54 Business The EconomistAugust 1st 2020
O
ne of themost intriguing questions in business is what hap-
pened 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 gecould walk on water? Does it be-
long 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 sup-
posed guardians of corporate America—the boards, regulators, an-
alysts, investors and cnbctalk-show hosts, none of whom can
(along with Schumpeter) resist the temptation to anthropomor-
phise business success and failure—also bear responsibility?
Two Wall Street Journalreporters, 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 pre-
vent motion sickness comes from a phrase Mr Flannery used
shortly before taking over from Mr Immelt in 2017: “No more suc-
cess theatre.” For decades gemanagers 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 tar-
gets. 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 gewas 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 contribu-
tion was building up ge Capital, the finance arm. It could borrow
cheaply because of its aaa credit rating derived from ge’s industri-
al strength. Its success ensured that ge shares traded at a high price
relative to earnings, helping Welch use stock to pay for takeovers.Andit helpedsmooth group-wide earnings in opaque ways, which
may have made it easier to hit Welch’s exacting profit targets.
geCapital eventually came to drag the company down. Within
months of Mr Immelt’s taking over in 2001, the scandal surround-
ing Enron, an energy giant, drew scrutiny of earnings-enhancing
accounting tricks, forcing geto 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 en-
gines, power turbines and health care. Yet after he launched the
sale of much of geCapital 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 Im-
melt’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 in-
vestors than a maker of products to sell to the world. He used Bo-
tox-like gimmicks, produced by his biker-jacket-clad marketing
sidekick, Beth Comstock, to persuade markets that gewas no
hoary industrialist but a digital innovator. But he came up with lit-
tle that was fresh or exciting. He wasted money on dinosaur indus-
tries 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 geis 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 com-
pany. 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 geout of a hole was to, as she put
it, “pick a simple story...and tell it again, and again”. Analysts, busi-
ness editors, even the occasional columnist, fall for this far too of-
ten. In ge’s case, this included articles with titles likening the com-
pany 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 en-
ergy all played a role in ge’s downfall. Second-quarter results on
July 29th revealed that covid-19 has halted Mr Culp’s rescue mis-
sion, hurting ge’s most profitable industrial businesses, especial-
ly 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. 7Schumpeter A GE whodunnit
The downfall of America’s industrial giant is a cautionary tale for all big firms