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The Book
This book is another surprise read. I was expecting it to be a rather boring read about corporate failures and being in corporate life myself, I was not too keen to hear about mess in other company. Not to mention when realised that it is a 919 pages long (ie. if you do not count acknowledgements section). However, it soon became a page turner as soon as I finished the first few chapters. I think I finished it in less than 4 days. Lights out, the fall of General Electric is a really good read. Well, the company is still around and did not collapse but just a pale shadow of what it used to be.
What is the book about?
I think it will be very difficult to sum up in just one word. The author says it in the title, pride and delusion but I can think of many words after reading it. Words like greed, hypocrisy, selfishness, self-importance all came to my mind as I was reading it. I was literally shaking my head with disbelief as I was reading them.
General Electric (GE) was one of the darling of wall street during its heydays and one with the biggest market capitalization. It was once high in the Dow Jones industrial index and share price went close to $60 in NYSE during the early 2000. Though $60 is nothing when you think of the tech stocks now such like Google, Facebook or Tesla but it was something then. It pride itself for never missing the dividends payout to the shareholders (only except once in 1938). Then it all came crashing down when the new CEO (John Flannery) came on board and found the company’s cash flow actually cannot sustain the dividends payout among many other things. As a result, he decided to reduce the dividend payout which was the sacred cow and the share price tumbled as a result. New CEO was fired not long after. John Flannery took over from Jeff Immelt who took over from the so often called “legendary” Jack Welch . Well, not so legendary after all once you read all the excesses and nonsense that had been going on since his days. He was probably the start of the problem. Each has to share some blame for the fall of General Electric.
So what really happened?
GE was an industrial giant making gas turbine, jet engines, electric appliances and other heavy industrial machinery during its heydays. It was very profitable and highly crucial for the red hot American economy in the early years. When Jack Welch took over, he diversified and made many acquisitions that made GE a conglomerate. At one time, it also owned NBC. It even had its own “bank” or GE capital. Quite a clever invention as the company can have cheap financing easily for expansion or acquisitions.
The trouble sort of started or rather surfaced when the chosen heir (Jeff Immelt) took over from Jack Welch after he retired. Immelt felt that GE was too diversified and not focused enough on its core business. He decided to sell off the rest of non core businesses and bet on the power division. However, he made some bad financial decisions and the power market has somewhat shifted. To prop up the share price, he used the company’s cash to do share buy back. That did not help much as the share price still do not go beyond $30 for long.
Then after 16 years at its helm, the next chosen heir took over and discovered many skeletons in the closet. He moved quickly to reduced the dividends as he found that the dividend policy was just not sustainable anymore. Share price tumbled and he was fired. That was the start of the fall of General Electric. The new and current CEO, Lawrence Culp who is not a GE insider is still there and still trying to revamp the company even until now.
What sticks out for me?
One of the thing that sticks out with the GE was the sheer hypocrisy and selfishness of their executives. The CEO (Immelt) has 2 private jets for all his business trips. One was his favourite which he always flew in and the other one was an empty jet that just followed him around as a backup plane. Such self importance and indulgence is shocking as he perhaps saw himself as a head of state. During this 16 years tenure, he had cut thousands of jobs to prop up the share price. Imagine how many job he could save if the just cut down on just one such luxuriously and wasteful lifestyle himself? He also had a security details, free cars, accommodation and many more, all paid by GE. By the way, GE maintained a fleet of private jets for their top executives and board of directors.
Another shocking thing that the did was the share buyback. He spent more than $108 billion on share buybacks. Such share buyback was supposed to boost the share price but the share price never went beyond $30 for long and soon dropped to $10. That was poor use of cash and it simply just evaporated. Or perhaps the share price may tumble even earlier if not for the share buybacks.
The other thing that that GE tried to maintain even though it is no longer sustainable anymore was the paying of dividends. GE has the proud record of never missed the dividends payout except for 1 year and all the CEO tried to do the same even if it means robbing Peter to pay Paul. This was just sad especially when a company do not even has enough cashflow. This was as a result of bad investment decisions and investments gone wrong in the power market. Yet they still tried to maintain the false facade. The dividends was finally cut down to size from 31 cents to 10 cents a share.
This dividend story has similar parallel in Singapore’s stock market too. StarHub, a local telecommunication stock was doing exactly the same. However, they used borrowed money from the bank to pay dividends. The stock was also a favourite among investors due to the high dividend payout and was viewed favourably as a defensive stock. It was as high as 6-8% at certain point. This practice was called out as not sustainable by some analyst and true enough it cut the dividend eventually triggering selloffs. Eventually it was booted out of the Straits Times Industrial Index just like GE kicked out of the Dow Jones industrial index.
High dividends are attractive to both institutional and retail investors alike. Imagine if you are a fund manager and you are always under pressure to give a return to your investors. Having guaranteed returns as high as 6% on some safe stocks with little risk is a god sent and a no brainer. Nowadays people will rather eat less than lose their mobile subscriptions.
So who’s fault was it?
Naturally after GE’s stock tumbled the blame game starts. Everyone blamed everyone for the fall of General Electric. It is a little hard to say who was really at fault but I would see many of the high level executives need to shoulder the blame for the failure starting with Jack Welch. He started many risky ventures and acquisition that goes beyond their core business just to boost the top line. He is financially savvy unlike Immelt and used some clever accounting tricks to show profit that is due for the future. Many of this tactics are just kicking the can further down the road. Immelt wants to do the right thing but the business become so colossal and his pride prevented him from seeing reality. He could have done alot to fix during his 16 years tenure and Flannery only 14 months. Jack Welch may have created the mess but Immelt has the time to fix it. Flannery is probably the most honest and unfortunate CEO and discovered a lot of dirt swept under the rug. He tried to be transparent and do the right thing but it was too late and too short a runway to fix the problems.
The board of directors were also to be blamed as they are supposed to be the check and balance but they fell far short. They enjoyed the perks (director fees, use of private jets, etc) but did not do their part. As a result of their negligence or failure, the biggest losers are the workers who lost their jobs. Should we pity the executives? Well, Jack Welch “locked in perks that continue until after retirement including a Manhattan apartment paid for by GE, access to corporate planes, sports and opera tickets, fresh flowers, and a personal chef.” It was estimated by some that he made over $1billion during his time in GE and Immelt made $168 million. The rest of the senior executives are also in the millions. These are just mind boggling remunerations for such a colossal failure.
I believed such stories are still happening in the corporate world and just waiting to be discovered. It is really sad to always read that the executives are the one that always walked away with a golden parachute while workers are laidoffs during corporate failures. Other than shame (many are unrepentant) the executives can still go about in their high life without any disruption to their luxurious living. Workers on the other hand have to find another source of employment and try to find food on their table for their families. Such is the unfairness of this world and the corporate greed that is so common place. The fall of General Electric not the first in the corporate world and will never be the last but it serve as a good lesson for all executives.
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