GE Should Have Gone a Step Further
(Bloomberg Opinion) -- “We need to hold teams accountable for the results,” John Flannery said last year on his first earnings call as GE’s CEO. On Monday, GE proved it’s doing just that, and it was Flannery who took the fall for the company’s ongoing struggles, with ex-Danaher Corp. CEO Larry Culp named as his immediate replacement. GE should have gone one step further.
Culp will also be GE’s chairman, extending a dual-role setup enjoyed by both Flannery and his predecessor Jeff Immelt. This is curious and seems like a missed opportunity to set the tone for future generations of leaders not only at GE but elsewhere. Culp is the first outsider CEO in GE’s 126-year history, and clearly this board is more awakened to its responsibilities than the one that allowed Immelt to sit in his seat for 16 long years. All the same, with GE embarking on an aggressive breakup plan and still grappling with how to resuscitate its power unit, this company is still complex and challenged enough to warrant extra eyes.
One of the biggest takeaways for me in the GE saga is the importance of checks and balances. GE got away with too much for too long because it was GE: a purported master in operational excellence, a powerhouse in its core industries and an aggressive counter-puncher when faced with even the slightest hint of criticism. The events of the past few years have shown the folly of arms-length scrutiny and the risk of concentrating too much power at the top. Recall that GE has resisted a shareholder proposal to separate the CEO and chairman roles, despite the idea receiving backing from proxy firm ISS and about 30 percent of shareholders participating in the voting at its most recent annual meeting.
An independent non-executive chairman isn’t a fail-safe protection against history repeating itself, but it seems unlikely to hurt anything. On the contrary, the management change today underscores how thin investors’ patience has worn. Making someone else chairman could buy Culp more time than the brief year-and-change Flannery was given. GE shares rallied on news of Culp’s appointment, and while he undeniably had a strong track record at Danaher, running that company required a completely different skill set than the one he will need to restore GE.
Culp spent more than $20 billion on takeovers during his 13-plus years at Danaher, largely in health care as he sought to push the somewhat staid industrial company he inherited into faster-growing, high-margin areas. There are only $3 billion in divestitures attributed to Culp’s tenure at Danaher and no spinoffs, according to data compiled by Bloomberg. One of the things that made Culp so great at M&A was his ability to make acquired businesses more valuable by plugging them into Danaher’s operating system. The rise in the company’s margins and stock price under his watch speak for themselves, and Culp will probably have a field day cutting all the fat at GE. Nevertheless, Culp is revered for building a great company. He wasn’t in the business of unraveling a formerly great company and finding a way to make it great again
It’s also worth noting that Danaher maintained an A2 credit rating from Moody’s Investors Service throughout Culp’s tenure and the company’s leverage was never a serious problem. Culp faces a much more tenuous situation at GE. The company’s admission on Monday that it will fall short of its cash-flow and earnings guidance for 2018 and will take an impairment charge constituting substantially all of the $23 billion goodwill balance at its power unit make a mockery out of the patience the rating firm has shown GE with regard to its own A2 rating. Downgrades are likely, maybe by several notches.
It’s helpful that Tom Horton, who joined the board alongside Culp earlier this year, was named lead independent director. Horton led American Airlines through bankruptcy and into a merger with US Airways in 2013. But why not make him chairman in a sign of true change at GE? The board is also still conspicuously light on experts in the power market where most of its current challenges lie.
More change is likely coming. Culp mentions opportunities for “continued board renewal” in GE’s press release, which suggests the remainder of the old-guard directors will be replaced soon with fresh voices. Anyone joining GE now should keep Flannery’s pledge of accountability in mind and know that they will be held to the same standard.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
©2018 Bloomberg L.P.