Power Failure: The Rise and Fall of an American Icon

by William D. Cohan

“If you’re helping to perpetuate Jeff’s reality and story, you’re on his team,” he said. “If you’re introducing facts, bad news, reality that doesn’t fit the story, his story, his view of reality, you’re not on the team. That’s where the narcissism and the insecurity comes from. I think he was over his head in the job. That was crystal clear.

Jeff Bornstein,

Bornstein didn’t run the power business, of course, but he had been caught unawares by the fact that the gas turbine market, which was supposed to be on the order of forty or fifty gigawatts annually, was actually ending up closer to twenty gigawatts.

Bornstein also reported that GE Capital did not dividend any cash to GE in the quarter because the company was in the process “of performing an actuarial analysis of claims reserves in our insurance business” and until that review was completed, “we have deferred the decision to pay GE Capital dividends to GE.”

Ed Garden.

the top of the list of potential new board members was Larry Culp, the former CEO of Danaher Corporation, a mini-GE-like conglomerate based in Washington, DC, that was formed in the 1980s by the Rales brothers, Mitch and Steven. The Rales brothers became billionaires by buying and selling a portfolio of seemingly mundane industrial companies and then squeezing more profit from them. Danaher had more or less become a publicly traded, industrial-focused leveraged-buyout firm.

It wasn’t all gloom and doom. The first chart in John’s PowerPoint presentation showed many of the incredible innovations that GE had pioneered since its creation in 1892.

the collapse of GE’s power business and the soon-to-be-revealed multibillion-dollar charge related to the long-hidden liabilities in an insurance business that Jeff should have sent out the door along with the Genworth IPO. The idea was to finally break up GE, the world’s most famous and successful conglomerate.

Larry Culp had run Danaher with a hundred people at corporate; the number of people at GE’s headquarters—not publicly disclosed—was many multiples of the number Culp used to run Danaher.

The message of the Eisenhower document was clear: if increasing cash flow and margins across GE’s businesses, specifically in Power, could not be achieved, GE needed to be broken up.

Essentially, John’s argument was that as stand-alone entities with their own publicly traded equities—certainly the aviation and health care businesses—would trade for higher multiples than GE did and could use that more valuable stock to make important acquisitions that GE had missed out on. In

GE was too complex, that it had wasted something like $5 billion on GE Digital with little to show for it, and that investor appetite for conglomerates had declined dramatically in the past five to ten years.

Finally, he proposed reducing corporate overhead by another $1 billion and having the corporate suite focus only on governance, emerging-market support, research, digital, and GE’s additive business.

On January 16, 2018, John announced that because of the “comprehensive review” of GE’s “run-off” insurance businesses, GE would take a $9.5 billion pretax charge ($6.2 billion after tax) to its fourth-quarter-2017 earnings. He announced further that, with the consent of the Kansas Insurance Department, GE Capital would make capital contributions of roughly $15 billion over the subsequent seven years, with $3 billion of that injection coming in the first quarter of 2018.

Jamie Miller, the new CFO, said that 2017 earnings would be at the low end of the previously announced range. John said that WMC, the mortgage originator that GE Capital had foolishly bought on Jeff’s watch, was in the “early days” of a discussion with the Department of Justice about what kind of fine GE would have to pay to get free of liabilities. (It ended up being $1.5 billion.)

The news came as a shock. One GE board member remembered getting the call from John about the problem. “I just couldn’t even believe it,” he said. “The numbers started out small and kept getting bigger. We went back

and looked at all the public filings, and there was nothing talking about this. My first reaction was ‘Did we miss something?’ . . . What I hear is that you could have solved it for, like, half a billion dollars or something” on Jeff’s watch. “But that didn’t happen.”

Eight days later, on the fourth-quarter-2017 earnings call, Jamie Miller dropped the latest bomb—that the SEC had opened an investigation into what led GE to take the $6.2 billion after-tax charge related to the health care–insurance liabilities and into GE’s p...

Part of the arrangement with Culp coming onto the board was that he would become the lead independent director in June, replacing Jack Brennan.

As part of the analysis, “for the first time ever,” according to one GE executive, the company created a comprehensive financial model of its business. It had never been done before.

It was like a massive game of Jenga: you pull out the wrong piece and the whole structure comes crashing down.

After Project Hubble, when GE agreed to effectively guarantee all of GE Capital’s debt, “everyone was strapped to the bomb,” said one executive. “I don’t know how much people even understood that at the board level when they did that.”

Slowly but surely the newly reconstituted GE board, with Paul Taubman’s help, came to see Eisenhower as the best path forward for the company.

On September 19, the operational difficulties in the power business took an unexpected turn. In a note on LinkedIn—of all places, yet again—Russell Stokes, the head of GE’s power business, dropped a bombshell, in the penultimate paragraph of a ten-paragraph post: that “an oxidation issue” in GE’s new HA gas turbines—the A

stood for air-cooled—could affect the “lifespan of a single blade component.”

Without John having a clue (and mostly in executive sessions), the board began to contemplate the once-unthinkable decision of firing John—after a brief fifteen-month tenure—and replacing him with Culp, who would be the first outsider to lead the company in its 126-year history. What happened next was nothing less than a “palace coup,” orchestrated by Garden and Culp.

An example the board member gave of John’s “indecision” was his unwillingness to pull the trigger on the sale of GE’s biopharma business, which GE acquired in the Amersham deal and whose sale John and the board had been talking about since early 2018.

becoming increasingly clear that GE had badly overpaid for Alstom. The staggering number that needed to be written off—even if it was just accounting, not cash—was looking like it was coming in in excess of $20 billion.

The question became when and how to pull the trigger.

Then, without John and without his knowledge even though he was CEO and the chairman of the board, the GE board had telephonic meetings on both Thursday and Friday nights where it finalized the decision to have Larry Culp replace John.

He said that he was taking over as CEO, effective Monday, and that Tom Horton, the former chairman and CEO of American Airlines, who had also joined the board in April, would be the new lead director. John was not only out as the GE CEO but was also kicked off the board, effective immediately.

The last thing he expected was to be fired from GE after barely fifteen months, especially after he had identified various problems, was in the process of fixing them, and had just laid out a board-approved restructuring plan that he was in the process of implementing. But as an at-will employee, there was nothing he could do.

He also believed that John didn’t have the right team around him. He recalled how, when John was preparing for the November 2017 presentation, John didn’t have the help he needed. “He had an average, at best, public relations person,” he continued. “He had an average, at best, institutional investor person—at best. We had hired [PR specialist] Joele Frank, who was supposed to be a superstar. She was nowhere to be seen.

Culp’s four-year contract paid him an annual salary of $2.5 million, plus a target bonus equal to 150 percent of his base salary, or another $3.75 million. He was also given an annual stock grant valued at $15 million. In addition to Culp’s roughly $21 million in annual compensation for each of his four years, he received a stunning one-time “inducement award” of between 2.5 million and 7.5 million GE shares, with the shares coming to him in 2.5 million–share chunks after the GE stock increased by a specific amount.

If GE’s stock increased 50 percent to $18.60 per share, Culp would get 2.5 million GE shares, worth about $47 million. If the stock increased 150 percent, he’d get 7.5 million GE shares, worth about $233 million. There would be no payout for Culp if the stock did not increase at least 50 percent.

initiated an eight-for-one reverse stock split, so that the GE stock would no longer trade in the teens. But it was just a cosmetic maneuver. Despite these Band-Aid measures, as of June 2022, GE’s stock is down 32 percent since Culp took over in October 2018.

To account for the challenges posed to the company by the pandemic, Culp and the GE board decided to start making changes to his 2018 compensation package. First, in April 2020, Culp voluntarily agreed to forgo the balance of his 2020 salary, leaving him with the $653,000 he already had been paid.

But he did receive his $15 million annual stock bonus.

Of course, Culp was involved in recutting his compensation package in August 2020.

Culp was getting even richer than he already was, while GE’s shareholders got basically nothing.

One longtime GE insider told me Culp’s compensation package was outrageous.

March 2022, the GE board took away $10 million of Culp’s annual $15 million stock grant, leaving him with a total compensation package for 2022 of $11 million.

With GE’s stock around $70 a share these days—meaning it’s down some 30 percent since Culp’s coup—it’s clear that Larry Culp is the only winner, so far, in all of the turmoil that has been created at GE since he took over on October 1, 2018. He’s been paid roughly $21 million a year since then—aside from his modest give-ups in 2020 and 2022—plus he’ll get his 1.1625 million additional GE shares as long as he is still around Boston at the end of 2024, or 2025, as is currently the intention. As for GE shareholders, they continue to suffer.

“Leadership requires ethics, morals, and values,”

Nearly eighteen years after Jones’s death, on November 9, 2021, Larry Culp put GE out of its misery. He pulled the plug on the company after 129 years.

a health care company, to be spun off in early 2023, with GE retaining a 19.9 percent stake; an energy company that would comprise GE’s power, renewable energy, and digital monitoring businesses, to be spun off in 2024 (and renamed,

absurdly, GE Vernova); and a jet engine business that would keep the GE name, and that Culp said he would continue to run. (In June 2022, Culp named himself CEO of GE Aviation while remaining CEO of GE.)

Without giving his predecessor, John Flannery, the slightest nod, he was essentially announcing his slightly tweaked version of Eisenhower, the breakup plan that John had conceived four years earlier sitting in the first-class section of a cross-country commercial flight, perhaps itself a fitting metaphor for the company’s stunning decline.

Did Jack set Jeff up for failure? Did Jack choose the wrong guy to succeed him? Or did Jeff play poorly the royal flush that Jack believed he had bequeathed his successor? Or did the world change materially for GE after September 11, four days after Jeff took over from Jeff? Or did the change come for Jeff and GE in the wake of the Sarbanes-Oxley disclosure law, making it increasingly difficult for GE to play the kinds of accounting shenanigans in which Jack seemed to revel, quarter after quarter? Why did Jeff fail to heed the powerful warnings he received from the likes of Bill Gross, Jim Grant, and Ravi Suria about the dangers lurking at GE Capital? Why didn’t Jeff—a product of a superior Ivy League education—take the time to understand GE Capital fully, including the risks in the way it funded itself and in its gargantuan asset portfolio? After all, GE Capital was generating more than 50 percent of GE’s earnings, meriting more than just a superficial understanding of what was going on there. Why was Jeff such a lousy dealmaker, overpaying for Alstom while selling NBCU on the cheap? Why did he send Genworth out the door without the two insurance subsidiaries that would later nearly blow up GE? Why did Jeff freak out after GE Capital became a SIFI and then decide the business should no longer be part of GE, before selling much of it for discounted prices—at a time, after the 2008 financial crisis, when big banks have never made more money? Why did he think it was a good idea

to bring Trian—a highly aggressive activist investor—under the GE tent? Was its support of Project Hubble worth the Sturm und Drang that the hedge fund later caused Jeff, John, and the staid GE board? And why, for the love of God, did Jeff stick to his desperate $2-a-share mantra for 2018 when he had to know there was no chance of GE achieving such results?