Waiting Too Long to Recall

General Motors

In early 2013, General Motors (GM) recalled over 4.2 million small cars with two separate ignition switch defects. The first defect turned off the engine and airbags while consumers were driving the cars. At least 13 deaths and 32 crashes have been reported. The second defect allows keys to be removed from the ignition switches in the “on” position. It is unclear how many other crashes and injuries have resulted from the second defect.

Congress and the U.S. Justice Department are investigating why GM did not recall the vehicles when the first defect was discovered over a decade ago. The company has spent over $1.3 billion on the recalls in the first quarter of 2013. More huge costs will be forthcoming for repairs, litigation, fines, stock market losses, and loss of consumer goodwill. Criminal charges may be filed against GM and the individual employees who silently changed the part number when they made new switches to address the first defect in 2006.

Compare the $1.3 billion number to the $37.7 million it would have cost to repair and replace the defective switches when the customer complaints started rolling in. Instead GM employees adopted a silent part replacement plan and kept it a secret from consumers and federal regulators. When GM executives became aware of this internal engineering cover up is not yet known. But the truth will come out. In the past, “smoking gun” paper documents could disappear forever but that was before the advent of email, servers and forensic computer examiners. In a digital world, internal company documents cannot be hidden.

GM’s CEO Mary Barra testified about the first ignition switch defect before two Congressional committees in early April. Her failure to provide substantive answers made her the target of a satirical skit on “Saturday Night Live.” A few days after her Congressional testimony, CEO Barra announced the formation of a new “product integrity unit” at GM. At the same time, GM lawyers asked the federal bankruptcy court for protection against new lawsuits related to the ignition switches.

Johnson & Johnson

Contrast GM’s current financial and public relations debacle with the actions of Johnson & Johnson in 1982. Seven Chicago residents had died after swallowing Extra-Strength Tylenol which contained cyanide. Johnson and Johnson did not wait to determine whether the product tampering was only occurring in Chicago. Instead the company immediately recalled the all Tylenol products nationwide and offered free replacement products. The short term costs of the recall were high but the benefits were long lasting. Johnson & Johnson designed new tamper- proof packaging and regained its market share in the over-the-counter pain medicine market. Its stock price recovered from the immediate crisis and the company’s actions became a shining example of ethical business management.

Determine When a Recall is Legally Required

Companies, large or small, may face a product defect situation from time to time. The causes of the defects can range from a design error, sub-standard components, shoddy or unsanitary manufacturing conditions, deliberate tampering or fraudulent substitution of ingredients by suppliers.

U.S. federal laws require companies to conduct recalls of products that are unreasonably dangerous or defective and/or fail to meet government safety regulations, including foods which are misbranded or adulterated. Whether a company’s regulator is the Food and Drug Administration, the Consumer Product Safety Commission, the National Highway Traffic Safety Administration, or another agency; management needs to understand under what conditions a recall is legally required.

Conclusion

Covering up safety defects and failing to conduct a legally required recall in a timely manner becomes far more expensive financially and damaging to a company’s reputation than taking corrective action immediately. Just like the Tylenol case became a famous business school case study illustrating superior management, the General Motors cover up will become a famous case study demonstrating egregious management failure.