Photo: Nigel Cox
By Doron Levin
April 10, 2014

You have to give Mary Barra points for trying. When the General Motors CEO arrived in Washington in the first week of April to be grilled by Congress about the automaker’s rapidly escalating ignition-switch recall crisis, she came with a clear public relations plan.

During her first day of testimony, in front of a House committee, Barra carefully explained that whatever had gone wrong had happened at the bad old GM — a dysfunctional place that had vanished with the company’s 2009 bankruptcy. Barra, who took over as CEO on Jan. 15, portrayed herself as the leader of a customer-focused new GM that would never endanger the lives of drivers over a $2 part. Yes, she was a 33-year veteran of the company, but she was just as mystified by the actions of the old General Motors as anyone.

That PR strategy didn’t play as well on day two. Facing a much more combative Senate committee, Barra was ridiculed for her inability or unwillingness to shed new light on the scandal. “Something is very strange,” said Sen. Barbara Boxer (D-Calif.), “that such a top employee would know nothing.” By the weekend, Barra was the target of the opening sketch on Saturday Night Live. Under cross-examination by the Senate committee, the SNL version of Barra blurted out, “The first rule of ‘new GM’ is you never talk about ‘old GM’!”

So much for distancing yourself. Late-night TV satire aside, however, the imbroglio is no joking matter for Barra or GM. Weeks after she made history by becoming the first female chief executive of a U.S. automaker, Barra, 52, has been forced to confront a spiraling scandal that threatens to undermine the progress the company has made during the past five years in regaining the trust of both investors and customers since it was reorganized in Chapter 11 and its finances were replenished with a $50 billion government bailout.

The egregious mishandling of reports of faulty ignition switches — both before and after bankruptcy — suggests that the car giant may not really be a new company anywhere except on its balance sheet. The new GM’s cars have recently scored high with reviewers such as Consumer Reports. (Disclosure: As a blogger covering Detroit, I often participate in test drives sponsored by GM and other automakers.) But it appears that the same values and policies that pushed General Motors into a financial abyss remain stubbornly in place — awaiting reform, presumably under Barra’s direction.

Plaintiffs attorneys representing accident victims and their families have portrayed GM as a plodding, cost-conscious, and at times bullying corporation that was deaf to criticism and placed profit ahead of its customers’ safety — accusations that GM executives, managers, and line workers vehemently rebut.

The details of the events as we know them, however, are damning. According to GM’s own report, a faulty ignition switch was first detected in preproduction testing of the Saturn Ion in 2001. Evidence of the defective switch surfaced again in 2004 when the Chevrolet Cobalt, a new, fuel-efficient model, was introduced. The following year GM issued a bulletin to dealers describing an ignition switch that could inadvertently slip from “run” to “accessories” under certain conditions, including when “the driver is short and has a large and/or heavy key chain.” The company considered replacing the faulty switches. But according to a deposition given by an engineer on the Cobalt program last year, GM made “a business decision” not to do so. (Replacements in the recall will cost as little as $2 each.) By the end of 2013 the automaker had concluded the faulty ignition could be linked to 31 crashes and 13 deaths.

To her credit, Barra appears to have moved quickly once she became aware of the issue. According to GM, the new CEO was first informed of the problem on Jan. 31. By the end of that month the company had notified the National Highway Traffic Safety Administration of the defect and recalled some 2.6 million vehicles. During her visit to Washington, Barra met with family members of crash victims and announced that GM had hired Ken Feinberg, who has previously overseen victims’ payments after the 9/11 terrorist attacks and BP’s 2010 oil spill in the Gulf of Mexico, to “explore and evaluate” options to potentially compensate victims. With questions mounting about why the recall took so long, Barra hired a pair of law firms to find out exactly what had happened, led by Anton “Tony” Valukas, a former U.S. Attorney who investigated Lehman Brothers after its 2008 bankruptcy.

Once the NHTSA presents its findings, the government could move to assess civil penalties. A criminal investigation into the matter is under way at the U.S. Attorney’s office for the Southern District of New York. Last month, following an investigation by the same office, Toyota Motor agreed to pay a $1.2 billion fine in connection with misleading information regarding complaints of unintended acceleration of its vehicles.

Even as Barra continues to manage the crisis, she must turn her attention to another challenge that may be more daunting: leading a full-fledged cultural turnaround at General Motors that is long overdue. “Changing a company like GM takes several years of continuous effort,” says Xavier Mosquet, head of the Boston Consulting Group’s automotive practice. Barra’s public acknowledgment of the company’s blunders, says Mosquet, “sends a strong signal to the whole organization that there is no time to rest and that customers must come first.” She should build on that and seize the opportunity for a “Mulally Moment.”

With the spotlight trained on GM’s faults, Barra should use the scrutiny to rally her troops, much as Alan Mulally did when he became chief executive of Ford Motor during one of its darkest periods. Mulally, recruited from Boeing late in 2006, was faced with horrendous financial losses, low morale, and cratering vehicle sales when he arrived. But he was able to steer the company away from near bankruptcy.

Key to Mulally’s reform was his judgment that Ford lacked a unified global strategy and that executives, in order to evade criticism or blame, refused to share critical information about troubled operations with one another. So Mulally introduced mandatory weekly meetings of senior leaders at which each was required to report on progress (or lack of it) using green, yellow, or red signals. He heaped praise on executives willing to disclose difficulties, and he came up with a simplified strategy he named “One Ford,” eagerly passing out wallet-size cards trumpeting the plan.

General Motors has yet to experience such a moment of operational clarity. Management turmoil has been constant at GM since 2009 when U.S. Treasury officials demanded that Rick Wagoner, a company lifer, resign as chief executive prior to the bankruptcy. GM’s board at the time, stacked with appointees from Washington, tapped Fritz Henderson, Wagoner’s No. 2, as his replacement. But after just six months the board appointed one of its own, Ed Whitacre, then recently retired as CEO of AT&T, to run the automaker. Whitacre lasted a year, quitting GM abruptly to return home to Texas.

Whitacre was followed by Dan Akerson, a private equity investor lacking experience in automaking. An aloof former Naval officer, Akerson publicly criticized GM’s hidebound culture. But few within the company expected him to stay long enough to lead change. He oversaw the triumph of repaying the government loans in cash and stock. And then, in December, after three years on the job, Akerson accelerated a planned exit by several months because of his wife’s illness. Barra, his handpicked successor, became the company’s fifth CEO in as many years.

Unlike Mulally, Barra is anything but an outsider. She started working for GM at age 18 while she was a student. But to drive real change, she’ll need to apply the zeal and fresh perspective of a newcomer. Some who know her believe she might be up to the task. Tony Cervone, a former GM communications executive who once occupied an office next to Barra’s, says she won’t be afraid to use her leadership skills to push through needed change. “There’s an unfair assumption that since Mary has been there for her whole career, she’s incapable of understanding the issues or GM’s cultural ineptness,” he says. “She was tough, fair-minded, and tenacious — but never a bull in a china shop.”

To follow Mulally’s lead on transparency, says Kathy Harrigan, a professor of management at Columbia University, Barra should move fast to review GM’s system of incentives to determine what behaviors are encouraged or discouraged — especially as they may relate to defect reporting. But she echoes Mosquet’s warning that a fix will take time. “I wonder whether the board is prepared to stay the course,” says Harrigan. “Turnarounds typically take three years or more. GM may require even more time due to work rules and labor unions’ resistance to change.”

Yes, unions. Just as at the old GM, labor relations are still a big part of the CEO’s job at the new GM. And a critical test looms for Barra next year when the United Auto Workers will open negotiations with GM and the other Detroit-based automakers on a new labor agreement. Since 2009 the UAW has been bound by a no-strike pledge it made as part of the bailout agreement. But the union is hoping to scrap its current two-tier wage agreement with the industry, which pays significantly less to new hires than to industry veterans.

If Barra emerges from the ignition-defect investigation weakened, it increases the odds that the UAW will select GM as its negotiating target. The union’s hope would be to force a rich pay package at GM and establish that pattern for the rest of the industry. In that sense, Barra’s rivals may be rooting for her now. If the new GM emerges from this crisis stronger, it could be good for the entire Detroit-based industry.

Doron Levin is a freelance writer and regular contributor to Fortune.com.

This story is from the April 28, 2014 issue of Fortune.

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