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GM Proves Bankruptcy Is No Cure for Sick Culture

NEW YORK (TheStreet) -- Contrary to conventional wisdom, bankruptcy can do a struggling business tremendous good. Debts can be minimized, uncompetitive employee contracts can be renegotiated, and burdensome business units can be sold off. American Airlines (AAL), LyondellBasell (LYB) and even, yes, Eastman Kodak (KODK) are examples of the tough but necessary change that happens in bankruptcy courts.

One thing bankruptcy doesn't necessarily change, however, is culture. If General Motors (GM - Get Report) is to be believed, it is that subtle lack of change that may mar what has otherwise been one of the most remarkable turnarounds in the history of American bankruptcy.

GM currently argues it failed to recall 2.6 million cars over an 11-year period, causing at least 13 deaths and 54 accidents, because the automaker had deep-seated cultural issues that meant employees would rather sweep a possibly fatal design flaw under the rug than alert upper management.

Former federal prosecutor Anton Valukas of law firm Jenner & Block, in an investigation into GM's recall crisis, called that indifference and complacency the "GM Salute" and the "GM Nod."

Most of the GM car models at the center of the company's crisis such as the Chevrolet Cobalt were manufactured and sold prior to the automaker's 2009 bankruptcy filing. However, in the wake of GM's government-assisted bankruptcy, the company didn't become more forthright with its design issues and it didn't recall any of the cars at the heart of its current crisis.

Those issues only came to light on Feb. 13, when GM decided to recall 619,000 cars just as incoming CEO Mary Barra took the reins of the automaker. That recall, as we now know, has become far larger and raised the biggest possible questions one can have of a company: Was GM simply negligent in failing to take flawed cars off the road, or did the company and its top brass act in a criminal manner?

We don't yet know all of the answers, even if GM continues to look inward at its culture as the root cause of the company's failures and the 13 deaths that were the consequence.

On Tuesday, CEO Barra vowed to the media and investors she would fix GM's cultural issues. According to company statements and the Jenner & Block report, top executives like Barra may not have known the extent of GM's design flaws or their impact on the road.

Perhaps, the civil and criminal investigations into GM and what its management knew are just beginning. However, if anything, GM's culture-based defense is believable.

Nowhere in GM's bankruptcy process was there a mandate to cure shortcomings such as an inclination to sweep issues under the rug, cut management layers, or incentivize employee accountability. Bankruptcy did dramatically reduce GM's debt, its pension and benefit obligations, and the company's portfolio of brands and drive-trains.

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