Archive for April 22, 2014

GM recall crisis: déjà vu all over again

As news of GM’s recall crisis heightened, Toyota kept coming to mind. It was, as Yogi Berra famously said, déjà vu all over again.

Within a figurative second of surpassing GM as the world’s largest automaker in January 2009, Toyota found itself in a similar brand-busting, headline-grabbing crisis. Camry and Lexus had defects that produced “sudden acceleration,” a syndrome believed to have been a factor in 200 or more accident complaints filed by consumers beginning in 2000.

When an occurrence of sudden acceleration, famously caught on video, claimed the life of a California Highway Patrolman in April 2009, it unleashed a torrent of publicity that ultimately led to a September recall of 3.8 million vehicles. And, like with GM, there was a lot more to come:  failed disclosures, arguments with the government, waves of unflattering press activity, public outcry, etc.

It’s pretty clear that GM, itself nearing bankruptcy and a federal bail out at the time, wasn’t doing much self-analysis as Toyota’s problems escalated. Had the company done so, it might have had a chance to avert the current struggle. As it turns out, though, GM joined a distressingly long line of companies that fall victim to these three crisis missteps:

[1] They don’t pay attention to warning signs or, worse, they cover them up.

[2] When the crisis goes public, they choose to protect financial interests rather than brand (read: customer) interests.

[3] They behave as though legal liability is synonymous with “cost.”

On the first, the CEOs of each company, in effect, acknowledged “cultures of denial” within their organizations and cited the need to break with their pasts to affect crisis resolution. The deeper issue, of course, is how management dealt with failure. To avoid it, most experts agree, a company has to embrace it. That means paying attention to signs of weakness and spelling out mistakes people don’t dare make.

The question of what to protect can be downright paradoxical. In good times, most managers would assert that doing what the customer expects – i.e. living up to core brand values – is the path to success. When crisis hits, however, customer interests are either put aside in favor of finance or market impact, or made deminimis by statistical probabilities.

In the case of the two auto giants, macro issues probably had an effect on decisions. Back in 2009, Toyota arrogantly contrived to protect their newly achieved “number one” status. GM probably wondered how a large recall would impact an imminent $50 billion taxpayer bailout. Likewise the micros: is a million-vehicle recall warranted with incident rates at .01 percent?

Meantime, with so much at stake in human terms – personal injury and fatalities – one wonders if the decisions at Toyota and GM would have been different if customers had effective advocates on the crisis management team (executive suite).

This is where credible chief communications officers come in. Their job is to represent the public’s view in the decision chamber to the point where C-suite types – and their lawyers and risk managers – can imagine a son or daughter or spouse behind the wheel of a potential death car. Get heads wrapped around that and company behavior usually adjusts.

Finally, in the court of public opinion, litigation values pale before real costs of brand and equity damage. If you measure reputation as the difference between market and book value, Toyota took a $15 billion equity loss at the onset of the crisis – a hit it took almost two years to regain on a sustained basis. They lost untold billions in sales and repairs plus the much-ballyhooed claim of “biggest.” By contrast, they paid $1.2 billion in fines and penalties.

So far, GM is getting the benefit of the doubt. Yet questions linger as $3.0 billion in equity has disappeared.

Why in the world they didn’t deal with it back then is beyond me, but it seems to me now that they’re doing the best job they can given the circumstances,” said Scott Schermerhorn, chief investment officer of Concord, New Hampshire-based Granite Investment Advisors Inc., which oversees $600 million and as of Dec. 31 owned 464,469 GM shares.

So what are the lessons? GM is learning them under fire – tell it all, tell it fast, and be your customers’ chief advocate. With this month’s announcement of a safety recall involving more than 6.0 million vehicles, Toyota appears to have been paying attention in class.

Hud Englehart
Managing Partner
Adjunct Professor, Crisis Communication
Northwestern University