GE’s Leadership Problem Goes Beyond Its CEO
Wharton's Michael Useem and Notre Dame's Tim
Hubbard discuss the ouster of GE CEO John Flannery.
Just about a year ago, in August 2017,
General Electric brought in John Flannery to help revive the
company. In November, the new CEO said the company
was streamlining
its business. By July, GE was
reporting progress on cutting costs, and at least one division,
aviation, was continuing to soar.
Flannery, a 30-year veteran of GE, said he
foresaw a “multiyear transformational journey” for the venerable company.
But if so, Flannery won’t be along on the
ride. After a slim 14 months in the top job, Flannery was ousted last week and
replaced by H. Lawrence Culp, Jr., the former longtime chief executive of
Danaher who joined GE’s board in April.
The tenure of GE CEOs has typically been
measured in decades rather than months, and Culp’s appointment marks the
first time the company has brought in an outsider to be its leader. These
factors make GE’s most recent turn of events a “total shocker,” said Wharton
management professor Michael Useem during a recent segment on the Knowledge@Wharton radio show on SiriusXM.
“It’s quite a bit of a change,” added Useem,
who is also director of Wharton’s Center for
Leadership and Change Management.
“Company culture at GE has really been focused on developing leaders over the
past 20 to 25 years, and so having an outsider come in really does mark how
much change I think the board wants in terms of efficiency and speed on various
strategic initiatives.”
GE has been reinventing itself and shedding
businesses, but according to reports, change has not come quickly enough for
the board.
“I don’t think a lot of the time they
disagreed necessarily with the decisions [Flannery made], but once the
decisions were made, the pace of change wasn’t keeping up with their
expectations,” said Tim Hubbard, management professor at the University of
Notre Dame’s Mendoza College of Business, also on the Knowledge@Wharton radio
show.
And once again, GE — with its laggard stock
price, balance sheet and cash-flow concerns and unclear place in a
fast-changing business environment — is grasping for direction.
“What
could anyone have done in a year?” asks Wharton emeritus management
professor Marshall W.
Meyer. Under prior leadership, GE overpaid for
oil-field services company Baker Hughes and Alstom’s power business, overpaid
for buybacks of GE shares, and exited financial
services but kept long-term care liabilities,
Meyer pointed out. GE’s stock price is currently trading at half of where it
was a year ago, and the company has lost $175 billion in market value over the
past 20 months. In June, GE was dropped from the Dow Jones Industrial Average
after more than a century.
The story of GE, Meyer said, has become “a
slow-motion train wreck.”
‘You’ve Got to Make Things
Happen’ — or Else
According to Useem, recent events at GE echo
a similar episode at Ford when that company brought up Mark Fields from the
ranks as CEO, and less than three years later replaced him for the same stated
reason: not being able to change the company quickly enough.
“Regardless of the people, if you’re in the
corner office these days, with the rate of change in just about everything —
think about digital disruption — you have to be a person who is agile, you’ve
got to move, you’ve got to make things happen,” said Useem. “Boards have become
unhappy with people who don’t do that,” similar to the stock market.
That GE went to an outsider for leadership,
Useem said, suggests that the board “in its wisdom decided that it needed
completely fresh eyes on the business to understand what they ought to keep,
what they ought to dispose of.”
Wall Street approves of the fresh-eyes
approach, at least so far. GE’s wan stock price gained about 7% immediately
after the announcement of Culp’s appointment as CEO and chairman. (Share prices
gained 3% after the June 2017 announcement of Flannery to the post.) “That is
actually an amazing percentage,” said Useem. “Let’s round off GE’s market value
at $100 billion and take 7% — we’re talking about $7 billion on the fact that a
new CEO is coming in.”
But many of the troubles at Boston-based GE
were already established fact when Flannery took over: the $13.5 billion
agreement to take over the power business of French company Alstom and the
decision to jettison consumer finance company Synchrony Financial, among them.
GE’s woes are a “combination of bad luck and
bad decisions,” said Meyer. “Bad luck is being in a bunch of bad industries at
a time they didn’t fare so well. Health care took a bit of a pause,
transportation/locomotive took a dive, oil at the time when they bought Baker
Hughes turned out to be a bad investment. On power generation, again, they buy
Alstom and that is not such a good investment because the market changes. And
you’ve got this monster firm that was an icon in the
U.S.for years. Suddenly it’s in trouble, and
given the size of the ship, it’s very hard to turn it [around].”
Was elevating an insider to CEO a bad idea?
Did Flannery have personal relationships or sentimental attachments to parts of
the company that made it difficult for him to render the tough decisions
necessary to turn the company around?
“You’d have to be a real insider to know
that,” said Meyer. Still, “if you spend 30 years in an organization, you are
deeply steeped in it and its way of doing business. It worked for you, so as a
consequence not only might you be loath to see the things you can see, but you
also miss a lot of things because you take them for granted.”
According to Useem, research on succession
shows that “when companies are doing fine, go within. When companies, though,
are in trouble, they need redirection … [and] looking to the outside is a good
way to go.”
While it’s not entirely clear why Flannery
was ousted so soon, one likely possibility is that the board was surprised by
the quality problems with turbines, liabilities from the long-term health
insurance business, and the misses on the sales forecasts, said George S. Day,
Wharton emeritus marketing professor and founder of the Mack Institute
for Innovation Management.
“Boards don’t want to hear that the leaders
missed the early warning signs,” said Day. “Not that a board expects
prescience. But they do rely on the leadership team to see sooner and act
faster when there are early warning signs. That is only one possibility [for
why they ousted Flannery], but I do think the board felt blindsided.”
Now, the pressure on Culp will be to boost
the operational effectiveness of the businesses GE decides to keep, said
Hubbard. “I don’t think they want to keep having the same product issues
they’ve been having lately — for example, in power — and at the same time, I
expect them to accelerate the spinoffs and various divestitures. I think those
two things will be very interesting to watch over the next few quarters.”
As that happens, Useem said the role of the
board is going to be critical. “They intervened here; they forced out a CEO,
and that doesn’t happen very often. It’s a strong board. They’ve got several
CEOs on it who can provide guidance and advice from their own personal
experience, and they are hopefully going to be of counsel, to actually help
Larry Culp speed time cycles up — to decide what ought to be spun off, to
reposition, to re-argue what they stand for.”
Notably, with Culp’s appointment, GE also
named Thomas W. Horton as lead director. The former American Airlines chairman
and chief executive oversaw the airline’s restructuring and eventual merger with
US Airways.
Changes on the board, in fact, have been one
under-noticed aspect of the ongoing change at GE, said Wharton management
professor John R. Kimberly. “The board that acted so quickly on Flannery is a pale
shadow of the board that was in place when Jeff Immelt left,” Kimberly noted.
“It turns out there are five holdovers from the old board and six new members.
Eleven of the members there in 2016 are gone, so that’s a pretty wholesale and
unusually large turnover at the governance level. What that does in terms of
the dynamics of these kinds of things is really open up opportunities to think
differently at the top of the company and to take actions which might be difficult
to take for board members that are longer tenured.”
For the many who work at GE, this latest set
of developments is likely “gut-wrenching,” Kimberly said. “There’s got to be
the potential for a pretty significant exodus of people, and some of that will
probably be good because it may be that the longer-tenured folks are part of
the problem, and Culp will be needing a next generation of managers with a
different mindset and maybe different skill set.”
The Only Way Is Up
Culp arrives at GE with some advantages.
Perhaps the write-downs are all behind the company now, and all the bad news is
known and being dealt with.
“They
are likely to cut the dividend [again] to strengthen the balance sheet,” said
Day. “That prospect has already taken the equity price down, so I think that’ll
happen. And they’ll certainly get behind Culp.”
Culp is widely admired for his track record
at industrial conglomerate Danaher, based in Washington, D.C., where over 14
years he boosted revenue and market share five-fold. “I think the markets will
give him a lot more latitude, and the board is going to give him all sorts of
latitude because he is one of them. Given what they did to Flannery, they can’t
turn around and be as impatient with him,” said Day.
Still, he said: “He’s got a tough situation
because he’s someone that builds businesses who now has a complex set of
long-cycle businesses that will be hard to turn around. The aircraft engine
business will keep doing well, and that’s going to help them enormously, and
they have to turn around the power systems operations, and that’s going to take
a long time. They are going to have to be patient, while Culp has to make sure
he doesn’t surprise everyone the way Flannery did.”
In announcing Culp’s appointment on October
1, GE cited the way he transformed Danaher from “an industrial manufacturer
into a leading science and technology company.” Under his watch, GE said,
Danaher “executed a disciplined capital allocation approach, including a series
of strategic acquisitions and dispositions, a focus on investing for
high-impact organic growth and margin expansion, and delivering strong free
cash flow to drive long-term shareholder value.”
Useem said Culp’s success at Danaher — which,
despite its more modest profile, resembles GE in some of its diversity of
businesses — came through use of a particular management method. “Larry Culp
was a great fan of the Toyota system in which there is continuous improvement,
exacting focus on what you’re delivering, no fooling around at the top and in
the ranks and insisting that everything be produced on time with quality.
[Danaher] way out-performed the market over the years he was CEO, partly
because of who he is, but maybe most importantly of all because of the system
he brought there. I think we’re going to see a doubling down on quality,
meaning process oversight, so everything you make goes out the door and it
works, which is not a trivial problem. And also no quarter, no year shall be
cheered as a success in and of itself: We’re going to look at the problems we
still face. That is the whole Toyota continuous improvement emphasis.”
Meyer said if it were up to him, he might
offer the board some contrarian advice.
“There is knowledge, there are capabilities
buried in that company that I’m sure they don’t even know about,” he said. “I’d
spend a lot of effort really trying to find out what you know and exploit that.
Go do a really deep dive and figure out what you have that the competition
doesn’t. You will be surprised what you will find.”
Can a new GE remain a conglomerate? Should
it?
GE will likely remain somewhat of a
diversified firm, said Useem. “They want to keep aviation, power and energy.
Those are not identical, although they have some commonalities. What Larry Culp
… is going to be asked to do is to find synergy. What you find in the aviation
research and development can somehow be kicked over to power. Or at least
you’ve got great people coming up in aviation who might be moved over to power.
If Larry Culp can do that, he can justify the fact that it’s still a modestly
diversified company,” which was the case at Danaher.
GE may not end up with the footprint it has
had. But that doesn’t mean it has lost its place as one of the great American
stories — or cautionary tales.
Said Useem: “We are all fascinated, almost
riveted, by what’s happening there — certainly investors [are]. Anybody with a
pension fund that is investing in any kind of index fund is in GE stock. We’re
all fascinated by whether Mr. Culp can pull it off.”
http://knowledge.wharton.upenn.edu/article/what-does-the-future-hold-for-ge/?utm_source=kw_newsletter&utm_medium=email&utm_campaign=2018-10-09
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