A Blog by Jonathan Low


Oct 2, 2018

Why Historically Stable GE Fired Its New CEO After Only 14 Months

The abrupt, even impatient firing may say more about the nature of the current economy than it does about the displaced CEO.

In a market dominated by algorithmic, high speed trading, with activist investors tracking every company's performance in search of weaknesses to be exploited as well as a 24-7-365 tech and social media driven news cycle, enterprises no longer have the luxury of time to demonstrate the efficacy of their strategies, especially for iconic corporate names whose pieces may, to some investors, be worth more than the sum of their parts. JL

Steve Lohr and Kevin Granville report in the New York Times:

Jack Welch, the famed G.E. chief, led the company for 20 years. Flannery’s predecessor, Jeff Immelt, was chief executive for 16 years. “Flannery seemed a smart, common-sense guy, but as an insider, he was slow to make the difficult decisions,” like shedding even more of his former colleagues to reduce expenses. Directors felt he was not decisive enough and not moving fast enough. "This board wasn’t waiting to see how he did.”G.E. shares, which had been down more than 50% in the past year, rose 7% on Monday.

When John Flannery was named chief executive of General Electric last year, he said he would rethink the troubled business “with speed, urgency and no constraints.” In the next months, he sharply cut expenses and devised a plan to sell off large parts of the industrial giant.

But that wasn’t enough. On Monday, G.E. announced that it had replaced Mr. Flannery with H. Lawrence Culp Jr., who joined the company’s board in April.

The switch stunned analysts, since the industrial giant traditionally measured its leaders’ longevity by the decade. Jack Welch, the famed G.E. chief, led the company for 20 years, and Mr. Flannery’s predecessor, Jeffrey R. Immelt, was chief executive for 16 years.

It also underscored the depths of problems at G.E., once considered a model of management excellence. In addition to the leadership switch, the company said on Monday that it would “fall short” of its earnings guidance for the year and would write down the value of its struggling power generation business by about $23 billion — the latest in a series of disappointments for investors. In recent days, the G.E. board decided that Mr. Flannery, 57, was not the right leader for the daunting turnaround challenge. Directors felt that he was not decisive enough and not moving fast enough, according to a person familiar with the deliberations who was not authorized to speak publicly.

Mr. Flannery, who had worked at G.E. for more than three decades, was told of the board’s decision over the weekend, the person said.

G.E. shares, which had been down more than 50 percent in the past year, rose 7 percent on Monday.

Mr. Culp, 55, is a former chief executive of Danaher, a conglomerate that makes scientific, medical and automotive equipment. During his 14 years as its leader, ending in 2014, Danaher was known for its lean management, deal making and outstanding financial performance.

In a statement, Mr. Culp gave no hint that G.E. would change strategy. He called G.E. “a fundamentally strong company” facing an uphill but achievable turnaround challenge.

G.E. has been battered by a series of shocks over the last decade. When the financial crisis hit, G.E., the nation’s largest nonbank financial institution at the time, was caught in the credit crunch and its future cast in doubt. Mr. Immelt moved to drastically pare back its big finance arm, GE Capital. Mr. Flannery, who took over in August 2017, continued whittling down the finance unit, but its troubles lingered. In January, the company announced that it was taking a $6.2 billion charge, after a review, mainly to cover obligations on long-term care insurance.

In June, in a blow to its storied corporate reputation, G.E., the last original member of the Dow Jones industrial average, was dropped from the blue-chip index.

Mr. Flannery’s recovery plan was to move G.E. away from its conglomerate past. The company would shed its large oil and gas, health care and rail locomotive businesses. It would focus on three others: jet engines, electric power generators and wind turbines. The remaining three accounted for 60 percent of G.E.’s revenue of $122 billion last year.

H. Lawrence Culp Jr., General Electric’s new chief executive, is a board member at G.E. and former chief at Danaher Corporation.CreditT. Rowe Price Group, Inc
Mr. Culp was on the board and approved the company’s strategic plan in June. So was Thomas W. Horton, a former chief executive of American Airlines, who was named the company’s lead director on Monday.

But the power generation business has continued to spawn problems. Two weeks ago, G.E. disclosed that it had a failure in a couple of its electricity-generating gas turbines and that they had to be temporarily shut down.

In a statement at the time, Russell Stokes, president of G.E.’s power business, characterized the problem as showing that “minor adjustments will be made along the way with any new technology.” The turbine blade problem, he said, was being fixed quickly. But the board apparently saw the incident as a red flag in a business that delivered a series of worrying surprises for more than a year, dragging down G.E.’s profit performance and its stock price.

The board held a meeting Wednesday to review the issues in G.E.’s power division, according to the person familiar with the deliberations. On Friday, Mr. Flannery, in an in-house video, addressed the struggles of the power unit and encouraged its work force to “keep your head up, your chin up, keep moving forward.”

The huge write-off in the power unit — a noncash charge — essentially erases all the good-will value in the business. Good will is the value attributed to a business beyond its basic assets, like factories and equipment. So good will typically includes the value of a brand name, customer accounts and patented technology.

G.E. is by no means the only company grappling with a weak market for power generators, as energy-efficiency programs and renewable energy sources reduce demand. But G.E. misjudged the market badly, more than rivals like Siemens.

The big write-down and the rock-bottom valuation, analysts say, suggest that the G.E. board was not confident that the power business was on a recovery path. Under Mr. Flannery, the nasty surprises continued, and the board was unforgiving.

“Flannery was the best internal, pragmatic candidate for the job, but this board wasn’t waiting long to see how he did,” said Nicholas Heymann, an analyst at William Blair & Company.

G.E. has repeatedly said its power business, while a fix-it project for the next year or so, is a fundamentally sound business with industry-leading technology and a large customer base. About one-third of the world’s electricity is generated by G.E. equipment.The logic behind keeping the power business also hinges on technology. A gas turbine that generates electricity, experts note, is very much like a jet engine — except it is larger and bolted to the floor of a utility plant.

In his statement, Mr. Culp declared that the task ahead for G.E. was “to drive superior execution, and we will move with urgency.”

The words are essentially the same ones Mr. Flannery voiced again and again. But now, they come not from a 30-year G.E. veteran but from an outsider. Under Mr. Culp, analysts expect the words to be backed by even more forceful action.

“Flannery seemed a smart, common-sense guy, but he was an insider,” Scott Davis, chief executive of Melius Research, an independent financial analysis firm, wrote in a report on Monday. “And as an insider, he was slow to make the difficult decisions,” like shedding even more of his former colleagues from the G.E. payroll to reduce expenses.


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