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

by Thomas Gryta

Under Immelt, there had been a buzzy, vague, optimistic spin that not only often failed to hold up under scrutiny but had eroded GE’s credibility with Wall Street and its workers alike.

Flannery had taken to uttering a new mantra around the company’s shiny new offices in Boston: “No more success theater.”

The pressure to perform inside GE is omnipresent, and missed goals can be fatal, a tradition true at all levels of the company.

The accounting tricks that looked like profits were actually just borrowing from the company’s future earnings to cover up problems in the present. Power had sold service guarantees to many of its customers that extended out for decades. By tweaking its estimate of the future cost of fulfilling those contracts, it could report boosts to its profit as needed.

In company lore, indestructible General Electric carries the torch of Thomas Edison, the legendarily prolific inventor. It is a connection that instantly validates the company’s place in America’s proud history of lucrative ingenuity. It is also, as it happens, a beneficial association for a company that sells lightbulbs.

the inventor’s legacy nevertheless survived in GE research culture, which institutionalized problem-solving and made invention a team pursuit.

To many investors, GE was just the right amount of boring: dependable as a utility, unlikely to skyrocket in price, and predictable.

Welch’s core mission was to attack complexity, ripping out layers of bureaucracy that had built up inside the company and making the massive company more nimble. Welch would do his best to kill anything that slowed GE down.

At its height, GE Capital produced more than half of GE’s total profits. The most famous industrial company in America had essentially become one of its largest and most inscrutable banks.

Another famous and controversial tactic—often called “rank-and-yank”—forced managers to come up with an annual ranking of the performance of their workers. The bottom 10 percent would be put on notice, and if they didn’t improve, they were fired. The constant pressure from this kind of tactic only added to employee tension.

But some managers didn’t see it as helpful, especially after it had been used for a few years and some competent employees were ending up in the bottom 10 percent. You can trim fat only for so long. Also, some thought that the policy made workers fight each other for survival and inhibited managers’ ability to bring their workers together to operate as a team for the good of the company. One manager tried to subvert the system by putting an employee who’d recently died in the bottom 10 percent of the ranking list in order to save another employee’s job.

Some of Welch’s critics see the country’s economic prosperity as the major reason for his strategy’s success. His supporters scoff at this, giving Welch full credit for GE’s booming decade, and some even argue that GE’s success actually fueled the concurrent expansion.

As long as GE could continue its long trend of hitting earnings targets and beating expectations, the company and Welch would operate with an unofficial exemption from the law of the marketplace: the right to be the last of the great old conglomerates.

The oversight role of the board was minimal. After all, Welch’s meteoric success provided very little for the board to complain about. Being appointed to GE’s board was already seen as a prestigious accomplishment and considered an honor for leaders, business titans, and other powerful people. The board had largely followed the

“What is the role of a GE board member?” “Applause,” the older director answered.

Immelt led by diving in. He learned from engineers at Appliance Park how to make the compressor change himself. When the trucks with service crews rolled out of the gates to make repairs, Immelt was often riding along. Soon enough, the young hotshot executive on loan from Plastics was on his hands and knees in customers’ kitchens, alongside the repair techs, helping to fix the flawed design, one balky fridge at a time.

As with most things at GE, it was more complicated than it first appeared. When Immelt took over the Plastics operation, the previous management hadn’t been playing it straight. Under pressure from Welch, the division had stretched to make its numbers, including misreporting inventory figures to reduce the cost of goods sold. Fudging the numbers about the size of the inventory gave an artificial boost to the division’s earnings, making it appear to have made the numbers Welch demanded.

even if the CEO didn’t bend the rules himself, Welch cultivated an environment of pressure that incentivized people to do just that. And his rough discipline also discouraged executives like Immelt from coming clean about their actual results once they recognized that they were in deep trouble.

Welch would say that he learned from this episode that it accomplishes nothing to step on the neck of someone who is already down. Despite his reputation for ruthlessness, Welch wasn’t heartless; he understood that a good coach knows when to keep his mouth shut and let the lesson be taught on the field.

A massive loss might trigger a sell-off in the company’s shares, but it would also serve as something like a reset—an understandable adjustment in a moment of national reckoning, and perhaps a new beginning. But GE opted to soften the blow. Only later would it be obvious that 9/11 did more harm to GE than the company acknowledged at the time.

Only GE could understand how its businesses made money, and investors should simply be happy with the results. “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.”

The Edison Conduit, however, had another, more important purpose: it was used to buy assets from GE Capital at prices higher than the recorded book value, creating gains that could be used to improve earnings. Of course, GE wasn’t transferring the risk of owning the assets, so it was really selling them to itself to produce earnings. But at the time, this wasn’t an accounting violation.

To most entities, a surge in profits would be welcome, but not to a public company whose results are compared to the previous year. One strong year and a few weaker years doesn’t look great to shareholders—it is much better to spread the profits around more consistently to give the impression of a well-oiled machine.

Although the maneuvers involved in managing earnings sound devious, and there is no doubt that at GE they weren’t transparent to investors, the practice was largely in line with accounting and governance principles.

“The worst thing to happen to Jeff wasn’t 9/11. It was Sarbanes-Oxley.”

At GE, managing a balance sheet had been essentially risk-free because the company—or more accurately, Welch—took care of that.

He had never worked in their division, and from the sound of things, he seemed less interested in finance than in marketing big ideas out of the industrial businesses and expanding GE to other corners of the world.

Some executives, watching Immelt’s frenetic assembly of acquisitions into new industrial business lines, wondered if the CEO misunderstood the meaning and the limits of GE’s management magic. The company prided itself on training good managers who could be asked to range across diverse businesses in the conglomerate in order to wring out greater results and improve performance. But the managers didn’t walk on water. They couldn’t be expected to solve larger strategic problems—especially the question of whether a potential acquisition should be part of GE in the first place. GE’s management system couldn’t take the place of a strategic rationale.

Immelt rarely folded his hand, even when some of his lieutenants thought he should. To him, leadership was perseverance in the face of doubt. And opposition to that approach wasn’t just disagreement but something worse. To Immelt, naysaying in these situations was a form of betrayal.

“My job is to make the company perform,” Immelt told a newspaper reporter, “and my job is to make sure that nobody defines this company other than me.”

GE’s corporate structure not only could prevent managers from developing the skills they needed to run an independent business, but also made it impossible to get an accurate picture of a division’s performance or health. Measuring profit without including all the underlying costs distorted the performance of the businesses and their management. It was great for painting a picture of success to investors. Less clear was whether the thickening of the corporate layer was a solid strategy for the long term. Immelt was effectively undoing the aggressive cuts that Jack Welch had inflicted on the GE bureaucracy. Welch’s dreaded layers were now returning under another name.

In other words, the crack internal squad with the word “audit” in its name was also being paid to search for ways to boost GE’s quarterly earnings.

Immelt, however, was determined to change the boys’ club reputation of GE and to affirm its rightful inclusion among the corporate giants of the twenty-first century. He would keep the vital bits of the Welch-era GE and leave the bad boy stuff behind.

the fact that JPMorgan had a strong banking connection to the company also lent strong credibility to Tusa’s more negative observations. To those who knew the research game, Tusa was the last guy who should rock a boat as big as GE. When he did, the thinking went, he must have had a good reason.

GE wasn’t Lehman Brothers. It wasn’t going to fail or have to declare bankruptcy. The extent of its military business alone made it unlikely that the government would allow GE to implode. The core businesses were considered strong—healthcare, jet engines, power turbines, and media—and they were all seen as solid bets for the future of America and the world. GE had real businesses owning real assets with real customers, and it was producing cash. But GE was in fact in trouble. And it needed some help.

Warren Buffett, American business’s patron saint of finding value where others had missed it. An investment from someone as well regarded as Buffett might provide GE with a level of legitimacy that so far its own marketing machine had failed to secure.

After repeatedly asserting that it didn’t need help, GE would use the government guarantee to sell almost $131 billion in debt through a staggering 4,328 different issuances. The second most active issuer, Citigroup, had just 1,655 issuances.

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.” In Comstock’s summary: “Pick a simple story . . . and tell it again, and again, and again.”

The company, for all the prowess of its engineering, tended to come off as an implacable ecological bad guy,

To investors, the risk in GE shares was more comparable to JPMorgan Chase and Wells Fargo than to industrials like United Technologies and 3M.

He wanted to do a giant industrial acquisition that would ramp up the money GE earned from machines and services, opening a new stream of cash into the corporate treasury. That cash, and those earnings, could then be used to make an even bigger move that wasn’t even discussed yet outside of the small groups that regularly huddled at headquarters in Fairfield and GE Capital’s nerve center down the road in Norwalk. If the industrial deal worked, GE would have the financial cushion to move even further to wean itself off financial services. Instead of simply promising a smaller and more secure GE Capital, GE could make a fundamental shift away from the dependence on finance that had defined it for a generation.

Bornstein quickly saw that the company’s operations, which increasingly ranged widely around the world, were riddled with clutter, duplication, waste, inefficiency, and complexity. Raised in the GE culture of Welch, with little tolerance for bullshit, he saw pent-up profit that could be gleaned from simply cutting. Releasing the synergies that would come from eliminating redundancies—that is, people GE didn’t need anymore—would lead to higher earnings. As renewed attention led them to try to whip the industrial businesses into shape, Bornstein, Immelt, and the rest of the GE top brass soon settled on a name for the program they embarked on in 2013: Simplification.

So when Bornstein said that, in far-flung markets with revenues in the mere hundreds of millions, “you don’t need a complete functional team and the infrastructure that comes with managing and reporting a P&L at that level,” an analyst named Steve Winoker replied, “That was how you raised managers, though.”

Ries argued that new firms as well as more established companies needed to act like the most successful software startups. They should design fluid responses to consumer demand, iterate and reiterate product designs, and be unafraid to go to market with what wasn’t yet perfect or to walk away from what had been judged a failure. This was, in short, not the way GE worked.

In spotlighting these impressive features of the company, Immelt and the GE message machine wove strands of rhetoric that imbued its underlying businesses with a greater purpose, an association with genius. The turbines and engines and the factories in which they were made were not just impressive, but “brilliant.” The company’s business strength lay not so much in the designing, building, and selling of intricate machines, but in the feats of imagination that conjured them into being.

Bank regulators and GE Capital’s proud core of deal-makers didn’t see balance sheets in the same way. And they really didn’t like each other. What Capital viewed as flexibility, and a culture of savvy deal-making, professional bank supervisors were apt to see as the absence of any meaningful rules at all. And GE Capital’s books were, to those experienced with the protocols of modern banks, a riot of tangential and unmatched risks.

What they did have was deep knowledge of the assets that backed the loans they were writing and a better track record than the big banks at completing what Capital folks called “workouts”—foreclosing and seizing assets when the borrowers couldn’t pay. Capital prided itself on knowing the market for the railroad tank cars that it accepted as collateral, or for the manure-spreaders that backed loans to farmers in the Midwest.

Frawley’s skepticism of GE’s internal controls wasn’t undeserved. Even now, years past the crisis, Capital remained a black box even to those who were paid to understand the company intimately, like sell-side stock market analysts and even some GE executives. The company’s remaining risks were unfathomably deep, some prescient investors felt. And the hubris that characterized decision-making elsewhere in the company could be just as prevalent at Capital.

The plan would call for GE to hang on to GECAS, the jewel in Capital’s crown; that unit owned and leased a massive fleet of planes and jet engines, reaping profits with every launch of a commercial airliner into the air. It would also hang on to the stubs that facilitated the operations of the industrial businesses, such as those that lent for the development of new power installations or financed the purchase of healthcare equipment. GE would also be left with what amounted to the unwanted detritus in the basement of GE Capital—the odds and ends of deals gone sideways or bets that hadn’t panned out over the decades of aggressively pursuing returns with borrowed funds. (To the surprise of some observers, GE’s investor slides would include a graphic showing a sliver of “insurance” among the assets that would be left behind in the Capital exit. Insurance was a business GE was supposed to have left behind a decade earlier.)

GE was planning to shed the Systemically Important Financial Institution categorization that had brought it under the scrutiny of the Fed by selling off most of its finance operation. SIFI status was the regulatory scarlet letter that followed the financial crisis: the designation was applied to the largest banks and financial institutions, those whose failure could trigger another meltdown. The only way to lose the label was to shrink.