GE's tumble from grace

Last month, General Electric lost its place among our nation’s top 30 performing corporations. It was the last member of the original companies which composed the Dow Jones Industrial Average.

Since 1896, American investors have looked to the Dow to judge how the top performing companies’ stocks are trading each session. The Dow favors companies with excellent reputations for sustained growth and which have broad investor interest.

GE, once the world’s most valuable company, was replaced by Walgreens Boots Alliance, Inc., the Deerfield, Illinois-based drugstore chain. GE stock slipped to $13 a share.

While the roots of GE’s problems go back to a series of bad acquisitions, the eviction was precipitated by GE’s tumbling profits. In 2017, earnings dropped by 45 percent while the Dow gained 25 percent. Unfortunately, GE’s slide continued this year, with profits dropping another 26 percent.

What happened?

Much of the focus is on GE’s leadership and the bulk of the blame has fallen on Jeff Immelt, CEO of the company from 2001 until last year, and on the GE board of directors that kept him on for so long. “Immelt has an impressive record for bone-headed and ill-timed acquisitions,” USA Today editorialized. Those actions drained GE’s cash and strained the company’s credit.

Immelt took GE into the subprime mortgage business in 2004, just as a credit bubble was getting ready to pop. In 2015, he bought the power generation division of a heavily regulated French multinational named Alstom. In so doing, he expanded GE’s position in coal-fired turbines just as utilities were moving to natural gas and renewables.

“But there is more to the story than villainizing a corporate villain. The fall of GE is at least in part a story of excess adulation of its erstwhile super CEO, Jack Welch,” USA Today added. He was chairman and CEO between 1981 and 2001. During his tenure at GE, the company’s value rose 4,000 percent.

Heidi Pozzo, former CFO for Longview Fibre and business adviser based in Vancouver, Washington, has an interesting perspective. “Under Welch, technology innovations, manufacturing capabilities and productivity gains slowed.”

Conglomerates are not successful over long term, Pozzo wrote in her June 27 newsletter. Jack Welch did well in a strong economy, but any successor was set up to fail. Welch created a complex organization which any successor would have difficulty leading and guiding through difficult economic times such as the severe recession starting in 2008.

“The structure and focus many times is established in a way that complements the owner/CEO. When you take the owner/CEO out of the equation, the business struggles.”

In her newly released book, “Leading the High-Performing Company,” Pozzo contends a successor will never be a clone of the former CEO and cannot lead in the same way. “They need to construct a team to replace the skills of the people who have left. But many times, succession planning does not focus enough on how to develop a team with all of the skills needed.”

That seems to be a key flaw at General Electric.

There are no easy fixes for GE’s woes. It is downsizing and spinning off major divisions. Hopefully, what units remain with GE will be more competitive and profitable.

That is reassuring news for Boeing, which powers many of its aircraft with GE engines. Reuters reported: “The changes in GE unlock, if anything, more capability out of GE Aviation. I don’t feel any constraints relative to what has happened in the past year - in fact, I feel the very opposite,” David Joyce, CEO of GE Aviation. Hopefully, Joyce is correct.

Don Brunell is a business analyst, writer and columnist. He recently retired as president of the Association of Washington Business, the state’s oldest and largest business organization, and now lives in Vancouver. He can be contacted at TheBrunells@msn.com.