GE Taps First Outside CEO to Speed Flannery’s ‘Glacial’ Revamp

(Bloomberg) -- Like John Flannery, Larry Culp has experience in industrial manufacturing and a reputation for improving operations.

General Electric Co. investors are hoping that’s where the similarities end.

GE Taps First Outside CEO to Speed Flannery’s ‘Glacial’ Revamp

The sputtering conglomerate on Monday named Culp, the former head of Danaher Corp., to replace Flannery as chief executive officer just over a year into his tenure. The shock appointment came after the board grew frustrated with the slow pace of Flannery’s turnaround and yet another crushing blow in the power business that was discussed in a closed-door meeting last week, said a person familiar with the matter.

By turning to Culp, the company is throwing out more than a century of precedent by tapping its first outsider as CEO. Culp, 55, must now try to breathe fresh life into GE, which lost $124 billion of market value under his predecessor’s brief tenure. Despite Flannery’s efforts to streamline the 126-year-old U.S. icon, GE remains burdened with sluggish demand for its marquee gas turbines, flagging cash flow and probes by the U.S. Securities and Exchange Commission.

“Investors and the board obviously lost patience with the glacial turnaround plan, mis-execution and poor communications,’’ said Todd Lowenstein, a fund manager at Highmark Capital Management, which owns GE shares. “Larry Culp is a bona fide outsider, as opposed to a GE insider, which will be welcomed by investors.’’

GE traded 2.6 percent higher at $12.40 in premarket trading. The shares have fallen about 31 percent this year after tumbling 45 percent in 2017. GE was expelled in June 2018 from the Dow Jones Industrial Average.

Emergency Meeting

Culp’s surprise appointment came together last week, after an emergency board meeting shook directors’ faith in Flannery, according to the person familiar with the matter.

It was Sept. 26, and Flannery had bad news.

The problems devastating the company’s crucial power division ran even deeper than expected, he told the board, according to the person. There were delays on major electricity projects. The outlook was increasingly uncertain. A massive writedown would be needed, which led to Monday’s announcement of an impairment charge of about $23 billion.

Through the weekend, board members held a series of calls and came to a conclusion: An outsider was needed to speed up GE’s turnaround effort. After a vote on Sunday, Flannery was out after just 14 months on the job.

In his stead, the board tapped Culp, a fellow director who made his name building Danaher with $22 billion in acquisitions. He took over at Danaher 17 years ago, when it was making unglamorous products such as gas pumps and Sears Craftsman tools. Over the next 14 years, he remade the company with a focus on equipment and service for the health care and life science industries.

Culp, who has been on GE’s board since April, was involved in recent strategic planning with Flannery and the change isn’t intended to mark a shift in direction, according to the person. Instead, the move was primarily about speeding up execution on the plan to shed units such as health-care and locomotives while narrowing focus around power, aviation and renewable energy.

Awkward Fit?

His dealmaking past is no guarantee of success at GE, which has been slimming down with asset sales, spinoffs and joint ventures.

“The fit isn’t obvious,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “He built Danaher using an aggressive acquisition strategy. GE doesn’t need acquisitions. It needs to split up.”

But Culp also won a reputation for his operating know-how. He borrowed freely from the Japanese kaizen method to help forge the Danaher Business System and made sure every employee knew the tenets of the approach.

His continuous improvement techniques, not unlike Jack Welch’s famous Six Sigma model during his two-decade tenure at GE, fattened Danaher’s profit margins. And Wall Street liked the results, sending Danaher’s shares up almost 14 percent annually during Culp’s tenure, compared to 5.5 percent for the S&P 500.

His success not only won him accolades from investors, but it also drew the attention of Flannery, who brought Culp to the board and cited the Danaher system as an inspiration for changes he had been making this year.

GE investors are counting on Culp to eventually rebuild a business culture that inspires other companies to follow. Culp was able to develop a deep bench of executives that have kept Danaher successful even after his departure.

Cost Focus

Danaher “delegates a lot of accountability to the operating people,’’ said Mike Magsig, who leads the board and CEO practice at executive search firm DHR International. “It’s not as centralized and hierarchical as GE has become.’’

One thing that GE needs most -- deeper corporate cost cuts -- is an area where Culp’s Danaher excelled, said Scott Davis, an analyst with Melius Research.

“He was a big cost cutter. Whatever acquisition he made, he was able to restructure,’’ Davis said. “Larry is a rock star.’’

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