After the Settlement: What GM Needs to Do Now
Hours after General Motors Co agreed on Thursday to pay $900 million to settle criminal charges related to a bungled recall, Chief Executive Mary Barra said the legal and public relations crisis that has shadowed her for nearly two years was "a catalyst for meaningful change."
Now, Barra must show investors and consumers that the change at the No. 1 U.S. automaker is real, and goes beyond the steps she ordered to attack the engineering and managerial lapses that resulted in GM waiting more than a decade to fix dangerous vehicle defects now linked to 124 deaths.
GM shares rose modestly on Thursday as investors digested details of the criminal settlements, for which the automaker will take a $1.475 billion third-quarter charge, including $575 million for private litigation.
However, GM shares are still trading well below their initial public offering price of $33, despite Barra's move in March to promise investors $10 billion in cash and stock buybacks through the end of next year.
Barra could face new pressure from investors to take more aggressive steps to lift the company's shares. Meanwhile, Sergio Marchionne, chief executive of rival Fiat Chrysler Automobiles NV, continues his campaign for a merger of his company and GM - a proposal Barra and her board have rebuffed.
GM executives would rather focus attention on their ambitious plans for launching new vehicles with advanced technology. Product development chief Mark Reuss, speaking to employees on Thursday, hit that note.
"We are going to deliver vehicles with features that astound and amaze people," he said, adding that GM's goal is to be a "zero defects" company.
The settlement caps a humbling episode for a company that once dominated the global auto industry. The recall scandal battered GM's reputation in its home market, chopped more than $5 billion out of the Detroit automaker's profit and helped usher in a new era of aggressive oversight by federal regulators.
GM disclosed in February 2014 that it failed to tell regulators what it knew about defective ignition switches that could cause vehicles to stall, and cut power to the air bags. Before that revelation, GM was regaining profitability after a federally funded bankruptcy, and Barra was hailed for breaking one of industry's formidable glass ceilings to become the first woman to head a major global automaker.
The recall scandal, which engulfed the company just weeks after Barra took over as CEO in January 2014, put the ills of the pre-bankruptcy GM at center stage in Washington, in the media and in the courts. Barra took sharp criticism from lawmakers during four hearings on Capitol Hill.
But the steps Barra took in response to GM's humiliation paid off.
She set up a compensation fund that paid $600 million to ignition switch crash victims, appointed a new safety czar to cut through managerial silos in the engineering organization, shared mountains of documents with federal investigators and publicly embraced a scathing internal report by Anton Valukas, chairman of the Chicago law firm Jenner & Block, that exposed deep flaws in GM's managerial culture.
All that helped GM secure a settlement that was less onerous than many financial analysts had expected.
The Justice Department did not charge any individuals, and credited GM in the deferred prosecution agreement with "terminating wrongdoers."
Critics speak out
The deal was also less punishment than some victims' families thought was deserved.
Laura Christian, the birth mother of 16-year-old Amber Rose, who died in a 2005 crash, lamented the lack of individual accountability in the agreement.
"We buried our loved ones because GM buried a deadly defect," she said. "And yet today all GM has to do is write another check to escape."
Barra called the settlement "tough," and said GM would change its ways. "The steps we took to do the right thing ... persuaded the Justice Department to defer prosecutions," Barra said during a televised talk to GM employees on Thursday afternoon. She also reminded employees, "people were hurt and people died in our cars."
Prosecutors charged GM with wire fraud and scheming to conceal material facts from a U.S. regulator. The Justice Department's failure to charge any individuals drew objections from some lawmakers and industry critics who had pressed for stiffer penalties.
GM admitted to failing to disclose a potentially lethal safety defect with the switches that kept some air bags from deploying. It also admitted to misleading consumers about the safety of affected vehicles.
The settlement was approved by U.S. District Judge Alison Nathan in Manhattan during a hearing on Thursday afternoon.
GM also agreed to a partial settlement of private litigation with drivers, passengers and families over the switches, and a settlement of related shareholder litigation.
Robert Hilliard, one of the lawyers leading the private litigation by drivers and passengers, said about 84 death cases and 370 injury cases would remain unresolved.
In settling with the government, GM entered into a three-year deferred prosecution agreement that requires an independent monitor to oversee its recall and safety-related practices. The criminal charges will be dropped if GM meets its obligations.
U.S. Attorney Preet Bharara did not rule out charging individual GM employees, but said there are "legal and factual" challenges to prosecuting them. "The law does not always let us do what we wish we could do."
GM's $900 million payment will be treated as a penalty, and the automaker cannot treat it as a deductible expense.
It is less than the $1.2 billion that Toyota Motor Corp agreed in March 2014 to pay to resolve a similar case alleging that its vehicles accelerated without warning.
GM shares gained 0.4 percent to close at $31.31 on Thursday.
(Additional reporting by Nate Raymond, Jonathan Stempel, Jessica Dye, David Ingram and Joseph Ax in New York; Editing by Lisa Von Ahn and Matthew Lewis)