Volume 7, Issue 6
Founded in 1995, Daruma Capital Management invests in high-conviction portfolios of no more than 35 stocks.
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Bureaucracy is more than just an annoyance; in the case of auto manufacturing, too much of it can cost lives.
Today's newsletter takes a look at GM's recently revealed internal bungling and offers four suggestions for avoiding these same types of errors in the running of your business or team.
(To listen to this month's newsletter, click here.)
Mariko O. Gordon, CFA
Founder, CEO and CIO
Daruma Capital Management LLC
The Four Bureaucratic Horsemen of GM's Apocalypse
Anton R. Valukas could have three heads with a big horn in the middle of each - and I would still have a schoolgirl crush on him.
You know, like those screaming teenage girls chasing after the Beatles in A Hard Day's Night.
Valukas is a freaking genius, writes like a legal Hemingway, and totally upended my world with his Report to Board of Directors of General Motors Company Regarding Ignition Switch Recalls. Don't let the boring title fool you - it's a 309-page study on the evil that bureaucracy can inflict upon the universe.
In my experience, postmortems usually force you to slog through a dense underbrush of legalese to get at the applicable life, business or investment lessons. But Mr. Valukas' report is a page-turner on a par with a Tom Clancy novel,
except with pictures of smoking gun memos and car parts. His seven-page summary is the single best synopsis I have ever read of a complicated, multi-year narrative,
even more impressive when you consider that it was drawn from 41 million documents (23 terabytes of data!). In case you've been living under a cone of silence, let me provide some background...
Beginning in 2002, GM started selling cars that stalled easily. The reason for the stall - a below-spec ignition that too easily switched off when the key was jostled - also caused the airbags not to deploy.
And while having your engine cut out on the highway was no picnic to begin with, it was particularly lethal when the stall occurred without airbags, just prior to hitting a tree. For 11 years GM could not solve this mystery; its failure to issue a recall caused deaths that would have otherwise been prevented.
good can come from this sad tale of colossal incompetence and bureaucratic bungling. For those of us who run investment processes and/or manage organizations, there are so many useful lessons here that I hardly know where to begin.
And while there was one bad actor, and a few incompetent or stubborn boobs, it's the four horsemen of business culture apocalypse that really set my hair on fire:
conflicting messages, lack of accountability, failure to execute and psychological traps.
Let's have a look at each:
- Conflicting messages.
GM employees were told, "when safety is at issue, cost is irrelevant." They were also told, "cost is everything." Stop and think about warring messages within your organization, and choose one clear winner.
If one car group made changes to a part that was also used by another car brand, the group making the change would be charged the expense of the change for all the other product lines. Are there any places in your business or investment team where incentives are misaligned? Do you talk teamwork but reward selfish behavior?
GM'ers were instructed never to use judgmental adjectives and speculation when describing a problem because it might raise flags. So they didn't use the word "stall" to describe the issue, making it that much harder to diagnose what was going on. Do you encourage truth-telling in your organization?
It was part of GM culture to not keep meeting minutes, in case they might be used against the company in the future. In addition to contributing to an overall lack of accountability, this made reconstruction of what was said at meetings (and even who was present) difficult. What unspoken rules do you have that get in the way of making sure loops get closed?
- Lack of accountability.
Death by committee meeting meant that there was no urgency, no timelines, no specific deliverables and no ownership of decisions. The committee structure killed accountability, giving birth to The GM Nod: "When everyone nods in agreement to a proposed plan of action but then leaves the room and does little." As Valukas points out, "although everyone had a responsibility to fix the problem, nobody took responsibility."
The GM Nod was often coupled with The GM Salute, a crossing of arms and pointing outward towards others, indicating that the responsibility belongs to someone else.
Is your firm nodding and saluting its way through committee meetings, leaving crucial work undone?
- Failure to execute.
GM had plenty of policies in place, but no system for checking that these policies were adhered to. As a result, an engineer was able to start the whole engine stalling mess and then, like a rogue trader, hide his 'bets.'
GM'ers routinely failed to perform "the most basic of investigative tasks," from gathering data to analyzing it and never seeming to start at the beginning and question or verify the most basic of assumptions. In short, they had no burning desire to get to the bottom of the matter.
How does your team challenge assumptions? What do you consider the most basic of investigative tasks? How will you recognize failure to execute before it impacts performance?
- Psychological traps.
The default GM mindset made the problem worse. There was a failure to revisit the initial conclusion that the ignition problem was not a safety matter and that airbags had nothing to do with it. There was a stubborn focus on getting a root cause explanation for every single airbag non-deployment, causing unnecessary delays. And there was a reliance on people's statements rather than empirical evidence in uncovering the truth.
As investors, we also need to let go of our initial conclusion, especially when the facts don't stand up to scrutiny. Knowing whether waiting for that very last piece of data is worth it can make the difference between a good sale and round-tripping a stock. And, of course, we better trust but verify whatever we are told.
In reading this analysis of GM's ignition switch recalls, one can't help but appreciate the ease with which bureaucracy can diffuse accountability, delay decision-making and allow dysfunction to creep into a firm.
Thank you, Mr. Valukas, for the brutal reminder of the cost of doing so. You will forever be a rock star in my book (though I promise not to chase after you screaming).