August 1, 2020
One of the most intriguing questions in business is what happened to GE, a company so beloved in the United States that it almost collapsed in 2018 and began to believe. It still hobbles, but the suspects behind a $ 500 billion worth of destruction in just over 20 years are so many that the mystery seems like a joke.
The blame begins with the late Jack Welch, chief from 1981 to 2001, who created the myth that GE could walk on water? Does it belong to Jeff Immelt, his successor for 16 years, who continued to sell this illusion, even when the waters rose treacherously around his neck – and the company -? Should it be shared by his short-lived successor, John Flannery? Or Larry Culp, the current chief, who has so far failed to turn the tide? And do the so-called guardians of corporate America – CNBC boards, regulators, analysts, investors and talk show hosts, none of whom (along with Schumpeter) resist the temptation to anthropomorphize business success and failure – do they also have responsibility?
Two Wall Street Journal reporters, Thomas Gryta and Ted Mann, wrote a book, “Lights Out”, which seeks to find out what went wrong. It spins and spins almost 40 years of modern GE history in a way that is at times as disconcerting as the conglomerate itself. But the thread that runs consistently enough to avoid seasickness comes from a phrase that Flannery used shortly before replacing Immelt in 2017: “Enough successful theater”. For decades, GE managers have had an exaggerated sense of their own abilities, which has led to narcissism, arrogance and flexing, if not breaking, of accounting rules to achieve their profit goals. This eclipsed any strategic vision they may have.
Welch set the tone. His mandate coincided with the dismantling of other conglomerates, such as AT&T. But he convinced investors that GE was the exception to the rule too big to manage, thanks to the brilliance of its executives. By cutting jobs, closing backward divisions and overseeing about 1,000 acquisitions worth $ 130 billion in 20 years, he has rejuvenated the company – and the reputation of American capitalism. However, as the book shows, his main contribution was the creation of GE Capital, the financial arm. It could borrow cheaply because of its AAA credit rating derived from GE’s industrial strength. Its success ensured that GE shares were traded at a high price in relation to earnings, helping Welch to use shares to pay for acquisitions. And it helped to smooth the earnings of the entire group in opaque ways, which may have made it easier to achieve Welch’s exact profit targets.
GE Capital eventually dragged the company down. A few months after Immelt took office in 2001, the scandal over energy giant Enron sparked a scrutiny of the accounting tricks that increased earnings, forcing GE to show that it was being fulfilled. Immelt failed to tame in time for the 2007-09 financial crisis, which has become a near-death experience for GE. In the following years, the perception of risk weighed on the price of its shares, encouraging Immelt to move away from financial services, in order to reinvigorate the company’s industrial heart: jet engines, electric turbines and medical assistance. However, after he launched the sale of much of GE Capital in 2015, the relief was short-lived. A disastrous $ 10 billion acquisition of Alstom, a French competitor, in the same year would be Immelt’s biggest mistake. Problems in GE’s energy business have been plaguing the company ever since. They contributed to the massive cash crisis that culminated in Flannery’s dethroning in October 2018, just 14 months after he became chief.
The book places most of the blame for GE’s problems on Immelt, a salesman who seemed to treat him more as a company to sell to investors than as a manufacturer of products to sell to the world. He used Botox-like tricks, produced by Beth Comstock, his marketing partner in motorcycle clothing, to convince markets that GE was not an experienced industrialist, but a digital innovator. But it came with little that was new or exciting. He wasted money on dinosaur industries, like oil and gas. He donated money via share buybacks. And he betrayed hints of pharaonic illusion: when traveling on business, his entourage sometimes included not just one, but two company jets.
Still, blaming one man, or even several men, for the collapse of an empire as watched as GE is a little superficial. It is, using Tolstoy’s concept in “War and Peace”, how to attribute the fall of Moscow only to Napoleon and Alexander. Bigger factors were at stake.
Start with size. Almost every boss wants to run a bigger company. Investors often applaud the size alone. However, the more complicated the company becomes, the greater the information gap between managers and markets. This makes it easier to disguise what is really going on. Next is the United States’ cult of chief executive. When both roles are occupied by a man (mostly men), subordinates and boards have a harder time challenging major decisions, even when potentially ruining.
A third common problem is the creation of myths in the stock market. Comstock’s approach to digging GE out of a hole was, as she said, “choose a simple story … and tell it over and over again.” Analysts, business editors, and even occasional columnists, fall for it very often. In the case of GE, this included articles with titles comparing the company to a smart startup. Better to keep a close eye on your old energy division of the economy, the company’s real Achilles heel.
Mr. Immelt, with the turbine blade, in the private jet
Ultimately, companies are never fully in charge of their own destinies. The internet, the rise of China, the financial crisis and greener energy all played a role in GE’s downfall. The results for the second quarter of July 29 revealed that the covid-19 interrupted Culp’s rescue mission, damaging GE’s most profitable industrial businesses, especially aviation. As companies age, events inevitably wear them down. To avoid this, companies have few better options than honing their skills and adopting the simple life – even if it implies less suspense. ■
This article appeared in the Business section of the print edition, under the title “A whodunnit by GE”
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