Bob's Gutsy Leadership Blog

GE – Destroying a Giant – 17 Years of Bad Management!

In 1907, the Dow Jones Industrial Average was formed as an Index of the stock prices of 30 of the largest and most successful companies on the stock exchanges in the USA and General Electric (GE) was selected as a charter member.  By 2018 GE was the last remaining charter member and was booted off at that time since the company had imploded in the prior 17 years due to very weak management; specifically, the CEO, who was appointed in 2001, and the Board of Directors. For perspective, from 2001 to 2017 (when the weak CEO departed), GE’s stock price dropped -51%, while the S&P 500 gained +102%.  For the past 4 years GE has been trying to dig out from the mess. GutsyIn 1907, the Dow Jones Industrial Average was formed as an Index of the stock prices of 30 of the largest and most successful companies on the stock exchanges in the USA and General Electric (GE) was selected as a charter member.  By 2018 GE was the last remaining charter member and was booted off at that time since the company had imploded in the prior 17 years due to very weak management; specifically, the CEO, who was appointed in 2001, and the Board of Directors. For perspective, from 2001 to 2017 (when the weak CEO departed), GE’s stock price dropped -51%, while the S&P 500 gained +102%.  For the past 4 years GE has been trying to dig out from the mess. 

So…what happened that caused this colossal train wreck for the former corporate icon formed in 1892 by Thomas Edison, J.P. Morgan and a few other partners?  Here were the key problems:

  • Lazy and Sloppy Business Practices – For example, consider the large GE Power division.  It made its money not on the generators and turbines it built, but on the service contracts it sold to maintain the machines.  As noted in the book Lights Out: The Fall of GE, the division constantly would “tweak the future cost estimates on those decades-long contracts to jack up the profits as needed, enabling them to paper over the real losses from unsold inventory and declining demand.”  Why the CEO, and the board, didn’t blow the whistle on this and demand that the core business be fixed is a mystery.  
  • Slow Decision Making – For many years, GE shares were overvalued, primarily by relying too heavily on its financial division, GE Capital. In GE’s glory-days, that division contributed nearly half the firm’s earnings via the short-sided approach of loading up on debt and becoming overleveraged in the insurance business. The new CEO in 2001 had as a key goal dismantling the badly hemorrhaging GE Capital, but he was very slow in doing so.  By 2008 when the financial crisis hit, GE Capital had $545 billion in debt. It took until 2018 to finally sell off its last parts.  
  • Hiding Behind Financial Band-Aids – Shady practices, like the financial tricks used by the Power division to show profits, were commonplace.  During this 2001 to 2017 period, as noted in the Wall Street Journal, ”funds that had been doled out to shareholders as fat dividends, and to executives as lavish salaries and perks, had largely been borrowed on the strength of the company’s high credit rating “ which was clearly not deserved.
  • Fostering a Culture of Lack of Accountability – Besides the weak management by the CEO, the board was equally as weak. As noted in the Wall Street Journal, the CEO during this period “prized optimism and suppressed dissent, preferring “success theater” versus rigorous accountability.” As noted in the book cited earlier, “The board didn’t entirely understand how GE worked and…the CEO was fine with that!”  

This is a sad tale indeed.  Why in the world would a CEO and a board of directors be so oblivious to what was really happening, and so undisciplined in their approach to the business.  Clearly it happens and you have to believe that somehow, they think they are so accomplished and revered that they no longer need to stoop to get their hands dirty.  Continued success in business, and just about anything in life, requires constant attention to detail, total objectivity, the backbone to call out and tackle weak performance, aggressively pursuing change, and personal responsibility.  

Subscribe to the Gutsy Leadership Blog's RSS feed ...