Inside Out

GE Could Use Some Fresh Eyes

The biggest issue seems to be a lingering preference for an insider perspective.
Photographer: Prashanth Vishwanathan/Bloomberg
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General Electric Co. CEO John Flannery could do more to improve accountability at the struggling industrial giant.

Holding top executives responsible for following through on promised results is one of Flannery's top priorities as he attempts to arrest a nearly 50 percent decline in GE's stock amid a massive cash shortfall and a $15 billion hole in a legacy insurance business. The CEO, officially on the job for about eight months, has made some progress: Bonuses for all executives except the leader of GE's crown-jewel aviation unit were scrapped; Flannery is taking a 47 percent lower salary than predecessor Jeff Immelt; and perks like corporate jet use and company cars have been rescinded.

One Direction

Flannery officially took over on Aug. 1. The stock has slid nearly 50 percent during his tenure and has flirted with levels last seen in the throes of the financial crisis.

Source: Bloomberg

But as GE's annual shareholder meeting approaches, employees, investors, analysts and proxy-advisory firms still see the company as not going far enough in its promised revamp. And they are right. Flannery's top-to-bottom rethinking of GE has at times seemed like more of a sprucing up around the edges. Take those pay cutbacks: Stifel Financial Corp. analyst Rob McCarthy has pointed out that the supplemental pension benefits due to top executives remain exorbitant, consuming about a fifth of its pension deficit. The biggest issue seems to be a lingering preference for an insider perspective.

Pension Perks

Immelt's benefits are equivalent to about 1 percent of the $6.7 billion funding deficit for GE's supplementary pension plan

Source: GE 2017 10K filing

Flannery cleaned house among top GE executives, but largely replaced the departed with other GE executives. GE is shrinking its board and booting out many of the directors whose oversight, in hindsight, was clearly lacking. That includes lead director Jack Brennan, who will depart in 2019. Former Danaher Corp. CEO Larry Culp and Leslie Seidman, the former chairman of the Financial Accounting Standards Board, were good choices to fill emptied seats and will help shore up the collective operating and accounting expertise. And yet GE is resisting a shareholder proposal to separate the CEO and chairman roles, arguing in its proxy statement that giving Flannery both jobs is the best way "to efficiently and effectively protect and enhance our long-term success."

Flannery was "deeply disappointed" by the magnitude of the charge in a legacy insurance business whose reserves were supposedly reviewed each year by auditors. As Vertical Research Partners' analyst Jeff Sprague put it, "It is hard to imagine a $15 billion problem materialized in the course of the year." But GE is asking shareholders to ratify KPMG as its auditor for another year, protecting a relationship that's existed since 1909. KPMG's deep expertise with GE's sprawling operations translates into "competitive" fees, according to GE, whereas bringing on a new auditor would entail a significant cost and time commitment on the part of management.

Those concerns would be valid if it weren't for GE's rapid downward spiral and the emergence of an SEC investigation into the company’s accounting practices. In an unusual move, both Institutional Shareholder Services Inc. and Glass Lewis & Co. recommended ousting KPMG. ISS cited questions about the company's accounting practices and a lack of transparency on the board's view of KPMG legal challenges, including a 2014 SEC settlement on charges it violated auditor independence rules. ISS is also backing a separation of the chairman and CEO roles because "there is ample evidence to suggest that GE in its current form is sufficiently large and complex that it is difficult for any one person" to do both jobs.

'Sufficiently Large and Complex'

ISS didn't take a stance on a breakup of GE, but its recent struggles suggest the company is still too sprawling and diverse for its own good

Source: Bloomberg

Overhauling GE's culture and businesses isn't going to be easy no matter who's in charge, but fresh eyes can't hurt. This tension between the old and the new was perhaps understandable in the early stages of Flannery's tenure, but it's growing less so by the day. After his flop of an investor day in November, followed by the insurance disclosure this year and now with the increasing likelihood that GE will have to walk back its already heavily lowered 2018 guidance, Flannery is going to have to get more radical about shaking up this 126-year-old company.

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

    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

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