JACK WELCH, JEFFREY IMMELT AND JOHN FLANNERY
This is gonna take a ton of work.
Are there on the face of this great earth of ours any more different, distinct, dissimilar and separate characters and personae — successively occupying the same exalted corner office — than these ‘Three Amigos’ ???
The last three CEOs of General Electric…Jack Welch, Jeffrey Immelt and the newly-appointed John Flannery couldn’t be less alike.
Welch was one of the greatest salesmen who ever sailed (credit to the Three Stooges).
Immelt spent 16 years devaluing GE stock by more than 1/3rd while the Dow Jones Industrial Average was doubling and then some.
And Flannery, bright, shiny and new talked a big game in an internal letter to the industrial conglomerate’s 333,000 employees but his time-worn and weary platitudes — focusing on customers; working more as a team; and executing better — did little to even modestly move the GE stock needle toward positive territory.
Better sales, more consistent profit growth, higher margins and some real direction might actually excite investors.
In 1960 Jack Welch was a General Electric junior chemical engineer working in Pittsfield, Massachusetts and earning a salary of $10,500. He wasn’t keen on the bureaucracy he encountered nor was he happy with the raise he’d been offered. Welch was a proponent of the small company atmosphere and was assured that its existence would be made a priority so he shelved his plan to quit.
He was nearly fired in 1963 when an explosion at the factory which he was managing blew the roof right off the facility. Somehow he skirted personal, professional disaster. Even at this early juncture in his career, he had demonstrated a knack for staying in the game and winning.
From 1968 to 1979 Jack Welch found himself scaling the corporate ladder at a dizzying pace. His meteoric rise was stunning to say the least.
In ’68 he became the vice-president and head of GE’s plastics division which then was a $26 million operation. In ’71 he added the title of vice-president of the company’s metallurgical and chemical divisions. In 1973 he was named GE’s head of strategic planning, a position he would hold until 1979; by any measure he was now swimming with the “big fish.”
Shortly after this promotion he was selected to be the senior vice-president and head of the Consumer Products and Services Division and by 1979 Jack Welch was the vice-chairman of the General Electric Company.
Two years later in April of 1981 Welch became GE’s youngest chairman and CEO, succeeding Reginald H. Jones.
He was forty-five years old.
During his two-decade tenure, the company’s market capitalization rose from $14 billion to north of $400 billion. The company’s value rose 4,000%.
Welch became The Lion King by cutting and slashing like an out-of-control Zorro.
He essentially dismantled the organization his predecessor Jones had built and his relentless streamlining of GE became the blueprint for other CEOs during the 1980s, a time when slow growth and Asian competition represented formidable but for Welch, somehow surmountable obstacles.
He closed factories, reduced payroll, curtailed basic research and development efforts and either shuttered or sold off underperforming subsidiaries.
Layers of management were stripped away and ultimately disappeared under his watch.
He fired the bottom 10% of GE managers each year while rewarding the top-performing 20% with bonuses and stock options. By the mid-eighties, “Neutron Jack” had cut GE’s workforce by more than one-quarter to 299,000.
As for acquisitions, he brokered a deal for RCA in 1986, retaining the NBC broadcasting network arm but selling off most of the rest.
His next move was to make purchases which helped shift the balance of GE’s businesses to financial services from manufacturing.
In the mid-1990s, Welch had adopted the Motorola Six Sigma Model and made it central to his business strategies for managing quality improvement. By the end of the decade, two-thirds of America’s largest companies had followed his lead.
Welch orchestrated it so that General Electric became famous for making Wall Street analysts’ quarterly earnings forecasts good as gold: its share price rose from just over $1.25 in 1981 to a peak of $60.00 in 2000.
When he retired from GE in 2001 he received a severance payment of $417 million, the largest such sum in business history at the time.
He became a legend. A very tough act to follow.
In 1999 Jack Welch parried the grandiose compliment bestowed upon him by Fortune magazine that he was nothing less than the best manager of the 20th. Century, “far and away the most influential manager of his generation,” with this circumspect retort:
“My success will be determined by how well my successor grows it in the next twenty years.”
This careful and prudent remark seems to have blown up in Welch’s face like a trick cigar some eighteen years later.
Jeffrey R. Immelt, Jack Welch’s hand-picked successor, saw to that quite adroitly.
His defenders are all too eager to point out that Immelt had to contend with the bursting of the tech bubble, the September 11 attacks and the financial crisis, all circumstances far beyond his control.
(But so did the chief executives of every other major company).
And he inherited “a highly inflated stock price,” thanks to Welch’s aura along with lofty expectations that most probably could have been met by no one, remarked Bruce Greenwald, professor of finance and asset management at Columbia.
Immelt’s critics seem to far outnumber the defenders.
“Given how horrendous the stock performance has been for so many years, the most amazing thing is why the board didn’t act sooner,” to replace Mr. Immelt, commented Charles M. Elson, a professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
With tongue firmly planted in cheek he added, “I’m a long-term G.E. shareholder [and] the bottom line is, I did poorly and he did very well.”
A Barclays managing director, Scott Davis, was more to the point describing Immelt’s tenure to CNBC as “an unmitigated disaster.”
General Electric’s stock price had markedly underperformed the stock market and lagged well behind the share values of some of its industrial conglomerate peers.
In the last decade GE shares have plummeted 25% in contrast with a 59% rise for the S&P. 500. Rival Honeywell’s stock has more than doubled; Danaher’s has tripled; and United Technologies gained 67%.
These numbers certainly didn’t negatively impact Jeff Immelt’s personal bottom line.
One of the country’s highest-paid executives, he earned $21.3 million in 2016; $33 million in 2015; and $37 million in 2014.
Fortune estimates that even in the absence of a formal severance package Immelt, 61, will receive an additional $211 million upon his retirement.
Elson was right; Immelt had done better than he.
And Greenwald wrapped Immelt’s legacy tidily and with a bow in his assertion that “about the best that can be said is that he enabled G.E. to survive through a difficult time. But he never really understood how to create value through growth.”
Nice work if you can get it.
Reflecting on his tenure as GE’s head honcho, Immelt highlighted the increased strength of the company’s industrial businesses, their competitiveness and their large market shares.
“I’ll say that will stand the test of time. Let other people make their own judgments,” he said, preferring to avoid the cold, hard numbers recorded under his watch.
GE’s overreliance on its sprawling financial services business, which had served Welch so well, rendered it exposed and vulnerable to a financial crisis which is exactly what befell — among other things — the Immelt regime.
Praised for dismantling and ultimately abandoning the Welch model, Immelt was much maligned for not acting sooner.
Becoming a more focused, industrial company and more specialized, i.e. eliminating in one form or another its many disparate operations, was the compelling strategy which should have been implemented by Immelt well before it in fact began to take shape.
And then there is Flannery.
John Flannery, 55, and a 30-year GE veteran is “the quintessential company man.”
As of August 1 he is the man, Jeff Immelt’s successor as CEO.
He has headed offices from South America to Asia. He has turned around the company’s foundering health care division, now all $18 billion-worth of it. He is assigned the daunting task of managing one of corporate America’s last conglomerates, of simplifying General Electric’s complex structure — it still makes everything from microwaves to wind turbines — and of pumping up the company’s languishing stock price.
His promise to conduct a “comprehensive review [with] a sense of urgency” as he ascended the throne, spurred Wall Street; shares immediately rose 3%.
Analysts were impressed by Flannery’s thumbprint on behind-the-scenes dealings, particularly with respect to the $13.5 billion agreement to take over the power business of the French strongman Alstom as well as the spinoff of GE’s consumer financial piece, Synchrony Financial and the sale of GE’s refrigerator business.
That he has shown an interest and ability to divest assets gives analysts comfort that Flannery could and will further simplify the multinational conglomerate’s sprawling and diverse interests.
When he took over the health care business in 2014, a leader in imaging and diagnostic equipment, the expectation was that the unit would be sold or spun off.
He was a self-described “bean counter,” after all.
Instead Flannery expanded it, making significant inroads into life sciences and cell therapy systems businesses.
But because his background was in GE’s business development — code for mergers and acquisitions — Deane Dray, an analyst at RBC Capital Markets posited that “one could draw the conclusion that he was preparing it for some sort of action that would maximize shareholder value.”
Investors — including the activist hedge fund Trian Partners, led by billionaire Nelson Peltz — would be pleased.
Perhaps Warren Buffett would also have been happy.
Then.
Alas, for General Electric and Mr. Buffett, time has run out.
On August 14th. it was reported that Berkshire Hathaway dumped its entire $315.4 million stake in GE in the second quarter according to a 13F SEC filing, roughly 10.6 million shares.
(A 13F filing is a quarterly requirement for investors managing more than $100 million).
General Electric shares, down 20.08% this year, rose 0.63% the day the filing was released. Berkshire received most of the shares in 2013 after loaning roughly $3 billion to GE in October of 2008, during the depths and horror of the financial crisis.
For John Flannery, it begins.
He must decide first and foremost what GE’s core business is.
And then, he must identify and vigorously pursue what America’s most iconic company and global business wants to define as its unifying purpose. Or vice-versa.
At least he can put his money where his mouth is. Last week Flannery bought nearly $2.7 million in GE stock (103,893 GE shares) for his 401(k) account. He now owns about 615,000 shares valued at about $15.5 million.
I know I join Jack and Jeff in wishing you nothing but good fortune John.
[Editor’s Note: This piece was written by Mr. Kaplan in August 2017.]
ADDENDA:
Jack Welch died March 1,2020 in Manhattan.
Jeffrey Immelt stepped down as CEO on August 1, 2017 and retired from his position as Chairman of the Board of GE on October 2, 2017. He is presently working as a venture partner at New Enterprise Associates.
John Flannery served as the eleventh CEO and tenth Chairman of GE from August 2017 until October 1, 2018 when he was fired “effective immediately.”
