I have to admit that I took a certain amount of satisfaction from today’s announcement that General Electric had suffered a first quarter drop in net income that forced them to restate their projected earnings for all of 2008, a state of affairs that led to a drop of about 12% (and counting) in GE’s stock price. See, I worked for GE for quite a while, and while I was handsomely compensated and loved the name recognition they brought to my resume, I was also pretty happy the day they announced that our branch of the company was being sold, employees and all.
From the perspective of a mid-level grunt like me, today’s announcement was virtually inevitable. GE is a company rife with severe problems, ones you don’t get to hear about much due to their exceptional PR activities. Spin is everything at GE, so even when bad news is announced, it’s usually masked as something else, or coupled with a pile of feel-good blurbs that make you miss the troubling bit altogether. But trust me, just because the light in your fridge works and there’s a cute digital baby elephant dancing on your screen during the Super Bowl, doesn’t mean GE is the world’s only problem-fee company.
From my perspective, the biggest of these problems with GE was the ladder-climbing leadership culture they fostered. Executives who want to get ahead are openly encouraged to skip from job to job every 12 to 18 months. They are sent to leadership seminars, where they network with other remorseless climbers and reinforce the notion that the way to get ahead at GE is to take a highly visible job (or make the job you already have as visible as possible), do something incredibly splashy (whether it needs to be done or not), ceaselessly publicize that splashy thing, and take the next promotional opportunity as soon as possible.
Preferably all of this should happen before your splashy accomplishment is revealed to be nothing more than smoke and mirrors, a pretty paint job over rotting timbers that are still in need of replacement. Just not by you. By the time this is discovered, you’re already in your next job, several hundred miles from the scene of the crime.
This culture is pervasive in GE, and as a result, the next person in that vacated role has incentive to do the exact same thing. He figures out quickly enough that the real problems weren’t solved by the last guy, but rather than stand up and deliver that message – something that he realizes no one in a leadership role above him cares to hear – he follows form and slaps another coat of pretty paint on the crumbling infrastructure. And so it goes. Rinse and repeat.
Now, anyone with a brain in their head knows that this isn’t a sustainable practice. Eventually, the rotten wood is going to collapse, and there aren’t enough coats of problem-obscuring paint to prevent that. When this collapse point is imminent, that’s when GE typically sells off that chunk of the company and buys some shiny new company with the proceeds.
They did it with my own company, which was their insurance subsidiary for over twenty years. Despite having a near-complete lack of knowledge about the insurance industry, GE arrogantly thought that their normal managerial practices would work here just fine. The problem is that they completely missed the boat when it came to recognizing that insurance is perhaps the most heavily regulated business in the world. You can’t just take the pile of cash you’re sitting on and throw it at any investment you want, or use it as a backstop to some of your other businesses which aren’t performing as well. The feds and every state insurance department simply won’t allow it.
Yet that’s what GE tried to do anyway. They determined the minimum amount of reserves they were required to retain, and stripped away everything else so the corporation as a whole could claim a profit each year, when the reality was that much of that “profit” was reserve money they had been sitting on for years that they just conveniently released when annual results needed to be reported.
Of course, all of this came back to bite GE in the butt a few years ago, when the habit of under-reserving their losses resulted in the need to re-inject billions of dollars into their insurance operations to cover losses. (For a really good summary of this sad story, see this article from Barron’s.) Once that was finally cleaned up, they sold the company.
Well, not every smart businessperson on the earth works at GE. Those working elsewhere eventually wised up, and now it’s not as easy for GE to reinvent their image and hide their old problems by selling off the chunks of the company that they mismanaged. The result was today’s announcement, as the poor economy and GE’s past mismanagement finally caught up with them.
I feel bad for all of GE’s stockholders, who have been duped for years into thinking that GE is a model of management. Those inside the company have always known better. As soon as there wasn’t a meatball on my pay stub, I sold off every last share of GE stock I ever owned.
And I’ve never regretted it.