete on his investigation.

Record Fine

The $35 million fine is the largest ever paid by an automaker in the U.S. for delays in issuing a safety recall. Ford Motor Co. (F) and Toyota Motor Corp. previously paid $17.4 million, the maximum allowable at the time.

Congress has since changed the maximum NHTSA fine to $35 million. Regulators are pushing lawmakers to approve fines of as much as $300 million for a bigger deterrent effect, the Transportation Department said.

“It’s disappointing that there’s no criminal prosecution,” Ditlow said. “This shows how hand-tied the Department of Transportation is under the Safety Act: The fine is too small, but that’s the maximum.”

GM earned $5.3 billion last year and has more than $37 billion in available liquidity on its balance sheet at the end of the first quarter, according to a company web presentation. Its first quarter profit fell 82 percent with the cost of recalls rising to $1.3 billion during the period.

“Today was just a show,” Robert Hilliard, a Corpus Christi, Texas-based lawyer, representing families in lawsuits against GM over the ignition-switch recall, said today in an interview. “It was taking GM to an artificial woodshed and pretending as if GM will now become responsible.”

He reiterated his recommendation that the government should’ve forced GM to park the effective vehicles. “$35 million is a complete win for GM,” he said.

GM Changes

Even before today’s announcement, Barra, in response to the recall crisis, has been making changes at GM. She named Boyer vice president for global vehicle safety in March, and he’s part of a newly aligned engineering department aimed at reducing compartmentalization and catching future safety issues.

Many of Barra’s changes inside GM are focused on resolving safety reviews more quickly.

John Calabrese, vice president of global vehicle engineering, is retiring and his department is being split into two parts with new executives overseeing the units. The Global Product Integrity division has been given about 35 new safety investigators to speed up reviews.

Boyer said in an interview this week that his team has been focusing swift resolution of ongoing reviews.

“We also want to make sure we expedite any new issues that we need to take appropriate action on, and we’re doing that promptly as well,” he said. “We’re not waiting for trends to emerge.”

Valukas Investigation

Barra has asked Valukas, who served as the Justice Department’s examiner of the downfall of Lehman Brothers Holdings Inc., to help lead the automaker’s internal probe of the recall along with GM General Counsel Michael Millikin. She’s also asked for a review by lawyer Kenneth Feinberg, who determined compensation for survivors of the Sept. 11 and Boston Marathon terrorist attacks, to make recommendations on what GM should do for victims of the crashes.

The agreement follows yesterday’s announcement by GM of five new recalls totaling 2.7 million in the U.S. that increases the total number of vehicles called back for fixes this year so far to a record of 11.2 million. The 2014 total through mid-May is more than GM recalled during the previous six years combined, according to NHTSA records. The company’s previous peak year for recalls in the U.S. was 10.7 million in 2004, according to NHTSA records.

“The recent ignition recall has lead us to reexamine really every part of our business to make sure our customers and their safety are at the heart of everything we do,” Boyer said this week. “As part of that, we’ve made some changes in our overall recall process and these changes, I’m sure that you’ve seen, have resulted in a much larger than normal number of GM vehicle recalls since the beginning of the year.”

To contact the reporters on this story: Jeff Plungis in Washington at jplungis@bloomberg.net; Tim Higgins in Southfield, Michigan, at thiggins21@bloomberg.net

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net; Jamie Butters at jbutters@bloomberg.net Jamie Butters

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