The Education of Jeff Immelt

The Jack Welch era is history. Suddenly, running GE is a whole new ball game

The latest crisis for Jeffrey R. Immelt came as they all have in his short tenure as chairman and CEO of General Electric Co. (GE ): without warning. This time, it was a quarterly earnings announcement. Despite an economy that Immelt describes as the toughest he has seen in 20 years, he was delivering a solid, 17% earnings increase before an accounting change. And just as investors had demanded, he was offering more detail. In a first for GE, Chief Financial Officer Keith S. Sherin would field questions from analysts. But the moment of triumph, as it has so many times in the past seven months, slipped away. Instead of responding with cheers and a runup in the stock on Apr. 11, investors bailed because of flat revenues and GE's cautious outlook. By the end of the day, shares had plunged 9.3%, and Chairman Immelt was peeved, to say the least. "The bottom line is that we met our numbers. We absolutely, positively met our numbers," he says. To buck up morale, Immelt phoned top managers and later dashed off a companywide e-mail reminding employees of GE's strong position in its markets. Imagine former chief Jack Welch having to do that.

Immelt's rite of passage as chief executive had been meticulously planned; it was to be Welch's final legacy to his successor. Instead, it has been one of the most tumultuous any new leader has experienced in recent times. The crises began on day two of his tenure when terrorists attacked the World Trade Center. The events of September 11 left him with two employees killed, a $600 million hit to GE's insurance business, an immediate slowdown in its aircraft engine operations, and the prospect of vast uncertainty in an already weak economy.

That crisis was quickly followed by anthrax attacks at GE-owned NBC, the implosion of Enron Corp., and accounting scandals at Tyco International Ltd. (TYC ), which dramatically diminished investors' trust in America's corporations. Those who once accepted GE's results gratefully and without question turned overnight into ill-tempered skeptics who seemed to see the worst in every announcement.

Immelt spent almost two decades apprenticing for the job of chairman and CEO of GE. But many of the challenges he faces are not the ones he prepared for. His hardest job was supposed to be churning out regular earnings gains. So far, he has managed to deliver the numbers, but the tough part is getting investors excited about the results. In almost every quarter over the past decade, GE has promised--and delivered--profit growth of more than 10%, and every year the stock price increased. That consistency is why the company has been one of America's most admired and Welch the most celebrated CEO of his generation.

But the Welch era is history, a glamorous artifact of a corporate world that no longer exists. Nobody ever asked the notoriously bombastic chairman to explain himself. And chances are he wouldn't have been any more persuasive. As Immelt recently told a group of customers, "even Jack's schtick wouldn't work in this environment." Predictable earnings growth simply is no longer enough. These days, it's all about quality. Even the predictability itself seems suspect. Suddenly Immelt is fending off questions about how much GE depends on acquisitions and noncash income, not to mention other accounting issues. While nobody doubts the integrity or prowess of GE's management, investors are suddenly daunted by its size, complexity, and business mix. GE's veil of invincibility has been lifted. On Apr. 11, investors saw it as an ordinary company facing tough times and treated it as such: They sold the stock.

That would have been crushing for any new CEO. But it's especially hard on Immelt, who has never had to face so many skeptics. By December, the 6-foot, 4-inch former fraternity president and Ivy League footballer was looking a little frayed around the edges, fatigued, and heavier than usual. Friends say the 46-year-old Immelt, who started his career as a salesman and is known for his sharp wit, is more circumspect, even more mature. In terms of experience, "Jeff is now fifty-something," jokes Vice-Chairman Robert C. Wright, the head of NBC. In quiet moments, while sipping the Diet Coke that always seems at hand, Immelt admits that the criticism has been more intense than he had imagined--and his ability to counter it less effective than he had hoped. Indeed, he has spent twice as much time communicating with Wall Street as he had expected. "I hate the criticism, but it's not a personal thing," he says. "I get up the next day and say, `These guys don't get it."' Still, he adds: "I'd be lying if I didn't say I felt stress. But it's never about this company. It's about wanting the world to see and to touch and to feel how different we are."

The pressure isn't likely to slacken anytime soon. GE stock has been slashed by almost half since October, 2000, and in just the past six weeks the company has lost almost $100 billion in market value. Immelt knows how much that hurts the 40,000 GE employees with stock options. David L. Calhoun, CEO of GE Aircraft Engines and a longtime friend of Immelt's, says that what particularly galls his boss is that "he can't satisfy his friends and associates. He can't fix it for them." Outside investors aren't much happier. No wonder GE expects a major turnout at the annual shareholders' meeting on Apr. 24, even though it's in Waukesha, Wis., where GE Medical Systems is based.

Immelt has tried to respond quickly to the new environment. When investors began demanding more information about GE's operations, Immelt promised that the annual report in mid-March would be the size of a Manhattan telephone book, if need be. It wasn't quite that hefty, but it did open the company up to unprecedented scrutiny. But then some complained that Mr. Nice Guy was bending too easily. He can't win. "Of course we're reacting," shouts GE Director Kenneth G. Langone, co-founder of Home Depot Inc. "If we didn't react, that would be worse."

The trouble is, having gotten more disclosure from the $126-billion behemoth, many investors don't like what they see. They're asking how GE can sustain double-digit earnings amid lackluster sales growth and a heavy reliance on a few units. Even if GE's management strength and business mix does allow it to keep growing by 15% a year, how long would it be before Immelt would have to at least consider breaking up the company? Within 15 years, GE could have annual revenues of more than $1 trillion.

In the current climate, GE may be vulnerable to criticism about its finances--indeed, its very business model--for a while longer. But Immelt has at least one sympathetic booster who understands about baptism by fire. When Welch started his tenure in 1981, he faced ferocious competition from the Japanese, a sour economy, and doubters who thought he, too, would have to split up the company. "There are all kinds of tough periods," says Welch. "He has got better results than I had." Indeed, many of GE's peers in the Standard & Poor's 500-stock index are expected to fare much worse. The challenge for Immelt, as it was for Welch, is to steer GE through the turmoil and find new ways to ignite growth--in sales, earnings, and stock price. Immelt knew he would have to defend himself. He never thought he would have to defend GE. Suddenly, his success will be measured in ways he never thought. The real education has begun.

On the day the Twin Towers collapsed in New York, GE's new chairman, the one who had just promised to make GE a technology leader, was stranded in Seattle with a laptop computer that couldn't break through the company firewalls. It didn't stop him for a minute. After working the phones, he made his way to a nearby GE sales office to log on. GE Aircraft Engines' Calhoun, remembers it as "five cubicles with a small place downstairs to get a doughnut and Diet Coke." While sales reps may have been surprised to see their new chairman trying to figure out the fax machine, Immelt was in his element. He began to assess the damage, and in a potentially risky move, decided to delay a Sept. 16 investors' meeting by only two days. "We knew where we stood," says Immelt. "I felt it was important for us to get out and make our statement."

Despite his efforts to calm investors, GE's stock suffered. When the New York Stock Exchange reopened six days after the attacks, GE shares dropped almost 11%, to $35.15. At one point, the price even dipped below $29. No matter how confident Immelt looked, there was no disguising the fact that GE's earnings would be affected. Any increase in military sales wouldn't offset the impact of insurance claims, pulled ads, parked planes, or a more protracted recession.

Then, as autumn progressed, Enron began to implode. At first, Immelt and his team were focused on GE's financial exposure--which turned out to be a relatively minor $80 million. But investors, stunned by the accounting chicanery, soon turned their attention to other household names with opaque finances. GE was an obvious target. Where Welch might have tried to ignore the critics, Immelt decided to appease them. After consulting Sherin and other colleagues, he pushed a plan to disclose more data to investors.

Meanwhile, a bigger problem was brewing. Tyco, a diversified conglomerate expressly modeled after GE, was having troubles of its own. Long rumored to rely on accounting gimmicks to bolster its astonishing earnings record, the stock began to crater in the new year. Mere months after CEO L. Dennis Kozlowski said his company could one day surpass GE, he proposed breaking the whole thing apart to "unleash" shareholder value. Investors didn't buy it and dumped the stock. Immelt seemed offended at the inevitable comparisons. "I hate even being mentioned in the same sentence as Enron and Tyco," he told a group of customers in Atlanta--but he felt forced to explain why GE was fundamentally sound. Vice-Chairman Wright says he wanted to shout: "Wait, you're not part of our family. Stop showing up at Thanksgiving!"

But the damage had been done. Fear and skepticism became the order of the day. Even with GE's expanded annual report and first conference call, investors still complain they don't have enough information to decipher GE. What are they looking for? First, investors are unnerved by the bleak short-term outlook. Power Systems, the big driver of growth, faces a downturn next year and reported $476 million in termination fees in the first quarter for canceled orders. That plus tough times at economy-sensitive businesses like Plastics, Aircraft Engines, and Industrial Systems leave many wondering how GE will grow in coming years. Beyond that, its reliance on fueling growth through acquisitions has become controversial, as have boosts from pension income and off-balance-sheet entities. And there's some worry about GE Capital's debt level. Immelt has repeatedly responded to these concerns, and certainly few would portray GE's collection of top-notch businesses as a house of cards. Still, GE's complexity just doesn't sit well with edgy investors.

If anything, the past few months seem to have emboldened Immelt. As GE director Scott G. McNealy, chairman and CEO of Sun Microsystems Inc., puts it, "you feel like you could run into him with a Caterpillar bulldozer and all it would do is dent the blade." Immelt even looks leaner and steelier. He has become more combative, less apt to revert to the salesman's desire to accommodate. Consider Immelt's reaction to Bill Gross, manager of Pacific Investment Management Co., which runs the world's largest bond fund. Gross sliced 6% off GE's share price when he issued a harsh report on Mar. 20 that wrongly accused the company of using cheap commercial paper and stock to buy its way to growth--but raised valid concerns over disclosure and GE's ability to pump out future profits. Immelt had Sherin whip off a press release stating the facts and asked Vice-Chairman Dennis D. Dammerman, the head of GE Capital, to call the fund manager. Dammerman delivered a stinging refutation. "We were pissed off that the report was so factually wrong and completely out of the blue," he says. Gross responds that his key concerns are dead-on, that GE is more of "a finance company than an industrial powerhouse."

Just as that crisis passed, more trouble emerged. Human Resources Vice-President William J. Conaty says that when his new boss is seething, he "puts that football face on--like a player about to make a block, with four-letter words sprinkled in for effect." Immelt had his game face on when he appeared on CNBC on Apr. 15, in part to combat an article in The New York Times that offered a scathing--and, Immelt says, inaccurate--assessment of GE's accounting. The article appeared on Sunday, and by Monday morning GE had posted a detailed rebuttal on its Web site. In his TV appearance, the genial Immelt was nowhere to be seen. Instead, he looked frustrated, fed up, and clearly intent on making his point. After the broadcast, he said: "It would be different if the stock price went down because we didn't meet expectations. Shit. I hate it when the stock goes down. The stock is my job. But we're doing what we said we would do."

For Immelt, the barrage of criticism has to be confusing, at the very least. Mostly, he has only known success. Born in Cincinnati in 1956, the younger of two brothers, Immelt adored his mom and his dad, a GE Aircraft Engines veteran. He credits them with instilling a rock-hard self-confidence; they used to tell him: "You can do anything you set your mind to." He had sports to build him up, too: He was an all-star high school football and basketball player and offensive tackle at Dartmouth College, where he majored in math. The big man on campus then landed at Procter & Gamble Co. in 1978 with office mate and fellow jokester Steven A. Ballmer, now CEO of Microsoft Corp. After earning an MBA from Harvard Business School, Immelt went to GE headquarters as a marketing exec in 1982.

Immelt was singled out from the start. Dammerman sent his notes on the bushy-haired recruit straight to managers so Immelt's application wouldn't get lost in the mix. At the very least, Dammerman says, "he was the best guy I saw that day." Susan Peters, who now heads up executive development for Immelt, recalls people pegging him as the next CEO back in the mid-1980s because of his confidence and ability to perform.

After helping organize a massive recall at GE Appliances in 1989, though, he almost got fired a few years later from his position as head of Plastics Americas. Immelt couldn't get prices up, and Welch was badgering him to fix the situation. The pressure was so intense that Immelt almost came to blows with a senior executive at General Motors Corp., one of his most important customers. In the end, after reviewing Immelt's plan to improve GM's productivity, the carmaker finally agreed to a price hike. "There were a lot of bruised feelings," says Vice-Chairman Gary L. Rogers, his boss at the time. "Jeff learned that while it's important to be customer-friendly, sometimes the situation requires you to do things that aren't going to delight them." Immelt admits the entire year toughened him up. And it was his ability to turn things around that got Welch's attention.

Immelt is determined to reshape GE for the next generation. Between battling crises, he has already launched several initiatives. His immediate push is to slash the company's administrative and support staff, now a full 40% of employees, while making the front-line workers obsessed with helping customers. That's right--obsessed. He will measure managers by how much they improve their customers' bottom lines--something Welch never did--and by how much time they spend in front of their customers. He wants GE to take the Six Sigma quality program and other innovations deep into a client's operations. Add to that more globalization, more business via the Web, and a more diverse senior staff. In short, a more modern GE.

Indeed, GE already looks different in at least one respect: Since Immelt was named chairman-elect in late 1999, 50% of all senior executive hires and 54% of new corporate officers are women, minorities, or foreign employees. He has put teeth into mentoring programs and made pals like Calhoun directly responsible for a diversity forum. He has also funneled a lot more money into research and development.

Immelt hasn't spent a day more than necessary at company headquarters in Fairfield, Conn. He has made it a priority to keep up the global travel, visiting customers and employees; he even devoted 21 full days for the annual "Session C" assessment of top talent, which ends in mid-May. He's out of the office almost 70% of the time, calling his wife, Andy, and 15-year-old daughter, Sarah, each night from different parts of the world.

Given the more demanding environment, Immelt has turned frequently to a coterie of senior managers, especially his three vice-chairmen, for advice. They weigh in on everything from company image to financial details--and Immelt listens carefully. He also has leaned on his already active board of directors, asking them to sit through audit-committee meetings, visit more GE units, and become even more committed to good governance. Director Shelly Lazarus, chairwoman and CEO of Ogilvy & Mather Worldwide, recalls one meeting during the Salt Lake City Olympics that lasted seven hours. They discussed how much transparency was useful without adding costs and confusion or tipping off competitors. "Jeff said, `You see what I'm about, and now I'm asking you for 100% commitment and 100% attendance,"' says Lazarus. "He made everyone sit up straight."

While outsiders may be pummeling him, Immelt seems to be a hit with the rank and file. In a March survey of 75,000 employees--expanded from 15,000 the year before--more than 80% of respondents expressed confidence in the top leadership. They love his enthusiasm, his vision, and his common-guy touch. After all, for years an intimidating celebrity had been at the helm. At the same time, employees at all levels are quick to note that the new chief's emphasis on radically increased customer interaction and reduced back rooms is already having a profound impact on how they do business. Administrative employees are scrambling to get to the "front lines," while salespeople are working to convince customers to spend more time on GE-inspired initiatives.

Then again, getting closer to the customer isn't as easy as it sounds. One appliance distributor snaps: "I already see enough of these guys." And David P. Mayer, chairman of radiology at Mercy Health System in Darby, Pa., thinks GE's famed Six Sigma is a lot of hype. He hasn't been wooed by Immelt's charms, either. After hearing him in Philadelphia, Mayer says: "He likes putting on that folksy, good ol' boy routine, but he's probably pretty intense underneath."

Sure is. But Immelt isn't the bully that Welch was. He's so friendly, so decent, and so focused on others that Dartmouth gave him an award for character. And yet he's every bit the boss. "This is not just a job," he says. "This is a passion. This is my life." As with Welch, nothing matters more than delivering the goods. Immelt will slap you on the back and then give you a little shove. He'll fire friends, but he'll do it in as nice a way as possible--even calling after they leave to check how they are doing. And he is already approving some massive layoffs to get the backroom staff down to a more manageable size.

Immelt knows that, barring a scandal or huge gaffe on his part, he could be running GE for the next 20 years. "When I get knocked by one of these guys, I don't go home and suck my thumb," he says. "I say, `Look, we're going to be better. We're going to show them they're wrong."' But he never expected that the world would change so dramatically--that admiration would turn to skepticism and respect give way to distrust. He may be leading a venerated 120-year-old company, but investors aren't taking anything he says for granted. Winning them over could be the toughest sales job of Immelt's career.

By Diane Brady

    Before it's here, it's on the Bloomberg Terminal.