Throughout the twentieth century, business schools heralded General Electric (GE) as America's most iconic company. It set the standards in leadership, organization, and effective management processes. The company delivered remarkable results over its storied history, evidenced by its stature as the only original component of the Dow Jones industrial average still on the list.
Today GE is becoming a shadow of its former self.
On November 13, new CEO John Flannery announced the shrinking of GE's holdings to three businesses – aviation, health care and energy and power – while shedding such legacy businesses as lighting and locomotives. Flannery also declared a 50 percent dividend cut, only the third in GE's history – this one coming when the economy is strong. Even by spinning off $20 billion in assets, GE apparently can't move fast enough to preserve the dividends that millions of retired Americans depend upon to maintain their standard of living.
In describing these dramatic cutbacks, Flannery failed to shed any light on the end of GE's tunnel. Disappointed investors drove GE stock down an additional 13 percent in the two succeeding days, bringing the cumulative decline to 40 percent since Flannery was announced on June 12, 2017 as successor to former CEO Jeff Immelt. Credit activist investor Nelson Peltz and his partner Ed Garden (now a GE board member) for blowing the whistle earlier this year, accelerating the CEO transition from Immelt to Flannery.
The legacy of Jack Welch
The contrast of GE circa 2017 with "The House that Jack (Welch) Built" could not be greater. Since its peak in 2000, GE's $410 billion market capitalization has shrunk to $156 billion, down $254 billion (62 percent). During his twenty years at the helm, Welch increased GE's market value twenty-eight times, making GE America's most valuable corporation. He expanded GE through internal growth and acquisitions, especially in GE Capital, as GE hit every quarter while investing for the long-term. For these results Fortune Magazine named him "Manager of the Century."
Welch followed a long line of fabled CEOs that includes Charles Coffin (1892-1922), Ralph Cordiner (1950-1963), and Reginald Jones (1972-1981). He moved aggressively as soon as he took over in 1981 to remake GE with his own imprint – even though it meant undoing predecessor Jones's legacy. Recognizing GE needed to be much leaner and faster-moving to compete globally in the 21st Century, Welch slashed its bloated corporate staff, cut several layers of management, and radically changed GE's cumbersome processes to accelerate decision making – enabling GE to move in front of major global competitors like Siemens, Phillips and Mitsubishi.
Under his leadership, GE was recognized for its disciplined execution, Six Sigma quality and cost control, and leadership excellence at all levels, built around its in-house training center at Crotonville. GE was known as a leadership factory that developed great leaders for its own ranks and beyond – training the CEOs of Honeywell, Boeing, ABB, Medtronic, and numerous other companies. Myriad business school cases were written to document the underlying reasons for GE's success. Welch immortalized his accomplishments in his books, Jack: Straight from the Gut and Winning.
Welch is not without his critics, especially after the recent declines. Numerous observers correctly criticize the dependence he created on GE Capital, which accounted for nearly half of GE's business by the end of his reign. But Welch left GE with a strong balance sheet and abundant cash flow to adapt to any difficulties encountered.
The Immelt years
The task to correct GE's overreliance on GE Capital fell to Immelt. He understood the issues, but failed to act in his first seven years – violating Welch's maxim that new CEOs are judged by their decisions in their first ninety days. When financial markets crashed in 2008, GE's balance sheet and cash flow were so drained that Immelt had to phone President George W. Bush and ask for a line of credit to keep the company afloat.
Yet Immelt still hesitated, not completing the final sale of GE Capital to Wells Fargo until 2016, fifteen years after Welch retired. What other CEO gets fifteen years to make desperately needed changes? How did GE invest the proceeds? By buying back $50 billion in stock at high prices, thus diminishing its balance sheet just as its competitors were bulging with cash.
Where was the GE board during these long years of value destruction? Was it asleep, or did management fail to shed light on its difficulties? Now Flannery is remaking the GE board, cutting it from 18 to 12 members, and adding three new board members with industry expertise. The sighs of "finally," are drowned out by the cries of, "what took so long?"
What business is GE in?
GE's deep problem today is that it doesn't know what business it is in. There is no central purpose that unites its disparate businesses, or enables them to be greater than the sum of its parts. Even GE's three remaining businesses – aviation, health care, and energy and power – bear little relationship to each other. As CNBC's Steve Liesmann noted after Flannery's announcements, why not go all the way and split GE into three separate companies, thereby eliminating the corporate staff and associated corporate costs?
Barring a strategy for revitalization and dominance of its global markets, GE is destined to become an industrial holding company that buys and sells businesses during market cycles and whose only mission is making money. Surely that will not inspire its customers, employees or shareholders. Meanwhile, GE may fall further behind competitors with clarity of mission and strategy like Boeing, Honeywell, United Technologies, and Johnson & Johnson.
If anyone ever needed convincing that leadership matters, GE's example provides the proof. Welch was an exceptional leader whose track record is not diminished by the company's steady decline after he retired. Immelt was a talented manager who erred by overly-emulating his predecessor's style when he more appropriately needed to emulate his urgency. In Immelt's early years he lacked the courage to make bold moves, and the discipline to achieve consistent execution.
In fairness to Flannery, the jury is still out as he gets started. Thus far, he has given every indication that he is a pure financial manager who lacks vision, strategy, and passion to rebuild GE as a mission-driven, values-centered company. While Flannery may achieve modest improvement in GE's numbers, he has not demonstrated he can restore its soul.
Commentary by Bill George, a senior fellow at Harvard Business School, former Chairman & CEO of Medtronic, and the author of "Discover Your True North." Follow him on Twitter @Bill_George.
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