Who turned the lights out? The slow death of General Electric (GE)
‘My second day as chairman, a plane I lease, flying with engines I built, crashed into a building that I insure, and it was covered by a (news) network I own.’ (GE’s CEO and Chairman, Jeff Immelt commenting on the events of 9/11)
Who or what is General Electric – and why should I care?
It is almost impossible to explain the influence, power, and mystique of General Electric (GE) to those born after a certain year, who have not lived in the US or studied its great companies. Before Microsoft, Apple, Google, and Amazon there was GE. Its brand stood for all that was successful about 20th century industrial America. GE was America, and America was GE. The love affair was mutual.
Even GE’s founding is rich in US history and mythology. It was incorporated in 1892 through the merger of several lighting companies including one created by renowned inventor, Thomas Edison, to market his electric light bulb. Initial financial backing came from J.P Morgan, the legendary banker. Like GE, JPMorgan Chase bank still exists and is one of the world largest financial institutions.
The last of the great conglomerates
Over 100 years GE grew into one of the largest companies of all time. At its height, its tentacles spread into 180 nations. In the year 2000 GE had a market value of just under US$600 billion. At that time if the company’s share price sneezed, the US economy caught a cold. GE was also one of the last of the mighty conglomerates, meaning it ran a range of entirely different and un-related businesses under the same corporate roof. These included aircraft engine manufacture, health equipment such as MRIs, railway locomotives, oil and gas exploration, broadcasting and Hollywood studios all bundled in with financial services and insurance. Buying, selling, and tweaking GE’s portfolio of fully owned companies and joint ventures employed hundreds of analysts and dealmakers. Before the GFC, GE, although not a bank, was in the top 5-6 financial organisations in the US – a fact we will return to. Although a private entity, GE was deeply committed to ground-breaking research and development. Two GE employees have won Nobel Prizes. A GE-employed engineer, Ivar Giaeve, won his Nobel for a discovery that led to the company building the world’s first MRI machine.
Macho culture and management fads
In terms of organisational culture, GE was its own universe. Nowadays it would be considered the home, if not one of the founders of, the corporate version of toxic masculinity. Particularly amongst its cadre of management elites, GE attracted the very best, educated them relentlessly via its own internal management ‘university’, drove them hard and threw them away if they did not perform or burned out. Executives worked hard, played hard, learned hard and earned hard. Even in the early 2000s women were a rarity in its leadership ranks.
Always at the forefront of management trends and business school jargon, GE perfected what was called ‘rank and yank’. That is, rank employees in terms of performance, and yank (push out) the bottom ten percent on an annual basis. The rewards, however, made it worthwhile. Senior executives criss-crossed the world in GE’s own fleet of aircraft and generous share option plans were available. Rank and file workers got pensions and healthcare even if unions and organised labour were discouraged.
Two decades of decline
Yet in 2021, GE is a shadow of its former self. The past two decades have been the hardest since 1892. From 2000 to 2020 its share price fell from above $US50 to the mid $20s. Profits similarly slumped. Its financial division needed a government bailout during the GFC. It was found guilty on a range of tax charges and spent 20 years fighting Federal pollution authorities before caving in and paying hundreds of millions of dollars to clean up waterways it had polluted. GE’s reputation for strategic brilliance crashed as hard as its share price. It bought into the oil and gas business just before the crude oil price crashed; it pumped millions of dollars into a failed enterprise software platform for industrial companies; it invested heavily in its power generation division even as renewables were taking hold; and the insurance business it told the market it had divested came back to haunt it in the form of billions of dollars of un-provisioned claims. Finally, in 2020 its much vaunted aircraft engine manufacturing and aircraft leasing businesses were all but grounded by Covid-19. The company survives but as a shadow of its former self. Everyone knows this generation’s ‘Big G’, Google. Less and less people have heard of the other ‘G’, General Electric.
In summary, it just about got to ‘lights out’ for the light bulb manufacturer. GE had always boasted that it was too big, too cashed up, too smart, too diversified, and too well managed to fail. Its near demise is brilliantly narrated in an engaging book titled, ‘Lights out’ by two highly credentialled Wall Street Journal business writers, Thomas Gryta and Ted Mann.
What can be learned from GE’s 20-year descent?
What follows is a summary of what I learned from Gryta and Mann about GE’s near demise. The story provides a textbook of learnings.
Excessive complexity brings its own costs
By the late 1990s, GE was a globally expansive, mind-blowingly complex undertaking. All big companies come with complexities, but the complexities embedded in massive conglomerates present unique governance and management challenges. GE was a major manufacturer of long lead time equipment such as aircraft engines and power generators. It was one of the world’s largest financial institutions. It spent US$5-6 billion a year on R&D – more than many of the most prestigious Universities in the world. It drilled for oil, it built railway engines, it leased aircraft and insured the elderly for their end-of-life care. It designed and manufactured expensive medical equipment like MRIs, ran a national TV network and owned film studios. It was too big to fail and too sprawling to manage. For years analysts, business academics and pundits had been arguing to break it up and sell it off. The strongest push back to that view came from GE’s well-known latter-day CEOs: Jack Welch and Jeff Immelt.
The cost of coming to grips with its complexity continued to rise even as the advantages of diversification eroded over time. No single CEO or executive team, let alone a board, was capable of understanding and managing the risks involved, let alone identifying and driving home the myriad opportunities. The company was so large and amorphous that new executives and board directors were continually becoming aware of businesses they did not know were part of the GE portfolio.
Strong, independent governance is not optional
A GE directorship was highly sought after. Some of the US’s most successful businessmen sat around the board room table. The board was large by contemporary standards, up to 18 individuals. As is often the case in America, the CEO and Chairman were the same individual. The incumbent wielded ultimate management power on the floor of the company as well as next to ultimate governance power in the board room. The CEO, as Chairman, had the authority to model and re-model the board in his own image and to his own liking.
Although highly paid and loaded up with perks, independence of mind amongst directors was not particularly valued. New directors were frequently surprised by how little board room debate there was about major decisions. The authors tell the story of one board newcomer who was confused by the lack of critique of significant management proposals. After a particularly acquiescent board session he asked a more senior director colleague, ‘What is the role of a GE board member?’ ‘Applause’, the older director replied!
Eventually Berkshire Hathaway’s Warren Buffett invested $3B to shore up GE and a hedge fund leveraged its investment to obtain a seat at the governance table. But in hindsight, GE’s governors asked too few questions and had too cosy a relationship with the executive team.
Learning to see around corners and hedge against the risks
Rear vision is, of course, perfect. Over the 1980s and 90s and into the 2000s, GE made a series of expensive, at times poorly researched investments, in specialised business sectors that it did not understand. These included insurance, oil and gas and enterprise software. Insurance and oil and gas investments are not only long term in nature, but the sector is also notoriously cyclical. Part of ‘seeing around corners’ – looking into the future - is understanding that the oil price waxes and wanes and that insurance liabilities and claims go up and down driven by forces a company cannot control like earthquakes and wild weather. Successful players in these industries hedge their risks and pad out their balance sheets in order to ride the waves.
The 9/11 attacks were not foreseeable, but arguably, the GFC or a similar credit shock, was. Quite high degrees of risk were built into the company’s business model, and particularly in its financial services division. Under CEO Jack Welch’s guiding hand, financial services grew to be 40% of GE’s revenues. It could be relied on as an internal hedge against poor results from the other businesses. Or so company rhetoric propounded. GE used it’s high-credit rating as an industrial company to borrow money cheaply and lend it out – including to its own businesses and its own customers. It was not a bank, however, and did not trade under the restrictions and oversights placed on banking institutions.
Despite generating significant amounts of cash, prior to the GFC the company was highly reliant on what is called ‘commercial paper’ for liquidity. That is, on short term, unsecured loans on terms spanning from overnight to several months. When the GFC hit, GE could not sell its commercial paper. Its famed liquidity dried up overnight. As a result, it literally had to beg for US Federal government support. Although GE boasted teams of highly trained risk managers and analysts, the default risk strategy seemed to have been an overarching belief that the company would always generate enough cash to operate successfully, was diversified, and run by smart, savvy people.
The intersection of short and long-term liabilities and risks
Historically, GE’s core business lines were long term: designing and building power generators, aircraft engines and locomotives or developing state of the art medical imaging machines. As noted, more recent additions had included heavy industries such as oil and gas drilling. The sale of some of these high value products was made at a loss because GE’s profits were generated via long-term service contracts on items such as aircraft engines and power generators. When cash was short at the end of a quarter or financial year, GE began to ‘monetarise’ or place an accounting value on, these service contracts. That is, they ‘pushed the accounting rules’ to revalue these contracts. For example, predicting a greater profit on a service contract in 10 years’ time than currently. These notional revaluations were booked as profit, but importantly, generated no new cash. When profits rose due to such revaluing, GE had to pay increased investor dividends which further ate up cash reserves.
Other GE businesses such as broadcasting were more short term and fickle in nature. Ratings drive TV channels and thus advertising revenue, for example. A single bad ratings season negatively impacts revenues. In reading ‘Lights Out’ it often seemed to me that the intersection of multiple layers of short-term volatility and opportunity in one part of the business, with long term product lines and unpredictability in other parts of GE, were not understood or provisioned for. In defence of management, perhaps GE was in fact too unwieldy to get one’s head around. That being the case, the leadership team should have simplified and slimmed down the business!
The hammer blows kept coming. When Covid hit in 2020 and the airline industry stalled, GE copped a double whammy. It had huge, ongoing overhead costs in its aircraft engine manufacturing plants at a time when nobody was buying aircraft and engines, and potentially eye-watering revenue collapses in its aircraft leasing businesses. The Covid shock may have been an external one, but in being vertically integrated – making engines AND financing planes – GE got slapped on both sides of its somewhat embarrassed face.
Yet the sleeper in the pile proved to be insurance. To be specific, a remnant insurance business everyone thought had been sold. Jeff Immelt, the GE CEO from 2001 to 2019, had publicly affirmed GE’s alleged exit from insurance on several occasions. But in early 2017 executives began to relate that a ‘stub insurance piece’ remained alive and smouldering on the GE balance sheet. The facts dripped out. GE had supposedly exited insurance in 2004 but had continued to write policies that covered costs like nursing homes and assisted living, for several more years. Few within GE understood this bespoke insurance business and the liabilities were never audited or mapped. In addition, questionable decisions were made in reinsuring the policy exposures. When an audit was done of the ‘stub’ insurance book, the results were shocking. GE was under-reserved by up to US$15 billion, a figure that was eventually rounded down to US$5-6 billion. Multiple lawsuits were filed, and regulators undertook investigations. Yet another cost of complexity had come to light.
Australians with long memories may call to mind the failures of GIO Reinsurance and HIH in the early 2000s. When a toxic, slow burning book of insurance policies fans into uncontrolled flames the results can be catastrophic – even for one of the biggest companies on the planet.
Beware hubris
Put simplistically, it took 20 years to build the modern GE under the legendary CEO Jack Welch in the 1980s and 1990s, and 20 more years to run it slowly and inexorably down under his successor, Jeff Immelt, in the 2000s and 2010s. But such simplicity masks significant facts. Welch was an amazing man, but the very way he led and grew the company embedded deep problems in the structure, governance, strategy, risk profile and, importantly, the culture of GE. It was Welch who bought into insurance and Welch who decided, no doubt with a little of his ego in play, that GE should own a TV network, NBC. NBC in turn gave GE and its celebrity CEO plenty of positive media tailwind. Ironically, NBC launched the reality TV career of a certain Donald Trump in ‘The Apprentice’!
Welch, who died in March 2020, had enormous self-belief. He drove himself hard, he drove the company hard. He instilled a can-do culture, a win at all costs, high stakes daily adrenaline rush that attracted and rewarded talented, driven people who did not overtly question the culture, let alone the CEO and his decisions. As noted, board directors were selected for similar characteristics. Immelt, who is also very gifted leader, was primarily a salesperson and deal-doer. Yet even prior to becoming CEO, he had a reputation for paying too much for acquisitions, an approach that found its nemesis in the ill-fated purchase of failing French engineering company, Alstom, towards the end of Immelt’s time as leader and chairman. An ex-college football player, Immelt grafted his own high testosterone, ‘we can do anything we put our minds to’ mantra onto Welch’s win at all costs cultural legacy. Businesses were bought on a hunch and an intuition; goals were announced without plans to achieve them.
One executive described a high-stakes situation where Jeff Immelt announced to the market a difficult, multi-facetted goal with little or no planning or internal consultation. The flabbergasted Executive asked one of Immelt’s direct reports how on earth they were going to deliver on such an outlandish promise. The answer he received was, ‘Deliver? That’s just work!’
Just work? Hard work and dollops of self-belief could solve everything, it seems. In this, GE lived out its own version of the American Dream, of the all-conquering pioneers and frontiersmen who founded America. In 21st century GE intractable problems were met with sports metaphors and rounds of ‘we can do anything’ back slapping.
Full of hubris, GE came to believe its own spin.
Who pays the piper? It’s all about the money
Who really owns GE? The stockholders? Investment organisations such as pension funds? GE’s employees or perhaps the citizens of the countries it operates in, such as the US? I wonder if at least some of the senior management, and perhaps even the board, came to believe that they owned the company, that it was theirs to do with as they saw fit. As the CEOs were also the Chairmen, over four decades management came to be very well remunerated.
The rewards big and small allocated to senior executives are worth recounting. For many years GE ran a second, hidden from view fleet of corporate aircraft that even independent board directors did not know existed. Each time the CEO and senior staff flew somewhere – they were forbidden to take commercial or even charter flights – a second GE plane was also dispatched just in case the first plane broke down. The crew of the second flight were carefully instructed to park at a distance from the first plane and to not talk to ground staff about why they were there.
When Jack Welch retired his payout was $417 million. As part of that package GE continued to pay for his luxury New York apartment until his death. His life-long post-employment contract included the regular delivery of flowers imported from Europe, use of a company jet and a chauffeured limousine. These and other details of Welch’s highly geared package only became public in his divorce proceedings.
The largesse was intergenerational. Despite presiding over a long-term slide in company share price and value, Welch’s successor, Jeff Immelt’s payout was estimated to be in the vicinity of $200 million. The top 700 GE employees drove company vehicles and gained access to free or subsidised holidays, perks and bonuses, tickets to sporting events and access to influential people from film stars to Presidents.
Money and power have always been intertwined. At GE, almost fatally so.
Guru-CEOs and their legacies
Jack Welch created massive value for stockholders during his years at the helm of GE. The battle over how much executives should be paid versus those with humbler roles, will not be solved in this article. But neither should the topic be off limits just because opinions run high.
But Welch and Immelt did not just run a legendary company for 40 years, they helped create and perpetuate a kind of management-as-priesthood guru-dom that still thrives today. Theirs was an approach to leadership and ‘win at all costs’ that at its worst runs roughshod over workers, the environment, the community, and even individual well-being. On the flipside, amongst its many achievements, GE lit up the world with the electric light bulb, created the MRI and flew airline passengers safely for decades.
Some people argue that wealth creation is a neutral activity, largely or completely independent of moral values and ethical constraints. The ends justify the means. If accounting standards can be pushed to the limits to maximise profit, then so be it. If a task can be done cheaper overseas, then work should be sent offshore. Money is money, it is neither good nor evil. I am not sure that this is true. I worry when individuals and companies act as though it were true. There are higher beliefs that historically many have chosen to live by; immutable moral principles we have consistently placed above success, wealth, and individual aggrandisement. ?
To paraphrase a well-known maxim: nobody ever says on their deathbed ‘I wish I had read another leadership book’ or ‘when I had the chance, I should have bought more blue-chip shares…’
A life well lived is bigger than GE.
Philip Pogson FAICD
August, 2021.
Philip has been a company director, Chair, and business owner for more than 20 years. He consults and advises on strategy and governance across a range of business sectors and also co-owns and operates a music production and promotion business. He enjoys writing about the intersection between leadership, governance, and long-term strategy.