Lessons from the Rise and Fall

When Jack Welch handed charge of GE to Jeff Immelt in 2001, GE’s share price was $480. Today it is $80. Immelt, who was sacked in 2017 after destroying 80% of its shareholder value, claims that Welch handed him a “bag of shit”. Several commentators disagree – they see Immelt as the primary protagonist in the rapid destruction of what was 20 years ago, the world’s mightiest company. For example, in their outstanding book “Lessons from the Titan”, Scott Davis, Carter Copeland & Rob Wertheimer, have a whole chapter on how Immelt’s incompetence & hubris wrecked GE. In case you don’t have time to read the book, you should listen to this Business Breakdown podcast in which Josh Aguilar takes apart Immelt in the space of 40 minutes of devastating commentary. As a parable on how the arrogance & incompetence of one man can wreck decades of hard work, Aguilar’s take on GE should be compulsory listening for CEOs.
Aguilar identifies three central drivers of GE’s downfall:

• GE Capital was used by Jack Welch to juice up earnings and keep Wall Street happy by showing predictable earnings growth. Whilst Welch had the competence to generate EPS growth by and large from his business smarts & operating nous, Immelt didn’t. So Immelt let GE Capital loose so that it could juice up GE’s earnings and hide his operational incompetence. The 2008 crisis wrecked GE Capital’s flimsy business model and took away from Immelt his crutch.
• Immelt comes across as spectacularly incompetent in allocating capital especially when it came to M&A. In his 15 years in charge of GE, he destroyed value with every single acquisition barring one (a biotech company called Amersham). Immelt’s final deal which brought GE to its knees was his acquisition of Alstom in 2015 for $17 billion. Within three years it was marked down to ZERO and GE’s board was obliged to sack Immelt.
• Welch and Immelt ran GE using a centralised management construct where monthly operating reviews for all businesses were led by the main man in HQ. This system worked under GE because of Welch’s superior ability to understanding engineering and factory operations. Immelt was neither an engineer nor had any affinity for factory operations. His reviews were second rate and GE decayed operationally.

Aguilar says the central learning from GE’s decline is that a conglomerate is only worth having if the CEO of the conglomerate can allocate capital better than the stockmarket. If he cannot – and Immelt couldn’t – the logic behind having the conglomerate falls away (implying that the conglomerate should be dismantled). The same point can be made for almost every listed conglomerate in India – given that almost all of them are run by mediocre capital allocators.
Towards the end of the podcast, Josh makes a very interesting point when he says that some CEOs are so arrogant that they cannot see the downside risk; you would want companies which you invest in to have an “intellectual corporate environment” where executives do not get beaten up by the boss for presenting the bear case of a specific capital allocation initiative.

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