A GE whodunnit

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ONE OF THE most intriguing questions in business is what happened to GE, a company once so dear in America that its near-collapse in 2018 beggared belief. It still limps on, but the suspects behind a destruction of $500bn in value over little more than 20 years are so many that the mystery feels like a whodunnit.

Does blame start with the late Jack Welch, boss from 1981 to 2001, who created the myth that GE could walk on water? Does it belong to Jeff Immelt, his successor for 16 years, who continued to peddle that illusion even as the waters rose treacherously around his—and the company’s—neck? Should it be shared by his short-lived successor, John Flannery? Or Larry Culp, the current boss, who has so far been unable to turn back the tide? And do the supposed guardians of corporate America—the boards, regulators, analysts, investors and CNBC talk-show hosts, none of whom can (along with Schumpeter) resist the temptation to anthropomorphise business success and failure—also bear responsibility?

Two Wall Street Journal reporters, Thomas Gryta and Ted Mann, have written a book, “Lights Out”, that seeks to find out what went awry. It twists and turns through almost 40 years of GE’s modern history in a way that is at times as bewildering as the conglomerate itself. But the thread that runs through consistently enough to prevent motion sickness comes from a phrase Mr Flannery used shortly before taking over from Mr Immelt in 2017: “No more success theatre.” For decades GE managers had an over-exalted sense of their own abilities, which led to narcissism, hubris and the bending, if not breaking, of accounting rules to hit their profit targets. This eclipsed any strategic vision they may have had.

Welch set the tone. His tenure coincided with the dismantling of other conglomerates, such as AT&T. But he convinced investors that GE was the exception to the too-big-to-manage rule thanks to the brilliance of its executives. By slashing jobs, shutting laggard divisions and overseeing about 1,000 acquisitions, worth $130bn, over 20 years, he rejuvenated the company—and the reputation of American capitalism. Yet, as the book shows, his main contribution was building up GE Capital, the finance arm. It could borrow cheaply because of its AAA credit rating derived from GE’s industrial strength. Its success ensured that GE shares traded at a high price relative to earnings, helping Welch use stock to pay for takeovers. And it helped smooth group-wide earnings in opaque ways, which may have made it easier to hit Welch’s exacting profit targets.

GE Capital eventually came to drag the company down. Within months of Mr Immelt’s taking over in 2001, the scandal surrounding Enron, an energy giant, drew scrutiny of earnings-enhancing accounting tricks, forcing GE to show it was playing by the book. Mr Immelt failed to tame it in time for the financial crisis of 2007-09, which became a near-death experience for GE. For years afterwards, the perception of riskiness weighed on its share price, encouraging Mr Immelt to move away from financial services in order to reinvigorate the industrial heart of the company: jet engines, power turbines and health care. Yet after he launched the sale of much of GE Capital in 2015, the relief was short-lived. A disastrous $10bn acquisition of the power and grid businesses of Alstom, a French competitor, the same year would become Mr Immelt’s biggest mistake. Problems in GE’s power business have dogged the company since. They contributed to the huge cash crunch that culminated in Mr Flannery’s dethronement in October 2018, a mere 14 months after he became boss.

The book puts most of the blame for GE’s woes on Mr Immelt, a salesman who appeared to treat it more as a company to sell to investors than a maker of products to sell to the world. He used Botox-like gimmicks, produced by his biker-jacket-clad marketing sidekick, Beth Comstock, to persuade markets that GE was no hoary industrialist but a digital innovator. But he came up with little that was fresh or exciting. He wasted money on dinosaur industries like oil and gas. He gave away cash via share buy-backs. And he betrayed hints of pharaonic delusion: when he travelled on business, his retinue reportedly sometimes included not one but two company jets.

Still, blaming one man, or even several men, for the collapse of an empire as closely watched as GE is a bit glib. It is, using Tolstoy’s conceit in “War and Peace”, like attributing the fall of Moscow only to Napoleon and Alexander. Bigger factors were at play.

Start with size. Almost every boss wants to run a bigger company. Investors often applaud size for its own sake. But the more complicated a business becomes, the greater the information gap between managers and markets. That makes it easier to disguise what is really going on. Next is America’s cult of the chairman-chief executive. When both roles are held by one man (they are mostly men), underlings and boards find it harder to challenge big decisions, even when potentially ruinous.

A third common problem is stockmarket mythmaking. Ms Comstock’s approach to digging GE out of a hole was to, as she put it, “pick a simple story…and tell it again, and again”. Analysts, business editors, even the occasional columnist, fall for this far too often. In GE’s case, this included articles with titles likening the company to a whizzy startup. Better to have kept a closer eye on its old-economy power division, the company’s real Achilles heel.

Mr Immelt, with the turbine blade, in the private jet

Ultimately, firms are never fully in charge of their own destinies. The internet, the rise of China, the financial crisis and greener energy all played a role in GE’s downfall. Second-quarter results on July 29th revealed that covid-19 has halted Mr Culp’s rescue mission, hurting GE’s most profitable industrial businesses, especially aviation. As businesses age, events will inevitably wear them down. To forestall that, companies have few better options than to perfect what they are good at and embrace the simple life—even if this makes for less suspense.