As GE transforms itself into a corporate shipwreck, pointing fingers at the captain has become the parlor game of the day. The latest effort is The Wall Street Journal, which took a deep dive into the conglomerate’s woes.
Even someone as astute as New York Times writer James Stewart found it irresistible to condemn Jeff Immelt for the failure of GE. Only he didn’t seek out chief executives who understand GE like Boeing’s Jim McNerney or former Home Depot and Chrysler boss, Robert Nardelli. Instead, he chose a law professor to confirm the verdict: “Given how horrendous the stock performance has been for so many years, the most amazing thing is why the board didn’t act sooner,” according to Charles M. Elson of the University of Delaware.
And so the judgment stands. Immelt was the undeniable steward during the period GE’s stock dropped $540 billion, a value higher than the GDP of the Kingdom of Belgium. That’s a lot of waffles. Many in the media felt the only way to judge a disaster of this magnitude was to blame the chief executive who oversaw the company during this period. That kind of story makes for a better headline than “there were many factors.” But I believe when a company that brandishes the most storied management development reputation in the world falls apart in six months after failed earnings guidance and a failed succession plan, a different question should be asked. And the answer reveals something much more ominous not just about GE, but about all of Corporate America.
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Jack Welch had it all in 1994. Then he instructed each division head of his sprawling conglomerate to become #1 or #2 in their sector or the business would be sold or folded. To the GE culture, this wasn’t a choice. It was a clarion call to fix things, and that meant cutting costs, firing employees, shedding product lines, and making the company over as an agile, lean and mean machine — emphasis on the mean.
Welch once told Immelt, “I love you, but if you don’t get your numbers this quarter, I’m going to fire you.” The truth was Welch loved productivity and if telling someone he loved them would help, he wasn’t shy about saying it. GE became a company built for the moment. You either made your numbers or your career was finished. It made investors happy, but in the process, turned ordinary good managers into heartless automatons. The GE culture was made over for today, not for yesterday.
As it turns out, not for tomorrow, either.
What did GE care about? The answer was Wall Street. Whatever multiple it assigned became a paint by numbers exercise to get into that business and out of any business that didn’t fit the fashion of the day. It didn’t matter if GE businesses took decades to build, they were out the door along with the management teams and company culture. New companies were bought and quickly folded into the big tent. Classic GE managers were appointed to lead them. Investment banks like Kidder Peabody and glitzy media companies like NBC were run by people who came from GE Capital or the leasing business. GE leaders didn’t run a business, they employed a strategy that drove productivity and cut costs until earnings flowed. And the place they flowed the fastest and the strongest was in a sector that no one outside the company thought much about. The old leasing equipment business.
A glance at the chart below tells the story.
When Jack Welch took the company over in 1981, it was a well-run conglomerate with predictable earnings. By 1995, Welch had fixed what he called the ‘software’ of the company, the people, training, and processes. His fame was such he began to appear on magazine covers and talk shows regularly, and he was as close to being a CEO celebrity as it got. Then something happened around 1995 and that something was called financial services.
GE Capital was a nonbank bank embedded in the company’s fabric because everything that was leased or rented or loaned came back to its bottom line. And it compounded that bottom line by using the company’s vaunted Standard and Poors’ AAA rating, then poured into the powerful brew high leverage and financial engineering, just like a hedge fund. It was a recipe for success today, but ultimately, a disaster tomorrow.
As Jeff Immelt took the reins four days before 9/11 in 2001, he could never have foreseen that the times ahead would not only decimate his aviation business after the terror attacks on the World Trade Center, but also his financial services business as it took a direct hit in 2008.
The makeover of the company into digital, healthcare technologies and automation weren’t far along enough to guard the company against the aftershocks. The result, as the stock market chart shows, Immelt drove the company to higher lows for long periods, during which he did earn his controversial salary, by the way. But the engine built for Wall Street’s quarterly gluttony could not muster the capital to reinvest into the new businesses fast enough and make them as good as the old ones. The problem is that old line industrial companies are going through the latter stage of disruption. They may have figured out the right things to do, but haven’t figured how to do them right.
Timing is everything, as baseball coaches say. Immelt was the right chief executive at the right time in so many respects as his continued buoying of the stock price against extraordinary disruptions proves. If he had been ten years younger, I suspect his retirement would be a victory lap, not a mea culpa.
Immelt took over a ship that wasn’t sinking, that’s true. But it was stalling, and turned out not to be optimally built for the storms it was about to encounter. If there is a lesson in this challenging story of GE’s decline, it is when we find a winning approach that Wall Street loves, let’s not be surprised that as the world changes, so does Wall Street’s passion. Better that we convey the confidence to look past the next quarter and stick with the things we will love for a long time, as Jack Welch might have said.