America’s Company

A Reversal of Company Fortunes

Jeffrey Immelt was almost immediately challenged when New York City’s World Trade Center was attacked four days after his ascension to the top job at General Electric. But these were challenging times with the confluence of economic events. The dot-com house-of-cards built during the Clinton Administration was collapsing, sending the business cycle downward as that presidency was drawing to a close in early 2000. And then self-created trouble at corporate giants such as Enron, MCI/Worldcom, Global Crossing, Tyco, and Adelphia caused loss in public confidence and trust. This crisis of confidence contrasted sharply with the primary public relations case study of the previous century.

People in 1982 Chicago began dying from taking Tylenol pain-relief capsules. Its maker, Johnson & Johnson, acted swiftly to protect consumers, including nationwide recall, immediate warnings to hospitals and distributors, nationwide ads, and ultimately, redesigned tamper-proof bottles. Johnson & Johnson was praised for its fast and aggressive handling of this incident. Because of the manufacturer’s zero tolerance for any compromise in public well being, the Tylenol brand rebounded to become the most popular over-the-counter analgesic in our country. The worst possible branding issue, death by use, was turned into a triumph through responsible management response.

About the same time as Iran’s war by proxy in Iraq was becoming known, General Electric business with Iran – either directly or through intermediaries – began to surface. GE’s management training program is legendary and Company leaders surely knew the earlier lesson of the Tylenol incident. When given an opportunity to provide transparency, Company leadership instead stonewalled. Jeff Immelt’s refusal to fully address the matter quickly like Johnson & Johnson had done so effectively, opened the door for insinuation and false perception. Refusal to provide transparency led many people to believe that the Company had something to hide. No less than America’s Company was implicated in deaths of our servicemen and women by virtue of “aiding and abetting” a rogue nation that was actively involved in supplying improvised explosive devices (IEDs), causing death and injury to Americans. Any business association with Iran – direct or indirect – was an affront to GE employees, investors and customers, many of which served honorably in our country’s armed services. And the number of Americans with relatives who have served in Iraq run into the millions. A 2003 PowerPoint presentation intoned, “GE recognizes that part of being successful and well-respected is being socially responsible as well.” So much for being socially responsible and well-respected . . .

Immelt’s predecessor had morphed General Electric from a manufacturing company into a services company that did manufacturing on the side. When Immelt arrived in the Chairman’s office, the Company derived roughly 2/3 of its revenues from services. Welch’s demurring away from a shrinking domestic manufacturing sector was defensive, uncharacteristic of its history on the offense. GE had capitulated to the country’s misguided leadership. The herd was joined. General Electric’s glory was in its manufacturing and Jack Welch’s direction found the company out of its element. The movement to services was a huge mistake. The embrace of services set the stage of a company that could – and eventually would – concentrate too much of its revenues in too narrow of a market universe.   Almost half of GE’s profits in recent years have been generated by General Electric Capital.

Immelt cannot be faulted for what he inherited. However, he bears full responsibility for failure to recognize the ascendency of financial corporations. Bank consolidations in the late 1990’s vaulted three of them into the rarified air of the top dozen corporations in America by 2008. A business strategy that had served GE very well was to participate only in markets where the Company could be #1 or #2 in those markets. Welch guided the Company out of markets where it could not be at or near the top, or where potential rewards were shrinking. To remain a meaningful participant in the financial services business, GE would have to out-bank the increasingly powerful banks. How could GE reasonably displace giants like Citigroup and Bank of America ?

Citigroup (#17) and Citicorp (#21) of 1998 combined to power Citigroup to the #7 position on the Fortune 500 in 1999. Citigroup would never fall lower than #8 through 2008. BankAmerica (#47) and Bank of America (#54) of 1998 combined to power Bank of America to the #11 position in 1999. Chase Manhattan would later combine with J P Morgan, and then with Bank One, to elevate JP Morgan Chase to #12 of America’s largest corporations by 2008.   Incredibly, Freddie Mac rocketed from #95 in 1998 to the #32 position on the list by 2003, while sister Fannie Mae jumped from #33 in 1998 to a lofty #16 in 2003. 

A second wave of rise in domination of the “financials” came during the period of 2004 to 2008: Goldman Sachs rocketed from #74 to #20, Morgan Stanley climbed from #39 to #21, and Merrill Lynch rose from #58 to #30. 

The costs of conducting manufacturing can be somewhat controlled by changing horizontal integration, adjusting employment levels, and adding capital enhancements; whereas conducting financial business is greatly challenged by variables beyond the enterprise’s control due to the financial market influences of the Federal Reserve, International Banks and governments, and the large numbers of financial institutions vying for a larger share of the total available market. All business leaders should have understood that foreign financials were increasing their presence in the U.S. Marketplace, therefore, competition was growing in two dimensions – power by virtue of size and number of players in the market. Immelt failed to see what were clear signs of a coming storm. Even more troubling was a disturbing pattern of staking out a position and then days or weeks later reneging on that position.

While Immelt & Company are sucking up to financing businesses, they suffer from an “opportunity cost” in the accelerating fields of Alternative Energy and Renewable Energy. A major focus in this country of reducing dependency upon fossil fuels seems to be nowhere on General Electric’s radar screen. If GE can make high-technology jet engines, it certainly has the competency to make microturbines and wind turbines. Companies much smaller than GE have been investing heavily in solar power and fuel cells. But where is GE in the upper strata of these companies ? Why should an electric giant that once competed with another electric colossus like Westinghouse not occupy # 1 or # 2 positions in these rising technologies ? 

The holy grail in electric energy is 5 cents per KWH power. But transmission of power over hundreds of miles is inefficient. Significant power is lost in its transmission. Create power at the point of consumption and its cost decreases, by virtue of much greater efficiency. We are close to low-cost power in places like Kentucky where 6 cents per KWH power is available. General Electric should be leading America to the goal of low-cost power.

The Electric Power segment of the Energy Market has always been comprised of three segments: generation, transmission, and distribution. General Electric’s history has placed it in leadership positions in generation by virtue of its work in generators and in distribution by virtue of its once-dominance in transformers. If the role of transmission can be dramatically reduced or eliminated, the company that controls generation and distribution also controls the Electric Power segment of the Energy Market. Here is a huge, strategic opportunity missed by incompetent top leadership at GE.

Then came the 2007-2008 campaign to elect a new President of the United States. In another move that was detrimental to the financial health of General Electric, Immelt’s NBC and MSNBC business units were found to engage in blatant media bias. A Google search of “media bias” and “NBC” or “MSNBC” lists over 230,000 hits.  

·                    Immelt chose to use a major asset of a investor-owned corporation to advance the candidacy of the nominee who favored increasing taxation on the wealthy. GE built great wealth from the innovation and hard work of millions of people over 130 years. And the Company was a repository of wealth for millions of investors. Thus, the enterprise was placed in the crosshairs of highly publicized plan to put a higher tax burden on the wealthy. Immelt offered up a wealthy General Electric Company as a target for higher taxes. Our country’s higher-than-most-other-country corporate tax rates were destined to ratchet upward, punishing businesses like GE even more.

·                    Secondly, after candidate Obama publicly told Joe, the Plumber, that he would spread wealth, Immelt’s enthusiasm for Barack Obama remained undiminished as expressed though continued, aggressive NBC News and MSNBC promotion of his candidacy. Millions of GE shareholders did not invest in the Company, only to have their wealth spread around by a socialistic government, implementing socialistic policies. On NBC’s March 3 Today show, CNBC’s Jim Cramer told host, Matt Lauer, “Shareholder-friendly? This is the most, greatest wealth destruction I've seen by a president.”

·                    Thirdly, millions of investors, employees, and customers did not feel comfortable contributing resources to an enterprise that openly and blatantly sided with a candidate not of their own political persuasion.

·                    Fourthly, the greatness of the General Electric Company was made possible by Capitalism. Its rise to industrial prominence was a triumph of Capitalism and a symbol of how business unfettered by unnecessary government burden can bring prosperity to the masses. Immelt’s promotion of socialistic candidates raised the risk to GE of being able to continue its long history of industrial success under a new order that was foreign to its environment for its first 130 years. Founder, Thomas Edison, turned on the light in 1879, and now the Company will continue to seek its direction while stepping into the total darkness of Socialism. As the February 16, 2009 Newsweek cover story headlines, “We Are All Socialists Now”.

General Electric’s overwhelmingly important AAA financial rating – only six corporations in the world have Moodys and Standard & Poors AAA ratings -- attracted the trust of millions of investors. A 2003 Company presentation indicated that the Company has about 4 million shareholders. That count goes much higher when you consider that many millions more beneficially own a share of GE through mutual fund participation. Investors, many of them retired and on fixed incomes since they were lured by the supposed safety of an AAA-rated company, were harmed by mediocre financial performance of the Company under Jeffrey Immelt:

Capital Appreciation. Five of the nine historical stock splits occurred during Jack Welch’s leadership ( ’83, ’87, ’94, ’97, ’00 ). There have been no stock splits during Immelt’s first 7½ years of leadership. With plunging share prices and recovery to pre-Immelt levels nowhere on the horizon, the Company’s next stock split is nowhere in sight. In fact, any return – within our lifetimes -- to the $39 share prices seen in 2001, is highly questionable.

Stock Price. Immelt came to the Chairmanship at a share price of 39.35 – share price never exceeded 42.15 during his first 7½ years of leadership. Share prices closed at 8.51 on the last reading day of February 2009. And a widely circulated Yahoo Tech/Ticker article on March 4 stated, “Even at Seven Dollars, GE's Not Cheap”, indicating that at its 15-year low, it could well be heading even lower. That 39.35 share in 2001 had lost 78% of its non-inflation-adjusted dollar value by March 2009. This loss was a steeper 82% when adjusted for inflation. Amost $350 billion of GE common stock value has vanished.

Dividends. General Electric Co. slashed its quarterly dividend by nearly 68% ( 31 cents, cut to 10 cents per quarter ) on February 27, 2009 in a bid to salvage its investment-grade credit rating, reversing a 31-year trend of annual increases to its payout. 

General Electric investors realized an average annual return of almost 24% during Welch’s term as Chairman; investors lost hundreds of billions of dollars during the first 7½ years of Jeffrey Immelt’s tenure. Jack Welch is a Capitalist; Jeffrey Immelt demonstrates a decidedly different leaning by virtue of his active sponsorship of Liberal Socialist, Barack Obama. Professional investors tend to be Conservative, at odds with the highest leadership at GE. Investors are called upon to value GE under “change” that Mr. Immelt helped usher in to replace a spectacularly successful track record under Capitalism. What was valued at $39 under a Capitalist leadership may be valued at $20 under a Socialist leadership. Investors may not live long enough to see the return to a $39 GE share price. With the full cooperation of a Board of Directors that is not at all committed to maximizing shareholder value, Immelt has created the paradox of a AAA-rated corporation with “junk- bond” investor community confidence. 

This, then, is the story of manufacturing-originated well-being of millions, mortgaged to continue the control of incompetent top management. And so it was that the progeny of a gilded manufacturing enterprise squandered its heredity.