| Huffington Post Business

Monday, January 11 marked the beginning of a ‘bellwether’ trial for General Motors (GM) that will provide a template for future litigation stemming from a faulty ignition switch. Between 2004 and 2013, at least twelve people died in ten separate accidents involving GM Cobalts and Saturn Ions which featured the faulty ignition switch. The switch was easily disabled by knee movements, which turned off the engine en route, disabling power steering and power brakes, thereby making it difficult for drivers to maintain control of their vehicles.

Manufacturing companies frequently encounter technical problems like the faulty ignition switch. In and of itself, this problem should have been a minor issue that was easily correctable. The fact that it was not corrected for years was a consequence of GM’s dysfunctional risk management.

My new book Behavioral Risk Management describes why the major risk management failures to have occurred in the last fifteen years stem from deep seated psychological pitfalls. In the book, I discuss the GM case, describing the psychological issues that led GM to engage in critical don’ts and avoid important do’s in the way the company practiced risk management.

Four of the most important psychological pitfalls are:
1. Downplaying the likelihood of unfavorable events, known as excessive optimism;
2. Overassessing own ability, known as overconfidence;
3. Turning a deaf ear to information that is unfavorable, known as confirmation bias; and
4. Taking an unfavorable risk to avoid having to accept a sure loss, known as aversion to a sure loss.
Personnel at GM exhibited every one of these pitfalls.

A firm with a strong risk management profile establishes protections against psychological pitfalls in the way that it sets standards, engages in planning, structures incentives, and shares information internally. GM failed abysmally on all counts.

Amazingly, in 2004 GM CEO Rick Wagoner test drove a Cobalt and turned off the ignition with his knee while he was driving! Ray DeGiorgio, the engineer who chose the ignition switch design, eventually recognized the problem, but could not convince his colleagues to address it. In desperation, of his own volition, in 2006 he asked parts supplier Delphi to replace the faulty switch with a superior alternative. However, he did not change the part number on the ignition switch and did not share the information with anyone else at GM. That failure to share information hampered GM investigators when they subsequently tried to figure out what was going on.

In July 2014 Michael Millikin, GM’s general counsel, told a Senate hearing that although GM’s legal team had been investigating the faulty switch issue for some time, it was only several months before that they even told him there was an issue. This is a colossal information sharing failure.

A company with effective risk management profile puts in place a risk management edifice that is strong along three dimensions: structure, culture, and behavior. Strong structure entails effective policies, procedures, and systems, with sound risk management practices being rewarded through compensation. Strong culture entails making risk management a valued activity, with clear communication channels for the sharing of information, and bosses who are good risk management role models. Strong risk management behavior means encouraging constructive devil’s advocacy.

How GM emerges from its bellwether case remains to be seen. However, what is clear is that GM was weak in all three dimensions. Engineer DeGiorgio found no policies and procedures for how to deal with the faulty ignition switch problem once he discovered it. His bosses were hardly role models for strong risk management. And as a junior GM lawyer discovered in 2012 when the company was trying to figure out what to do, his suggestion of a product recall was not welcome.

All in all, when it comes to GM’s risk management report card, the verdict is guilty.

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