When bad things happen to good companies

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By Tom Martin

It seems that barely a week goes by without another major corporate scandal capturing our collective attention. The latest headline grabber was Wells Fargo. The megabank admitted to falsely creating or applying for more than two million phantom credit card and bank accounts, using the names of real customers, solely in order to meet what many considered unrealistic sales quotas. In the wake of the scandal, more than 5,300 Wells Fargo employees were terminated; the CEO, John Stumpf, made two disastrous appearances before Congress and ultimately resigned under pressure.

While it’s too soon to tell how the Wells Fargo situation will ultimately be resolved, in other highly-publicized cases, companies facing devastating crises have made great headway in addressing the immediate issue, repairing the damage, and restoring their reputations among key stakeholders.

Take GM for example. In 2014, an ignition switch defect in GM vehicles was implicated in the deaths of 124 individuals, which ultimately led to the recall of 30 million vehicles worldwide and a cost to the company of at least $1.5 billion. At the center of the response to the crisis was Mary Barra, the CEO of GM who had been with the company for 35 years. GM’s board had elected Barra as the company’s first female chief executive in late 2013 and she assumed the role in January of 2014. Only a month later, GM issued the first of many recalls connected to the ignition switch problem and the crisis defined Barra’s first year as CEO.

In April of 2014, Barra testified before Congress about the defect. In her remarks, Barra made two significant announcements. She said that GM would hire Kenneth Feinberg to help the company address the issue of compensation for the victims’ families. Feinberg had been widely praised for his role in many mass-injury cases, including the BP gulf oil spill.

She announced that GM had also hired independent attorney Anton Valukas to help the company develop a comprehensive understanding of why it took so long to initiate the recall. The hiring of both Feinberg and Valukas would prove to be key developments in GM’s restoration of trust with its publics.

GM’s recovery strategy had three essential components:

  • Fix the vehicles
  • Do the right thing for customers
  • Hold GM accountable

Through the recall program, GM began replacing the faulty ignition switches on millions of vehicles worldwide. The program was expanded several times to ensure that all vehicles with a potential risk were addressed. With the assistance of Kenneth Feinberg, the company developed a program that offered millions of dollars in compensation to the victims.

A key moment of truth in the crisis was the release of the Valukas report on June 5, 2014. The report was released by the company despite being highly critical of GM’s actions in the ignition switch recall process. What is significant is the manner in which GM responded to the scathing report and in particular the sense of personal responsibility exhibited by Mary Barra. Barra went to great lengths to detail exactly what the company was doing to respond to the findings and to take meaningful actions to reduce the risk of such crises occurring again. “This is a test of our character and our values,” she said “In the end, I’m not afraid of the truth.  I want it known that we will face up to our mistakes and take them head on.”

It was a powerful demonstration of CEO accountability. While the words were powerful, the actions spoke even louder. Fifteen GM employees were dismissed, some for incompetence, some for misconduct and some for simply being too slow or insensitive in their response to the situation. The company paid $900 million in a settlement with the U.S. government and committed to $600 million more in compensation to the families of the victims. GM also implemented a comprehensive new approach to safety, consolidating safety responsibilities under a corporate vice president and hiring 35 new safety investigators.

In the ensuing months since the crisis first surfaced, GM has seen many positive developments as a result of the strong actions taken. Public opinion surveys indicate that by a 2 to 1 margin those surveyed believe GM is moving the in right direction. GM’s news visibility has dramatically improved, and by a 3 to 1 margin most believe the recall is largely behind the company. Employee attitude surveys have shown the most favorable results since prior to the GM bankruptcy period and are significantly improved since the early days of 2014.

Wells Fargo now must demonstrate a similar ability to face hard truths, take firm action, be held accountable, and demonstrate a resolute commitment to making lasting and meaningful changes to its corporate culture and behavior. Bad things can happen to even the best of companies. How they respond ultimately determines just how good they really are.

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