GE chief warns against quick-fix expectations

FORTUNE and FINANCIAL TIMES

Investors react badly to message about a ‘journey’ towards decentralised group of businesses
Delivering the closing speech at the Electrical Products Group conference in Florida — one of the big events of the year for US manufacturers — John Flannery spelt out his philosophy for turning round General Electric. Since taking over as chief executive last August, as the company faced a host of problems including downturns in key markets and lingering liabilities from its financial services operations, he had taken a “deliberate and methodical” approach to change, he told the attendees. “Being deliberate and then moving when things make sense, as opposed to moving just because somebody wants to, is just my style,” he said. That would not endear him to everyone, he acknowledged, but he was confident he was doing the right thing. Investors wanting “super-short-term decisions” were “maybe not my target audience”. The warning against expectations of a quick fix was only sensible, given the reaction to Mr Flannery’s presentation. When he had risen to speak at the conference, GE shares were off about 1 per cent. By the time the market had closed, they had fallen 7.3 per cent. Investors reacted badly to several aspects of Mr Flannery’s remarks: his warning about the continued tough outlook for GE’s gas turbine business; a seemingly tepid commitment to maintaining the dividend, which was cut only last year; the lack of a promise of an imminent solution to the problem of the group’s residual insurance liabilities: and the lack of any more dramatic moves towards restructuring the group following the $11bn merger of its transport division with Wabtec announced on Monday. Looking past the disappointments, however, there was an important message in Mr Flannery’s remarks that should have pleased shareholders seeking more radical action. A section in the speech detailed how he was trying to “fundamentally turn things inside out” in GE’s organisation, moving to a decentralised structure in which operating divisions have more autonomy. I have no nostalgia for the way things have been. If there’s a better way to do things, we’ll do them John Flannery, GE chief executive One result of that strategy is that it would make it easier to spin off the three core divisions of aviation, healthcare and power equipment as separate businesses.  GE had for “a number of decades” been a highly centralised company, Mr Flannery said. Jack Welch, chief executive from 1981 to 2001, acquired a stellar reputation by buying businesses and applying his management methods to improve performance. Jeff Immelt, who succeeded him, was not acclaimed in the same way but similarly stressed the value of the group’s central organisation, including the “GE store”: the research and development operations that served the businesses and made connections between them. Mr Flannery, however, argued that this model, which “could serve us well for a long period of time”, might now be superseded. He was transforming GE, he said, from a “headquarter-centric” company to one where “the businesses are the centre of gravity”. That means giving businesses more flexibility to pursue opportunities, including acquisitions, rewarding leadership teams according to the performance of their own divisions, and being more selective about using the central R&D operations. The research centres would be subject to “an internal market test”: if the businesses believed the research activities they were paying for provided cost-effective services, then they would continue, Mr Flannery said. If not, “we can’t maintain them”. Decentralisation was “a journey”, Mr Flannery said, and not yet complete. But its destination is a group with a “much smaller” centre, focused on governance, capital allocation, overall strategy and talent, and divisions with more flexibility and freedom to take decisions. Recommended Analysis Industrials General Electric sets out on road to regaining investors’ trust GE today employs about 250 people at its temporary headquarters in Boston, compared with about 800 at its previous head office in Fairfield, Connecticut. The plan is for staff of about 800 again when the new building is complete in mid-2021, but Mr Flannery has said there could be “meaningful” savings to come from central corporate costs. As the ties binding GE’s divisions together are loosened, the case for keeping them in a single company is also weakened. Questioned by an analyst at the EPG event, Mr Flannery said he had “not changed one iota” from his assertion earlier this year that “everything is on the table” in terms of restructuring. “I have no nostalgia for the way things have been,” he said. “If there’s a better way to do things, we’ll do them.” Two precedents for creating autonomous divisions with separate listings are provided by the Wabtec move, which will leave GE with 10 per cent of the merged company, and the deal with oilfield services group Baker Hughes, in which GE holds 62.5 per cent. There are some analysts who argue that a further break-up of GE using similar structures might not create much additional value for shareholders. But investors who felt let down by Mr Flannery’s failure to announce any dramatic restructuring on Wednesday might be reassured that he is at least heading in a direction to make such moves easier in the future.

 

 

One thought on “GE chief warns against quick-fix expectations

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s