GM and Its No Good, Very Bad Year

With the announcement that GM Chief Executive Officer Mary Barra received the outsized compensation of $16.2 million in 2014, what should have been a year of humiliation and soul-searching for that feckless automaker instead ended on a disturbingly self-satisfied note.  Purely from a public relations perspective, Barra worked hard for her money.  Appearing repentant, sincere, and downcast, she persuaded star-struck members of Congress that the company was committed to overhauling a culture characterized by what she called the “GM shrug,” loosely translated as avoiding individual accountability at all costs.  Even as she blinked in the television lights, GM fought bitter battles behind the scenes to block consumer damage cases and exploit corporate tax loopholes.

Largely on the basis of her political adeptness, Barra has been taking victory laps in the business press, hailed as the rare (female) CEO who has led her corporation out of a morass that could happen to anyone.  This performance and the accolades it inspired provide a troubling coda to what was a destructive year for American drivers.  Dubbed “the year of the recall,” automakers recalled an unprecedented 64 million vehicles -- about one in five cars on the road; GM led with 26 million of this total. 

To restore justice to GM’s beleaguered customers – and the scores of families who lost loved ones in crashes caused by the defective switch – we can only hope that the Justice Department’s criminal investigation of the company and its senior executives results in prosecutions that could offset the unjust favors the legal system is already prepared to bestow.

For example, the company took its taxpayer-funded bailout agreement and turned it around on millions of consumers unlucky enough to own compact cars with ignition switch defects who had accidents before July 10, 2009, the date when the agreement became effective.  Invoking a liability shield negotiated by the Obama Administration, GM won a ruling from a bankruptcy judge that is now on appeal, avoiding billions in damages for injuries, deaths, and the lost resale values of vehicles with the defect.  The judge took the view that when the “old GM” went bankrupt, the “new GM” got a fresh start, even though all but 15 of the executives and managers involved in the ignition switch fiasco remain ensconced in the company’s iconic skyscraper in Detroit.  GM won this counter-intuitive relief even though areport it commissioned from former U.S. Attorney Anton Valukas revealed that senior executives knew about the problem as early as 2005 but dragged their feet on notifying consumers until 2014.  “Although everyone had responsibility to fix the problem, nobody took responsibility,” he wrote.

The owners of its defective cars recently learned to their dismay that a significant amount of the money GM pays in compensation to victims, and perhaps even government fines or penalties, are tax deductible.  Under the tax code, companies can deduct “ordinary and necessary expenses” but supposedly cannot deduct penalties imposed for violations of the law.  But corporate counsel, including GM’s own outside law firm, argue that legal fees and other defense costs are tax deductible, and even that if the company does not admit liability, the fines or penalties may be deductible as normal business expenses.  This possibility is one reason why we see dramatic increases in so-called “deferred prosecution agreements” that allow companies to settle cases without acknowledging criminal culpability in exchange for an agreement that if they subsequently misbehave, the government can reinstate the case.  (The Department of Justice, too, often forgets to circle back.)

All of this special treatment probably seems nothing less than amazing to Candice Anderson, who was 21 when she lost control of her Cobalt in a moving stall caused by a defective ignition switch, and it ran into a tree, killing her fiancé.  Texas police charged her with reckless homicide and her parents liquidated their retirement account to pay for her defense.  She pled guilty, spent five years on probation, and paid $10,000 in non-tax deductible fines.  Five months before she entered her guilty plea, GM had investigated the accident and determined the defect was the cause, but it never communicated its conclusion to Anderson or local law enforcement.  In November 2014, after GM finally acknowledged the defect’s role in the fatal accident, a judge cleared her of responsibility for Erickson’s death.

For Anderson and so many others (the company has acknowledged it should pay for 90 deaths), Barra’s compensation, avoided liability, and unwarranted tax breaks are deeply offensive.  GM’s success in working the system must be offset by criminal culpability, on both the corporate and individual level, for leaving consumers to drive in ticking time bombs for so many years.

This blog is cross-posted on the American Constitution Society's Blog.