Can He Retool the Ultimate Industrial Giant?
WHY YOU SHOULD CARE
Success for one of the world’s largest industrial companies ought to be good for everyone.
By Steven Butler
Part of OZY’s occasional Know This Name series, on prominent business, political and world leaders.
Early in his career at General Electric, in 1989, Jeffrey Immelt drew the short straw. Famed CEO Jack Welch dispatched him to Louisville, Kentucky, to stop the bleeding at GE’s appliance division — in the midst of a massive recall of defective refrigerator compressors. “It was like being sent to the far side of the moon,” Immelt told biographer David Magee. In the stress of the assignment, the 6-foot-4 former college football player gorged on junk food and packed on more than 60 pounds. He restored the division to profitability, and later shed the weight, but as for GE under Welch? It kept bulking up in a nonstop acquisition spree.
When Immelt took over as CEO from Welch a dozen years later, GE was a sprawling conglomerate of unrelated businesses — NBC, consumer finance, light bulbs and even jet engines all under one roof. But it was also an amazingly predictable quarterly earnings machine. Investors adored Welch, and bid up the price of GE stock enough to make it the most valuable company on earth. Unfortunately for Immelt, it was a brief assent. The share price began to fall in 2000 — almost exactly when Immelt was named to replace Welch the next year, and it has never recovered those lofty heights. Yet, through nearly 14 years of reshaping the unwieldy collection of businesses he inherited, Immelt has created a focused industrial giant — and he entered the homestretch of executing that strategy this month when he announced plans to sell most of GE Capital, the huge finance arm of the company, while returning something like $90 billion to shareholders in dividends and stock buybacks.
Immelt was unlucky enough to follow an acclaimed management genius. Neutron Jack, as Welch was known, fired a lot of people in his day, wringing profits out of tired and inefficient industrial businesses, buying hundreds of other companies to make GE a leader in whatever industry it chose and then deploying cutthroat managers to make them profitable. Perhaps the core of the company was the GE leadership school, where he trained his executives to achieve targeted results. And when they didn’t? Welch ranked his managers in open meetings and then lopped off the bottom 10 percent. Not a sentimental guy.
He claims he goes to bed every night recounting his mistakes of the day, and then “I wake in the morning and say, ‘Hello, handsome. Let’s go.’”
Immelt was (literally) born into the GE family, the son of a middle manager in the GE Aviation division and a schoolteacher, in Cincinnati. He was a reliable overachiever, playing basketball and football in high school, while earning an A average that got him into Dartmouth College, where he also played football and was president of his fraternity. As for his success? “Your peers basically determine your success,” he recently told students at McCombs School of Business, whether you earn their support or not.
Today, at 58, he’s got a big, beefy face and a shock of unruly gray hair, with a self-deprecating sense of humor that doesn’t know irony. He claims he goes to bed every night recounting his mistakes of the day, and then “I wake in the morning and say, ‘Hello, handsome. Let’s go.’” He considers resilience a key achievement, with a combination of self-awareness and self-confidence. “If you’re self-confident and not self-aware, they call you a jerk,” he jokes.
Still, no amount of achievement or peer support prepared him for the mess at GE, and he officially took over just four days before two aircraft propelled by GE engines brought down the World Trade Center, killing two GE employees and creating a $600 million insurance loss for the company. GE’s gas turbine business tanked in the wake of the collapse of energy maverick Enron later that year. And then Immelt had to come up with more than $9 billion to rebuild the reserves of the reinsurance companies before he could sell them off a few years later. (Ouch!) Turns out that under Welch, the reserves had been tapped to supplement earnings for that nice predictable performance that investors loved so much. (A GE spokesperson says they have nothing more to add on the topic.) “He inherited a tightly managed but unsustainable situation,” says Stephen Tusa, analyst at JPMorgan Chase. “Almost every available nickel and dime had been reflected in earnings.”
The end result, says Nick Heymann, an analyst at asset manager William Blair, is that Immelt was forced to skimp on investing during the early years. Yet today, GE, with $146.8 billion in revenue last year and 305,000 employees worldwide, is restructured and resilient, Heymann says. Gone are the insurance companies, the TV network, and plastics, and on the way out are consumer appliances as well as what’s left of consumer finance — businesses Welch made profitable, but, as Immelt discovered, that had no logic holding them together.
So what’s left? A leadership school where managers come out focused on a common goal: infrastructure. That is, as Heymann puts it, providing water, oil and gas, electric power and transportation to the “4.5 billion people in the world who are not in the modern economy,” along with expertise in project finance aimed at making it happen. They’re also acquiring technology in offshore wind power and electrical grid management. Immelt has tied it all together with a big data operation with 1,100 software engineers aimed at milking minute information to push profits.
Despite the progress, Immelt was recently subject (again) to rumors that he would step down under investor pressure. Heymann figures the former offensive tackle is more likely to stay around for a few years, maybe just long enough to see the stock price chase the old record.