Breakingviews: Asking the Big Questions of General Electric

This post was originally published on this site

https://static01.nyt.com/images/2017/11/14/business/14DB-GEVIEWS/14DB-GEVIEWS-moth.jpg

Breakingviews

By ROB COX

It doesn’t take much imagination to grasp the religious undertones in General Electric boss John Flannery’s plan for the $178 billion conglomerate. He says he is “looking for the soul of the company again.” Now, some 100 days into the job, Mr. Flannery has categorically exorcised the ghosts of false expectations past by halving its dividend, reducing earnings guidance and questioning entire swaths of the company’s portfolio of industrial assets. Next up is G.E.’s board of directors.

That Mr. Flannery is asking “why do we exist?” is not entirely surprising. He is, after all, a man with many years ahead of him to make some hard decisions, fundamentally reshape the company Thomas Edison founded and rebase its share price for the hard restructuring ahead. By contrast, his predecessor, Jeff Immelt (a.k.a. Two Jets), was fighting for time, struggling to justify what was already done and had been previously promised during his 16 years running the company.

But the about-face from Mr. Immelt to Mr. Flannery has outdone the usual kitchen-sinking that accompanies the passing from one chief executive to the next. It’s certainly a stark contrast from Mr. Immelt’s own transition from Jack Welch in 2001. And that has raised a key question for G.E. shareholders: How did the board allow Mr. Immelt to continue for so long without intervention? If it was so obvious to Mr. Flannery and many investors that G.E. was overspending on dividends, flubbing on acquisitions and committing to too many second-rate businesses, what were G.E.’s 18 directors thinking?

Mr. Flannery has already clarified that G.E.’s board is oversized, under-engaged and badly in need of a housecleaning. So perhaps the most encouraging development to be found in Mr. Flannery’s 57-page slide show on Monday is a plan to put just 12 directors up for a vote next year, including three new ones. That means it is parting company with half the current lineup. G.E. will also create a new “finance and capital allocation committee” with increased oversight of the company’s acquisition and buyback strategy.

The composition of the new board will include, among others, a representative of Trian Partners, the activist fund manager led by Nelson Peltz. But that person can’t be the only director willing to question the strategy, dig through the numbers and, where needed, prod Mr. Flannery to shift gears. The era of the all-powerful G.E. boss, with two jets at his disposal in case one breaks down, is over. That, beyond any numerical pledges, should be the most important statement to emerge on this investor day.