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Breakingviews - Review: GE’s decline is the story of corporate BS

MILAN (Reuters Breakingviews) - In 2006, Breakingviews criticised General Electric for its sprawl. We argued that “spinning off NBC to shareholders would make GE a more focused industrial company”, bring in some $35 billion of cash and aid Chief Executive Jeff Immelt’s desire to bolster the group’s finances. The only reason GE kept the media business was because its executives liked to hobnob with celebrities, we wrote.

General Electric Co Chief Executive Jeff Immelt listens during a news conference to discuss the company's plan to move its headquarters to the city of Boston in Boston, Massachusetts, April 4, 2016.

All of that was true. And the case for raising cash and refocusing is hard to refute now that the company is worth 80% less than it was at the time. But GE’s public relations machine went on the warpath. In particular, it argued for a correction to a line that NBC “is rarely among the best performers”. The Wall Street Journal, which had syndicated the column, agreed. Breakingviews held its ground.

At the time, GE’s tactics came across as disproportionately aggressive. Why was America’s most-admired industrial company taking such offence at a piece that took as its premise the “remarkable job” it had done “managing its eclectic collection of assets” and beating rivals in the market? “Lights Out: Pride, Delusion, and the Fall of General Electric” clears up the confusion. GE’s corporate culture was obsessed with storytelling. Anything that swerved from its chosen narrative, even if true, was anathema.

GE’s downfall has been startling. The company, whose origin myth lies with the inventor Thomas Edison but owes more to financier John Pierpont Morgan, has seen its market value drop from $600 billion at the start of the century to $53 billion today. It has been cast from the Dow Jones Industrial Average, where it was once the sole name to have endured for the benchmark’s first 100 years. The company’s credit rating has been slashed. Any reasonable prediction for its future is not as a vast industrial juggernaut but as the manufacturer of jet engines, and perhaps of healthcare equipment.

All this bad news has been obvious in the marketplace. But Thomas Gryta and Ted Mann, reporters at the Wall Street Journal, provide texture below the surface. They reveal what happens when executives, for want of a better expression, drink too much of their own Kool-Aid. GE bosses from Immelt on down believed they, and the company they worked for, were infallible. Mistaking a story for a strategy is how companies die.

“Under Immelt, the company believed that the will to hit a target could supersede the math, even when hundreds of thousands of livelihoods – those of investors, customers, and suppliers, to say nothing of workers retirees, and their families – hung in the balance,” the authors summarise. “GE became synonymous with the idea that all that stood between a company and an arbitrary $2 earnings (per share) target was drive – simply wanting it bad enough.”

“Lights Out” shows how Immelt, a hard-charging former Dartmouth football player, rode roughshod over opposition from within, including from the board of directors he ruled with an iron fist. One telling anecdote reveals how Sandy Warner, a long-serving director and former chairman of JPMorgan, was effectively cast from the board for his insistence in 2016 that Immelt accelerates his succession plans.

Hoping to exorcise the demons of GE’s near-death experience during the financial crisis of 2008, Immelt and his lieutenants – including the man who would succeed him, John Flannery – were hell-bent on finding a big, transformational deal. The one they settled on, a purchase of Alstom’s power assets, turned out to be an utter disaster. “Lights Out” shows that outcome was clear even before the near-$14 billion purchase had closed. Yet Immelt’s supplicants refused to back out because there was no crossing the big boss’s desire to tell the story that GE was back in the business of getting bigger.

The overarching need to tell tales, at all costs, proved Immelt’s undoing. His reliance on Beth Comstock, the chief marketing officer, and her belief that the company needed merely to “pick a simple story…and tell it again, and again, and again,” helped lead the executive team to ignore facts and figures that got in the way. It also spawned stupid slogans like “Imagination at Work”, which Immelt once declared was “a reason for being”. And it spawned a doomed effort to cast itself as America’s oldest startup, with billions of dollars frittered away on its “Predix” software and data analytics project.

In the end, Immelt was gently shown the door and Flannery took his place, only to discover the truth behind the marketing mumbo jumbo. The company was largely meeting its numbers through legal, but stupid, financial chicanery that was starving the business of cash. He also found that GE’s decision to spin off its insurance assets more than a decade before had left the company on the hook for some $15 billion. And so on.

As a dyed-in-the-wool GE guy, Flannery proved the wrong executive to fix what he and other Immelt acolytes had broken. He lasted just 14 months. But his decision to bring Larry Culp onto the board, and eventually make him the company’s lead independent director, proved prescient. The no-nonsense, numbers-obsessed Culp was previously CEO of rival conglomerate Danaher, which today is worth nearly three times as much as GE.

When Culp took charge in 2018, he inherited a worse hand than Immelt received when replacing the legendary Jack Welch just before Sept. 11, 2001. But at least there is no longer any sense that Culp’s mission will be to restore the conglomerate to its Welch-and-Immelt-era swagger. That story is over.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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