GM’s risk management failures provide lessons for other firms

GM’s risk management failures provide lessons for other firms

Strategic fails afford valuable lessons. There is something to be learned from the spectacular recent failure of General Motors’ once highly-touted enterprise risk management program.

In 2012, G. Mustafa Mohatarem, the Chief Economist at General Motors, in praise of his firm’s implementation of a new Enterprise Risk Management (ERM) program, commented on lessons learned by his company. He said: “There is a tendency to underestimate the risk…It is relatively easy to say, ‘Well, it’s a low probability risk, let’s go on.’ It may be a very low probability event, but those low probability events have a way of materializing, and we’ve got to understand what happens if we do it.”

General Motors is now caught in the grip of a strategic failure that materialized from a seemingly “low probability” event. A recall of 3.1 million vehicles is expected to result in a charge of $300 million. The US Justice Department has launched a criminal investigation to determine if GM knowingly withheld information from consumers on defective vehicles. Just this week, Toyota was fined a record $1.2 billion by the US Government in another case. GM is facing similar penalties.

Whenever a company or organization finds itself in the throes of failure, large or small, it is useful to return to fundamentals and ask what happened in terms of basic analysis. At the heart of most any corporate strategic failure lies a misunderstanding of simple concepts such as Porter’s Five Forces, the SWOT analysis or competitive advantage.

GM did not take its own risk management process seriously. In 2012, GM’s then-Chairman and CEO, Dan Akerson gave the impression GM was in control, saying, “The best risk management function…is one that you never hear about publicly…You are always trying to anticipate, trying to move before you have to, and if you do, try to look across the entire enterprise and get an integrated view of risk… Decisions you make today will ultimately have an impact on you many years out. Large, complex, global organizations…don’t fail with one dumb decision. There has to be many, cascading decisions that accumulate to erode your competitive position.”

Those were the days when a proud GM trumpeted the value-added benefits of its ERM program. The company was touted as a risk management model for others to emulate by risk professionals, trade journals and academics. “If any company can be said to have put the ‘enterprise’ in risk management, it’s GM,” CFO magazine announced in 2013.

GM Risk Mgt

Source: GM Presentation at RMS 2012 ERM Conference

Alain Genouw, CFO at GM Global Connected Consumer, OnStar LLC, characterized the risk management attitude at GM this way: “In the past, risk management was not on the forefront of everybody’s thinking or tasks. It was more of a check-the-box type of activity. Today at GM (2012), risk management is front and center for everybody…It is more of a collaborative effort to make sure we understand those risks and be proactive about managing those risks.”

A Global Risk Insights post three months ago questioned whether GM’s ERM had evolved beyond the “check-the-box” stage sufficiently to focus on effective execution. The piece ended pessimistically, stating that “It might be a while before GM can quantify its ERM program’s impact.” It seems this pessimism was unwarranted. GM can now quantify its impact; the ERM program could cost well over a billion dollars.

There is some hopeful news. The new CEO at General Motors, Mary T. Barra, knows where to begin in the wake of the recall disaster: “These are serious developments that shouldn’t surprise anyone. After all, something went wrong with our process in this instance, and terrible things happened…We are conducting an intense review of our internal processes.”

Developing a strategy to turn GM’s ERM process into an effective program for risk management analysis and execution would be a good start. Brian Thelen, GM’s Chief Risk Officer, told CFO magazine that ERM helps GM make better decisions and is part of the global automaker’s competitive advantage. This is probably true to some extent, but ERM is not the strategic strength GM management believes it to be.

GM ERM Process

Source: GM Presentation at RMS 2012 ERM Conference

In retrospect, the company’s confidence in its process seems misplaced. The graphic above is a slide from a presentation given by CRO Thelen in 2012. It can be argued GM violated most if not all the components of its Risk Management Process.

GM’s risk management culture was not as developed as it should have been. Exposing individuals at various levels of management to the goals and objectives of the ERM program are not the same as promoting and embedding risk awareness. The company was not as adept at spotting, assessing and mitigating risks as it imagined. No one in the firm seems to have owned this particular risk, so no plans appear to have been developed to manage it.

A feedback loop appears not to exist. The communication and evaluation of existing internal risks – in this case, faulty ignition switches – did not take place for 10 years. It appears GM underestimated the probability of the risks associated with the faulty engineering, and failed to recalculate risks in a Bayesian fashion. It looks as though GM performed an inadequate cost-benefit analysis, if any.

GM manufactured long-standing weaknesses in an important strategic activity – the identification, communication, analysis, and mitigation of risks. An “accumulation of cascading decisions,” the weaknesses contributed to a significant failure. These problems were entirely internal to company operations; GM was in complete control of these factors. Further, these weaknesses thrived despite a “model” company-wide ERM process in place under the direct and active supervision of the company’s top management and board.

Instead of being part of General Motors’ competitive advantage, as CRO Thelen asserts, the company’s enterprise risk management system created for GM a distinct competitive disadvantage. When companies mistake process for execution, “terrible things” can happen. CEO Barra is correct, this should surprise no one.

About Author

Steven Slezak

Steven is on the faculty at Cal Poly in San Luis Obispo, California, where he teaches finance and strategy. He taught financial management and financial mathematics at the Johns Hopkins University MBA program. He holds a degree in Foreign Service from Georgetown University and an MBA in Finance from JHU.