Number of words: 1,496<\/p>\n\n\n\n
Jeff Bornstein could not control his emotions.<\/p>\n\n\n\n
\u201cI love this company,\u201d began the tough-talking, hard-driving chief financial officer of one of the world\u2019s most storied corporations.<\/p>\n\n\n\n
Then he broke down in tears.<\/p>\n\n\n\n
It was August 2017, less than a month after John Flannery, the brand-new CEO of General Electric, had taken the reins. Flannery and Bornstein had both devoted their entire careers to GE, like most of those present for this moment at the annual summer meeting for top executives in Crotonville, NY, a leafy campus where the company\u2019s professionals spend months being indoctrinated in the corporation\u2019s proud culture.<\/p>\n\n\n\n
But what should have been a celebration felt more like a wake.<\/p>\n\n\n\n
Days earlier, the two men had met in Schenectady to examine the books at GE Power, the century-old company\u2019s most venerable and profitable division \u2014 and had found a dry well where they expected cash.<\/p>\n\n\n\n
Power\u2019s \u201csolid profits \u2026 were illusory,\u201d write Thomas Gryta and Ted Mann in \u201cLights Out: Pride, Delusion, and the Fall of General Electric\u201d (Houghton Mifflin), out July 21. \u201cThe accounting tricks that looked like profits were actually just borrowing from the company\u2019s future earnings.\u201d<\/p>\n\n\n\n
At that earlier meeting, Flannery wheeled on his CFO and tried to tamp down his rising panic.<\/p>\n\n\n\n
\u201cDid you f\u2013king know about this?\u201d he demanded.<\/p>\n\n\n\n
Founded in 1892 by Thomas Edison, J.P. Morgan and several partners, General Electric\u2019s corporate pedigree had been peerless. The company was a charter member of the Dow Jones Industrial Average, on board at its creation in 1907 and the only one that remained there 110 years later.<\/p>\n\n\n\n
GE grew from the nation\u2019s premier power and lighting company into a behemoth. By the turn of the 21st century it was valued at $600 billion, encompassing media, plastics, aerospace, energy, digital, financial services and more.<\/p>\n\n\n\n
But in the months after the retirement of Jeffrey Immelt, Flannery\u2019s predecessor, all its apparent wealth began to evaporate.<\/p>\n\n\n\n
Disgraced CEO Jeffrey Immelt would travel with not one private jet but two \u2014 just in case \u2014 and would stock his planes with both lobster and steak as he drained the company\u2019s coffers.Alamy; Shutterstock<\/p>\n\n\n\n
In Flannery\u2019s first year on the job, more than $140 billion in value vanished from GE\u2019s stock price \u2014 bigger by far than the losses incurred by the epic collapses of firms like Enron and Lehman Brothers. GE was unceremoniously booted off the Dow.<\/p>\n\n\n\n
It turned out the problems at Power were not unique. For years, GE\u2019s profits had been a mirage built on whirlwind mergers and accounting sleight of hand. The funds that had been doled out to shareholders as fat dividends \u2014 and had covered its managers\u2019 lavish perks and pay \u2014 had largely been borrowed on the strength of the company\u2019s golden credit.<\/p>\n\n\n\n
The book\u2019s authors paint a damning portrait of Immelt\u2019s 16 years at the helm of GE, where a rubber-stamp board of directors allowed him to hemorrhage money almost unchecked.<\/p>\n\n\n\n
Immelt was just 45 when he ascended to the top spot in September 2001, succeeding business legend Jack Welch. A charismatic, natural-born salesman, Immelt\u2019s boundless optimism fueled a strategy of continual expansion, as he went fad-surfing after the buzziest new ventures.<\/p>\n\n\n\n
At Immelt\u2019s urging, GE\u2019s many arms \u201coverpaid for businesses they didn\u2019t understand and then [were] crushed by the market,\u201d Gryta and Mann write.<\/p>\n\n\n\n
On his watch, GE bumbled into the subprime mortgage business shortly before the 2008 crash, leading to deep losses that pushed its stock into single-digit territory. Immelt spent $14\u2009billion on an aggressive expansion of GE\u2019s oil and gas holdings \u2014 just as the fracking boom cratered the price of crude oil. The digital division he set up in Silicon Valley and showered with $5 billion of capital never managed to produce the machine-learning platform he touted.<\/p>\n\n\n\n
Meanwhile, GE\u2019s corporate structure placed Immelt at the top of its board of directors, essentially making him his own boss.<\/p>\n\n\n\n
\u201cThe board didn\u2019t entirely understand how GE worked, and \u2026 Immelt was just fine with that,\u201d the authors write. The well-compensated board members were chosen for their willingness to cheer Immelt on \u2014 and he readily ejected directors who objected to his plans.<\/p>\n\n\n\n
At the same time, GE\u2019s established divisions were expected to meet earnings goals far removed from reality. \u201cUnder Immelt, the company believed that the will to hit a target could supersede the math,\u201d Gryta and Mann report.<\/p>\n\n\n\n
It was a recipe for a disaster. Up-and-coming middle managers knew that a missed goal could stymie their climb up GE\u2019s ladder; division heads \u201cdidn\u2019t necessarily know how his underlings got to the finish line and it didn\u2019t really matter,\u201d the authors write.<\/p>\n\n\n\n
Those toxic incentives drove the debacle that Flannery uncovered at GE Power. The division made its money not on the generators and turbines it built, but on the service contracts it sold to maintain the machines.<\/p>\n\n\n\n
All a manager had to do was tweak the future cost estimates on those decades-long contracts to jack up profits as needed \u2014 and to paper over real losses from unsold inventory and declining demand.<\/p>\n\n\n\n
All the while, as the Wall Street Journal reported, Immelt often jet-setted around the world with two corporate aircraft \u2014 one that actually carried him, the other flying just behind as a backup \u201cshadow plane\u201d on the off chance that a mechanical problem might delay his busy schedule. His aircraft was rumored to stock both lobster and steak so the boss could choose his midflight meal. Over his last dozen years as GE\u2019s CEO, Immelt raked in an estimated $168 million.<\/p>\n\n\n\n
Onetime GE CEO John Flannery (left) and his CFO Jeff Bornstein (center) discovered financial rot at the once-powerful company previously helmed by the legendary Jack Welch (right).<\/p>\n\n\n\n
At age 61, after a 35-year GE career, Immelt announced his retirement. He had long planned to depart at the end of 2017, and the board had been conducting an internal audition process for months. But after a contentious investors conference that May, when Immelt was forced to admit that the oil unit would likely drag down GE\u2019s annual profits, he sped up the timeline.<\/p>\n\n\n\n
In August 2017, Flannery took the reins. (His CFO Bornstein, who had apparently been unaware of the fiscal games that divisions like Power had been playing, had also been on the four-man shortlist.)<\/p>\n\n\n\n
It took months for Flannery to take a complete inventory. Once he did, he ripped off the bandages with a public reveal at an investors update meeting that November.<\/p>\n\n\n\n
\u201cWe\u2019ve been paying a dividend in excess of our free cash flow for a number of years now,\u201d Flannery confessed to a crowd of stock analysts and financial reporters in Midtown Manhattan. He revealed that Immelt had spent more than $150 billion on stock buybacks that artificially nudged GE\u2019s per-share earnings higher, burnishing the company\u2019s image on Wall Street \u2014 but had actually borrowed to pay out dividends.<\/p>\n\n\n\n
GE would miss its annual earnings target by a shocking $5 billion that year, Flannery announced \u2014 and would slice its dividend in half. It was a cold splash of reality in the face of a stock market accustomed to Immelt\u2019s breezy promises of boundless gains. Almost all of that year\u2019s losses stemmed from the black hole at the heart of GE Power.<\/p>\n\n\n\n
\u201cNo more success theater,\u201d Flannery pledged.<\/p>\n\n\n\n
The truth hurt \u2014 and sent GE\u2019s stock price plummeting. But in the next few months, not even a wholesale housecleaning of the board and the removal of Flannery\u2019s top deputies, including Bornstein\u2019s ouster that October, was enough to turn the ship around.<\/p>\n\n\n\n
The new board of directors voted to fire Flannery after just 14 months on the job, replacing him with the first-ever GE CEO to be trained outside its corporate culture.<\/p>\n\n\n\n
New honcho Larry Culp promptly shed several divisions, including Immelt\u2019s ruinous oil and gas venture. But GE\u2019s slow bleed continues. In October, Culp froze pension contributions for 20,000 employees. In March, he promised to give up his 2020 salary while announcing a 10 percent layoff in the Aviation division. The company\u2019s shares are still publicly traded on the New York Stock Exchange, but at less than a quarter of their former value.<\/p>\n\n\n\n
Since leaving GE, Immelt, now 64, dove into venture capital, working with tech startups in California and chairing the board of a medical software company in Boston.<\/p>\n\n\n\n
But he has been named in at least two shareholder lawsuits filed by angry investors who accuse him and other former GE execs of covering up its liabilities.<\/p>\n\n\n\n
\u201cGE still weighs on him,\u201d Mann and Gryta report. \u201cHe feels misunderstood and unfairly portrayed\u201d \u2014 and as he often reminds interviewers, he has held onto his GE shares, hoping against hope for an epic comeback.<\/p>\n\n\n\n
Soon after Immelt stepped down, he published a self-congratulatory 6,000-word valediction in the Harvard Business Review titled \u201cHow I Remade GE.\u201d<\/p>\n\n\n\n
\u201cIt will take years for GE to fully reap the benefits of the transformations,\u201d he wrote with his signature sanguine obliviousness. \u201cI\u2019m confident that I\u2019m handing over a company that will flourish in the 21st century.\u201d<\/p>\n\n\n\n
Excerpted from <\/em>https:\/\/nypost.com\/2020\/07\/11\/how-a-power-hungry-ceo-drained-the-light-out-of-general-electric\/<\/em><\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"