Toyota's Settlement Lesson for General Motors Investors

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As one of the world's largest automakers finally resolves a long-standing criminal investigation, another is just starting to feel the heat. Here's what General Motors (NYSE: GM  ) investors can learn from Toyota's (NYSE: TM  ) recent record legal settlement.

Generally good motors
Just last month, General Motors announced a worldwide recall for more than 1.6 million vehicles due to faulty ignition switches. Not only could a faulty switch cut the motor while a car was moving, but it also had the potential of causing an airbag to fail to deploy in the event of an accident. More than 30 accidents have been linked to the ignition switches in question, with 12 resulting fatalities.

While every automaker will eventually find a need for recalls, a more damaging fact has surfaced surrounding the recent GM actions -- namely that some employees within the company may have known about the troublesome switches as early as 2001.

With lawsuits already popping up in California, Texas, and Michigan, the automaker not only faces civil suits, but the Justice Department has already started discussing a criminal investigation. CEO Mary Barra will be testifying in front of the U.S. House Energy and Commerce Committee on April 1 about the company's management of the faulty switches.

Settling matters
Earlier this week, Toyota and the Justice Department announced a $1.2 billion settlement over the manufacturer's handling of a similar situation.

The penalty was the largest recorded for any automaker and concluded a four-year criminal investigation into how Toyota handled disclosures and recalls of more than 10 million vehicles for unintentional acceleration problems.

Since the Justice Department's investigation centered directly on whether Toyota was forthright about disclosing safety problems and addressing safety issues, an important lesson can be learned: reporting a safety-related problem will hurt more the longer an automaker waits -- and not just monetarily.

Giving a damn about your bad reputation
Following the news that several models from Toyota Motors were included in the massive recalls due to the unintentional acceleration problems, the automaker had to start repairing its reputation. Up until the recalls, Toyota was viewed by car buyers as one of the most reliable brands of vehicles.

Based on J.D. Power and Associate's 2012 Initial Quality Study, consumers consider reliability and dependability first when choosing a particular make and model. Though safety ranked 10th in the study, GM's faulty ignition switch could fall within the realm of reliability, as well as safety concerns.

One factor that GM investors should keep in mind is that the Detroit-based automaker is still working through a rebuilding process following its near collapse a few years ago. Though the company has produced some successful vehicles in the subsequent years, its reputation is nowhere near the solid footing that Toyota enjoyed before its recall snafu in 2009.

Barra's testimony in front of the House's Energy and Commerce Committee could help fight off some negative impacts to GM's reputation, but it all depends on her responses to the committee's questions and how she handles the situation overall.

All about the Benjamins
Of course, holding back information from regulators and other governmental entities can lead to serious financial penalties. Toyota not only paid more than $66 million in fines for its delayed disclosures of the safety concerns surrounding the acceleration issues, but it will be shelling out more than $1 billion following an extended criminal investigation.

General Motors may not end up paying out such a hefty fine, if a criminal investigation does move forward, but investors should anticipate increased legal costs and other penalties and fines as the situation unfolds. This all on top of the $100 million in estimated costs stemming from the actual recall repairs, according to two analysts at Automotive News.

Don't hold back
While no one likes to admit that they made a mistake, in the case of automakers, saying sorry and correcting the issue quickly can be less costly in the long run. If Toyota is any model of how the Justice Department will handle similar cases revolving around safety concerns and untimely disclosures, General Motors and its investors may be in for a long ride.

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Jessica Alling

Contributing writer for covering the financial sector with an emphasis on the insurance industry.

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