November 13, 2017 / 2:39 PM / a year ago

Breakingviews - GE's shaman exorcises ghosts of false expectations

NEW YORK (Reuters Breakingviews) - It doesn’t take much imagination at work to grasp the religious undertones in General Electric (GE.N) boss John Flannery’s plan for the $178 billion conglomerate. He says he is “looking for the soul of the company again.” Now, some 100 days into the job, Flannery has categorically exorcised the ghosts of false expectations past by halving its dividend, reducing earnings guidance and questioning entire swaths of the company’s portfolio of industrial assets. Next up is GE’s board of directors.

The ticker symbol for General Electric is displayed on a screen on the floor of the New York Stock Exchange July 20, 2015. REUTERS/Brendan McDermid

That Flannery is asking “why do we exist?” is not entirely surprising. He is, after all, a man with many years ahead of him to make some hard decisions, fundamentally reshape the company Thomas Edison founded and rebase its share price for the hard restructuring ahead. By contrast, his predecessor Jeff “Two Jets” Immelt was fighting for time, struggling to justify what was already done and had been previously promised during his 16 years running the company.

But the about-face from Immelt to Flannery has outdone the usual kitchen-sinking that accompanies the passing from one chief executive to the next. It’s certainly a stark contrast from Immelt’s own handover from Jack Welch in 2001. And that has raised a key question for GE shareholders: How did the board allow Immelt to continue for so long without intervention? If it was so obvious to Flannery and many investors that GE was overspending on dividends, flubbing on acquisitions and committing to too many second-rate businesses, what were GE’s 18 directors thinking?

Flannery has already clarified that GE’s board is oversized, under-engaged and badly in need of a house cleaning. So perhaps the most encouraging development to be found in Flannery’s 57-page slideshow on Monday is a plan to put just 12 directors up for a vote next year, including three new ones. That means it is parting company with half the current lineup. GE will also create a new “finance and capital allocation committee” with increased oversight of the company’s acquisition and buyback strategy.

The composition of the new board will include, among others, a representative of Trian Partners, the activist fund manager led by Nelson Peltz. But he can’t be the only director willing to question the strategy, dig through the numbers and, where needed, prod Flannery to shift gears. The era of the all-powerful GE boss, with two jets at his disposal in case one breaks down, is over. That, beyond any numerical pledges, should be the most important statement to emerge on this investor day.

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- As part of its Nov. 13 investor day, General Electric’s new Chairman and Chief Executive John Flannery laid out a strategy that will see the industrial conglomerate’s dividend cut in half, its earnings guidance reduced and a reorganization of its portfolio of industrial assets.

- For previous columns by the author, Reuters customers can click on [COX/]



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