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December 30, 2022 - January 17, 2023
Jeff was particularly peeved (again) at Lynn Calpeter, the CFO of the power business, for a presentation she gave in August 2016 at a GE officers’ meeting.
(He fired Calpeter in early 2017. She could not be reached for comment.)
By the end of 2016, it was increasingly clear that GE would not make the numbers it had promised investors it would make. Somewhere between the problems in the oil and gas business and the power business, it just wasn’t coming together as Jeff had planned. Trian decided it was time to ratchet up the pressure on GE.
In an interview, Jeff said the problem in Power was the dysfunctionality of the Power team. They just weren’t executing.
Jeff conceded that maybe GE overpaid for Alstom by $2 billion, quite an admission by someone who had refused to heed the advice of people like Steve Bolze to negotiate for that level of price reduction for Alstom when he had the chance.
A major conflagration broke out between McElhinney and Mastrangelo. “These guys were all dysfunctional, they’re all fighting with each other,” explained one GE executive. “Bolze is clueless. Mastrangelo and McElhinney don’t like each other. Everybody’s living in different cities. It’s a very fucked-up team.”
“The core operations of the company had gone haywire, especially in the power business, trying to get somehow to some operating-profit number that fundamentally was very disconnected from what was sensible in the market.”
Some believe that it was in Shanghai, at the two-hour executive session, that the board concluded that Jeff had to go. And that John Flannery, the CEO of GE’s health care business, should succeed him.
detected in the tone of the conversation a sense of desperation or panic,” he continued. “It was weeks later that this all came to a head.”
For some deranged reason, he still believed GE would make the number he had promised to investors.
But I thought focusing exclusively on $2 at that point in time didn’t make sense. We just needed to focus on organic growth and margin expansion.” Another GE executive believed when GE’s cash flow was $1.7 billion negative in the first quarter of 2017—for the first time ever—that’s when Jeff should have backed away from the $2 a share.
But Bornstein, the CFO, could not convince Jeff to abandon the 2018 goal. He wanted Jeff to talk about a range, rather than a specific number, or better yet, leave all talk of 2018 performance to the new CEO.
But Jeff wouldn’t listen.
Most of what he said was a combination of corporate pabulum and technical jargon.
“Alstom is going to hit its earnings plan,” Jeff answered, which was obviously untrue.
He compared Jeff’s zealous adherence to $2 a share to getting too far out on a tree limb “and it just broke.”
Jeff moped around his Kiawah Island home—for which he had paid $7.2 million in 2006.
According to one GE board member, Jeff’s problems with the board began when he tried to push out Bolze. Some board members remembered that he also could not get along with Krenicki and then pushed him out. He couldn’t get along with Calhoun. Now he still could not get along with Bolze.
“Jeff had lost the board’s confidence to run the company at that stage, and it was time for a new CEO.”
“The biggest single moment in the history of GE was using $40 billion of balance-sheet equity to buy back stock to support a $2 a share,” explained one board member. “Jeff, all these guys, they should be eviscerated and chastised for taking a short-term view in a company they were building. And the reason they did it was because there was so much pressure from the Trian guys that if they didn’t achieve it, they were going to get canned anyway.
What was supposed to happen that Saturday, six days before the board meeting, was for Jeff to tell Flannery that he had been chosen by the board to be Jeff’s replacement. That way Flannery would have six days to prepare himself for what was coming. But Jeff didn’t do it. He couldn’t bring himself to tell the next CEO of GE what the board had decided.
investors increasingly don’t like conglomerates, they just don’t like complexity? And maybe to you, you may see synergies. But investors, they don’t.”
asked GE’s outside actuaries to examine closely a long-forgotten liability—for health care provided to the elderly—hiding inside a small GE insurance subsidiary in Overland Park, Kansas.
the hidden liability became a time bomb that Jeff left behind for John to try to disarm without blowing up GE.
As a reminder, as part of the 2004 IPO of Genworth, Jeff decided to retain a small insurance subsidiary, Union Fidelity Life Company, or UFLIC, which was in the business of providing insurance to cover the costs associated with long-term health care, nursing-home care, and home health care. In December 2005, Jeff also retained at GE something called Employers Reassurance Corporation, or ERAC, from the $7 billion sale of Employers Re to Swiss Re. ERAC was in the business of reinsuring term life insurance policies. After the Genworth IPO, UFLIC stopped writing new policies and was responsible
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Had he not ordered that audit, or allowed the insurance team to delay doing it, and then signed off on the 2017 numbers, he could have been the target of any number of shareholder and SEC lawsuits. “Thank God I told them to go do this fucking review, because if I hadn’t done that, I’d be fucking toast,” Bornstein told me.
How were they ever going to explain to the world that GE suddenly had a $2 billion liability, never reserved for, popping up in a business that the company had told everyone it hadn’t been in for a decade? Responded Bornstein, gruffly, “Yeah, it’s not good.”
And then you wouldn’t be sending money from GE Capital up to GE parent. And you wouldn’t be doing your share repurchases,” which cost GE tens of billions of dollars in cash that it could have used—should have used, in hindsight—to shore up its balance sheet, not speculating on its own stock. But, the logic went, Jeff did these things in his quest to “reshape the company,” make $2 a share, “get the stock to $40,” and then “Jeff can go home saying it’s a win.
In addition to the molten lava bubbling up from Kansas City, it was also increasingly clear to the top GE executives that GE’s power business was in dire straits. Whatever Jeff and Bolze had
hoped to derive from the Alstom merger in terms of increased dominance in the power-generation business was not happening.
Factoring of the receivables didn’t seem particularly alarming at the time because the profit margins on the “upgrade kits” were “enormous,” making the discount that resulted from factoring “de minimis,” explained one GE executive.
Part of the problem lay with Bolze and his dysfunctional management team, and part of the problem was that GE had misread the market.
They came to understand that the business was in deep trouble.
“We sold a bunch of power equipment in Angola, and we just took an account receivable,” one person in the meeting remembered. “No cash. No security. No nothing. They’re not paying it. Of course, we book the income and the sales.”
Flannery was incredulous, the person recalled. He turned to Bornstein and asked how GE ended up with a $1.1 billion account receivable from Angola.
The message was clear: it was another example of Jeff pushing people to make their numbers.
Another GE executive believed that the same kind of obfuscation that occurred with the long-term-health liability—fiddling with the assumptions that went in the actuarial model to keep the problem subordinated—also occurred in the power business in 2017, as service contracts, in particular, were renegotiated.
The problems that were brewing in both the power business and residual insurance businesses raise profound questions about the failure of the GE board of directors—and the way
Jeff managed the board—to ask the tough questions of GE’s management, including Jeff, and whether the board abdicated its responsibilities in order to try to stay in Jeff’s good graces.
How could the board allow Jeff to maintain his devotion to the $2-a-share earnings projection when he must have known—as did those around him—that achieving it was a virtual impossibility?
Bill Gross raised the specter of GE Capital’s reliance on commercial paper as early as March 2002. He was right. Jim Grant raised concerns about GE and its business practices between 1998 and 2012. And he was right. Like Grant and Gross, Ravi Suria saw and articulated problems at GE with its funding and its accounting. He was right. Steve Tusa and a variety of other research analysts saw problems brewing at GE and wrote about them. They were right, too. Even Mike Damiano in his April 2017 article about Jeff was right. But there was always pushback from the GE apparatchiks to anything that
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Why did the GE board fail so miserably in its fiduciary duties to GE’s stakeholders—employees, creditors, shareholders—at every twist and turn in the road?
In 2001, Jeff was handed the most valuable, most respected company in the world to manage, and in 2017 he handed off to his successor a company badly damaged, “a company on fire,” as one executive told me. Jeff was “imperial” and “delusional,” many people explained. But the failure of the GE board to rein in Jeff’s behavior and to question Jeff’s judgment more deeply, or to push back against his imperial and delusional tendencies, together stand as one of the greatest corporate governance abdications in American history.
Not only did Jeff have his own private bathroom, but so also did his two assistants. They also had their own private pantries. There were two helicopter pads, a shoeshine station, and many a private dining room. There was a private twenty-eight-room hotel, known as the Guest House, that Jack authorized be built as GE’s profits soared.
execution, as defined as stretching to hit a target in any way possible, should be replaced by ‘pragmatism,’ where managers are not afraid to bring bad news to the C-suite,” Tusa wrote. “A product of the Welch era, we believe there is almost too much accountability at GE, to a point where bad news does not travel fast enough to senior management leading to decisions that are not perfectly informed and more often than not late. . . . From an investor perspective this ‘no bad news’ culture was a key reason why expectations never reset. This is a key change we will be watching for.”
At a meeting with GE’s top executives at Crotonville in August, John shared with GE’s top executives a twenty-page PowerPoint presentation about how much cash the company was actually generating compared with how much cash people thought the company was generating. It was an eye-opener. Normally, the presentations at Crotonville were like a “puppet show,” one GE executive told me, where “everybody [would] get up and say how great everything is.” But this time, the executive continued, John “was like, ‘Fuck that, people need to know what’s going on in this company.’ ” He walked the group
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“for much of his tenure” around the world in a private jet, with a second jet tagging along nearby in case of mechanical failure in Jeff’s primary jet.
The Journal documented a weeklong around-the-world trip Jeff had made in September 2016, starting in Boston and then on to Anchorage, Vladivostok, Tokyo, Singapore, Kuala Lumpur, Bangkok, Helsinki, and then back to Boston. On this trip, the two Bombardier Global Express jets took off within thirty-three minutes of each other.
Another narrative that Jeff could not control was the one about “success theater,” the idea that he tended to dismiss bad news in favor of some sort of perpetual optimism.
Jeff hated the idea that he had created a culture where people could not bring him bad news or speak their minds, although there certainly was some truth to
