Power Failure: The Rise and Fall of an American Icon

by William D. Cohan

The story of GE’s glorious rise and distressing fall is not just the story of a power company or a jet engine company or a TV network or a finance behemoth. It’s a cautionary tale about hype, hubris, blind ambition, and the limits of believing—and trying to live up continuously to—a flawed corporate mythology.

But given the nearly insatiable capital needs of the industry, and in an era before anyone had thought of dual-class stock and other protections for founders, it was probably inevitable that Edison would lose control.

In 1893, Edison sold his stake in GE for a reported $1.5 million (around $430 million in today’s dollars). He was over the whole electricity thing. “I have a lot more new material on which to work,” he continued.

The creation of General Electric stemmed from three imperatives: a desire to eliminate competition; a desire to have first dibs on the capital needed to sustain a capital-intensive business; and a desire by both management and investors to run a more effective organization.

At first, Young’s response was to deflect: Didn’t they realize that GE was an electrical device manufacturing company, not a wireless communications company, and that it had no interest in becoming one? Bullard responded that Young was being shortsighted, that a huge opportunity was staring him in the face. GE could not only manufacture the communications equipment but could also sell it to a ready-made customer that it controlled. It was a gift, Admiral Bullard insisted. “The argument could not fail to capture the imagination of such a far-seeing man as Owen Young,” Archer noted. GE succumbed to the navy’s arm-twisting.

Out of the stalemate was born, inside GE, the legendary Radio Corporation of America, which would unleash years of American technological ingenuity and the creation of what we now know to be radio and television broadcasting.

its start, RCA was the largest radio communications company in America. It not only manufactured radio equipment but also controlled the nation’s first network of radio broadcasters, known as the National Broadcasting Corporation, or NBC.

NBC was started by RCA, and at the time of its launch, RCA owned 50 percent of NBC, GE owned 30 percent of NBC, and Westinghouse owned the remaining 20 percent—but no company could have accomplished this alone, not even RCA or GE. In 1921, the retail value of radios sold in the United States was $5 million; seven years later it was $650 million. In 1921, the radio audience in the U.S. was 75,000 people; at the beginning of 1929, it was 40 million.

Whitman

Cordiner said. “A committee moves at the speed of its least informed member and too often is used as a way of sharing irresponsibility.”

And Jack was convinced that eventually people were going to spend more time watching cable—even though it was the golden days of broadcasting, that we had to get into that business. He said to me, ‘You know, I don’t care if we lose money. We have to learn about this business. This is the future.’ Which is a theme for Jack: it’s about embracing the future.”

“His overall style was basically to get real immediately,”

“Jack more than anything wanted the name on the front of the jersey to be more important than the name on the back of the jersey, and Kidder was a place where the name on the back of the jersey was far more important than the name on the front of

The gossip was that Jack had decided long-term strategic thinking was not important. Cote decided to ask Jack about that. For some reason, like John Flannery, he was fearless in questioning the imperial CEO in a roomful of corporate types. Jack’s answer impressed him. “Strategic planning is critically important to a business,” Jack replied. “But the business leader has to own it, and what’s happened is they’ve just all delegated responsibility to a group of people who were in the strategic planning function, who work on making prettier and prettier charts to just impress all the other strategic planning bosses, and business leaders no longer own a strategic plan, and they’re not doing the strategic thinking the way they need to.” Cote said Jack’s answer made a lot of sense.

A surprising number of close GE observers, both inside and outside the company, believed that Jeff should have used the time after the September 11 attacks to sit down with the research analysts on Wall Street who were covering the company and also with key GE shareholders and explain to them the world had changed. That GE had changed and the days of continuous double-digit sales and earnings quarterly growth were gone. That earnings growth was likely to become more episodic and less predictable. He could have explained that he was not Jack Welch. He was not the CEO of the Century. It was time for Jeff to “reset” expectations about GE’s earnings and GE’s stock. He could have put an end to Jack’s practice of managing earnings, taking any write-downs that needed to be taken, and he could have begun to defuse the ticking time bombs tucked away in the recesses of GE’s balance sheet. He could have told Wall Street that it was no longer reasonable for GE to have the astronomical price-to-earnings multiple that it had under Jack, often approaching fifty times

earnings. He could have said that GE was a bank attached to a huge, slow-growth industrial company that had just suffered a major rupture. “He absolutely should have done that,” explained Jeffrey Sprague, a longtime Wall Street research analyst. “I hate to call 9/11 an opportunity. It was a terrible event, but it was a real event that had economic implications that impacted his business and did provide an opening to reset things, and he really chose not to do it. I think not doing it early in his career, then with each passing year it just became harder and harder to even think about doing it.”

He said Jack used to tell him, “If it flies, fucks, or floats, rent it, don’t buy it.”

Longtime GE executives were beginning to notice that Jeff’s approach to dealmaking was different from what they had witnessed with Jack. Quite different, in fact. One longtime GE executive told me that Jeff was the “antithesis” of Jack when it came to doing deals. “He doesn’t want to talk substance,” he continued. “He hasn’t really read the material.” Like many other GE executives who worked for both Jack and Jeff, he couldn’t stop himself from drawing a comparison between the two men. “You had a team that built credibility by working for maybe the greatest leader of our generation, who respected your work,” he said of Jack. Jack read everything sent to him. He knew more than you. “When you went up there, you had a discussion that exhilarated you, and you learned something, or he told you something you didn’t know,” he continued. “And you had to go back and figure out the answer to his question, and it lifted all of us.” But it was different working with Jeff. “It was like walking into a cold shower when you walked into your first meeting with Immelt, because he didn’t read the deck,” he said. That seeming

indifference was noticed. “He lost us,” he said. “And this is one thing that I know as a leader: if you want your team’s respect, you’ve got to read their work. I think Jeff lost most of us in the first meeting. We all turned to each other and said, ‘He didn’t read the deck.’ ” There would be consequences. Jeff’s dealmaking

For all his efforts to make GE a visionary company, Jeff was developing a blind spot as a CEO, and he was losing (or driving out) the executives who dared to tell him the truth as well as the seasoned veterans who could help him navigate a crisis.

Instead of the team of rivals that had surrounded Jack, Jeff had created a team of sycophants, aided and abetted by the

unintended consequences of a highly lucrative supplemental pension program, which had the ability to silence even the most outspoken GE executives, unless, like Calhoun, they left.

Another GE executive derided the unintended consequences of the “incredibly rich” supplemental pension plan, even though he was a beneficiary of it for the rest of his life, assuming GE did not file for bankruptcy. “It’s the worst thing in the world, because once you get to the gravitational pull of the SUP, what you have to do is avoid being fired,” he said. “Therefore, you take no risks.”

Jack told me he “flipped his lid” when Jeff missed the first quarter 2008 earnings guidance. He said “to shoot” someone if they missed their numbers was “a common phrase around GE at that time, as in ‘We’ll shoot him if he doesn’t do it.’ ” He said he “blew my top” but that Jeff had “overpromised,” adding “and you can put that on his gravestone: overpromised and underdelivered.” He then quoted from the letter he had written Reg Jones in 1979 as he was campaigning to become CEO. He wrote that GE needed earnings consistency: “Make the numbers. Make the cash flow if we’re ever going to be recognized as a valuable stock.” Jack was unforgiving. “He missed,” he said. “You couldn’t make a couple of cents

“In the dead of winter, even a favorite armchair begins to look like kindling,” he said.

He quickly ascertained, he said, that the incentive at NBCU wasn’t to make money. “The game here was to keep GE, to keep Connecticut, happy,” he said. “So the game then became telling a story, as opposed to running businesses, and the incentives were to do that. And then GE—and I fault Immelt on this—they never had the intellectual curiosity or the drive to really understand the businesses.”

Jeff began the Global Growth Organization.

“What became apparent to me over time,” one former GE executive told me about Jeff, “was he never really grew from the national sales manager that he was at Plastics. That was his core competency. It’s what he always talks about on the sales side. So the full P&L capability that you’ve got to have to be the successful CEO—that Jack had, Cote had—where they understood how their initiatives or actions, everything they did, came back, connected to the numbers, the value creation, [Jeff] couldn’t connect the dots on that stuff. It’s shocking. I don’t know how people didn’t see it. But he was national sales manager, parading, masquerading as a CEO.”

All of which goes to prove the point that Warren Buffett made

in his 2019 Berkshire Hathaway shareholder letter about what CEOs too often want in their board members: “When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”

Why has nearly every board member, especially the most powerful ones, including Jack Brennan and Sandy Warner, steadfastly refused to engage in any effort to explain the board’s responsibility for what happened to GE? 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. The abject failing of the GE board is yet another example of the old Wall Street adage that “success has many fathers and failure is an orphan.”

As for corporate governance, he continued, “As an up-and-coming leader in GE, you are not trained on corporate governance. When you go to Crotonville, you are trained to be a leader . . . but corporate governance—and Warren Buffett says this, you’ve seen it a hundred times—putting somebody in the CEO job when they haven’t trained [in] corporate governance tends not to go well. You’ve got to get CEO succession right. That’s the number one function in corporate governance—CEO succession. And top leadership succession. And I’m not saying that Jack got it all right. Maybe he

The truth may be that the principles of successful business decision-making are so simple they could be taught in an afternoon. My nominations are facts, focus, and integrity.