Lessons From a Dysfunctional Board

After emerging from the government bailout about five years ago, the board of the “new GM” was supposed to exercise their fiduciary responsibility more diligently than their predecessors. However, after recalling nearly 30 million cars and revelations that some GM managers had known about defective switches that resulted in 19 known deaths for over 10 years, the board’s current chairman, Theodore Solso said that he “only had a vague recollection of the details.”

He went on to say in a recent interview: “I can’t remember the specifics.” What planet does this guy live on? He even dug a deeper ditch by saying: “When we had all the facts we did our job.” Really?

After the resignation of a number of board members recently, the remaining board is realizing that the boards of both the “old” and “new” GM were negligent in applying their fiduciary responsibilities to the shareholders. This now has resulted in lawsuits from shareholders against former and current board members, as well as legal investigations by the Justice Department, the SEC and 45 state attorneys general.

Senator Richard Blumenthal of Connecticut has accused the board of abdicating too much responsibility to management for resolving the switch problem that resulted in the aforementioned deaths of drivers of GM cars with defective switches. He concluded that ”the board’s silence and apparent absence as a force is really regrettable.”

Board chairman Solso claims, “We didn’t understand the enormity of the situation at the beginning, because I don’t think management did—it was an evolving problem.” How many people had to be killed before it was recognized as a serious problem?

GM’s chief legal counsel, Michael Milliken, is also blaming his inaction on members of his staff who did not inform him of the severity of the problem. What is his job if not to know that the company’s cars have killed people? He hired Anton Valukas—a well known legal investigator—to document what happened. That was like letting the fox into the henhouse.

Solso has called Milliken “a really important person at GM and a valued advisor to both the board, and CEO Mary Barra.” Well, if he winds up in jail, he may be so valued that some members of the board and management may be joining him.

Meanwhile, Valukas’ 315-page report uncovered what the board and management should have already known—that there had been years of serious mistakes and errors, and deceptions among engineers, product specialists, and even lawyers, on how a defect could cut engine power and disable airbags in millions of GM cars.

Solso’s response to the report was, “Yes, we should have known earlier. The way I look at it, GM has not been run well for a long period of time.” This is from the new chairman of the board! He went on to say that he was “shocked” and “stunned” by the findings in the Valukas report.

However, the the most shocking statement of all was when Solso said the board and management were not lax about safety. Instead, he said, “the problem is that people did not do their job.” Well isn’t the job of management to oversee the employees, and the job of the board to oversee management? It doesn’t look like anybody was overseeing anything.

Now the board has hired the prestigious law firm of Wachtel Lipton & Katz to evaluate management. What’s better than this, the board abrogates their fiduciary responsibility and then hires a law firm to verify that management screwed up, too!

If this doesn’t make for one of the best Harvard business school cases ever, I’ll be surprised.

All of this represents a vivid lesson for any board of directors on how not to function. It is also a classic example of everyone in management, who had the ultimate responsibility, for blaming everyone but themselves for evading their responsibilities.

For CEOs and board members, this should serve as a lesson for all.