Lights Out: Pride, Delusion, and the Fall of General Electric

by Thomas Gryta

The board had largely followed the chairman’s lead. One newcomer to the board under Welch was surprised by the CEO’s command of the boardroom and the sparse debate among the group. Confused by how the meeting transpired, the new director asked a more senior colleague afterward, “What is the role of a GE board member?” “Applause,” the older director answered.

“My second day as chairman, a plane I lease, flying with engines I built, crashed into a building that I insure, and it was covered with a network I own,” he said just weeks afterward.

“We’re a very complex, diverse company that no one from the outside looking in can reasonably be expected to understand in complete detail,” he said. “Our story to the investing world is, we have a lot of diverse businesses, and when you put them all together they produce consistent, reliable earnings growth.”

red flag

At the same time that there was less oversight of GE finance operations, Immelt quietly reduced the board’s involvement with financial complexities. In 2002, he disbanded the finance committee of the board, which had been tasked with oversight of “retirement plans, foreign exchange exposure, airline financing and other matters involving major uses of GE funds.” He gave no reason.

The doubters soon realized that “Imagination at Work” wasn’t just advertising. Immelt was intent on putting marketing at the heart of GE strategy to dictate not just how the company sold the things it made but what it made in the first place. Much as Welch had before them, Comstock and Immelt hatched new jargon to express the process they wanted the company to follow. GE business leaders would now convene to come up with “Imagination Breakthroughs”—that is, ideas about products the company should design and sell.

Immelt...imagination

Immelt wanted division heads to generate imaginative new product and service concepts, which in turn would generate the new organic revenue on which his vision depended. It was a tall order: a handful of product ideas that would each pull in $100 million in new sales for each business. More important, Immelt wanted these “breakthrough” sessions to be led by each unit’s marketing department—to have the division that usually dictated advertising and branding stepping into the role that had been the province of product engineers. Immelt’s inspiration for the directive was an article he read about a smaller industrial conglomerate called Danaher Corporation that had formed an internal incubator to develop new ideas that could drive revenues and profits. Its CEO was a young whiz named Larry Culp who, at age thirty-seven, was even younger than Immelt had been when he took the reins.

It was a pure interpretation of how markets should work and a major topic of debate around the financial crisis. The markets needed to have winners and losers. Intervening in the markets to help those who made bad decisions, no matter how calculated, distorted the risk taken by participants. That could have an impact on future investment behavior if risk was seen as having finite limits while returns had no corresponding ceiling.

Schmidt’s advice would come to define the methods of Comstock’s media and public relations operation. The campaigns of both politicians and companies, Schmidt told GE, were not “won by the candidate or company with the best character, or product, but by the one with the simplest and most clearly told story.”

There was support for Immelt’s foray into software in the traditionally gritty industrial world. Marc Andreessen famously wrote in 2011 that “software is eating the world,” meaning that it was transforming and disrupting businesses and sectors throughout the economy. But the widespread innovation, he noted, wouldn’t be as destructive for certain companies. “In some industries, particularly those with a heavy real-world component such as oil and gas, the software revolution is primarily an opportunity for incumbents,” he wrote. “Over the next 10 years, the battles between incumbents and software-powered insurgents will be epic.” GE

The other major oil industry suppliers were similarly weary, trying to shore up earnings by slashing jobs, trimming project costs, and squeezing their own customers and suppliers wherever they could. (The wildcatters had it worse: many of the mom-and-pop operators of the American oil patch started to file for bankruptcy.) One year later, GE would merge its oil and gas unit into the oil-field giant Baker Hughes, keeping for itself a more than 50 percent stake in the company and spinning out a new public company to be run by Simonelli, under GE’s control. The transaction eased GE’s exposure to the ongoing oil rout and gave the new company, dubbed “Baker Hughes, a GE company,” vast new areas of redundant employees and operations to eliminate. With Baker Hughes, GE changed its tone a bit. The deal was transformational, but in which intended direction wasn’t made clear. GE execs like Bornstein would proclaim that the deal gave them “optionality,” but the reality was that investors were left in the dark on the strategy: Was GE doubling down on oil? Or was it preparing to exit the industry? The idea of holding such a long-term option was nice, but the game pieces in the positioning were people, and those who didn’t leave their job had no idea where the future of the company might be. The new arrangement didn’t spare Lufkin. The historic foundry was closed. The city’s annual financial report now just shows a blank line when listing the company’s employment tally, evidence of the m...

FLANNERY PAINTED A dire picture. It would take years to fix some of the company’s businesses, with most of the work needed in Power, and he was going to cut the dividend in half, saving $4.2 billion a year. Immelt would not have made this move. Flannery also slashed Immelt’s financial targets for the next year, finally euthanizing the delusions of $2 a share in earnings. The new boss cautioned that conditions in 2019 would also be difficult. He called 2018 “a reset year” for GE. Flannery wanted to focus on three core divisions—Power, Aviation, and Healthcare—and exit most of the rest of GE’s operations. As the Journal had reported weeks earlier, GE would sell its transportation division, one of the oldest and biggest makers of diesel locomotives. It also hoped to finally sell GE Lighting, as it had been trying to do for years without luck. Both divisions traced their roots all the way back to Thomas Edison. Flannery was also shedding one of Immelt’s biggest and most disastrous projects, the oil and gas business. The years of deals had been poorly timed, and the service side of the industry was now dominated by two giant companies, Schlumberger and Halliburton. It wasn’t Immelt’s fault that the entire oil sector had turned south. But he was responsible for GE investors being so openly exposed to the collapse. Just months after merging the oil and gas division with Baker Hughes into a new company, GE would look to sell its two-thirds stake in the $40 billion company. In a so...

While Immelt said that he encouraged debate, meetings often lacked rigorous questioning. One executive recalled being in a board meeting in which Keith Sherin was presenting the quarterly financial results to the group. The Power business had missed badly, but little specific detail was provided on what went wrong. This executive braced for the reaction from the directors, but it never came—none of them asked what went wrong. When Flannery committed to renewing and shrinking the board of directors, it included half a dozen current or former CEOs, the former head of mutual fund giant Vanguard Group, the dean of New York University’s business school, as well as a former chair of the Securities and Exchange Commission. The seventeen independent directors got a mix of cash, stock, and other perks worth more than $300,000 a year. The terms had been even more generous when GE still made appliances; the company allowed directors to take home up to $30,000 worth of GE products in any three-year period. The company matched the directors’ gifts to charity, and upon leaving the board, a director could send $1 million in GE money to a charity. Some directors admitted to having been sold by Immelt’s sweeping optimism, even if they knew he wasn’t the best deal-maker. But they knew he had a hard job, was playing with a tough hand, and had survived multiple major crises. Plus, they liked him. Immelt said that he did his best to keep directors informed, noting that he required them to make...

In the weeks and months after Immelt left GE in 2017, a parade of negative stories and embarrassing disclosures revealed major problems that sent the company’s stock into a long decline. Conversations about what happened inevitably shifted to blame, and Immelt was the obvious target. He had spent sixteen years at the top and, regardless of what Welch had left for him, he’d had plenty of time to fix it. But there was plenty of blame to go around. Perhaps most of it should be placed on the board of directors, the independent group that oversees the CEO. Board members claimed to have been unaware of problems and to have gotten bad guidance from external advisers, and they said they didn’t understand how the company went from good to bad seemingly overnight. Some directors had no experience in GE’s business lines, others had trouble staying awake during meetings, and many stumbled away from GE’s collapse wondering, How could we have known? It had been their job to know, however, and their job to ask the hard questions that weren’t fully answered, or were never asked at all. It was their job to oversee management, and it was their job to protect investors from fatal hubris. Still, the path ultimately leads back to Immelt. As chairman, he was also responsible for steering the board. There is no doubt that GE’s size and complexity, which grew exponentially under Immelt, made it difficult or even impossible to manage. The CEO of a company is responsible for its daily functions and...