Yesterday (June 6th), I was called by a reporter for the Wall Street Journal to discuss what had been reported about the "old GM" culture. Apparently, defects in that culture led to employees and managers failing to take responsibility for an ignition switch problem that is blamed for the deaths of 13 people over 11 years or more, and failing to inform top management and the board. Eventually, 2.6 million vehicles were recalled, the federal government is conducting an investigation, and 15 employees have been fired following an internal investigation led by Anton Valukas (see the report here). (Note: Anton Valukas was responsible for investigating the events that led to the Lehman Brothers bankruptcy.)
In her report to GM employees in a Town Hall meeting on June 5th, GM's CEO said:
Repeatedly, individuals failed to disclose critical pieces of information that could have fundamentally changed the lives of those impacted by a faulty ignition switch. If this information had been disclosed, I believe in my heart the company would have dealt with this matter appropriately.
Furthermore, numerous individuals did not accept any responsibility to drive our organization to understand what was truly happening. The report highlights a company that operated in silos, with a number of individuals seemingly looking for reasons not to act, instead of finding ways to protect our customers.
To give you a sense of the thoroughness and forcefulness of the investigation, I want to paraphrase a few of the key conclusions:
- GM personnel's inability to address the ignition switch problem, which persisted for more than 11 years, represents a history of failures.
- While everybody who was engaged on the ignition switch issue had the responsibility to fix it, nobody took responsibility.
- Throughout the entire 11-year history, there was no demonstrated sense of urgency, right to the very end.
- The ignition switch issue was touched by numerous parties at GM – engineers, investigators, lawyers – but nobody raised the problem to the highest levels of the company.
- Overall, the report concludes that from start to finish the Cobalt saga was riddled with failures, which led to tragic results for many.
You should know that Mr. Valukas' report revealed no conspiracy by the corporation to cover up the facts. In addition, the investigators found no evidence that any employee made a trade-off between safety and cost.
The problem is this case is more complicated and more nuanced. What Valukas found was a pattern of management deficiencies and misjudgments — often based on incomplete data — that were passed off at the time as business as usual.
Have a look at this article in Forbes. It describes some of the problems identified in the Valukas report:
The GM Nod. As described by Barra, this is a practice of GM managers sitting in a room, nodding in agreement at steps that need to be taken, then leaving the room and doing nothing.
The GM Salute. The Valukas Report defines this as the habit of employees going through meetings, with their arms folded and pointing outward at others, as if to say that the responsibility lay with them, not with the employee.
The reporter asked me if culture problems, such as those reported at GM, were more frequent at old, established organizations.
I told him, first, that I had no personal knowledge or insight into the GM situation beyond my dealings with the GM internal audit team. I told him that I believed that the internal audit team had strong leadership and I presumed that they performed quality work (some of the GM IA leaders are personal friends that I met through my IIA committee work and in whom I have confidence).
I also said that culture problems exist in many companies, both young and old — where individuals do not feel free to escalate potential issues (of any form, not just product safety) because of the fear of retaliation, managers' intense focus on their personal goals and career progression, and the inability of leaders to accept what they see as criticism and challenges to their authority.
I spent most of my career in companies much younger than GM, primarily in banking (large savings and loans), oil refining and marketing, and technology (contract manufacturing and software). Many of those had culture problems, such as:
- Senior executives being upset and reacting with anger when employees surprised them by raising issues in large meetings instead of through their manager in small meetings.
- A CFO telling the risk officer to assume that there was no risk to Finance from the integration of an acquired company and its conversion to a new ERP.
- A corporate finance team creating a culture where plant finance managers believed they were expected to "find a way to make the number," but not told how.
- Successive CEOs who allowed, if not encouraged, the organization to operate in silos, with each region and business unit competing for customer contracts, failing to share information, and setting up independent IT functions and systems.
I told the Journal reporter that internal auditors were starting to look at the risk to the organization from a failure in governance processes — and culture-related issues fall into that category. While this is a politically dangerous area to audit, the risk to the organization can be very serious — as demonstrated in the GM case. I also told him that I would be surprised if this had not been at least considered by the GM IA team — although, again, I have no personal knowledge of what they have done in that area.
I didn't have time to raise the Veteran Affairs (VA) story with the reporter, but it is certainly germane to the discussion.
At the same time as the reports were coming out on GM (June 5th), the Washington Post published an article on the VA situation. They said:
Federal investigators are examining claims that the Department of Veterans Affairs retaliated against 37 whistleblowers, including workers who tried to report actions relating to the agency's recent scheduling scandal.
The complaints include allegations that managers demoted, suspended and lowered the performance ratings of employees who tried to expose inappropriate record-keeping practices at VA hospitals, according to the Office of Special Counsel, a federal investigative and prosecutorial agency that protects federal employees from reprisals…
An inspector general's interim report last week said VA health centers manipulated their records to hide treatment delays, possibly with the intent to improve their performance marks. The OSC said roughly half of the VA complaints were filed before news organizations began widely reporting the problems around late April.
This is another story about organizational culture.
So what does this mean for boards, executives, risk officers, and internal auditors?
I told the journalist that this is something that needs to be addressed by the board, asking probing questions to obtain reasonable assurance that there is a healthy organizational culture.
In this, they can be helped by an internal audit team that understands the risks (perhaps collaboratively with the risk function) of an inappropriate culture, and performs audit engagements to assess whether those risks are managed to acceptable levels. (For example, every organization will always have one or more "bad" managers. However, they need processes to identify poor leadership, management, and supervision at any level of the organization and to take appropriate corrective actions).
Leadership from the CEO on down means not just embodying desired culture and practices in policies, but living them every day.
That will not be easy for some CEOs (and other senior executives), who have total belief in themselves and are unwilling or unable to be open and listen to others — or they act in such a way that managers and employees believe that is who they are.
The perception of leadership is more important than the reality in this, and it will lead those below them to mimic the perceived behavior and spread culture failures across the organization.
The senior executive team needs to be sensitized to this and periodically assess the culture of the organization. One effective way is to ask employees, in a periodic survey, questions that will elicit feedback and insight on the corporate culture. I give SAP (my former employer) a lot of credit for including probing questions in their employee survey such as:
- Do you trust and have confidence in the leadership of your department?
- Do you have confidence in the company's executive leadership team?
- Do you understand and have confidence in the company's direction and strategic plans?
- Do you feel comfortable raising issues and concerns?
Not only did SAP ask these questions, but they took swift and decisive actions when the general feedback negative — including replacing the CEO. You have to give the SAP board a huge amount of credit for this, as well as credit for bringing on joint CEOs who have made a massive difference.
If you can, please share your personal insights, experiences, and suggestions relating to corporate culture and the risk it can represent.