Reading 'Lights Out'

Lights Out: Pride, Delusion, and the Fall of General Electric by Ted Mann and Thomas Gryta is a book about GE’s management in the last 20 years. The company was an icon of American innovation valued at over $500 billion (in 2000). Since then, the large conglomerate fell to under $100 billion, and also started selling off divisions (it continues to this day with the recent news that GE is being split into 3 companies).

The book is based on news articles and interviews over a 6 year period. I didn’t have any idea about GE’s corporate culture so this was an interesting topic.

Here are my notes as I read through it (Disclaimer: not an expert on financials).

Financial results management

GE’s CEOs seemed to be measured by only one metric - the stock price. Every quarterly result influenced the stock price. They were incentivized to keep it ticking higher, so new targets kept being set accordingly. When divisions couldn’t keep up, it started the rise of creative accounting to ensure targets were always met.

At first, the rise and fall in income across the quarters was balanced to always show a gradual increase. Then phantom orders right before the end of a quarter. Then more accounting gimmicks to adjust the cost of future service contracts. The book covers more examples.

Ineffective auditing

GE’s internal audit group and the external auditor (KPMG) should have identified a lot of the financial problems and the risks taken. However, they are shown to have a ‘cozy relationship’. Audits conducted were also to look for more opportunities to ‘juice the numbers’.

Shirking accountability

Faced with criticism as these accounting practices were discovered, the 2 CEOs had defensive statements that the high targets were not expected to be achieved the way they were actually done - how convenient.

Marketing and money without coherent strategy

GE seemed to have great marketing with visionary statements and a good story. However, ‘marketing running before the product’ was a problem and there were many examples where the reality was nowhere close to the vision.

One prominent example was Predix - (jargon alert) GE’s next-gen cloud-based machine learning software solution utilizing data from GE’s equipment to make them run even more efficiently. GE was rebranded as a ‘digital industrial company’, and planned to spend $5 billion to make the software work, with ‘armies of new employees’ hired. While software development at such a large scale stalled, sales teams continued to pitch the ‘deep analytic software platform’.

The echo chamber

In their defense, the 2 CEOs maintain that the company’s direction and their financial numbers were agreed by everyone present. However, the book also notes how managers were reluctant to confront the CEO with bad news of not meeting targets. It is clear why there would be no significant opposition in an autocratic environment.

The book also mentions Board members hadn’t challenged any of the information being presented, and didn’t fully understand the complexity of GE’s business. The CEO being the Chairman of the Board further weakened their influence.

Same data but different inferences

Based on projections that the world needed 50 percent more power in the next two decades, GE (firmly set in the fossil fuels market) predicted the market for natural gas turbines would grow by 50 percent. Siemens (a rival energy company) was invested in a strategy called ‘Fleet of Ships’ - it backed several energy strategies (including renewable sources). While the energy projections were reasonably accurate, GE saw the price of renewable alternatives steadily falling and cutting into their projections.

The activist investor

I did not know about this term before reading this book. The term seemed to indicate prominent investors concerned about reducing greenhouse gas emissions or wanting to have a positive impact on society, and were influencing the company to make decisions accordingly. But no, they are investors focused on cutting costs and improving the share price by any means necessary. Trian, invested $2.5 billion and when the results didn’t improve, the investor got a seat on the board to drive the changes needed (replacing the CEO eventually).

Government regulations and involvement

There are several instances in the book where the government had to be involved in GE’s corporate affairs. The CEOs complained about the overhead and cost involved. However, reading all the examples including their opposition to the EPA (Environmental Protection Agency) about the Hudson River cleanup after pumping toxic compounds, it demands the need for even more regulation.

On the flip side, GE actively sought government assistance during the 2008 financial crisis - it wanted to be considered as a financial institution when banks were bailed out.

Final takeaway

Every corporate organization claims to have values and ethics. Honesty and Transparency feature in a lot of those.

But like exceptions to a rule, some get exempted from these standards. Statements and actions could be called hype, visionary, and futuristic, but they are different flavors of misinformation if known it is not reality. It could probably be legally defended, but not ethically.

These days it is called 'fake it till you make it' by the Silicon Valley. And so it continues.