General Electric: Big Company, Bad Performance

Investors have been thoroughly spanked by the stock performance of GE. Dead money for 30 years some might say, unless you were lucky enough to time the highs and lows which have seen some extremes.

GE had two CEO’s in the last 30 years. Jack Welch was the CEO / Chairman from 1981 to 2001. Jeff Immelt became the new CEO in 2001.

Jack Welch liked the press and went public with his management methods. Methods that received a lot of press included : cut 10% of the worst workplace managers / workers every year (often noted as the Rank and Yank system), implement lean six-sigma methodologies for cutting waste (Jack was highly influenced by Motorola’s “success” with six-sigma), ensure “management alignment” was in place (everyone thinking the same thing), along with a bunch of other clichés. None of these helped investors but they did sell a lot of books and made some consultants rich. Many of the “worst 10%” management performers from the GE workforce became six-sigma / management consultants who in turn tout GE management practices to this day.

In 2001 Jeff Immelt was selected as the next CEO of GE. Jeff soon found that he had been handed a “house of cards” and the stock price started to drop, just like that of Motorola which went from $105 to $14, GE stock price declined from $60 to $6 per share. Sure there was the 911 attack on New York which took most stocks down a bit but then followed GE accounting irregularities and manipulation of EPS expectations as charged by the SEC as well as other misfortunes like an over leveraged balance sheet which culminated in a stock rout. The SEC press release stated the following:

“The SEC’s complaint, filed in U.S. District Court for the District of Connecticut, alleges that GE met or exceeded final consensus analyst earnings per share (EPS) expectations every quarter from 1995 through filing of its 2004 annual report. However, on four separate occasions in 2002 and 2003, high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles (GAAP). In one instance, the improper accounting allowed GE to avoid missing analysts’ final consensus EPS expectations”

Many times investors thought Jeff would be chopped as per the GE “worst 10% rule” but amazingly Jeff is still hard at work and seems to have rethought some of the Jack Welch methods. In 2009 Jeff was on his knees to Obama seeking $139 billion dollars from the US government to save GE. People remember that the US government bailed out AIG to the tune of $189 billion dollars, but do they remember the $139 Billon Dollar bailout of GE in 2009? Jeff Immelt found a loophole by which the US government granted TARP funds to GE, even though GE was not technically a bank but did own a couple of small banks. Luckily GE was saved.

So just how badly managed was/ is GE? How does GE stack up?

• 85,000 of the 100,000 employees that Jack Welch trimmed were re-hired in overseas countries like China. I suppose this is not so bad, unless you are pro … “Made in the USA”.

• Jack Welch cooked the books for a couple of decades and GE was eventually charged by the SEC with overstating profits. Jack had a few tricks that were mostly legal and now studied at business schools. GE spent $200 million defending themselves against the SEC charges and eventually paid a whopping big fine. Jack does not want to talk about this. But there is that big question mark of why Jack Welch was never charged personally given the huge investor losses.

• The S&P 500 is a stock market index consisting of 500 US companies. GE has consistently underperformed these 500 other companies, despite the GE rhetoric on best management practices.

• Not only did GE consistently underperform the S&P500, GE also underperformed relative to its industrial peers too!

Now that’s a whole lot of underperformance for CEO’s everywhere to reflect upon!

Next time some consultant says they are using GE models for performance management or other similar language, you have to ask yourself “do I really want to be another Motorola / GE?”.

We all know that stock prices do go up and down based on economic cycles, management decisions, market perception, etc. But no stock has astounded me more than GE which as one of the largest companies on earth has consistently underperformed everything around it and seems to be on a long term down trend. Let’s hope Jeff Immelt does better than Jack Welch. It appears that Jeff has rejected most of Jack’s methods and some good research comparing these two CEO’s is now out there pointing out the differences. Time will tell if Jeff can repair all the damage.