The risk in saving the world – General Electric edition (GE)

A guy I know writes software for energy rebates and building codes. It’s great world-saving type stuff, at one point there was even a feature that showed you how many trees you had to plant to offset the carbon footprint of your new AC unit. The more high-end your new machine, the lower your carbon footprint. He makes an awful lot of money to write this software for big companies and works long hours. From time to time he sits down with a couple of gin and tonics at night to work on his software and doesn’t have time to read his kids a story. “Tomorrow” he’ll tell them.

His wife likes to watch the morning news on the TV. She talks to the TV and has answers for all the problems in the world. Alan Garcia, Keiko Fujimori, Maduro, Trump, no problem in the world goes unsolved except breakfast for her kids, usually she leaves that to the maid.

When I recently shared some thoughts on the current situation at GE with a few of my former co-workers there, here’s what one of them responded:

I don’t blame Jack Welch for ruining the company, that’s not giving Immelt the credit that he deserves for what he steadily did for 16 years. Sure, the accounting was flawed back but at least Neutron Jack held people to some level of accountability. People got fired when they messed up. Immelt, and for that matter the whole corporate gang, was more concerned about looking good in the press; making sure we are known for our “diversity”, “equal opportunity”, LGBTA and how GE single handedly saves the world….bla, bla. He made very bad business predictions and based his spending and acquisitions on those. He gambled with $30 bil of the pension fund and lost. He should have been locked up, but instead he got a fat $211 mil retirement check.

People will debate Welch and Immelt and write books about GE. I suppose only the “corporate gang” as my friend describes them truly knows their motives. Were they liberal progressives at heart, did they enjoy the media attention, was it easier to talk about LGTBA rights than the corporate balance sheet, or did they think pushing a liberal agenda was good for sales of windmills, ECM motors and expensive light bulbs? Whatever the motive, they sure didn’t take care of their own house while they were busy saving the world.

One thing is for sure: be leery of any large organization – for profit or not – that peddles their “saving the world” ideologies while moving millions of dollars.

New Year’s missive for the General

Every year a few old friends from my previous job at GE are so kind as to check in around the holidays, exchange best wishes and such. Naturally there’s always some catching up on the latest happenings at what was once one of the most respected companies in the world. One of my friends wrote “I’m sure you’ve heard about the General in the news. Nothing good coming from there for over a year now”.

Here’s what I responded:

… I actually quit reading any and all news some time ago because I just got tired of reading how the world is coming to an end and everything is the fault of middle-age white men. Having said that I did know that GE is in bad shape. They’ve actually been in bad shape for a long time, were it not for the government bailout GE would have been bankrupt in 2008. I felt bad at the time I was there (believe it or not) for being so critical of the company and some of its management but I always felt that GE’s corporate culture was horrible. At least in the aviation business you guys are doing well because you’re building good products that the market needs but the people most responsible for its success (ie. the technical people) were always the ones with the least career opportunities whereas the ones that just look and sound good but couldn’t tell which pointy end of the airplane goes down the runway first were the ones with better career opportunities. Long story short it’s not beyond the realm of possibilities that GE files Chapter 11 at some point (most likely a controlled type bankruptcy a la GM) which would wipe out the retail shareholders and significantly hit the “fixed” pensions of (ex-)employees like us. Jack Welch was really the bad guy here, with all his “financial engineering” he destroyed GE. Immelt was just to dumb or too timid to do anything about it, he only kicked the can further down the road and then made it significantly worse with some of his decisions. I mean, if you’re not fluent in French, you don’t launch head-first into the French corporate world. Here’s a guy flying around the world on a fleet of corporate jets, pulling in 8 (or 9?) figure paychecks, being a “jobs” advisor to the US Prez but he doesn’t know what anybody in a French cafe could tell you over 3 beers?! You could probably argue some of it was criminal, GE’s “financial engineering” clearly pushing the limits of acceptable accounting practices. Now you guys in aviation are like the spouse working a 9-5 job who just found out their ex ran up a $2M bill at a Vegas casino (in your name, while legally married, etc etc). I’m not saying they’re definitely going into Chapter 11 but you can’t rule it out either. Job-wise you guys should be safe but it does piss me off to think I might lose part of my pension while the schmucks responsible for the disaster got away with a fortune.

Anyway, don’t let it get to you. Here’s some pictures of the kids, would have you thinking that I lead a stress-free life with 3 well behaved kids. Entirely misleading to be sure.

https://www.icloud.com/sharedalbum/#B125oqs3q8sdOWe

Message to Jeff Immelt:

Jeff,

There’s no real easy way to say this: please quit screwing my friends!!!

I’m sorry. This blog was previously free of profanity.

But Jeff, sometimes it’s better to say what you really think, and I honestly feel bad for my ex-collegues at GE who saved up for their retirement in GE stock. I got sentimental once and bought about $1,200 worth of GE stock for my 401(k), it’s probably worth $200 now. Some of my friends had their entire life savings in company stock, now they’ll be saying “hello, welcome to Wal-mart” for the next 20 years.

What really makes me angry Jeff, is that I remember seeing a memo from you several years ago saying “we still do too many things by the rules of some old playbook.” So I think you knew long ago the culture you inherited from the GE of Jack Welch was nothing but a grand illusion, but why didn’t you do anything about it?

Jeff, ayude me pues, GE’s Short/Current Long Term Debt alone is $193 billion, that’s 6 times the entire foreign debt of Peru, a country of 29 million people.

But let’s put things in perspective Jeff. Fly down here to Cusco (economy ticket on LAN is $800) and I’ll introduce you to a 10 year old kid in my English class. He has no hands but is happy as anything, he gets by just fine despite his disability. I can also introduce you to about 4,000 other kids where I teach, every one of them believes tomorrow will be better than today, and so do I.

I’ll also introduce you to Mama Vicky, who worked the land with her own two hands her entire life. Funny thing Jeff, Mama Vicky might “be worth” more than all of GE right now, since she has a house in a good area of Cusco – and no debt. But the point is this: she worked hard to provide tangible things to her family for eighty-some years, and GE can do the same thing.

GE makes lots of great things, tangible things, but GE culture is lousy. When I was at GE Jeff, kids with MBAs who didn’t know which pointy end of the airplane goes down the runway first had better career opportunities than hard working engineers and technicians. And what’s up with V-dollars? Come on Jeff, that sounds ridiculous even for a guy who went to business school.

I like how you cut the dividend Jeff, it was a decision based on reality. Quit worrying about AAA credit ratings. I know, I know, it affects the cost of capital. But borrowing money like it’s going out of style is what got us in this predicament, so let’s not borrow any more, okay Jeff.

Come have a few cervezas at Mama Africa with me and we can talk about how to ditch GE’s stale old 20th century culture and split of the industrial businesses in a successful IPO.

Seriously Jeff, you might think I’ve been drinking too much coca tea, but GE was a standard-bearer for business in the late 20th century, and that kind of culture is exactly what caused the recession. So let’s stop doing things like we did in the 20th century, that was a decade ago. Let’s look forward and start a radical overhaul of GE, so my friends can say “Welcome to Key West” or wherever they choose to retire, not “Welcome to Wal-mart” for the next 20 years.

GE releases 4Q earnings

GE, my former employer, released earnings this morning. As expected, it wasn’t pretty.

GE needs a radical new corporate culture

GE needs a radical new corporate culture

Many of my former collegues who have been at GE since the stock’s heyday of the late 1990s have a hard time understanding how GE stock has consistently lost value for nearly 10 years now while the company continues to post profits. Some of them still believe the stock will go back up like it did in the 1990s.

Now working at GE was very good to me. The company has great benefits, health care, tuition reimbursement, a fixed pension, etc. In the aircraft engines division we had a fantastic team of engineers and technicians, as well as a world-class work environment. It’s easy to understand how many of my former collegues, from inside the company, always believed in GE’s stock.

The trouble with GE is that the finance arm Jack Welch created to buy and sell companies at will, and thereby achieve his illusion of “managed earnings”, has now become a big headache. I’m no finance guy or economist, but check out a great analysis of GE’s creaky balance sheet here.

What to do if I were Jeff Immelt:

GE’s corporate culture needs a radical overhaul. GE’s culture is still focused on things like competitive advantage, doing more with less, earnings growth, and all those tired old 20th century concepts that simply won’t work in the 21st century. Only by having a culture that relentlessly drove an illusion of value did GE end up with north of half a trillion $ in debt.

Change in a large organization is not easy, but here are some ideas:

  • Do away with all the “fast track” management programs (HRLP, OMLP, etc.) These programs are indeed good mentoring tools, but the trouble is they have created an exclusive fraternity. In a company with over 300,000 employees, it doesn’t make sense to largely limit your innovation and opportunities to a select club of “golden boys/girls”.
  • Get rid of most internal metrics and focus on managing people and relationships. Many metrics are unreliable and drive no behavior, or drive unwanted 20th century type thinking.
  • Ditch “Six Sigma”. I’m sure when “Six Sigma” was introduced as a quality tool it had its benefits, but it’s no longer relevant today. I could come up with many reasons why, for one, it stifles innovation, but most importantly “Six Sigma” is a throwback to the old way of doing things, pervasive like a cancer in GE’s culture, and it needs to go. Have a big “Green Book” bonfire. Bring hot dogs and hamburgers and have a “Six Sigma cookout” for employee morale. I’ll take onions and BBQ sauce on my burger please 😉

There are plenty of other things I could think of, but the main idea is that GE was a standard-bearer of business in the 20th century, yet corporate culture of the late 20th century set the stage for today’s crises, and a radical overhaul is needed. You can read Umair Haque’s great thoughts on 21st century economics and why 20th century thinking won’t work any more.

Reality check:

As much as I believe in overhauling corporate culture, GE may also have to make structural changes to survive. If GE were forced to take the kind of write-downs on its financial portfolio that major banks have (and there’s no reason why that’s not a possibility) the company would be in big trouble. It may be inevitable to split the finance arm from the rest of the company.

Some more positive ideas going forward:

  • Spin of the traditional (non-finance) businesses in a successful IPO. Why should all the good people and great technology in the traditional businesses be burdened with the worry about a half a trillion $ debt load?
  • Buy Yahoo! and combine it with GE’s traditional businesses. That’s right, GE’s technology and media businesses would be great partners for Yahoo! – a technology/media company. And coupled with a new and better corporate culture, it would be a cool new place to work!

In the final analysis, you may think I’m naive, just plain wrong or have been drinking too much coca tea. But GE and the rest of corporate America already know how to do business in the 20th century, so if I’m wrong we can always return to the old way of doing things. But if we wait any longer to look forward, it may be too late in case the new reality is here to stay, as I believe it is.

NB: 5 year chart used above courtesy of marketwatch.

The end of supply-side economics?

I was reading the news stories the other day about the Boeing machinists strike and the potential sale of Chrysler. Interestingly both those companies are headed by former GE executives. My friends at the GE plant where I used to work are actually affected by the Boeing strike, not a fun prospect with the holiday season coming up.

Now working for GE was the best job I’ve ever had. The company still has a fixed pension plan, affordable health insurance, education benefits, etc. In the aircraft engines business we had world-class engineering, a very safe work place and generally a fantastic team of people.

However, I was never a big fan of GE’s corporate culture and I believe the current meltdown in stock markets, credit markets and housing prices has much to do with corporate America’s culture and beliefs. Jack Welch’s infamous idea of double-digit earnings growth is no different from the belief many real estate investors held in recent years of double-digit price increases. Those kinds of beliefs totally ignore the fact that money is just a funny printed paper bill, it has value only in how it facilitates the exchange of goods and services.

In my opinion the current crises show that globalization, outsourcing and supply-side economics in general have their limits. The banks and hedge funds who were leveraging their funds 30 times or so were in effect playing Federal Reserve, printing up their own money. Problem is, if you don’t offer some valuable goods or services, the money remains just a funny printed paper bill.

In terms of housing prices, the damage has already been done. Either prices have to return to historical levels or we have to experience steep wage inflation to bring the cost of owning a home back in line with personal incomes. We may be able to apply some bandaids such as 40 year mortgages, but at the end of the day we have to bite the bullet on this one.

As for Chrysler, Boeing or any other company trying to prepare for what will undoubtedly be a significant global slowdown the answers are easier. People’s quality of life isn’t determined by how much stuff they have. I make less in one week here in Peru than I used to make in a day at GE, but I’m just as happy if not happier. Hopefully CEOs like Bob Nardelli and Jim McNerney can wrap their minds around the idea that people’s quality of life is more important than earnings growth. You only have to look as far as companies like Honda or Southwest Airlines to realize that a company that offers good products/services and has a motivated workforce will do well in the long run.

Ward Welvaert

international business
turnaround consulting
aviation/airline consulting
CIS applications

Me and my friend 'Bridge' at the GE jet engine shop in Durham, NC.

My friend 'Bridge' and I at the GE jet engine shop in Durham, NC.