Our view: GE’s decline reveals perils of cultish CEO worship
The fall of General Electric has been nothing short of spectacular. The world’s most valuable company in
2000, it has been in a state of accelerating decline ever since. It has sold off key units. Just last month it announced plans to spin off its health care division and unload its 62.5 percent stake in an oil field services company. It has also shed value through its declining stock price — more than $150 billion since January 2017. And a month ago, it suffered the indignity of being tossed out of the famed Dow Jones Industrial Average.
Naturally, much of the blame has fallen on Jeff Immelt, CEO of the company from 2001 until last year, and on the GE board of directors that kept him on for so long.
Immelt has an impressive record for bone-headed and ill-timed acquisitions. He took his storied company into the subprime mortgage business in
2004, just as a credit bubble was getting ready to pop. In 2015 he bought the power generation division of French multinational named Alstom. In so doing he expanded GE’s position in coalfired turbines just as utilities were moving to natural gas and renewables. He also ensnared the company in France’s notoriously rigid regulatory climate.
But there is more to the story than villainizing a corporate villain. The fall of GE is at least in part a story of excess adulation of its erstwhile super CEO, Jack Welch. One of the reasons GE’s valuation has dropped so much is that it was vastly inflated in the 1990s as gullible Wall Street analysts bought into the myth of Welch.
The company reached a peak market capitalization of $601 billion in 2000 as Welch delivered quarter after quarter of increasing profits. In reality, these profits came by shortchanging capital investments, a move that would hurt the company later, and by tweaking the numbers in the financial unit known as GE Capital. When the financial crisis hit, GE Capital was so undercapitalized that the company needed what was billed as an investment, but was more of a bailout, from Warren Buffett.
This is not to say that Welch was as bad as Immelt. He was not. He did a lot of things right at GE to offset some of the more questionable moves he made.
But it is to say that he was far from the best CEO of his generation, or of the 20th century, as some of his champions proclaimed in the 1990s.
In fact, the whole GE story should be an object lesson in the dangers of buying into the idea that the right, extraordinary CEO can deliver outsize returns. This argument has been used widely to justify excessive compensation packages for senior executives while not delivering promised long-term returns.
On far too many occasions, CEOs have been awarded massive pay packages and retirement deals for returns later shown to be the product of financial engineering or macroeconomic trends they had nothing to do with.
It is time to revisit the cultish search for the super CEO. The GE story shows how overdue that is.