Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

As the reality of General Electric Co.'s plight sets in, the blame game is starting. And there's plenty to go around. 

This time last year, GE was a $260 billion industrial titan emerging from a major streamlining effort with high hopes of becoming a top 10 software maker. Now, it's a $175 billion cautionary tale of bad management grappling with a draconian drop in earnings expectations. And that's just what we know at this point.

The Mighty Have Stumbled
The day Jeff Immelt took over as GE's CEO, shares of the company were trading near $40. Now they're worth about half that.
Source: Bloomberg

There's speculation GE's cash crunch could force a dividend cut as early as this week, and new CEO John Flannery will present his plan for reshaping the company's sprawling portfolio on Nov. 13. There's even (as of now, unfounded) speculation that GE misled investors and regulators as to its financial well-being.  

GE got a pass from too many people for too long because, well, it's GE -- a beacon of American industry and operational excellence that traces its roots to Thomas Edison. That time has ended. Someone has to answer for GE's downward spiral, starting here: 

Management: GE's former CEO Jeff Immelt has received the brunt of criticism, and he deserves it. Immelt spent grandly on energy and power deals just as those markets slipped into a decline that's largely responsible for GE's recent earnings struggles and cash shortfall.  But he wasn't a one-man show. Steve Bolze, former head of GE's power unit and once a top contender to succeed Immelt, didn't respond quickly enough to weakening demand. And former CFO Jeff Bornstein could be just as much a cheerleader as Immelt on overly optimistic forecasts -- and he was the numbers guy. Bornstein took public responsibility, noting on GE's recent earnings call that "the buck stops with me." Given that he was on his way out at the time, it's to his credit that he showed up at all, and it's a lot more than we've heard from Immelt. But this falling-on-the-sword rhetoric will only go so far with investors. Depending on how bad things get, they may seek clawbacks of hefty pay packages. 

John Scissorhands
Bloomberg's Dividend Forecasting analysts are projecting CEO John Flannery will have to cut GE's quarterly dividend in half.
Source: Bloomberg Dividend Forecasting analysts

The Board: GE's fall from grace has exposed a deeper oversight crisis, starting with the company's practice of having an empty private jet tail Immelt. GE was under pressure to cut billions in costs, but the board and Immelt were reportedly unaware of the second plane. At best, this drama is an embarrassing sideshow. At worst, it should spark concern about what else the upper ranks of GE didn't question thoroughly. For example, why did Beth Comstock, head of GE's Business Innovations unit, receive the same 2016 special retention grant as fellow vice chair and head of GE's crown-jewel aviation unit David Joyce? Why did GE need vice chairs at all? There were 17 external advisors on GE's board. In its most recent proxy statement, GE said its larger-than-average board was necessary, given the diversity and complexity of its business. The extra sets of eyes don't seem to have helped much.

Well-Compensated
In hindsight, GE's board should been harder on management
Source: GE Proxy Statement
NOTE: Compensation includes cash fees, stock awards and other compensation. The amounts reflect partial-year board service for Cash, Swieringa and Warner, who retired in April 2016.

Trian Fund Management: The activist fund run by Nelson Peltz first disclosed a stake in GE in October 2015. At the time, it sought to add credibility to Immelt's transformation strategy and encourage more cost cuts and even greater return of cash to shareholders. Trian seemed to grow increasingly frustrated with GE, and founding partner Ed Garden was just added to the board. But it's worth wondering if Trian's initial endorsement helped shield some of GE's challenges and whether it could have been more aggressive, sooner. In March, Trian brokered a deal that tied GE executives' bonuses more directly to operating profit and cost-cutting goals. I commented at the time that the agreement was cold comfort because it assigned penalties only if GE fell short of both targets. GE has already exceeded its cost-cutting goal for 2017, but is nowhere near the profit benchmark. And that means nothing happens to the bonuses, at least as far as this agreement is concerned.  

Wrong Call
Analysts with buy ratings have been in the majority at GE for some time. That's now starting to change.
Source: Bloomberg

Equity Analysts -- While the outlook for GE's businesses has gotten materially worse, the majority of analysts are still upbeat on the stock. There's logic to this: the further GE falls, the closer (in theory) the stock gets to a bottom from which it can recover. But there also needs to be some soul-searching among these bullish analysts as to how they underestimated GE's shortcomings. A number of them have since downgraded the stock or lowered their price targets, and there's no shame in that. Some of us columnists could have been harder on the company, too. But it creates a bit of whiplash when you simultaneously reiterate a $35 price target -- a nearly 75 percent premium to Monday's closing price -- and speculate SEC investigations are nigh, as Melius Research's Scott Davis did last week.

Who's to blame for GE's dire straits? It takes a village, I guess. We'll find out just how dire things are later this month.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. GE vehemently denied that there were any accounting improprieties at the company after Melius Research's Scott Davis suggested the company's accounting, auditor and past senior management would draw scrutiny and potentially spark regulatory and criminal investigations. 

  2. GE Business Innovations encompassed its lighting, venture capital and sales, marketing and communications operations. 

  3. GE sets bonuses based on a mix of financial and strategic goals for each year, so there will likely be some kind of impact from its latest disappointments. But there likely will be no extra penalty from the Trian deal. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net