SECTION III

UPS AND DOWNS

15

Too Full of Myself

For chrissakes, Jack, what are you going to do next? Buy McDonald’s?”

The remark came from a foursome of guys across the seventh fairway at Augusta as I was teeing off from the third hole in April 1986. Four months after announcing the deal to buy RCA, I had just acquired Kidder, Peabody, one of Wall Street’s oldest investment banking firms.

While the guys were only kidding, there were others who really didn’t think much of our latest decision. At least three GE board members weren’t too keen on it, including two of the most experienced directors in the financial services business, Citibank Chairman Walt Wriston and J.P. Morgan President Lew Preston. Along with Andy Sigler, then Chairman of Champion International, they warned that the business was a lot different from our others.

“The talent goes up and down the elevators every day and can go in a heartbeat,” said Wriston. “All you’re buying is the furniture.”

At an April 1986 board meeting in Kansas City, I had argued for it—and unanimously swung the board my way.

It was a classic case of hubris. Flush from the success of our acquisitions of RCA in 1985 and Employers Reinsurance in 1984, I was on a roll. Frankly, I was just full of myself. While internally I was still searching for the right “feel” for the company, on the acquisition front I thought I could make anything work.

Soon, I’d realize that I had taken it one step too far.

Our logic for buying Kidder was simple. In the 1980s, leveraged buyouts (LBOs) were hot. GE Capital was already a big player in LBOs, helping to finance the acquisition of more than 75 companies in the prior three years, including one of the earlier successes of the LBO game—Bill Simon’s and Ray Chambers’s acquisition of Gibson Greeting Cards.

We were getting tired of putting up all of the money and taking all of the risk while watching the investment bankers walk away with huge up-front fees. We thought Kidder would give us first crack at more deals and access to new distribution without paying these big fees to another of Wall Street’s brokerage houses.

Eight months after closing the deal, we found out we had walked into one of the most public scandals ever to hit Wall Street. Marty Siegel, a Kidder star investment banker, admitted trading insider stock tips to Ivan Boesky in exchange for suitcases full of cash. He also admitted that Kidder had made trades based on information allegedly obtained from Richard Freeman at Goldman Sachs. He pleaded guilty to two felonies and cooperated with U.S. attorney Rudy Giuliani’s investigation.

As a result, armed federal deputies stormed into Kidder’s offices on February 12, 1987, at 10 Hanover Square in New York. They frisked, cuffed, and removed from the building the head of arbitrage, Richard Wigton. They also arrested another ex-Kidder arbitrageur, Tim Tabor, and Goldman’s Freeman for alleged insider trading. The charges against Wigton and Tabor would eventually be dismissed. Freeman would be sentenced to four months in prison and a $1 million fine.

Though the illegal trading occurred before GE acquired Kidder, as the new owners we got saddled with the legal responsibility. After the arrests, we began an investigation, cooperating fully with the SEC and Giuliani. It showed that there were lots of weaknesses in the firm’s control systems. Kidder chairman Ralph DeNunzio had nothing to do with the scandal, but it was clear Siegel had been given great latitude.

Siegel had complete run of the equity trading floor, and when he asked the risk arbs to make a trade, there were few questions. He also had a strange habit that would prove to be part of his downfall. He kept file drawers full of every pink telephone message slip he had ever received. With those slips and Kidder’s detailed phone records, it wasn’t hard to establish a pattern to Siegel’s trading.

Giuliani, who could have gotten Kidder’s licenses suspended and put it out of business, wanted us to dismiss much of the senior management. Larry Bossidy, then a GE vice chairman, spent a couple of Saturday mornings with Giuliani negotiating a settlement. We ended up paying fines of $26 million, shutting down Kidder’s risk arbitrage department, and agreeing to put in better controls and procedures. While all that was going on, Ralph DeNunzio and several of his key people decided to leave.

As far as senior management was concerned, this left us with little more than the furniture Wriston warned us about. We had to go out and find someone who could build back the trust in the company. I thought Si Cathcart was the perfect choice. He was savvy, honest, and someone I trusted completely. Si had been on the GE board for 15 years and had been chairman of Illinois Tool Works.

When I called him in Chicago and told him about my idea for him to run Kidder, his first reaction was not exactly encouraging.

“Are you out of your cotton-pickin’ mind?” he asked.

“Si, just listen. I’ll come out there or you come to New York and we’ll have a good discussion about it.”

A few days later in March, Larry Bossidy and I met him in a small Italian restaurant in New York. Si showed up with a sheet of yellow legal paper with 15 reasons why it was a bad idea. He had the names of half a dozen people he thought would be better for the job. I looked over his notes and crumpled them up.

“Si, we’ve got a real problem and you’re the only guy who can help us,” I said. “We have to stabilize things and get Kidder back on a recovery path. The job won’t last much more than a couple of years. You and Corky will have a great experience in New York. You’re too young to retire.”

I probably said a lot more. Larry and I really needed him. Si finally agreed to go home and talk it over with his wife, Corky. Fortunately, she was excited about coming to New York and Si wanted to help us. He called back in a couple of days and agreed to accept the job.

 

On May 14, the day after Giuliani dismissed indictments against Wigton and Tabor, Si took over as CEO and president of Kidder. Larry Bossidy announced the change on Kidder’s interoffice squawk box at 10 A.M. sharp. Not everyone was ecstatic. The Wall Street Journal article quoted an unnamed Kidder official: “Just what we need, a good tool and die man.”

One of the problems was that Marty Siegel was not simply another guy who took the money and caused the scandal. He was Kidder’s star. Good-looking, smooth-talking, and the highest-paid employee in the place, he was one of the leading investment bankers on Wall Street.

The media called Siegel “the Kidder franchise.” Many of Kidder’s traders idolized and worshiped the guy. For pleading guilty to two counts of insider trading, Siegel paid $9 million in fines and was sentenced to two months in prison and probation. Why, with all he had going for himself, he got involved with Boesky and bags of money was beyond anyone’s comprehension.

Many of Kidder’s employees lived off Siegel’s franchise. Losing it sank the morale in the rest of the firm. As Si dug into things, he found that it wasn’t very pretty. When he asked about purchasing—a question someone from manufacturing might ask—no one knew who ran the department or where it was. The bonus system was ad hoc. Ralph would sit down with the top people in the firm and negotiate one by one their year-end bonuses.

Frankly, the bonus numbers knocked most of us off our pins when we saw them. At the time, GE’s total bonus pool was just under $100 million a year for a company making $4 billion in profit. Kidder’s bonus pool was actually higher—at $140 million—for a company that was earning only one-twentieth of our income.

Si remembers that on the day Kidder employees got their bonus checks, the place would clear out in an hour. “You could shoot a cannon off without hitting anyone,” he told me. Most of them lived a lifestyle dependent on those annual bonuses. It was a different world from what Si or I knew.

When Si went through his first bonus exercise, he’d ask everyone at Kidder to give him a list of his or her accomplishments for the year. Inevitably, he’d have six people claiming credit for being the key player on the same deal. Every one of them believed they made the deal happen. The attitudes were symbolic of the problem: an entitlement culture where every player overvalued themselves.

Where God parachutes us is a matter of luck. Nowhere is that more true than Wall Street. There are more mediocre people making more money on Wall Street than any other place on earth. Sure, there are some stars, and some earn every nickel they make. The crowd they carry along with them is something else. Wall Street might be the only place in the world where a $100,000 raise is considered a tip.

When you handed someone a check for $10 million, they’d look you in the eye and say, “Ten? The guy down the street just got 12!” “Thank you” was a rare expression at Kidder.

The outrageous pay in a good year was bad enough. It really drove me nuts in a bad year. That’s when the argument would go something like this: “Yeah, we had a tough year, but you’ve got to give them at least as much as they made last year or they’ll go across the street.”

This place had the perfect we-win, you-lose game.

Wall Street had to have been better when the companies were private and the partners were playing with their own money rather than “other people’s money.” The concept of idea sharing and team play was completely foreign. If you were in investment banking or trading and your group had a good year, it didn’t matter what happened to the firm overall. They wanted theirs.

It’s a place where the lifeboats carrying millionaires were always going to make it to shore while the Titanic sank.

Si’s stay at Kidder was tough. He put in better controls and hired some good people. Five months into the job, in October 1987, the stock market crashed. Kidder’s trading profits disappeared. Kidder losses hit $72 million that year, and we had to lay off about 1,000 of the 5,000 people on the payroll.

It was obvious to all of us that the cultural differences between Kidder and GE were so great that I should have listened to the dissenters on my board. I wanted out, but was looking for a way to do it without losing our shirt. I hoped to show some results before selling the business.

Si wanted out, too. He had a steadying influence on the place, but after two years in the job, he felt that Kidder needed a permanent leader. We hired a search firm to look for Si’s replacement. We couldn’t get one.

Larry and I asked an old friend, Mike Carpenter, then an executive vice president at GE Capital, if he would run Kidder. Larry, Dennis, and I had met Mike in late 1980 when we were trying to acquire TransUnion, a Chicago-based railcar lessor. We lost the deal to Bob and Jay Pritzker but got to know Mike, who was then with the Boston Consulting Group and had recently completed a strategic analysis of TransUnion.

I hired him in 1983 as business development leader for GE. Mike was a big player in the RCA deal and was doing a great job at GE Capital, where he had responsibility for our LBO business. He wanted to run his own show and agreed in February 1989 to take on what he knew was a very tough assignment at Kidder.

Si stayed for several months, helping Mike in the transition. Mike continued Si’s efforts to make integrity a key value of the place. He also developed a well-defined strategy for each of Kidder’s businesses. Profits recovered, and Kidder went from losing $32 million in 1990 to making $40 million in 1991 and $170 million in 1992.

We still wanted out and started conversations with Sandy Weill of Primerica. We came very close to striking a deal that would have gotten us out whole. But it fell apart over the 1993 Memorial Day holiday. Sandy and I had a general agreement on Friday of that weekend. We all felt that on Wall Street, you had to make the deal fast, over a weekend if possible before the news leaked, or you’d quickly lose the employees and get slaughtered. Dennis Dammerman, then chief financial officer, negotiated the fine print over the weekend, staying in touch with me in Nantucket by phone.

I expected to return on Memorial Day to wrap it up with Sandy.

It didn’t work out that way. By the time I returned it was obvious that we weren’t going to get the deal we started with. Sandy has done one of the great jobs in American business by building an enterprise through great acquisitions. I’m one of his biggest fans. But it was a challenge negotiating with him. By Monday, the deal that was going to get us out whole had been scratched, clawed, and picked at so that it was unrecognizable.

I spent a few hours that evening trying to get it back to where it had been. After a couple of tries, I saw it was hopeless and walked down the hall and told Sandy, “This deal is not for us.” He smiled. We shook hands and have remained friends.

After the Primerica deal collapsed, Mike went back to work and we stayed out of the spotlight. Profits reached $240 million in 1993, and things appeared to have stabilized—or at least I thought they had.

 

I was getting ready to leave the office for a long weekend on Thursday night, April 14, 1994, when Mike called with one of those phone calls you never want to get.

“We’ve got a problem, Jack,” he said. “We have a $350 million hole in a trader’s account that we can’t identify, and he’s disappeared.”

I didn’t yet know who Joseph Jett was, but over the next few days I would learn more than I cared to about him. Carpenter told me that Jett, who ran the firm’s government bond desk, had made a series of fictitious trades to inflate his own bonus. The phony trades artificially boosted Kidder’s reported income. To clean up the mess, we would have to take what looked like a $350 million charge against our first quarter earnings.

The news from Mike made me sick: $350 million, I couldn’t believe it.

It was overwhelming. I rushed to the bathroom, and my stomach emptied in awful spasms. I called Jane, who was already waiting for me at the airport, told her what I knew, and asked her to come home instead. That evening I called Dennis Dammerman, who was teaching at Crotonville.

When he came to the phone, I told him: “It’s your worst nightmare.”

Actually, it was my own worst nightmare. I had made a terrible mistake in buying Kidder in the first place. It had been nothing but a headache and an embarrassment from the start—and now this.

Dennis went down to Kidder’s offices with a team of eight others and began working around the clock throughout the weekend. I couldn’t do much because they were doing gritty audit work, checking account balances. I sat by the phone, waiting for updates from Dennis. If I had gone down there, I probably would have driven them nuts.

By Sunday afternoon, I had to see it for myself. When I did, Dennis and Mike said they were sure the paper entries reported as earnings were bogus. We didn’t have all the facts, but with our first quarter earnings release two days away, they were convinced we had a $350 million noncash write-off to deal with.

I spent hours trying to figure out exactly how hundreds of millions of dollars could disappear overnight. It didn’t seem possible. We obviously didn’t know enough about the business. We’d later discover that Jett had taken advantage of a flaw in Kidder’s computer systems.

That Sunday evening, I called 14 of GE’s business leaders to deliver the bad news and apologize to each of them for what had happened. I felt terrible, because this surprise would hit the stock and hurt every GE employee.

I blamed myself for the disaster.

The previous year, 1993, when Jett’s phantom trades accounted for nearly a quarter of the profits made by Kidder’s fixed income group, Jett had been named Kidder’s “Man of the Year.” We had approved Mike’s request to give Jett a $9 million cash bonus, a huge award even for Kidder. Normally, I would have been all over this. I would have dug into how one person could be so successful, and I would have insisted on meeting him. I didn’t.

It was my fault because I didn’t ask the “why” questions I normally did. It turned out that Kidder was as culturally distant from us as GE appeared to the Kidder employees.

The response of our business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said they could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise. Though it was too late, their willingness to help was a dramatic contrast to the excuses I had been hearing from the Kidder people.

Instead of pitching in, they complained about how this disaster was going to affect their incomes. “This is going to ruin everything,” one said. “Our bonus is down the toilet. How will we keep anyone?” The two cultures and their differences never stood out so clearly in my mind. All I heard was, “I didn’t do it. I never saw it. I never met with him. I didn’t talk to him.” No one seemed to know anyone or work for anyone.

It was disgusting.

We fired Jett and reassigned six other employees that night. When I got home later, I told Jane to hunker down. We were going to go through a very long and very tough ride.

“The media’s going to come after me. Just hang on.”

The coverage was brutal. Again, I went from prince to pig. In the space of a year, we ended up in the right-hand column of the front page of The Wall Street Journal numerous times. Time magazine had a new moniker for me: “Jack in the Box.” A Newsweek writer claimed that “you can hear the sound of the pedestal cracking.”

A cover story in Fortune on the disaster jumped to the ridiculous conclusion that the scandals at Kidder were brought on by poor GE management. It was BS. The problem at Kidder was confined to Kidder. It was all about having a bad apple and insufficient controls.

The internal investigation of what went wrong at Kidder was led by Gary Lynch, a former SEC enforcement chief who was now with Davis Polk & Wardwell. With enormous help from GE’s audit staff, he found that the oversight of Jett’s trades was a big part of the problem. Lynch reported that time and again questions raised about the unusual trading profits were “answered incorrectly, ignored, or evaded. . . . As his profitability increased, skepticism about Jett’s activities was often dismissed or unspoken.”

At Kidder, the fixed income group had become the franchise, earning more than the firm earned in total. When they spoke, the firm listened, and few questioned the basis for their success. We weren’t the first on Wall Street to learn this lesson. Michael Milken and Drexel Burnham was the most vivid example, but even terrific leaders like Frank Zarb and Pete Peterson struggled with the dominance of trading at Lehman Brothers. The lesson was there to be heard. We hadn’t listened.

Later, an SEC administrative law judge found that Jett had acted “egregiously” in committing fraud on Kidder. Judge Carol Fox Foelak found that Jett had intentionally deceived his supervisors, auditors, and others with false denials and misleading and conflicting explanations. She barred Jett from association with any broker dealer and ordered him to pay $8.4 million in penalties.

Kidder cost us years of trouble and some of our best executive talent. By mid-June of 1994, I had to ask my friend Mike Carpenter to leave his job. That was about the hardest decision I ever had to make. Mike was a great executive, who had attacked the Jett problem—one he didn’t create.

He was a bigger victim of the scandal than anyone. The media wanted his hide, and until they got it the negative coverage would never end. He and I had a long conversation, which I concluded by saying, “This isn’t going away until you go.” He understood and was a class act. Jett’s immediate boss, Ed Cerullo, the head of the fixed income area at Kidder, left a few weeks after Mike.

In Mike’s place, we temporarily moved Dennis Dammerman to Kidder as chairman and CEO and Denis Nayden, another smart GE Capital veteran, as president and chief operating officer.

Four months later, in October 1994, we finally struck a deal to sell Kidder for $670 million plus a 24 percent stake in PaineWebber. Once again, Pete Peterson played an important role. Negotiations between GE Capital and PaineWebber CEO Don Marron had broken down over a weekend in early October.

I called Don to see if we could put things back together again. Don called in Pete, a longtime friend of his, as an adviser on the deal. Don and I knew each other only vaguely, so Pete became the key player in the negotiations. Pete, Don, Dennis, and I quickly reached a general agreement and shook hands. I left for a ten-day Asian business trip, and Dennis did the final negotiation. Pete called me a couple of times, once I remember at 3 A.M. in Thailand, to work out a couple of stumbling blocks.

The deal was concluded in about ten days, and the friendship among the four of us has never wavered.

The story has a somewhat happy ending. Late on a Friday in mid-2000, Pete called me just as I was about to leave the office.

“Jack, I’m sorry to bother you,” he said, “but I wanted to make your weekend for you.”

Pete said that he and Don had reached an agreement to sell Paine Webber to Swiss bank UBS for $10.8 billion. “We just made over $2 billion for you, and I hope you’ll go along.”

“Make my frigging weekend?” I shouted. “You made my whole frigging year!”

Don, his team, and several key Kidder players made the merger a great success. That success gave us an eventual after-tax return of 10 percent a year over the 14 years from the purchase of Kidder to the sale of Paine Webber. By no means was it a financial success, but the outcome was better than a few others.

However, there’s no amount of money that would make us want to go through that again.

 

The Kidder experience never left me. Culture does count, big time. During the dot.com craze of the late 1990s, several people in the GE Capital equity group were enjoying success—not unlike day traders in their living rooms. These folks decided they would stay with GE only if they got a piece of the equity in the deals they were investing GE money in.

I told them to take a hike. A few did, and the media gave us some heat, claiming we were “not with it.” We didn’t get the New Economy. “Absolutely!”

It gave me another chance at the officers meeting in October to make the point that at GE there is only one currency: GE stock (below). There are different amounts of it for different levels of performance, but everyone’s life raft is tied to the same boat. One culture, one set of values, one currency, doesn’t mean, however, one style—every GE business has its own personality.

For the same reason—a big culture gap—I’ve passed up opportunities to acquire high-tech companies in Silicon Valley that appeared to be a good strategic fit. I didn’t want to pollute GE with the cultures that were developing there in the late 1990s. Culture and values count too much.

There’s only a razor’s edge between self-confidence and hubris. This time, hubris won and taught me a lesson I’d never forget.

 

16

GE Capital: The Growth Engine

One night in June 1998, I was sitting on the couch at home, leafing through the “deal book” for the next day’s GE Capital board meeting. One of the ideas up for approval struck me as one of the wackiest I had seen in my 20 years on the board.

The proposal was to buy $1.1 billion of auto loans in Thailand from a group of failed finance companies that had been seized by the government. I knew the country was in the worst recession in its history, and we were the only auto finance company still standing.

I quickly explained the deal to Jane, who was sitting across from me.

“The guy making this pitch won’t even get to sit down,” I told her. “We’ll blow him out of the meeting in five minutes or less.”

These sessions aren’t your run-of-the-mill board meetings. We finance billions of enterprises yearly, and potential deals are put through a monthly torture chamber. The meetings are hands-on, no-holds-barred discussions among some 20 GE insiders with more than 400 years of diverse business experience.

This crowd has looked at and torn apart literally thousands of deals before we make a decision. Although all the proposals have been rigorously prescreened before they hit the board—and 90 percent of the proposals eventually get approved—we still send back one in five for another look.

When I read the details on the Thai deal that night, I was convinced this one was headed for the Dumpster. The proposal, a 50/50 partnership with Goldman Sachs, would make us the owner of one of every nine cars in Thailand. To pull it off, we’d have to hire 1,000 extra employees in the country to underwrite the loans, collect the payments, and manage the disposition of any repossessed cars. If our bid was accepted, we’d take over the loans for 45 percent of their face value. The idea had come from Mark Norbom, who headed up GE Capital’s business in Thailand.

The next morning, I walked into the meeting in Fairfield with a smile on my face.

“Thai auto loans?” I said, laughing. “I can hardly wait to get to that one.”

When I turned the page to Mark’s proposal, I frowned and shook my head.

“How could we possibly hire and train those 1,000 people within a few months?” I asked.

Mark’s answer impressed me. He said his team had already screened 4,000 job candidates, interviewed more than 2,000, and issued 1,000 contracts contingent on winning the bid. He told us that a car is among the most prized possessions in Thailand. People would give up almost everything else—would even sleep in their cars—before losing them for nonpayment of a loan.

After a bit of banter and a passionate pitch from Mark, we bought it. Talk about changing your mind on something because of a good presentation and a lot of passion. That was as good an example as I could remember.

I walked into that meeting thinking, This guy’s outta here, and I walked out thinking, Isn’t this neat?

Mark was right. Over the next three years, GE has done well, and the company built an ongoing and profitable auto business in Thailand. The transaction led to several other troubled asset purchases in Asia, all of which panned out well for GE and the local economies.

Mark did okay, too. He became president of GE Japan.

The small Thai deal was one of thousands that show how GE Capital, once a popcorn stand, has become one of the most valuable parts of GE. When I got my first look at the business as a sector executive in 1978, GE Capital earned $67 million on $5 billion in assets. (In 2000, GE Capital made $5.2 billion, 41 percent of GE’s total income, on more than $370 billion in assets.)

The story of that phenomenal growth has been told many times and in many ways. What most people outside GE don’t know is the incredible intensity, ingenuity, and entrepreneurship that goes on behind that success.

What I saw in 1978 was immense opportunity—not just the benefit you get on a balance sheet, but the additional leverage you get by putting together two raw materials: money and brains.

Since I had been involved in making things all my life, pounding and grinding it out to make a nickel, I couldn’t believe how easy this “appeared” to be. The business already demonstrated there were terrific deals with good collateral that could produce remarkable returns on equity. One example: Leveraged leases on aircraft could earn 30 percent or better returns.

I fell in love with the idea of melding the discipline and the cash flows from manufacturing with financial ingenuity to build a great business. Of course, we needed the right people to make this happen.

Dennis Dammerman would always remind me of Ben Franklin’s old adage, “You don’t earn interest unless you collect the principal.” Fortunately, GE Capital already had a culture that insisted the people making the deals stayed with them from womb to tomb. If you pitched a deal, you’d better make damn sure it was going to work. Or else you’d better be able to take over the asset and make it work yourself.

I was sure the opportunity was enormous. All we had to do was take the business from the back of the boat to the front. Better people and a greater financial commitment could lead to huge profits.

Happily, I found Larry Bossidy playing Ping-Pong. Larry, along with GE Capital CEO John Stanger, was the guy who shook the place up. From our game in Hawaii, I understood his frustration. In 1978, GE Credit was an orphan business, outside the mainstream of the company. Plastics, too, had been an orphan business during my earlier days there. Larry wanted to put GE Capital up on center stage. A former auditor, he came from deep inside GE Capital, and he knew what had to be done.

The first big move I made at GE Capital was to get Reg’s approval to make Larry chief operating officer in 1979. Larry, like me, was not a picture-perfect GE executive. No model of sartorial splendor, Larry could always be recognized from the back because his shirttail flew in the wind. His idea of a summer suit was to take his winter suit and dress it up with a white belt and shiny white patent-leather shoes. (With his increasing prominence in the business world, Larry’s now become GQ cover material.)

He has always been a remarkable family man. His wife, Nancy, did a fantastic job raising their nine kids. Larry helped but often worked late nights and weekends. Three of their children came to work for GE, including Paul, who now runs commercial equipment finance with $38 billion in assets, one of our top 20 GE businesses.

Larry and I thought along the same lines on a lot of things, nowhere more so than on the people front. Not only did we have Session Cs to look closely at people, but we had the monthly board reviews where we held their feet to the flame. We saw people under real fire, pitching deals every month—and in some cases, explaining later how they’d work their way out of trouble.

 

Over my 23-year involvement with GE Capital, I saw the growth develop in four distinct stages: from 1977 to 1985, CEO John Stanger and Larry Bossidy lured some of the best people we had into GE Capital. In the second half of the 1980s, Bossidy (by then a vice chairman) and CEO Gary Wendt began to aggressively grow the business by making GE Capital an acquisition machine.

Through the 1990s, Wendt and operating chief Denis Nayden created a global financial services business by leading a decade of unprecedented deal making. The current team of Denis as CEO and Mike Neal as COO is expanding that global franchise and bringing to financial services the rigor of Six Sigma and digitization.

Looking back over the years of uninterrupted double-digit growth, it almost seems surreal. I can still remember when I stewed and stewed over a $90 million GE Capital deal. Compared to those Thai auto loans and the billions of dollars we might commit in a board meeting today, this was insignificant—but not back in 1982.

That’s when Larry Bossidy, Dennis Dammerman, and I were at a GE Capital management meeting in Puerto Rico, debating whether we should acquire American Mortgage Insurance from Baldwin United. We were just about dying over the deal—then GE Capital’s largest ever—mulling over how much to bid and worrying about every potential complication.

It’s a matter of perspective. Before we decided to buy American Mortgage in 1983, Dennis was literally signing every insurance policy we issued because his insurance business was so small that he couldn’t justify the purchase of a signature machine. After the deal, we not only could buy the machine, we became a major player in the business.

A year later, in 1984, we topped the little $90 million deal with our $1.1 billion acquisition of Employers Reinsurance Corp. (ERC). John Stanger and Dennis Dammerman first looked at ERC, one of the three largest property and casualty reinsurance companies in the United States, in 1979. The insurer asked us to be a white knight to fend off an unwanted bid from Connecticut General Insurance. At the time, our insurance assets were pretty small. ERC preferred us as a parent over Connecticut General, which obviously was a big player in the industry.

But, ERC went with their definition of a perfect white knight, a company that knew absolutely nothing about insurance: Getty Oil. In one of the most notorious deals of the decade, Getty was eventually acquired by Texaco, which had little use for a reinsurance company. With the background work done years earlier, we were able to move quickly to bring ERC into the fold. I negotiated the final details of the $1.1 billion deal with Texaco CEO John McKinley.

We were still puny operators in those days. When the ERC team came to Fairfield for Sunday night dinner after the deal, they told us they were going to fall short of the annual earnings forecasts assumed in the transaction.

I immediately wanted a discount on the price. My friend John Weinberg of Goldman Sachs had represented us in the acquisition. I phoned him at Augusta, pulled him off the golf course, and ranted about the earnings shortfall. I told him to call McKinley to get an adjustment on the price.

Fortunately, McKinley was a gentleman, accepted the new numbers, and gave us a $25 million discount. We ended up paying $1.075 billion. It makes me feel a little embarrassed today to have done that, but I was relatively new in the job and probably a bit too competitive for my own good.

The ERC acquisition was a big leap forward. We had a great run in ERC, growing net income from $100 million in 1985 to a peak of $790 million in 1998, until tough pricing and a rash of storms in 1998 and 1999 derailed us. We earned only $500 million in 2000.

We made Ron Pressman CEO to get it back on track. A former auditor, Ron had built a highly profitable real estate business and had just the right mix of smarts and discipline. Pricing is better, Six Sigma is taking hold, and if the weather cooperates, Ron will make this business hum again.

 

Most of what we did in the 1980s, we did in small steps. One of the hallmarks of GE Capital has been a “walk before running approach” to the markets. Before diving into a specific market, we tiptoed into the water.

We never had a great strategic vision for GE Capital.

We didn’t have to be No. 1 or No. 2. The markets were enormous. All we needed to do was couple GE’s balance sheet with GE brains to grow.

In the 1970s, the focus was on traditional consumer lending like mortgages and auto leasing, with some transportation and real estate investments.

In the 1980s, our focus shifted to stronger growth while maintaining tight control of risk. We didn’t change the conservative risk profile that existed in the seventies. What we did was hire unique people. We set them free to find the ideas, make the case to invest in their ideas, and grow.

Grow we did, as deals came from everywhere. Over the past 20 years, GE Capital exploded into a host of equipment management businesses from trucks and railcars to airplanes. We jumped on private-label credit cards. We became more aggressive in real estate. We went from half a dozen financial niches in 1977 to 28 different GE Capital businesses by 2001.

If ever there was a lesson that people made the difference, this was it. Over the years, we had a murderers row of talent—Larry Bossidy, Dennis Dammerman, Norm Blake, Bob Wright, Gary Wendt, and Denis Nayden. Every one of them would go on to become CEOs inside or outside the company.

A perfect example of homegrown success was Denis Nayden, who started right out of the University of Connecticut in 1977 as marketing administrator for air-rail financing. Over the next two decades, he moved up the ladder to become Wendt’s right-hand man until being named CEO in 1998.

We used talent from our industrial businesses to turn GE Capital from a pure financial house into a business with deal making as well as operational skills. Half of the current top leadership at GE Capital Services grew up on the industrial side.

Our managers knew how to run businesses. When a deal went sour, we rarely put a line through it. We hated write-offs. Instead, we took it over and ran it ourselves. We had the operational capability that let us stick with a tough asset.

When a loan to Tiger International went bad in 1983, we stepped in and became a railcar leasing company. When some of our passenger planes came off lease into a soft market, we converted the planes to cargo carriers and launched Polar Air, an independent cargo line. Our long experience in aircraft leasing led to the purchase of Polaris and the expansion of our business with Irish-based Guinness Peat Aviation’s assets in 1993 and 1994.

Today, GE Capital Aviation Services (GECAS) manages $18 billion in assets.

 

We built GE Capital deal by deal—big or small—with the great majority of the deals coming before our monthly board meetings. The company was always careful about the bets it made in financial services. I didn’t add any new discipline to the GE Capital risk process from the 1970s—but I didn’t lessen the discipline, either. Any equity deal involving more than $10 million and any commercial risk per customer over $100 million had to be brought before the board.

We never changed the approval levels as we grew.

I was in on just about every one of these transactions, so I share credit for the good decisions and blame for the bad ones. We did get into the leveraged buyout craze in the 1980s. In one LBO deal, we financed the buyout of Patrick Media, an advertising billboard company, in 1989. The business had decent cash flows and reasonable growth rates. Only one thing bothered me. Patrick was being sold by John Kluge, head of Metromedia and a famous deal maker.

I didn’t know much about billboards, but I knew that when John Kluge was selling, I shouldn’t be buying. I had met John during my days negotiating the Cox deal. I liked him a lot, but I also knew he was one of the savviest investors around. I should have followed my instincts and walked away. When billboard use hit bottom in the late 1980s, we took ownership of the company to avoid a $650 million write-off. We rebuilt the business, eventually earning a modest gain on its sale in 1995.

We also did an LBO of Montgomery Ward in 1988. It was almost a home run. Our 50/50 partner, Bernie Brennan, made the Forbes 400 as one of the richest men in the world, and Wards flourished. The retailer later hit a wall. Despite the valiant efforts of a new management team, Wards went through hell and eventually went bankrupt in 2000.

However, the good deals far outweighed the bad, and their range was extraordinary. For instance, we went into auto auctions. I had liked the business and had seen it at Cox Broadcasting during the failed negotiations in 1980. Cox owned Manheim, the leader in auto auctions. It was a pure service opportunity with low investment and high margins. Ed Stewart, who then ran auto leasing, began buying little auction companies in the early 1980s. Ed eventually bought more than 20 auto auction companies and formed an 80/20 joint venture with Ford Motor.

An auction was like going to a flea market, set up on grounds with wooden bleachers. Roving vendors sold hot dogs and beans and Harley-Davidson leather belts from the stands. Auctioneers were selling off used cars one a minute. In the end, Manheim was also the reason we sold the business. They were much bigger than we were and had the opportunity to consolidate the industry. We took the gain and sold to Manheim in the early 1990s.

Many of the best deals before the board—and some of the wildest—came from Gary Wendt, who led GE Capital’s strong growth as CEO from 1986 until 1998. The deals he pitched were imaginative and creative. Gary was not just a brilliant deal guy, he also had the rare ability to tell you what it would take to make a good deal out of a not-so-good deal.

Gary was a trained engineer, a Harvard MBA, and a natural negotiator. He was doing workouts at a real estate investment trust in Florida when he was recruited to GE Credit as manager of real estate financing in 1975. Later, he oversaw all commercial finance dealings, becoming chief operating officer of GE Capital in 1984. When Bob Wright left as GE Capital’s CEO to run NBC in mid-1986, Larry Bossidy put Gary Wendt in charge. Gary and Larry continued to work together to build GE Capital.

 

By 1991, Larry wanted to run his own show. He was 55 and a vice chairman, yet he couldn’t really go any higher at GE because I still had ten years in front of me as CEO. Larry wanted a chance to run a large company, and he got it through Gerry Roche, the headhunter at Heidrick & Struggles.

On a Monday morning in late June, Larry came into my office with the news.

“Jack,” he said, “you know the time has come for me to move on. I don’t want to sit here for the rest of my career. Something’s come up, and I’m going to take it.”

“When are you going to do it?” I asked.

“It will be announced tomorrow.”

“So you’ve made up your mind?” I asked.

“Yep. I’ve just got to do it,” he said.

It was an emotional meeting. We went way back, from the time in 1978 when we played Ping-Pong together in Hawaii and I convinced him to stay at GE. A lot of tears fell, and we hugged each other.

Then Larry told me he was going to become CEO of AlliedSignal, the industrial products company in New Jersey.

Larry said AlliedSignal appealed to him because it was a turnaround situation and it was located in the Northeast so he wouldn’t have to move his family.

When Roche called me later, I said, “Gerry, half my face is crying because you’re taking away my best friend and my best guy. The other half is smiling because he can run any company in this country and he deserves to run his own show.”

 

In the 1990s, Gary Wendt wanted to plant a flag everywhere he went. He told his team not to worry about a few wounds. “We’re going to win the war,” he said. “You’ve got to take ground.”

While every business took on globalization, no one practiced it more effectively than GE Capital. With Europe in a slump, Gary led a massive effort there. In 1994, Gary and his team picked up $12 billion in assets, more than half offshore. In 1995, they more than doubled the pace, acquiring $25 billion in assets, with $18 billion outside the United States.

GE Capital was on a global roll, acquiring consumer loan companies, private-label credit operations, and leasing operations for truck trailers and railcars.

The stories behind many of these deals are enough to fill volumes. One summer, during his vacation in 1995, Gary and his head of business development for Europe, Christopher Mackenzie, drove a van through eastern Europe. An idea machine, Christopher was Gary’s deal finder. They came back energized to do all kinds of deals in that part of the world. They also had in hand a proposal to buy a bank in Budapest. We liked Hungary and the bank fit nicely with GE Lighting, already there as a major employer in the country.

We also bought banks in Poland and the Czech Republic and used them to move into personal finance in those markets. The Czech bank deal had a funny twist because the bank’s owner also had an appliance distribution company and a warehouse loaded with Russian TVs. We agreed to the deal after being assured we wouldn’t get stuck with this Czech appliance business.

All three banks today are modestly profitable, throwing off about $36 million in annual net profits. Gary’s road trip is still paying off.

Another funny one was the time Dave Nissen, CEO of global consumer finance, set the stage for a pitch on buying Pet Protect, the second largest British company selling life and health insurance for cats and dogs. This one fell into the Thai auto loan category, appearing to be dead on arrival.

Dave began his presentation in 1996 with the words, “This dog will hunt.”

I didn’t know much about the market for pet insurance. We found out the business was growing by 30 percent a year with annual premiums of $90 million. The U.K. market ranked second only to Sweden in the percentage of cats and dogs insured, 5 percent versus 17 percent, so there was plenty of upside.

Jim Bunt, a GE Capital board member and treasurer, had a lot of fun with this one. In his review of the deal, Jim joked that the principal product coverage included “kennel costs if the dog owner was suddenly hospitalized,” but not “catastrophic loss due to dog bites.”

We gave the okay not because we knew pet insurance, but because we trusted the guys making the pitch.

With a price tag of $23 million, this deal was also a little one. There were many other bigger ones that raised serious questions. One time, in 1997, Nissen was pitching a deal to buy Bank Aufina, the consumer finance unit of a large bank in Switzerland. I balked.

Swiss bankers owned the banking world. Why would they agree to sell anything that would actually be any good? It didn’t compute. Nissen explained that Swiss bankers are real bankers who prefer the bigger deals and were more interested in global investment banking. A personal loan and auto financing business was a diversion.

We ended up buying two companies in Switzerland. In 2001, they made $78 million.

These deals were part of a grand plan by Nissen to build a global consumer finance company. The first big one, giving GE Capital a major European presence, was our acquisition in 1990 of the private-label credit card operations of the Burton Group, Britain’s largest clothing retailer. The next year, Dave added Harrods and House of Fraser.

During the difficult negotiations for this deal, the head of Harrods had a demanding and unusual negotiating style. When he didn’t like the way things were going, he’d leave the room and tell the guys that he’d be back in five minutes and wanted a better answer. After the tenth time he pulled the ploy, Nissen and his team made up cards with big block letters that spelled “SCREW YOU.”

When the head of Harrods came back into the room, the guys held up the letters. He got a kick out of it, and the humor took a lot of the tension out of the negotiations. They soon closed the deal.

While Gary and Denis were driving global growth, a lot was going on here in the United States. Some of the more interesting deals were being brought in by Mike Gaudino, head of commercial finance. While I looked every day at companies I wanted to buy, Mike looks at companies he wants to save. He always points out that more than half the companies in the United States are non-investment grade. Mike comes into the board six to seven times every year with troubled companies already in or often headed for bankruptcy. Along with judging the company’s leadership, Mike digs into our ability to recover the receivables and inventories. It’s an upside-down look at a business—the opposite of what we’re used to.

A good example is Eatons, a large retail chain in Canada that experienced financial difficulty in 1997. When other lenders wouldn’t provide financing, Mike sought approval for $300 million in loans to help the retailer out of bankruptcy. After another downturn, however, the company ultimately had to be liquidated. Mike managed to get back every penny of our investment and all of our projected returns. By working out dilemmas, like Eatons, Mike built great credibility. He’s had only one deal out of more than 200 turned down in the past six years. Mike’s upside-down approach coupled with strong underwriting has taken the business from breakeven in 1993 to close to $300 million in net income in 2000.

 

Gary Wendt became the high priest of growth inside GE Capital. He made business development a key part of its culture. Besides the more than 200 people dedicated to looking for acquisitions, each GE Capital executive came to work every morning thinking about potential deals. It was part of the growth mind-set Gary brought to the business. The Harvard Business Review used GE Capital as a model for successfully integrating acquisitions, giving a blow-by-blow account of how Gary and his team did them—and there were a ton.

In the 1990s, Gary and Denis Nayden closed more than 400 deals involving over $200 billion in assets.

Gary lived for the deal, and everything with Gary was a negotiation. Denis Nayden remembers the time he and Gary were in Hong Kong and Gary went into a shop to buy a radio. He haggled with the salesperson for what seemed like an hour to get the price down and left happy with his bargain. Down the street, Gary nearly died when he spotted the same radio he had just bought in the window with a price tag lower than his highly negotiated purchase.

It drove him nuts over the weekend.

Gary also loved plotting strategies to sell deals. Mike Neal tells of the time he came in for his first preboard pitch to Gary in 1989. Mike wanted to buy Contel Credit, a telecom company leasing business. Throughout Mike’s entire presentation, Gary seemed bored and didn’t say a word—until Neal was completely finished.

“Mike,” he said, “this may be the worst acquisition we’ve ever had anyone pitch us, but we have another deal that’s big and sporty. It’s a commercial aircraft deal we really like. We’re going to let you take your deal up to the board meeting first and put you right in front of the deal we like. Jack seldom turns down two in a row. You’ll set us up to get the okay.”

Mike came in and pitched. We bought his deal. Gary’s preferred transaction got shot down.

We fought like hell over a lot of deals, but Gary had a very high batting average.

Years before Japan allowed foreign investment, Gary had sent a small business development team there to scout potential opportunities. When the Japanese economy began to sour in the mid-1990s, the country’s banking and insurance sectors were overleveraged and filled with bad investments. Nonperforming loans were out of sight. They needed new capital and new ownership.

When Japan began to open to foreign investment, Gary’s early groundwork gave GE Capital a head start.

The first deal in 1994 was to acquire Minebea, the $1 billion consumer finance company subsidiary of a ball-bearing company. Along with Jay Lapin, then the head of GE Japan, Gary put together several innovative deals in consumer finance, insurance, and equipment leasing. A former lawyer in our appliance business, Jay was the perfect area executive. He had worked hard to gain the trust of Japanese regulators and the business community. He loved Japan and its people. They knew it and responded. The parties he held at his home when I visited Japan brought me together with the CEOs of many of the country’s largest corporations and key opinion leaders.

By 1998, we really hit stride. The GE Capital team made two more deals that year in life insurance, consumer finance, and leasing that put us on the map as a big player in financial services in Japan.

The first one in February was a $575 million joint venture with Toho Mutual Life Insurance. Mike Frazier brought the deal to the board. Mike, too, had been a GE auditor. He had worked for me in Fairfield, searching the world for best practices and had been president of GE Japan in the early 1980s. Mike had built a strong U.S. insurance company, integrating 13 separate acquisitions into a highly successful whole. Now he was planting a flag for his business in Japan, with Gary’s strong support.

I was scared stiff over this one, and I gave it a lot of push-back. Toho was a bankrupt company, and the scale and scope of the acquisition overwhelmed me. This was unfamiliar territory. I didn’t know the laws, and I wanted to make sure Mike and his team had done the homework to assess all the risks. So we had a lot of back-and-forth. During December, he shuttled to Tokyo and back several times to satisfy both our and the seller’s concerns. The deal closed shortly before Christmas.

The second deal, announced in July 1998, was our $6 billion acquisition of the consumer loan business of Lake, Japan’s fifth largest consumer finance company. Lake was a provider of short-term consumer loans through automated teller machines. With 600 branches across Japan and nearly 1.5 million customers, it made us a big player in consumer finance in Japan. This was a highly complicated deal with a virtually bankrupt company that took nearly three years of work to complete.

The first overture in 1996 by Dave Nissen was rejected because we refused to take over the company’s liabilities. A second offer a year later didn’t go much further. Finally, in 1998, Nissen and his team came up with an unusual structure to pull it off. We’d buy Lake’s personal loan operations and help set up a separate company that would hold the rest of Lake’s assets, including some $400 million worth of art bought by the company’s owner. We agreed to put extra money on the table—an earn-out—that would give Lake’s shareholders some upside if we hit certain earnings targets.

To get the deal done, we had to convince 20 different banks in Japan to take a discount on the debt they had issued to Lake. Nissen’s team even hired Christie’s to assess the value of the Picassos and Renoirs that hung in Lake’s offices. Though we weren’t buying all this fancy artwork, if Lake could raise more cash from the sale of these and other assets, we’d have to pay less under the earn-out provision.

Before bringing Lake to the GE Capital board, Nissen and his team hammered out the deal in eight preboard sessions with Gary, Dennis Dammerman, and CFO Jim Parke.

I liked the concept. After we acquired Lake, I was playing golf with Warren Buffett at Seminole when he told me he really loved the transaction we’d just completed in Japan. I always pictured Warren sitting in Omaha, being cagey and smart. I didn’t think of him as being all that global, but he has more tentacles out than anyone.

“How do you know about Lake?” I asked.

“That’s one of the best deals I’ve seen,” he said. “If you weren’t there, I would have taken that one.”

Warren was a bit more aggressive when in 2001 GE Capital tried to participate in a restructuring of Finova, a finance company. As a major bondholder of Finova, Warren was trying to do a workout of the troubled concern. I would have liked to have worked with Warren, but he couldn’t go with us because he already had a partner in Leucadia. We bid for the company. Warren improved his offer and won Finova.

This time, we were on the outside, looking in.

 

Gary Wendt was quirky, to say the least. You never knew where he was coming from or what kind of mood he would be in. One thing he didn’t like was supervision. Whether it was Larry Bossidy, Bob Wright, or me, any boss drove Gary nuts. Having a boss who said no once in a while really sent him off the wall.

Parting ways with Gary in late 1998 was an inevitable consequence of the CEO succession process.

Denis Nayden, president, and Mike Neal, an executive VP, were ready. Denis, who has worked at GE for 21 years, is a remarkably driven person, a superb underwriter with the brainpower to structure big, complex deals. His best characteristic is his tenacity. He can work a deal until there’s no blood left in it. While Gary was the big idea guy, Denis was always the get-it-done guy.

I always thought of Mike Neal as the soul of GE Capital. Unlike most managers there, he didn’t come to business with a financial background. A former sales manager in GE Supply, he had to learn the business—and he has. Mike’s greatest strength is the way he connects with people. He’s well-liked and witty, always ready with a quip to defuse the tension in a room.

Jim Parke has been chief financial officer since 1989 and a key part of the growth story. He has great judgment and knows the business backward and forward.

Dennis Dammerman, who had been in or out of the business three times during his career, gave us all comfort that we had the bridge of expertise to the next generation of leadership at GE Capital.

With this succession team in place, Gary and I concluded that he didn’t want to work for the next CEO at GE. He had earned and deserved great treatment, and his severance package reflected that. We also got a noncompete.

In June 2000, Conseco, the insurance and financial services company, was in deep yogurt. Their stock had plunged 33 percent in 1998 and 41 percent in 1999, and they needed help fast. The principal Conseco shareholders, Irwin Jacobs and Thomas Lee & Associates, wanted Gary to bail them out. In fact, Gary was the perfect guy for this turnaround assignment.

He could finally be his own boss.

One of my more enjoyable negotiations was getting phone calls from Jacobs, telling me why I should release Gary from our noncompete contract. I got my first call from Jacobs to ask how much I would want to let Gary out.

“Irwin, you must think I have hay between my teeth. You want me to negotiate against myself?”

Irwin asked if $20 million would do it.

“Forget it. I’m not letting him out. He’s too smart and too valuable.”

Irwin called several times and suggested higher prices, but nothing close to what Gary was worth.

Not long afterward, I got another call from David Harkins, a Conseco board member and interim chairman and CEO. Like Irwin, David was very pleasant, trying to mollify me into a deal, each time modestly upping the ante. After several more phone calls over two days, we worked out an agreement. I agreed to cancel the noncompete in exchange for Conseco buying out all of GE’s obligations to Gary and issuing 10.5 million warrants for GE to buy Conseco stock at $5.75 a share—the market price at the time of the agreement.

The nice thing about this deal is that everybody won. Gary found his ideal spot, a place where he’s the boss and his brains will work wonders. Conseco got the turnaround in stock price that it wanted, and we got to sit on the sidelines and cheer for Gary again. We had skin in the game and could take the ride with him.

 

When Gary left, I named Dennis Dammerman the new chairman of GE Capital Services and he was elected a GE vice chairman. We promoted Denis Nayden from chief operating officer to president and CEO. I felt the two of them—both long involved in GE Capital’s success—would give us the leadership we needed to take the business into the next century. They kept the team intact, and GE Capital continued to build on its great strengths. In 1999 and 2000, the business acquired $47 billion in assets, including $33 billion outside the United States. GE Capital Services’s net income grew 17 percent in 2000 to $5.2 billion, another record year of double-digit earnings growth.

 

The numbers don’t tell the entire story.

The chart I like best is one that was shown by Jim Colica, the longtime head of risk management, at a GE board meeting in June 2001 (below). It captures the growth and breadth and risk containment of GE Capital Services. While there were many blips in individual deals, the diversity of our business and our philosophy of controlled risk provided consistent growth. In 1980, GE Credit had 10 businesses and $11 billion in assets and was based only in North America. By 2001, GE Capital Services had 24 businesses and $370 billion in assets in 48 countries.

GE Capital Services is the story of melding finance and manufacturing. Combining creative people with the discipline of manufacturing and money really worked.

 

17

Mixing NBC with Light Bulbs

When we announced the acquisition of RCA in December 1985, NBC looked great. The network was a $3 billion business with 8,000 employees that had a lot of juice. It was on the verge of being first in prime-time ratings, first in late night programming, and first in Saturday morning children’s programs. Led by The Cosby Show, the highest-rated series on TV, we had nine of the 20 most-watched TV programs, including Family Ties, Cheers, and Night Court.

At the top of my mind was, How do we keep it going? I spent a lot of time getting a handle on the business during the integration meetings prior to completing the acquisition in June 1986.

It didn’t take a brain surgeon to realize that NBC president Grant Tinker and his entertainment division head, Brandon Tartikoff, were the two players who made NBC work. They had picked the shows that made NBC No. 1.

Grant was tired of commuting between New York and California and told me the day of the acquisition that he was not going to stay. Grant thought he had a leadership team in place that would keep NBC on top. He assured me everyone, including Brandon, was on board.

Fortunately, I had an old friend in Don Ohlmeyer, an independent TV producer, whom I had known from his association with Ross Johnson of Nabisco. We had played golf in the Nabisco/Dinah Shore Open. As a favor, Don called to tell me that Brandon was getting itchy.

At the age of 30, Brandon had been the youngest president of entertainment at a major network. He played a big role in NBC’s hits, including L.A. Law, Miami Vice, Cheers, The Cosby Show, Family Ties, and Seinfeld.

I didn’t want to lose him.

I called and asked Brandon to meet me for dinner at Primavera in New York on May 12. We really hit it off. He was a baseball nut like I am. I assured him things would be better than anything he had seen in the past. A month later, he signed a new four-year contract. Having Brandon heading up our entertainment team gave me confidence that GE could succeed in the network business.

During that summer, I interviewed the candidates on Grant Tinker’s staff to find a potential replacement for him as CEO of NBC. They were all good guys. Grant recommended I select Larry Grossman, then head of the news division. However, Larry didn’t have the business vision and edge I was looking for.

I told Grant I couldn’t go with any of his candidates. I asked him to meet with Bob Wright, who I felt from day one was the ideal person for the job. I arranged to have Grant fly up to Fairfield for dinner with Bob and his wife, Suzanne, who had been a key partner in Bob’s success. While Grant and Bob liked each other, nothing was going to dissuade Grant from wanting to promote one of his own guys.

Nevertheless, two months later, in August, I made Bob the CEO of NBC.

The reaction was predictable. People wondered how a “light bulb maker” could run a network. I was confident Bob was right for the job. He had been with me in Plastics, Housewares, and GE Capital, where he was CEO.

Bob had a lot going for him. His three-year stay with Cox Cable gave him the experience to help us expand beyond the traditional network business. His style radiated the management and creative skills to deal with talent. He was also a generous man, who took business friendships to deeper levels, always rushing to the side of someone with a personal crisis.

Bob and I were enjoying the success of NBC’s entertainment results, but there were clear signs of trouble ahead. NBC appeared stuck in the past. Entertainment was strong, but cable was steadily eroding its audience. News had been in the red for years and in 1985 was losing about $150 million a year. Typical of the entertainment business, spending seemed extravagant.

NBC wasn’t facing any of these realities.

We first tackled the losses in news. That brought us once again to NBC News president Larry Grossman. We were on different planets. He had been in advertising for NBC early in his career and later was president of PBS when Grant recruited him back in 1984.

Early in our relationship, Larry invited Bob and me along with our wives to his home with several of NBC’s stars and their spouses—Nightly News anchor Tom Brokaw, and Today show co-hosts Bryant Gumbel and Jane Pauley.

The Grossmans put on a nice evening.

There was only one problem: It was the night of the sixth game of the 1986 World Series, with my Red Sox playing the New York Mets. I had lived and died with the Sox since I was six years old.

This was the night they could finally win their first World Series in my lifetime. NBC was televising the game. I doubted Larry even knew it was World Series time. It turned out to be the saddest night in Red Sox history, when Bill Buckner let a ball dribble between his legs and the Red Sox eventually lost in the tenth inning.

I was shocked by Larry’s insensitivity to the game’s importance, but he might have felt equally upset that such a “trivial thing” could consume me. It was an odd night, but it wouldn’t be the last awkward experience between us.

Despite our demands on NBC News to cut losses, Larry stunned me in November when he showed up for the S-II budget review proposing an increase in spending.

Larry hated this kind of meeting. He thought it was demeaning to talk about costs with some business suits. He operated under the theory that networks should lose money while covering news in the name of journalistic integrity. His dismissive attitude only added to the friction. I was ripped after the meeting.

I stewed on it overnight. In the morning, I decided to confront the issue and asked Bob to helicopter with him up to a meeting in Fairfield.

‘ “Larry, I didn’t like the way the meeting went yesterday.”

“What didn’t you like?” he asked.

“I didn’t like your lack of responsiveness to our cost challenges.”

I never touched him. We were miles apart. After a couple of hours, Larry looked at his watch and said, “Jack, I’ve got to get this over with. I have to get back to New York because I have dinner with Chief Justice Burger.”

“Larry, if you like having dinners with the Justice Burgers of the world, you better get this thing in line fast. You work for Bob Wright. You work for GE. Get your costs in line or move on.”

We put up with Larry for 18 months until he left in July 1988.

During his transition out of the company, Larry, like so many people, ended up on the couch of Ed Scanlon. I met Ed during my RCA integration meetings. He was RCA’s head of human resources, a job that theoretically put him in charge of NBC’s human resources even though NBC thought of itself as pretty independent. I really liked him. Ed was straightforward and street smart. He was particularly helpful in melding the RCA and GE cultures.

I wanted to keep him but didn’t have a position equal to what he had at RCA. I thought he was the best HR person in RCA and felt he would help GE link with NBC. Ed lived in New Jersey, and all he had to do was move down about 40 floors at 30 Rock to take on the top HR job at NBC. The network had the visibility to make the job attractive to Ed.

He accepted.

What a lucky break for us. Ed related well with everyone, from union leaders to the on-air talent and their agents. He could bridge the gap between corporate and creative. Bob and I would work closely with him for the next 15 years.

 

NBC’s success was making it even more difficult for many of the top managers to face the new realities. Bob asked me to share my thoughts at his March 1987 management meeting at the Sheraton Bonaventure Hotel in Fort Lauderdale. It was a little bit like the first Elfun meeting in Westport six years earlier.

Not everyone was pleased.

I spoke before dinner to Bob’s top 100 executives and told them NBC had to change and adapt to a new world. “Cable is coming, and it’s going to change your life. Too many people in this room are living in the past. There are too many staff people living off the entertainment gravy train, and that train is not going to run forever. You must take charge of your destiny. If you don’t, Bob will.”

For the A players, this could be a real opportunity.

“For the turkeys,” I said, “it will be marginal at best.”

Less than 20 percent liked what I had to say. The rest thought I ought to be arrested or committed.

We looked long and hard for Larry Grossman’s replacement. Michael Gartner came highly recommended by Tom Brokaw, the anchor of Nightly News and the dean of NBC. Michael had great news credentials. He had been the front-page editor of The Wall Street Journal and editor of the Des Moines Register and the Louisville Courier-Journal. Despite a somewhat quirky personality, he had a reputation for doing a top-notch job editorially and financially. He seemed the perfect fit, and in many ways he was.

Gartner joined in July 1988. His first management change would end up leading to a great NBC success story.

Tim Russert had been serving as Larry Grossman’s deputy. Gartner wanted his own guy, so Bob Wright suggested that Russert get an operating job. Tim had been a staff assistant to Governor Mario Cuomo and Senator Pat Moynihan, so he’d never run anything.

Michael offered him the job of bureau chief for NBC’s Washington bureau. Tim resisted, worried about leaving the center of power in New York for an outpost. I spent an hour with him, describing why he should jump at the job to manage NBC News’s biggest field operation. Here was the chance to show us what he could do as a manager.

Tim’s move to Washington was a win for everyone. He hired Katie Couric as a Washington correspondent in 1989. That was the start of what would be an incredible career.

Katie became co-host of the Today show in April 1991 and immediately caught on, establishing an easy rapport with the morning audience. The ratings began to climb. Katie has been the show’s longest recognizable star. Sadly, Katie had a personal tragedy when her husband, Jay Monahan, died of colon cancer in 1998.

All of America grieved with her. To increase awareness of colon cancer, she even went on national TV to have a colonoscopy, bringing attention to the procedure. During a recent physical, my doctor told me that as a result of Katie’s efforts he was booked for the next year.

Meanwhile, Tim Russert’s insights from Washington impressed Michael during the daily teleconferences with bureau chiefs for the Nightly News. In 1990, Michael put him on Meet the Press as a panelist. A year later, Tim replaced Garrick Utley as host of this show when Garrick moved to New York with the weekend Today show.

Tim has been special in so many ways. He’s taken Meet the Press to first in the ratings, becoming arguably the leading political commentator on TV. His fame has not gone to his head. He’s a straight shooter and extremely popular everywhere, particularly in GE. He’ll go to any of our plants to give a talk and meet with employees.

I wasn’t sure Tim understood our stock option program when I got a notice that his ten-year-old grant was about to expire in three months. I called him and said, “You know, this piece of paper you have in your drawer is worth a lot of money, and it runs out in 90 days.”

“Jack, I’ve got faith,” he said. Turned out he had more faith and more smarts than most of us and did very well by holding his options to the last days.

Gartner didn’t put just Tim into a position to succeed. He also was responsible for making Jeff Zucker the executive producer of the Today show. Jeff had joined Dick Ebersol, the head of NBC Sports, straight out of Harvard as an assistant at the Seoul Olympics. Dick liked him, took him under his wing, and got him involved in the Today show. With Ebersol’s encouragement, Gartner and Bob decided to make Jeff, at age 26, executive producer of the Today show. Their confidence was rewarded a thousand times over with the tremendous success of the Today show under Jeff’s leadership. Jeff was named president of NBC’s entertainment division in 2001. Now we need him to work his magic there.

Everything wasn’t perfect under Michael. His unfamiliarity with TV and his management style caused some issues. His courage to attack the NBC News cost structure, while popular with us, didn’t win him support there. But Michael suffered his biggest blow when a major controversy broke out over a Dateline news feature. On November 17, 1992, Dateline ran a segment on allegations about the safety of General Motors pickup trucks. “Waiting to Explode?” depicted GM trucks exploding on impact. On February 8, 1993, GM sued NBC, accusing the network of rigging the crash tests.

An internal investigation found that some of the reported facts were suspect. Although Jane Pauley wasn’t involved in the GM story, she agreed to go on Dateline and read an on-air apology that brought the issue to closure. That was the ultimate in being a team player. Jane was great to do that, and her well-earned credibility with the audience made a huge difference.

Although Michael Gartner was not directly responsible, he never recovered from the Dateline incident. Before resigning on March 2, Michael was in the process of enticing Neal Shapiro from ABC to become executive producer of Dateline. Neal is creative, genuine in every way, and deservedly one of the most popular figures at NBC. He not only restored the show’s credibility, he expanded Dateline into three to four prime-time hours every week. The show became a huge success for NBC, and so did Neal. In 2001 he became president of NBC News.

After the Dateline incident, Bob interviewed just about everybody in the news business to replace Gartner. Again, Tom Brokaw played a big role. Tom’s reputation made him the public face of NBC News. He’s been a mentor to many young newspeople over a 30-year career.

Tireless and very demanding of himself, Tom has been a great help to Bob, who has used his counsel on almost every major decision at NBC News. After Bob interviewed all the obvious candidates, it was Tom who suggested that Bob talk to Andy Lack, then an executive producer at CBS.

Andy and Bob had a long dinner at the Dorset Hotel, where Andy made a big impression. After this dinner, Bob wanted me to meet him, and I did a couple of days later.

I think I’ve told everyone that Andy was the most exciting person I ever interviewed for a job. He was totally different from any of the news leaders I had met. He was humorous, spontaneous, filled with energy, and totally comfortable with himself—traits by now you know I find appealing.

He charmed the hell out of me.

Twenty minutes into the conversation, I turned to Bob and said, “What are we waiting for?”

“Let’s do it,” Bob said.

I looked at Andy and asked, “Why aren’t you jumping up and down? This is a huge job we’re offering you.”

He responded, “After all the stuff I heard about you guys, I’m wondering whether I’d get the resources to get news back on its feet.”

We both assured him he’d get what he needed to turn around the news operation.

Andy called Bob on Sunday and took the job. He quit CBS on Monday morning and joined us in early April 1993.

 

Meanwhile, Bob was moving ahead on cable.

When we bought NBC, the network’s only cable asset was a one-third financial interest in the Arts & Entertainment channel. Bob was desperate to enter the cable business in a big way. The window was closing. In early 1987, he hired Tom Rogers, who had spent several years on the Hill working on telecommunications policy as a congressional aide to Representative Tim Wirth. Bob put Tom in charge of expanding NBC’s cable efforts. He had great contacts in the industry and was a terrific negotiator and a brilliant strategist.

Tom and Bob went first to Chuck Dolan, a pioneer of the cable TV business. Chuck had founded Cablevision Systems in Long Island, a company that became one of the largest U.S. cable operators. Chuck launched Bravo, was co-founder of HBO, and had developed a group of other cable properties. Bob knew Chuck and his family and had almost left Cox in the early 1980s to become president of Cablevision.

They struck a partnership in January 1989, with NBC buying half of Chuck’s Rainbow Properties for $140 million. The deal gave us interests in Bravo, American Movie Classics, Sports Channel USA, and regional sports services across the United States. NBC also would buy stakes in Court TV, the Independent Film Channel, the History Channel, and Romance Classics.

Bob’s deal with Chuck let either side bring to the partnership any new ideas we wanted to develop from scratch. The first big one was CNBC, the business news network. I loved the idea from the start. I thought there was an opportunity for a business channel, and unlike entertainment and sports, business programming wouldn’t involve any rights fees.

The only other competitor at the time was Financial News Network (FNN), and it was losing money. Chuck agreed to go into CNBC with us on a 50/50 basis, and CNBC went on the air in April 1989.

By 1991, our cumulative losses were nearly $60 million. Business news was not taking off. FNN went into bankruptcy in January. At that time, FNN had access to 32 million homes. CNBC had 20 million subscribers. Chuck had no interest in going after FNN in bankruptcy.

He’d had enough. Chuck withdrew his 50 percent ownership of CNBC, and we went after FNN alone.

We thought we could get it for $50 million. We were all surprised when the opening bid from Westinghouse and Dow Jones was $60 million. The bidding reached $150 million when Bob and Tom Rogers came back and said they needed another $5 million. Silly as it now seems, the GE guys, including myself, agonized over our bid because it was three times our preliminary evaluation of the deal. Fortunately, we badly wanted a financial news network, and the extra $5 million closed the deal.

The deal more than doubled our distribution. We retained the best FNN talent, including Ron Insana and Sue Herera, who today co-anchor our top-rated Business Center news program, and Bill Griffeth, who hosts Power Lunch.

 

On the entertainment side, things weren’t going as well.

From 1988 to 1992, we introduced dozens of shows that didn’t click. I wasn’t worth a nickel here. After acquiring NBC, I went to Hollywood once to look at the pilots for the new prime-time schedule.

You ought to hear the presentations and the wild predictions of success for each pilot. Every show has a shot: a great producer, sensational stars, an Emmy-winning this or that. Every comedy is Seinfeld reincarnated and every drama is ER.

Thank God there are so many optimists in the business.

Facts are, I’ve never seen anyone predict a sure thing. Most of the shows bomb. Something like one in ten that come out of development make it on the air, and you’re lucky if one in five of those are successful. The odds of getting a series that really clicks, like Seinfeld, Frasier, or Friends, is something like 1 in 1,000.

People would always say to me, “How can you own NBC? You don’t know anything about dramas or comedies.”

That’s true, but I can’t build a jet engine or a turbine, either. My job at GE was to deal with resources—people and dollars. I offered as much (or as little) help to our aircraft engine design engineers as I offered to the people picking shows in Hollywood.

We weren’t doing too well out there. Most of the past NBC hits had run out of gas. Brandon Tartikoff left NBC to run Paramount in 1991. Bob named Brandon’s deputy, Warren Littlefield, as president of entertainment. Warren inherited a difficult situation. We didn’t have any new shows, and the TV advertising market fell into its worst slump in two decades. NBC’s profits fell from a peak of $603 million in 1989 to $204 million in 1992.

That year we had to make a difficult decision. We were in Boca in 1992 at the time of the decision on who should take over The Tonight Show from Johnny Carson. This was a terrible dilemma because both Jay Leno and David Letterman were on our network at the time.

Close to midnight, CFO Dennis Dammerman and I walked into a conference room in the middle of a hot discussion. Most of the East Coast guys wanted Letterman. The West Coast guys, hooked up by videoconference, favored Leno. Bob wanted to keep both of them. He feared that picking one would risk a defection by the other to CBS, which had nothing going for it on late night. Dennis and I sat in the back of the room, listening to the debate, when Bob turned to us.

“What do you guys think?”

“You know I’m not qualified to pick either one,” I said. “But if I were you, I would do this: I’d go for GE values. You like Leno’s values. He’s good for the affiliates. He’s a good human being. The American public will find out that’s true.”

We got beat up over the Leno decision. Letterman left us for CBS and pulled ahead in the early going.

The critics were everywhere, and they were joined by Grant Tinker. I liked Grant and thought I had a good relationship with him. In 1994, he came out with a book that blamed Bob and me for the decline.

He called my decision to appoint Bob head of the network a “kamikaze assignment.” He said our decision to replace Johnny Carson with Jay Leno was dead wrong. He claimed we overpaid for FNN, and he placed CNBC in the dead-air category.

“Other than its stock ticker, CNBC has failed to develop any discernible persona,” wrote Tinker in his book. “I’ve wondered whether Jack ever watches it and what he thinks of it.”

The venom in Grant’s comments surprised me until I noticed that his book was co-authored by Bud Rukeyser. Bud was a former public relations head of NBC who had left on less than amicable terms in the spring of 1988.

In the middle of the slump, we added to our problems. We partnered with Chuck Dolan to do a cable Triplecast of the 1992 Summer Olympics in Barcelona. For an extra $125, cable subscribers could have three channels to watch over 1,000 hours of live and taped coverage without commercials.

It was a flop.

We had hoped to sign up as many as 3 million of the 40 million homes that could receive the offer. Instead, we drew about 250,000 viewers. We took a real beating—in the media and financially. We were looking at a $100 million loss on the Triplecast alone. While Bob was confident Chuck would honor his commitments, our accountants worried that we’d get stuck for the majority of it, even though Dolan was our 50/50 partner.

Chuck is as tough a negotiator as they come. He is also as honorable a guy as you’ll meet. In November we received a check from him for $50 million to cover his share of the Triplecast losses.

Triplecast was just another problem in a troubled time.

From 1992 until 1994, we spent a lot of time struggling with all these issues and were searching for a solution. That led to talks with lots of players, including Paramount, Disney, Time Warner, Viacom, and Sony. We weren’t looking for cash. We were trying to put things together to make NBC a bigger and stronger player. We came closest with Disney and Paramount.

Dennis Dammerman, our advisers, and I had a dinner meeting with Disney CEO Michael Eisner and a team from Disney one evening during the summer of 1994. We came to a tentative understanding that Disney would buy 49 percent of NBC but would have operating control while we retained majority ownership. My main condition was that Bob Wright would be the CEO of the combined Disney TV production studios and NBC’s operations.

Michael liked it, and Dennis and I were thrilled.

By morning, though, Michael had changed his mind and didn’t want to do the deal. We had several other serious discussions, including some with Marty Davis of Paramount, that ended up the same way. With all these discussions going on, the press naturally got hold of it. Speculation about GE’s plans for NBC ran rampant throughout 1994.

Bob Nelson, Dennis, and I prepared an analysis on why we thought staying in the network business made sense long-term. The value of the property at the time was somewhere in the $4 billion to $5 billion range. We were confident we could create a far more valuable asset with very limited downside. I took the analysis to the board in October 1994, recommending that we stay in the business.

It was the only time I ever polled every board member, one by one, for a show of support for a decision. They agreed unanimously to stick with NBC, and we went public with our commitment to the network.

 

Meanwhile, Warren Littlefield was having success developing new shows. Bob decided to give Warren more support and hired as head of West Coast operations Don Ohlmeyer, the old friend who had tipped me off to Tartikoff’s itchiness. Warren and Don were a perfect match. Warren was deep into the programming details. Don, a blunt and irreverent six-foot-three bear of a guy, had a knack for promotion. He was running his own successful production company, and we actually bought it to get him. His larger-than-life presence helped bring back a sense of pride to our Burbank Studios. Seinfeld and Mad About You—two shows begun under the earlier administration—were already catching on.

Within 18 months of their collaboration, under Don’s leadership, the two of them launched Frasier, Friends, and ER. A turnaround was under way.

News was also enjoying success under Andy Lack. When he arrived in April 1993, we were a distant three out of three. None of our news programs was No. 1—Today, Nightly News, or Dateline. There were even suggestions that we give back the second hour of the Today show to our affiliates because the show’s ratings were so weak.

Within two months of joining us as president of news, Andy was pitching at a business review what some of his colleagues believed was a crazy idea. He wanted to move the Today show out of its old third-floor studio in the GE building and build a new studio at street level in Rockefeller Center.

He thought this could really change the game.

“We could use Katie Couric and Bryant Gumbel in ways to get some buzz and engage the audience,” said Andy. “This is not a cheap idea. It will cost $15 million. If it bombs, it will be a big bomb.”

“No! No! No!” I shouted. “It’s not going to bomb. It’s a great idea. Let’s do it!

“Dennis,” I said, “you can find 15 million bucks.”

After moving into the new studio 18 months later in the fall of 1994, Today began to take off. The massive windows that allowed people to peer into the studio and the opportunity to take the show into Rock Center made Today a New York City tourist attraction. On Friday mornings, Today’s live outdoor concerts in the plaza often attract thousands of people.

On the other hand, Bryant Gumbel—after 15 years with the Today show—was getting tired of the morning drill. He and his agent made it clear to Andy that they wanted to try something new. Andy and Bob started thinking about replacements. A solution was in our backyard.

Bill Bolster, the president of WNBC, NBC’s New York station, had been facing the challenge of fixing the 5-to-7 morning show that preceded the Today show. He had watched Matt Lauer a few years earlier hosting an interview show on Channel 9 in New York.

Since then, Matt’s career had been going nowhere. In fact, one morning, Matt spotted a “Help Wanted” sign on the back of a truck of a tree trimming firm. He called and left a message for the job. When Bill Bolster telephoned the next day, Matt thought the call was from the landscaper. Instead, it was Bolster with a better offer—a much better offer!

He hired Matt to co-anchor WNBC’s early morning news. Shortly after joining the station in late 1992, I watched him at 6:30 A.M. on WNBC after starting the morning on the treadmill with CNBC. Like Bill, I thought Matt filled the screen. He was unassuming yet charismatic, and he looked like a potential replacement for Bryant.

Within a year, my campaign began.

I’d call Andy endlessly, acting as Matt’s best agent. Bolster had an ally.

“What do you think of Matt Lauer?”

“He’s great,” Andy said.

“When are you going to give him the job?”

“He needs a little more seasoning.”

“Oh . . . come on! Let’s go!”

Today’s executive producer, Jeff Zucker, tried Matt out as a news reader in 1994, and gradually Matt began subbing when Bryant was out on vacation. Everyone liked his style.

CBS took Bryant out of the morning business with a great offer for his own prime-time show. We were all happy for Bryant.

Matt took over for him in early 1997. Katie Couric and Matt turned out to be a great match, instantly captivating the morning audience.

Today, which became the No. 1 morning show in 1996, widened the gap between itself and No. 2 ABC’s Good Morning America. The following year, Tom Brokaw made Nightly News No. 1, a position it still holds. Dateline executive producer Neal Shapiro, with co-anchors Jane Pauley and Stone Phillips, turned around our prime-time magazine show after the GM debacle.

Andy really had things working at NBC News.

 

The person who got CNBC going was Roger Ailes, a former political adviser to President George Bush and executive producer of Rush Limbaugh’s TV show. Bob found Roger and hired him as CEO of CNBC in August 1993. I was an instant fan. Roger was an edgy and excitable guy, full of opinions. He created a distinctive look for CNBC, plotted its prime-time programming, and promoted personalities like Chris Matthews. Chris brings energy to the coverage of Washington mishaps. Roger also created from scratch a “talking heads” network called America’s Talking.

He built CNBC’s operating profits from $9 million in 1993 to $50 million in 1995. The creation of MSNBC, our joint venture with Microsoft, indirectly drove Roger out of the company. He didn’t like our decision to fold his baby, America’s Talking, into MSNBC. I hated losing Roger when he left in January 1996 to start up Fox News Channel, which he has made into a real success.

We replaced Roger with Bill Bolster, who had built WNBC to a No. 1 position in New York. Bill put on the CNBC screen a real-time ticker for stock market prices and treated our business coverage as a fast-paced sports event. He expanded the “pregame show” for the stock market with a three-hour block of Squawk Box.

Squawk Box has developed an ensemble of characters: Mark Haines, Joe Kernen, and David Faber. Their spontaneous banter and sharp insights rev up the market before it opens. The show’s popularity has just about every CEO in America watching.

The “game” is reported, often from the “field” or trading floor, by CNBC’s first real celebrity, Maria Bartiromo, whose inside scoops earned her the reputation of being one of the best financial journalists in the country.

The “postgame” show, Business Center, hosted by Ron Insana and Sue Herera, is like ESPN’s Sports Center. They’ve made it the most authoritative financial news program on television.

As he was shaping the day’s programming, I pestered Bill constantly. I sent him clips of the same business stories out of The Wall Street Journal and the New York Post, urging him to adopt the Post’s more blunt and entertaining approach.

After all, business is a game. Bill and his team, led by Bruno Cohen, former news director at NBC TV in New York, have, in fact, captured the sport of it.

CNBC’s profits over the next five years rose to $290 million in 2000, making it one of the most profitable assets in cable television.

By 1996, NBC had turned around. Operating profits surpassed $1 billion for the first time. ER had become the No. 1 drama series on TV. Seinfeld was the No. 1 sitcom. CNBC was profitable and growing rapidly. America agreed that Jay Leno was the best late night host as The Tonight Show won the late night battle with CBS’s David Letterman.

 

Late in 1995, Bob Wright, aware that Microsoft was thinking of making an investment in CNN, started discussions with them about a possible tie-up. We had always wanted to develop a cable news channel, but it was very expensive to do from scratch. At an NBC strategy review session in October 1995, Bob described his ongoing negotiations with Microsoft.

We were having trouble figuring out the right relationship with Microsoft. One possibility was a licensing arrangement. I jumped up and went to an easel and led a discussion of all the alternatives, eventually drawing on a flip chart a partnership structure similar to that of many previous GE deals. In this structure, we’d have a couple of 50/50 joint ventures: one on the cable side with NBC in control, and another on the Internet side with Microsoft in control.

Tom Rogers and Bob then began negotiating this concept with the Microsoft team. Microsoft was primarily interested in using our news-gathering operation and developing an online news channel. Cable was secondary, which made the negotiations more difficult. The evening before a December 1995 press conference to announce the partnership, there were still a number of sticking points.

Tom and his team had been up all night, trying to close the deal. Bill Gates’s concern about cable was the last open issue.

By 7 A.M., just two hours before a major press conference at NBC’s New York studios, the deal still wasn’t done.

The announcement was scheduled to be a grand affair, with Bill hooked up by satellite from Hong Kong and Tom Brokaw in Germany. To close the deal, Bob Wright asked me to intervene with Gates.

I called him. Bill was concerned that he could get stuck with major losses in cable.

“Jack,” Bill asked, “do you believe the cable forecasts?”

“I think cable’s a no-brainer,” I replied. “You’re the guy who has the tough job with the online part. I don’t have any doubt we’ll make cable work.”

I gave Bill some guarantees on cable performance to protect Microsoft from major losses if we couldn’t get the channel into more homes.

“That’s enough for me,” he replied.

About 40 minutes before the press conference, Bill Gates and I agreed. MSNBC turned into the black in 2000 and MSN became the No. 1 news Internet site.

MSNBC also gave NBC the chance to showcase Brian Williams. Brian had joined the network in 1993 and was backing up Tom Brokaw on Nightly News and doing weekend anchoring. Andy Lack gave him his own show, The News with Brian Williams.

While you don’t see it much on the air, Brian can be one of the funniest guys you’d ever meet. I actually think he’s so talented that, if he wasn’t already committed as a news anchor, he could have his own late night show.

Bob and Tom Rogers continued looking for Internet opportunities and made a number of dot.com investments, later merging most of them into a new public company called NBCi. Like so many other dot-coms at the time, NBCi focused too much on advertising revenues. When the Internet ad market fell apart in early 2000, its business model couldn’t make it. In 2001, we repurchased NBCi and began using it as a portal to promote the rest of NBC.

 

Toward the end of 1997, Bob and I got some bad news. Jerry Seinfeld, star of television’s hottest prime-time sitcom, wanted to call it quits. Jerry wasn’t only America’s favorite comic, he was also mine. At a Sunday brunch in Bob’s New York apartment in December 1997, we tried to convince Jerry to stay on the air for one more season.

A year earlier, we had gone through the same drill and convinced Seinfeld to stay on through the 1997 season. That time, Bob called me down to his office to see if I could help make the sale. It was a quirky meeting. To convince Jerry to stay, we had given him a package of stock options and restricted stock. Jerry asked me to take him through what they meant. It was a priceless moment as I pretended to give a finance lesson to someone who could play dumb as a fox as well as he could get a laugh.

We talked him into returning then—now he wanted out again, before the 1998 season. This time, Jerry brought along two wonderful friends, George Shapiro and Howard West, who could have come out of Central Casting as oldtime Hollywood agents. Bob made a great presentation, a typical GE pitch with charts, to show that Jerry would be the only television star who left while his series was still growing. No show in the history of TV, not even Milton Berle’s, was growing its audience in its ninth year.

Jerry wanted to go out on top. Bob argued that Jerry hadn’t even seen the peak. It was a great pitch—and we offered Jerry $100 million in GE stock to stay just one more year.

Bob and I thought we had made the sale. That feeling lasted about ten days. On Christmas Eve, I got a phone call in Florida from Jerry in Burbank.

“Jack,” he said, “this is a very hard decision for me, and I hate to disappoint you.”

I felt awful. I knew we had lost him.

“Jack, it’s Christmas Eve and I’m in my cubicle. Everyone else has gone off to their families, and I’m here writing a show. I can’t do it another year, Jack. I can’t.”

“I wish you’d made a different decision,” I said.

I thanked him for all that he had done for us. I respected his choice. He wanted to go out on top, and he did.

 

We not only lost Jerry, we also “lost” the NFL. After televising pro football since 1965, we lost the broadcast rights to the National Football League in early 1998.

Passing on this was an easy decision. There was no one at NBC, even in sports, who wanted to touch the numbers needed to get the rights.

Of course, my favorite paper, the New York Post, always has great fun with things like this. They put a mug shot on the front page, showing me dropping the ball.

Yet this wasn’t a fumble. We passed on that $4 billion eight-year deal because the numbers were nuts.

Losing the NFL led to our effort to launch in 2001 a new football league, the XFL (for “Extreme Football”), with Vince McMahon, head of the World Wrestling Federation. It turned out to be a bomb, and I was right in the middle of it. If you screw up in another business, you can generally hide it—but not on TV.

Everybody’s always watching, especially the critics.

I was as big a supporter of the XFL as anyone in the company. We had nothing going on Saturday nights. Vince McMahon had flair and made a big success with the WWF. Minnesota governor Jesse Ventura added drama as an announcer. We launched the new league with eight teams in some key markets.

Our problem was we could never decide whether the XFL was entertainment or football. The dilemma began when they brought the Vegas bookies to the training camps. The bookies didn’t want the crazy rules the XFL had proposed because that made it more difficult to put odds on the games. Our sports division thought we needed the credibility and publicity the betting lines would provide. That closed the door to doing some things that might have made the XFL far more entertaining.

The first game got off to a big ratings start, but even then we lost audience during the long game. The sportswriters tore us apart. The only coverage the league got was opinion pieces on how the XFL threatened the sanctity of professional football.

The fans didn’t like either the entertainment or the football. The death watch began. Nobody watched the games. Everyone watched our failure.

After a single 12-week season, we called it quits. The XFL turned out to be a rock. It cost us $60 million, the equivalent of a couple of failed sitcoms—and eight out of ten of those don’t make it. While it wasn’t pleasant, it wasn’t a large financial hit. Taking those swings is one of the big benefits of GE’s size. You don’t have to connect all the time.

Although the XFL failed, almost everything else Dick Ebersol was involved with was a success. Dick, who joined in early 1989, was the protégé of Roone Arledge, the pioneer of Monday Night Football and Olympics coverage. Dick succeeded Roone as the master of televised sports.

In 1995, Dick pulled off the ultimate coup in sports programming. For the first time in 20 years, the International Olympics Committee agreed to give NBC broadcast rights without competitive bidding. NBC laid the groundwork for Dick’s agreement, televising the Summer Olympics in Seoul in 1988, Barcelona in 1992, and Atlanta in 1996.

Toward the end of July 1995, Bob and Dick called me with a novel proposal. Dick and his team wanted to make an unprecedented offer to the Olympics committee to acquire both the 2000 Sydney and the 2002 Salt Lake City Olympics. By going for two games instead of one, Dick believed, they could get both games and eliminate the usual bidding process.

They wanted to move quickly. To get approval, Dick arranged a conference call with Bob on a boat off the Nantucket coast, while Dennis Dammerman joined us from a cabin in Maine, and I participated from my summer house in Nantucket.

The price was steep: $1.2 billion.

“Dick, what’s the worst-case scenario here?” I asked.

“We could lose $100 million,” he replied.

We all agreed to go for it. Dick immediately took the GE jet to Sweden to meet with Juan Antonio Samaranch, president of the International Olympics Committee, and then flew to Montreal to meet with Dick Pound, the committee’s head of TV rights.

Within 72 hours, he had locked up both Olympics.

A few days later, Dick was thinking about doing more. By early December 1995, four months later, we had gained the rights to broadcast three more Olympics—in Athens, in Torino, and for the 2008 games—for $2.3 billion.

The Olympics deal has been a home run for both the network and particularly its cable properties. Carrying the Olympics on our two major cable properties allowed David Zaslav, head of cable distribution, to significantly extend the duration of the carriage and the reach of CNBC and MSNBC into millions of homes. Today, CNBC has commitments to be in over 80 million homes, and MSNBC, which had fewer than 25 million subs in 1995, will be in over 70 million homes in 2002.

 

Over the years, NBC has proved an enormous benefit to GE.

We’ve profited from its financial results and from the glitter that makes most employees proud to wear a T-shirt with the NBC logo. Bob’s vision to see NBC as more than just a network was a winner. The network audience has continued to erode, making his bets on cable television look even better. CNBC is the leader in financial news, and MSNBC is the top-rated cable news network on a 24-hour basis among 25 to 54-year-old viewers. Even though NBC has fallen to third place in household ratings as I’m writing this book, it’s still the leading network among people 18 to 49, the most important demographic group for advertisers.

Through it all, Bob Wright has become one of the longest-serving network heads in TV history. He has proved that a “light bulb maker” can make it big in the TV business.

18

When to Fight, When to Fold

One of my strongest childhood memories is of climbing the stairs to my parents’ second-floor flat in Salem, Massachusetts, and hearing my mother crying. I was only nine years old in 1945. I had never heard my mother cry before. When I walked through the doorway, she was standing over an ironing board in the kitchen, pressing my father’s shirts. Tears were streaming down her face.

“Oh, God,” she said. “Franklin Roosevelt has died.”

I was stunned. I didn’t know why the president’s death would cause my mother such heartache. I didn’t understand it at all. Yet I felt some of the same feelings when John Kennedy was assassinated 18 years later, and I was glued to the TV set.

My mother’s reaction to Roosevelt’s death came from her heartfelt belief that he had saved our country and our democracy. She put her faith in him and our government. So did my father. Both of them believed that the government served the will of the people, protected its citizens, and always did what was right.

For many years, I shared my parents’ faith, but that faith has been severely tested on a number of occasions. I’ve seen government up close, both right and wrong, both good and almost evil, from honest, hardworking public servants to politically motivated, devious self-promoters.

I’d seen many small instances of bad government in action, but my first big case didn’t come until 1992.

I was in the middle of a board meeting in Florence, South Carolina, when our general counsel, Ben Heineman, pulled me aside. He said that The Wall Street Journal was doing a story for the next day, April 22, on a lawsuit filed by Ed Russell, a vice president who had been fired in November.

This was no ordinary suit for wrongful discharge. Russell, who had run our industrial diamonds business in Ohio, accused us of conspiring with De Beers of South Africa to fix diamond prices. He claimed that he was fired because he complained about a meeting his boss, Glen Hiner, had with De Beers to supposedly fix these prices.

I left the board meeting that afternoon and huddled with Ben and Joyce Hergenhan, our vice president of public relations. I knew Russell wasn’t telling the truth. For one thing, Glen Hiner, head of GE plastics, had impeccable integrity. For another, Russell had been fired for performance reasons. I knew, because at one crucial point, I had written his direct boss, telling him Russell had to go—something that even Russell didn’t know.

I had met him shortly after he joined GE in 1974 as a strategic planner. He moved up through our lighting business and in 1985 became general manager of GE Superabrasives, the name of our industrial diamond business. I knew that business well because I oversaw it from Pittsfield in the early 1970s. At first, Russell did well in the job, increasing revenues and profits nicely. But in 1990, he hit a wall. Profits dropped to $57 million, from $70 million the year before.

Over the course of 1991, Russell’s problems continued. His numbers didn’t improve, and he had difficulty explaining the situation in a series of reviews with his boss, Glen Hiner, the head of our plastics business. I was troubled by it. I had been a supporter of Russell’s for many years and approved his promotion to general manager of superabrasives in the first place.

However, in September, Hiner and I had what would be our last review with Russell in Pittsfield. He was totally unable to answer my questions. At one point, he said he wasn’t prepared to discuss some straightforward issues in his business because he didn’t think that was the purpose of the meeting. My financial analyst, Bob Nelson, was in the session with me and felt as surprised as I was by Russell’s response.

The next day, I scribbled a note to Glen Hiner summarizing the meeting. In it, I included the observation that Russell “made a fool of himself in July and yesterday he appeared totally out of it. Bottom line, Russell has to go” (see below).

The next month, Hiner called him back to Pittsfield and on November 11 fired him.

Now, Russell had filed a lawsuit making all kinds of crazy claims, accusing Hiner of wrongdoing. Before drafting a response to it, I remembered the note I had sent Hiner and had it faxed to me in Florence. Luckily, my note made clear that Russell was fired for performance reasons and that I did it—not Hiner, who was the target of Russell’s made-up charges.

 

 

Ben, Joyce, and I drafted a statement for the Journal and other reporters. We made it clear that Russell was removed for “performance shortcomings” and that he had many conversations with GE people, trying to get a better severance package. Russell never brought up any antitrust issues in those talks. He was a bitter employee who had been canned.

The next day’s stories contained even worse news: Russell had gotten the Justice Department to open a criminal investigation into his price-fixing allegations. When a Journal reporter asked me about it after the meeting, I called it “pure nonsense.” We began our own investigation. We called in lawyers from Arnold & Porter and Dan Webb, a litigator with Winston & Strawn, to look into the charges.

It didn’t take much longer than six weeks for the outside lawyers to conclude that Russell wasn’t telling the truth. Now we had to convince the Justice Department. We shared with them the results of the investigation and put together a “white paper” that documented 12 outright misrepresentations Russell had told in his depositions in the case.

It fell on deaf ears.

In February 1994, Ben Heineman and I went to Washington to meet with an assistant attorney general to make our case. She couldn’t have cared less about our arguments. She was out to get an indictment, and nothing was going to get in her way. To avoid an indictment for price-fixing, she asked us to plead guilty to a felony and pay a fine.

There was no way I was going to do that. We hadn’t done anything wrong. The government’s case was built on a bunch of lies. We had to fight this all the way.

A grand jury indictment is usually routine when the government requests it. Three days after our meeting in Washington, she got her indictment against us and De Beers for allegedly conspiring to fix prices. She didn’t trust her own lieutenants, so she hired an outside lawyer at the government’s expense.

Eight months later, on October 25, the trial started in a federal court in Columbus, Ohio. Dan Webb led the litigation team, with great support from Bill Baer of Arnold & Porter and Jeff Kindler, GE’s inside litigation chief.

The team did such a good job destroying the government’s case that we never had to present our evidence.

On December 5, after listening to all the government’s evidence, Judge George Smith threw out the entire case. “The government’s conspiracy theory falls apart completely,” he said. “The government’s arguments are without merit. . . . Even when the evidence is viewed in the light most favorable to the government, no rational trier of fact” could find GE guilty.

The clear victory in the Russell case justified fighting for what we knew was right. The government had no case, just a knee-jerk dislike of a big company. Judges almost never dismiss a criminal antitrust case in the middle of a trial—before a defendant has even presented its side. But that’s what happened here. The fight took us three years, three years of bad press every time it was mentioned. Only the facts told us we were right.

This was government at its worst. They got the FBI to wire a dismissed employee and got nothing. They spent a great amount of time chasing nothing. They hired an expensive outside gun to try the case—all so some government types could make names for themselves.

Of course, we’re not perfect. In a completely different case a year earlier, the government had been right.

 

This one started with Ben as well, when he called me on a Saturday afternoon at home in December 1990.

“You’re not going to believe this,” he said, “but we have an employee who has a joint Swiss bank account with an Israeli air force general.”

I couldn’t believe my ears. If there was one thing I preached every day at GE, it was integrity. It was our No. 1 value. Nothing came before it. We never had a corporate meeting where I didn’t emphasize integrity in my closing remarks.

When Ben called me at home that Saturday, we knew only what had been reported in the Israeli newspapers and picked up by a GE employee over there. The press reported that an employee of our aircraft engine business, Herbert Steindler, had conspired with Air Force General Rami Dotan in a scheme to divert money from major contracts to supply GE engines for Israeli F-16 warplanes.

By the time this mess was over, 19 months and many headlines later, we had to discipline 21 GE executives, managers, and employees, pay the U.S. government $69 million in criminal fines and civil penalties, and testify before a congressional committee. The head of our aircraft engine business had to stand up in federal court to plead guilty for the company, and a GE vice chairman spent a week in Washington getting our engine business off suspension.

I nearly choked when I heard Ben’s news. Imagine having a crook on your payroll. Steindler was suspended immediately, and when he refused to cooperate with our internal investigation, he was fired in March. We hired a group of outside lawyers from Wilmer, Cutler and Pickering to help a GE audit team do an investigation. For most of the next year, they virtually lived in Cincinnati, the home of our aircraft engine business. Working with our audit staff, they traced every process of the contracts and talked to every participant. Over a nine-month period, they reviewed 350,000 pages of documents and interviewed more than 100 witnesses.

It turned out that Dotan, with Steindler’s help, had set up a fake New Jersey subcontractor. A close friend of Steindler’s owned the firm, and they used it to divert about $11 million to the joint Swiss bank accounts owned by Dotan and Steindler. Dotan was a demanding and intimidating customer. As early as 1987, some employees began raising questions about certain aspects of Dotan’s transactions. But the air force general portrayed himself as a great patriot in Israel who was simply cutting through red tape, and Steindler convinced his superiors there was nothing to be concerned about.

Only one employee knowingly violated our policies for direct financial gain: Steindler. Throwing him overboard was easy. The problem was that 20 other GE employees who didn’t gain a cent were not sensitive to the scheme. Those 20 people had worked for GE for a total of 325 years. Some of them had been employees their entire professional lives, as long as 37 years. Many had impressive track records and superb performance reviews. Two of them were corporate officers and good friends of Brian Rowe’s, head of our aircraft engine business.

Brian was a larger-than-life figure in the aircraft industry, a pioneer who still enjoyed designing engines. Brian loved his guys. He was having a difficult time deciding what to do with them. Brian’s indecision was understandable. With the exception of Steindler, who ended up going to jail, most of the other people caught up in this were guilty of omission—not commission. None of them benefited personally from the scheme. They were outsmarted, or just sloppy, or they ignored warning signals.

Beyond Steindler, everyone else’s involvement was less clear. That made the disciplinary case very difficult for everyone—but especially so for Brian.

The only good thing that came out of it was that I found Bill Conaty. Bill, who would later become head of human resources for all of GE, had just taken over the HR job at aircraft engines. He bore the brunt of the disciplinary action, making sure that everyone was treated as fairly as possible under the circumstances. All the employees caught up in this mess received detailed letters outlining our “concerns” or “allegations” based on our internal investigation. They had the opportunity to give their side of the story, with the help of lawyers they hired—at our expense. Bill came back with disciplinary recommendations for each employee.

At one point during a two-month period, Bill, Brian, Ben, and I were on the phone nearly every day.

Frankly, it was easier for Ben and me sitting in Fairfield to be tough disciplinarians than for poor Brian, whose longtime friends were involved. Fortunately, all three of us had great respect for Bill, and he was able to bridge any differences that existed among us.

Ultimately we fired or asked for the resignations of 11 of the 21 people involved. Six other employees were demoted, and the remaining four were reprimanded. One officer had to be demoted, and the other one resigned.

It sent a clear message through the company: Sergeants weren’t going to be shot while generals and colonels could continue on as if nothing happened. We wanted our managers to know that if an integrity violation occurred on their watch, it was their responsibility. That chiefs got shot for being indifferent to integrity was a huge event in GE.

In many ways, it was a big learning experience for me—both internally in terms of discipline and externally with Washington and the media. Outside GE, the idea began to surface that it was the pressure of competition and the drive for profits that made people cheat. Some didn’t want to see it for what it was—an isolated violation in a company with hot lines, ombudsmen, voluntary disclosure policies, and constant leadership emphasis on integrity.

I went to Washington in July 1992 to testify before a House subcommittee chaired by U.S. Representative John Dingell. I found Dingle tough, but honest and fair. It was all I could ask for. We had settled with the Justice Department, agreeing to pay $69 million, a week before my appearance on the Hill.

Testifying was not the most pleasant thing I ever did. But I felt strongly about my message—and I wanted to deliver it in person. I told the committee, “Excellence and competitiveness aren’t incompatible with honesty and integrity.”

I added, “Mr. Chairman, we have an employee population that would rank with St. Paul or Tampa if it were an American city. We have no police force, no jails. We must rely on the integrity of our people as our first defense. Unfortunately, that system wasn’t good enough in this case. But I take great pride that 99.99 percent of our 275,000 people get up every morning all over the world and compete like hell with absolute integrity. They don’t need a policeman, or a judge. They only need their conscience as they face the mirror each morning.

“They see no conflict between taking on the world’s best, every day, all over the globe, giving 110 percent and more—to compete and win and grow—and at the same time maintaining an instinctive, unbendable commitment to absolute integrity in everything we do.”

I got a fair hearing that day. Despite the ugliness of why I was there, I felt very good about making the point, and I feel even more strongly today that integrity must be the foundation for competitiveness.

 

One of the most frustrating issues I’ve had to deal with for 25 years—20 as CEO—was PCBs (polychlorinated biphenyls).

PCBs, a liquid chemical, were used prior to 1977 as an insulating fluid for electrical products to prevent fires. They became the focal point of a massive Hudson River dredging proposal by the Environmental Protection Agency (EPA) in December 2000.

The agency came up with this plan in the final days of the Clinton administration. It’s really a case where good science and common sense have become drowned out by loud voices and extreme views—to prod the government to punish a large global corporation.

Over the years, this debate has gone from PCBs to a more fundamental crusade. Extremists have latched on to issues like PCBs to challenge the basic role of the corporation. These people often see companies as inanimate objects, incapable of values and feelings.

GE isn’t made up of bricks and buildings. It’s nothing more than the flesh and blood of the people who make it come alive. It’s made up of people who live in the same communities, whose children go to the same schools, as the critics. They have the same hopes and dreams, the same hurts and pains.

Corporations are human.

When they’re big, they’re an easy target. And when they’re winners, they’re an even bigger target.

Facts are, GE has one of the best environmental and safety records of any company in the world. It has more than 300 manufacturing and assembly locations and virtually no disputes with governments over compliance issues. Nearly 60 facilities in the United States have been given special “STAR” recognition by federal regulators for health and safety compliance.

In the last decade, we’ve reduced emissions of 17 ozone-depleting chemicals by more than 90 percent and our total emissions, which the EPA measures, by over 60 percent.

This didn’t happen by accident. All our plant managers go through rigorous training programs and report annually on their performance to their business CEOs and a VP for environmental programs. Every three months, I got an update on each business’s environmental and safety performance.

In short, we’ve approached the environment and worker safety the way we did everything else: We set the bar high, we measure, and we expect outstanding results.

We’re not perfect, nobody is, but we were always striving to be the best.

Money is never the issue. GE has the resources to do the right thing, and we know that doing the right thing is always better for our bottom line over the long run. Only in this context can you appreciate why we’ve been so adamant about the PCB issue.

For me, the PCB story started accidentally a couple of weeks before Christmas 1975, when I was a group executive in Pittsfield. I was visiting a semiconductor plant in Syracuse one day when the division manager happened to mention casually that New York’s Department of Environmental Conservation (DEC) was going to hold a hearing soon. He said it would focus on a possible violation by two of his capacitor plants in upstate New York that were discharging PCBs into the Hudson River.

I had never dealt with PCBs before, but being a chemical engineer, I was familiar with plant discharges, and I was curious about this hearing.

A couple of days later, I was in my Pittsfield office and had a slow day. I decided to drive over the mountain to Albany to find out what was going on. I sat in the back of the hearing room, and no one knew I was there.

That day, GE’s expert witness was testifying. A biologist and vice president of a laboratory hired by us, he claimed his tests showed negligible levels of PCBs in fish from the Hudson. Our expert didn’t look or sound like one. He seemed unsure of his own work. He had trouble giving a straight answer. The more I listened, the more uncomfortable I got.

I knew if he couldn’t convince me, he couldn’t convince the hearing officer.

After the hearing, I called Art Puccini, my general counsel, and asked him to come over from Pittsfield. This now seemed important enough that I should stay overnight. Art and I asked the “GE expert” to come to my motel room. We asked him to walk us through all the details of his handwritten control sheets for the study. After questioning him until 2:30 A.M., we were convinced that he hadn’t done a thorough job. We felt we could not use his data or allow the hearing officer to use it, either.

I could have strangled him.

The next day, I told our outside defense lawyers not to rely on his data and to tell the hearing officer the same thing. Two months later, the DEC hearing officer issued an interim ruling that in his words claimed “PCB contamination” was a result “of both corporate abuse and regulatory failure,” because our PCB usage had been legal and we had state permits to discharge them.

Now I was into it. Art and I negotiated a settlement with DEC commissioner Peter Berle, who later became president of the National Audubon Society. The DEC hearing officer, a Columbia University law professor named Abe Sofaer, helped to mediate the settlement. We agreed to pay $3.5 million to a river cleanup fund, support research on PCBs, and stop using the chemical. New York’s DEC agreed to match our contribution and release us from any further liability on the Hudson.

Berle and I eventually signed the settlement. The New York Times ran a picture of both of us above the headline, “GE-State Pact on PCB Is Praised As Guide in Other Pollution Cases” (opposite page). The Times quoted Sofaer, who called the settlement “an effective precedent for dealing with situations of joint culpability.” Governor Hugh Carey later offered to drink a glass of water from the Hudson River to demonstrate his confidence that the river water was not harmful.

The September 8, 1976, agreement even required the state to turn to the federal government for money if any further action to protect public health and resources were needed. That’s as clear as can be on page three of the agreement: “In the event that the funds herein provided for implementing remedial action concerning PCBs present in the Hudson River shall be inadequate to assure protection of public health and resources, then the Department will use its best efforts to obtain additional funds, from sources other than General Electric, that are necessary to assure such protection. These best efforts will include preparation by the Department of a plan of action to obtain such funds including specifying applications will be made to federal agencies and/or other sources of funds in as expeditious a manner as possible.”

But it didn’t end there.

 

 

The settlement had been made on the basis of animal studies. I wanted to know if PCBs caused cancer in humans and whether our workers were at risk. I knew that if a company-funded study was going to have any credibility, I had to get the most widely respected scientist I could find. So I went down to see Dr. Irwin Selikoff, then head of Mount Sinai’s Environmental School of Medicine. Selikoff had become something of an environmental icon after finding that exposure to asbestos could cause lung cancer. He listened carefully to my request. I asked him if he would go to our plants to study GE employees who had the greatest exposure to PCBs. For years, those employees had worked in it up to their elbows.

I gave Selikoff total access to our employees. He put a research team together and set up a lab at our Fort Edward plant. Selikoff first examined over 300 volunteers from the two GE factories. His study, finally published in 1982, is what convinced me more than anything else that PCBs didn’t cause cancer.

Selikoff’s mortality study found there were no cancer deaths or other serious side effects among workers 30 years after they were first exposed. Normally, in a population of the size he studied—without any major PCB exposure—at least eight cancer deaths would have been expected.

Other scientists studied utility workers and Westinghouse employees who had been heavily exposed to PCBs. Alexander Smith, of the government’s National Institute for Occupational Safety and Health (NIOSH), gave the most succinct summary of this work in 1982. He wrote: “One would expect that adverse human health effects from exposure to PCBs, if they exist, would most readily be identified in groups with the greatest exposures. None of the published occupational or epidemiological studies (including ours), however, have shown that occupational exposure to PCBs is associated with any adverse health outcome.”

The PCB issue had been raised much earlier when two major false alarms were sounded. The first was in the 1930s, when a chemical mixture containing PCBs known as Halowax led to a serious acnelike condition and, in a few cases, deaths due to liver disease. A Harvard scientist studying the incident first reported that PCBs were the most toxic component of the mixture.

After studying this further, however, he corrected himself in 1939, by stating that PCBs were “almost non-toxic.” Unfortunately, his correction got little or no recognition. Almost 40 years later, in 1977, a government report by NIOSH stated that the Halowax experiences “have continued to be erroneously cited.”

Even today, it’s not unusual to get a call from a reporter thinking he has discovered some new “explosive evidence” in these old Halowax incidents discredited by both scientists and the government.

Another false alarm, the Yusho incident, was sounded in Japan in 1968. About 1,000 people using a type of vegetable oil from rice hulls in cooking developed severe acne and other symptoms. When PCBs were detected in the oil, the incident became known as the “PCB oil disease.”

However, later analysis by Japanese scientists found that the oil also contained high levels of two other chlorinated chemicals, both high-temperature by-products of PCBs. They also examined Japanese electrical workers and found they had higher levels of PCBs in their blood than the Yusho patients. But the workers weren’t sick. When scientists dosed monkeys with PCBs and these different chemicals, they concluded that it was these other chemicals—and not PCBs—that caused the Yusho incident.

It was those false alarms that prompted an American researcher, Dr. Renate Kimbrough, to do one of the first rat studies for the U.S. government on PCBs. Dr. Kimbrough found that rats fed large doses of PCBs had increased tumors in their livers. She was heavily involved in this work in the mid-1970s when she was at the Centers for Disease Control and Prevention and later at the EPA. Just as I had in 1975 with Dr. Selikoff, I wanted a recognized scientist with unassailable integrity and credentials to look at PCBs again. This time, in April 1992, we asked Dr. Kimbrough to take on the assignment.

Internally, our PCB efforts were led by Steve Ramsey, former head of the Justice Department’s Environmental Enforcement, who now leads GE’s environmental and safety operations. He and a GE scientist, Dr. Steve Hamilton, knew critics would still be skeptical of GE-funded research. They established an advisory panel to peer review the Kimbrough and other studies. The panel was made up of U.S. government and academic researchers led by the former head of the National Cancer Institute, Dr. Arthur Upton.

Kimbrough studied virtually everyone who ever worked at those two GE plants in Hudson Falls and Fort Edward between 1946 and 1977. Private investigators were hired to track down some of them through payroll records and old telephone directories. Death certificates were examined. Some 7,075 current and former employees were involved in the research.

In 1999, Dr. Kimbrough issued a striking report. The death rate due to all types of cancer for employees at our plants was at or significantly below the general and regional population rates.

As part of its review of the Kimbrough work before their final decision, the EPA asked an epidemiologist at the University of Southern California’s Norris Comprehensive Cancer Center for his opinion. In a letter to the chief of the EPA’s risk methods group, Dr. Thomas Mack had this to say: “I found the Kimbrough paper to be well designed, appropriately analyzed and fairly interpreted. The follow-up was complete . . . my bottom line is that the summary statements . . . in the paper are appropriate. I think it is appropriate to downgrade the priority given to PCBs.”

We know about Dr. Mack’s opinion only because we got it from EPA files after a Freedom of Information request. His final sentence is telling. “I’m sure this has not been particularly useful for you, but it’s the best I can do.”

I doubt this would have seen the light of day if we hadn’t used the law to dig it out of the EPA.

Through this long, drawn-out controversy, GE has been portrayed as an uncaring big business that “dumped” PCBs from plants in Hudson Falls and Fort Edward, New York.

The truth is, we never “dumped” PCBs, and we never made them. Their use was dictated by fire and building codes because they solved a long-standing problem in electrical equipment. The prior insulating material caught fire and could explode. PCBs were viewed as a lifesaving chemical. New York State approved our discharge and issued permits to us for it.

What do our critics using PCBs as the foil say about us?

First, they say GE has more Superfund sites than any other company. (In 1980, Congress passed a law to address the cleanup of sites where wastes had been disposed in the past. This law was known as the Superfund Act.) The implication is that we did something wrong. We do have a large number of these sites, 85 to be exact. But the number has everything to do with our longevity and our size. GE was founded in 1892 and has had more factories in more towns than any other company in the world. Like most other companies, we disposed of our wastes legally, under government permits when required.

At the majority of the Superfund sites, GE has less than 5 percent of the liability for what was put there. The remaining liability is shared by dozens of other parties, including municipalities, other companies, and waste haulers. GE has taken its responsibility for these sites seriously. We’ve spent almost $1 billion in the last decade on their cleanup.

Criticizing us for having these sites is like criticizing someone for having gray hair. It says nothing about character and everything about age.

Another common complaint is that we’re challenging the Superfund law so we can get off the hook for our cleanup obligations. Yes, we have challenged a portion of the law. Americans are used to getting their day in court. This is true for everything from traffic offenses to murder.

This isn’t the case when the EPA issues a Superfund order. You really have only one choice under the law: Do what the agency tells you or else. Otherwise you face treble damages and daily fines. The law gives the EPA power to issue orders of unlimited scope. You get no hearing before being ordered to do the work. You get no hearing until many years later, and then only when the EPA chooses to tell you the work is done.

It’s a shoot first, ask questions later law.

We believe that’s wrong. I’m a chemical engineer and not a constitutional lawyer, but I can’t understand why in God’s name this makes any sense under our Constitution. It denies you the basic right of due process. The EPA is using this law in their dredging proposal.

Today, the EPA says the Hudson is safe for swimming, boating, wading, and use as a source of drinking water. Bald eagles and other wildlife are flourishing in the Hudson Valley. The government’s proposal to dredge is based on a wild risk assessment:

If a person eats half a pound of fish every week for 40 years, the EPA contends that the person’s risk of cancer may increase by one in 1,000. In other words, you’ve got to eat 52 meals a year for four decades before the increase might go up by one in a thousand. Why doesn’t a rational mind come to the conclusion that that risk is practically lower than breathing?

Never mind that eating fish from the river has been banned for two decades or that PCB levels in the water and fish have fallen 90 percent since 1977. More than 20 studies—most completely independent of GE—show no link between PCBs and cancer. At the end of the day, what happens in rats does not happen in humans when both are exposed to PCBs. Levels in fish are now down to between three to eight parts per million. Two is the level the FDA says is safe for sale at the fish market.

Think about the magnitude of what the EPA’s proposal would do. The agency proposes removing 8 billion pounds of sediment from the Hudson to get at probably 100,000 pounds of PCBs. It would take 24 hours of dredging a day, six days a week, for six months each year. Some 50 boats and barges would have to be in the river full-time, along with miles of pipelines to carry PCBs.

The EPA proposes building plants along the river to dry the mud that would be carried away in tens of thousands of trucks or railcars. After the EPA gets the sediment out, they’re proposing to add 2 billion pounds of sand and gravel back into the river. Divers would also have to replace 1 million aquatic plants destroyed by dredging.

After doing all this, dredging won’t get PCBs out of the Hudson. It will cause resuspension of buried PCBs that will flow downriver.

Imagine if someone came along with a commercial proposition to dredge anything out of the Hudson River. Tear up the banks. Destroy the ecosystem. Knock the trees down to widen the roads through farmlands and backyards to remove whatever they were after.

It would be an environmental disaster.

Why would anyone rip up the Hudson? The EPA itself rejected dredging in 1984, saying it could be devastating to the ecosystem. Nothing has changed since then, except the politics—and PCB levels in fish have been reduced by 90 percent.

GE has spent more than $200 million on research, investigation, and cleanup. We’ve reduced the PCBs coming out of the bedrock under our old facilities from five pounds per day to three ounces. We think we now have the technology to reduce the daily seepage to zero. Source control coupled with the natural sedimentation in the river would reduce PCBs in fish to the same level as dredging might, without resuspension—and without destroying the river.

One of the puzzling things about the EPA’s proposal is that it failed to analyze whether there were less destructive and less disruptive alternatives.

This isn’t about money. We’ll spend whatever it takes to do the job right.

To tell this story to the people in the Upper Hudson and explain why we oppose dredging, we’ve spent over $10 million on an information campaign. That caused a controversy as well. There was little argument over the information in the campaign. Activists think we should be quiet and do what we’re told.

We made some progress in getting the facts out. Polls show that by more than three to one, the people in the Upper Hudson, from Washington to Dutchess Counties, are against the EPA dredging proposal. More than 60 Upper Hudson River local governments and organizations oppose dredging. The EPA’s final decision should take into account the views of those most affected by their proposal.

Unfortunately, this issue is no longer about PCBs, human health, and science. This isn’t about what’s best for the Hudson River. It’s about politics and punishing a successful company.

Do you for a minute believe that if we thought PCBs were harming anyone, I or my associates would be taking these positions? There’s just no way!

Nothing is more important than a company’s integrity. It is the first and most important value in any organization. It not only means that people must abide by the letter and spirit of the law, it also means doing the right thing and fighting for what you believe is right.

On PCBs, we’ve assured ourselves that they are not harmful to our employees or our neighbors. We’ve spent hundreds of millions using the best science to clean up our sites and the Hudson in the most ecologically sensitive way—and we will continue to invest whatever it takes.

I’ve seen a lot since that day I saw my mother crying over Franklin Roosevelt’s death. Yes, I’ve become a skeptic—hopefully, not a cynic about government. Only a company with great integrity and the resources to fight for what’s right can afford to take on the government.

Fortunately, we have both.

SECTION IV

GAME CHANGERS

 

 

If you like business, you have to like GE.

If you like ideas, you have to love GE.

This is a place where ideas can flow freely from and through more than 20 separate businesses and more than 300,000 employees.

Boundaryless behavior allows ideas to come from anywhere. We formalize our freewheeling style in a series of operating meetings that blend one into another. We can be doing a Session C review of managers in power systems and someone will come up with an idea on sourcing in Hungary.

The next day we’re in medical, bragging about what power has just done in Hungary. Before you know it, they have something new going in Eastern Europe. It’s wild, sometimes humorous, and informal. The net effect is powerful. The best practices and the best people are always moving across the units and driving our businesses. In effect, boundaryless behavior has given us a “social architecture” that thrives on learning.

In the 1990s, we pursued four major initiatives: Globalization, Services, Six Sigma, and E-Business.

Every initiative started off with the seed of a smaller idea. Once put into the operating system, it had the chance to grow. Our four have flourished. They’ve been a huge part of the accelerated growth we’ve seen in the past decade.

These are not “flavors of the month.”

At GE, we defined an initiative as something that grabs everyone—large enough, broad enough, and generic enough to have a major impact on the company. An initiative is long lasting, and it changes the fundamental nature of the organization. Regardless of the source, I became the cheerleader. I followed up on all of them with a passion and a mania that often veered toward the lunatic fringe.

Initiatives come from anywhere and everywhere. Globalization grew out of Paolo Fresco’s passion for it. Product services accelerated after a Crotonville class’s recommendation to define our markets more broadly for faster growth. Six Sigma sprang out of an employee survey in 1995. While our employees thought our quality was okay, they believed it could be a lot better. And e-business came, arguably late, because it couldn’t be ignored. We jumped in and got wet in a revolution we didn’t understand. We trusted our operating system to teach us what it was all about.

To make the initiatives work, it took a passionate all-consuming commitment from the top. Beyond the passion, there was a lot of rigor. Not only did we put the best people on each initiative, we trained them, measured them, and reported their results. In the end, each initiative had to develop people and improve the bottom line.

The leaders of every business had to be the champion—and timid and rational advocacy wouldn’t work. They made sure we got our A players to lead every initiative. We made sure the rewards—salary increases, stock option grants, and role-model recognition at company meetings—were highly visible.

The organization judges an initiative’s importance by whom they see getting the leadership assignments. Nowhere was this more important to GE’s success than in Six Sigma. If we didn’t get the best and brightest, it could have been perceived as just another “quality program.”

We pounded all our initiatives in January at Boca, at every quarterly CEC meeting, at the human resources reviews in April, the planning sessions in July, the officers meeting in October, and the operating plan meetings in November.

There was always a relentless drumbeat of follow-up.

We used the annual employee survey to find out how deep in the organization the initiatives were taking hold. We started anonymously polling 1,500 employees in 1995 and are including 16,000 today. We used the survey to help set our direction—and as a BS detector. The survey got right at questions about the initiatives—whether or not our messages were getting through.

When we launched Six Sigma in 1995, for example, we asked employees if they agreed or disagreed with the statement, “Actions taken by this business clearly show that quality is a top priority.” Some 19 percent of our top 700 senior executives disagreed. In 2000, that dropped to 8 percent. In 1995, in our 3,000-person executive band population, a quarter disagreed. Five years later, that number was down to 9 percent.

Making initiatives successful is all about focus and passionate commitment. The drumbeat must be relentless. Every leadership action must demonstrate total commitment to the initiative.

The initiatives’ impact showed up where it should have—in our operating results. Our top-line growth rate has doubled in the last five years, and our operating margins have increased from 14.4 percent in 1995 to 18.9 percent in 2000.

19

Globalization

GE has always been a global trading company.

In the late 1800s, Thomas Edison installed the 3,000-bulb electric lighting system at London’s Holborn Viaduct. At the turn of the century, GE built the largest power plant in Japan. Some of the company’s earliest CEOs traveled by boat for a month or two to look for business in Europe and Asia.

I had an early start in globalization.

Reuben Gutoff and I formed two joint ventures in plastics in the mid-1960s, one with Mitsui Petrochemical in Japan and the other with AKU, the chemical and fiber company in Holland. Mitsui and AKU were large chemical corporations, and our little project in specialty plastics turned out to be too small to get their attention. We had locked ourselves up in long-term agreements. We had to get out.

I’ll never forget my final negotiations with Mitsui. Tom Fitzgerald, the sales head of plastics, and I were having lunch at the Okura Hotel in Tokyo with the Mitsui officials. We were sitting on the floor, with our shoes off. After a day or two of negotiations, I had drafted two letters of intent to significantly change our relationship. One copy spelled out a clear separation after a negligible payment. The other detailed Mitsui’s staying in the deal and being diluted down.

At lunch, it was clear that Mitsui wanted out of the agreement as much as we did. I couldn’t have been happier. I was expecting a negotiation. I immediately handed them the “staying-in-the-deal” document. It was only after looking at my copy that I recognized I had given them the wrong papers.

I blurted out, “Oh, my God, there’s a typo.”

I grabbed the document back and pulled out of my briefcase the letter of intent that would end the deal. They signed it, and we were free to look for a new partner in Japan. Tom must have told that story a thousand times to show what a dope his boss was.

We also got out of the AKU deal—without my screwing it up this time. AKU had built a pilot plant to produce PPO and had spent $20 million to $30 million on the project. Their principal interest in PPO was as a fiber. When the polymer turned out not to be useful for that purpose, they lost interest.

However, their vice chairman met with me at his office in Arnhem and wanted a couple of million dollars to end the venture in order to offset some of the losses they had incurred. I told him it would take me months to get through the GE bureaucracy, and even then I had no idea if I could get approval. I said I had the authority to spend up to $500,000, however, and I could give him the money on the spot. He accepted it, and we set up our own wholly owned company in Europe.

In Japan, we knew we needed distribution, and we wanted a relatively small partner. We looked at several and picked Nagase & Co., which at that time was principally a Kodak film distributor. I made the deal with the head of the Nagase family. We brought the product and technology to the partnership. They brought their knowledge of Japan’s complex distribution market. Together we invested in local plants to compound plastics for the Japanese market. Today, it’s the heart of our Asian plastics business. We used the same model for a deal we did for medical systems in the late 1970s with Shozo Yokogawa of Yokogawa, an instrumentation company.

Those relationships and the deals behind them have endured for more than 25 years and have thrived even as they have changed. GE may appear big, but it is made up of lots of small pieces. The success of our deals with Nagase and Yokogawa reinforced the idea that our most successful partnerships are with smaller companies that feel the project is critical to their operations. Whenever there was an issue to work out, our people could get to the top—and not have to work through a massive bureaucracy.

I remember being frustrated by how long the Japanese took to make a decision. But when they made one, you could bet your house on it. In over 35 years, almost every business relationship I had in Japan turned into an enduring personal friendship.

When I became CEO, I spent the first several years doing only an isolated deal or two outside the United States, visiting Europe and Asia once a year to review current operations. One of the early deals, a joint venture in 1986 with Fanuc of Japan, bore a large resemblance to the Yokogawa and Nagase partnerships. I had always admired Fanuc and its head, Dr. Seiuemon Inaba. They were the clear market leaders in numerical controls for machine tools, and we were in the process of trying to launch a factory automation effort. Selling the concept of a “factory of the future” was going nowhere for GE. We had slogans like “Automate, Emigrate, or Evaporate,” but we didn’t have much business. All we had was U.S. distribution and a couple of strong product niches.

I asked Chuck Pieper, who was head of GE Japan at the time, to visit with Dr. Inaba to see if there was any fit between our two companies. Chuck had several visits with Fanuc that set the stage for my meeting with Dr. Inaba in New York in November 1985.

We hit it off immediately. Our distribution and Fanuc’s product technology would make a great marriage. A couple of sessions later, we struck a worldwide deal. At $200 million, it was the biggest international deal that we had done in the 1980s. Like Nagase and Yokogawa, Fanuc and Dr. Inaba have been great partners and our 50/50 joint company has prospered. It saved our “factory of the future” venture.

Truth is, I didn’t put much focus on the global direction of the company in the first half of the 1980s. I did eliminate a separate international sector and made the business CEOs clearly in charge of their own global activities. The international sector had been something of a hybrid between scorekeeper and helper.

I always believed there was no such thing as a global company: Companies aren’t global—businesses are. I’ve given that speech a thousand times or more to make clear that the CEOs of each business were responsible for globalizing their businesses.

In the early 1980s, the only truly global businesses in GE were plastics and medical systems. GE Capital had invested in only U.S. assets. Our other businesses had global sales of one size or another; two—aircraft engines and power systems—were very large. But these were primarily export businesses with facilities exclusively in the United States. In the 1970s, GE forged a joint venture with the French company Snecma on the aircraft engine that would power the most popular commercial airplane ever, the Boeing 737.

It was Paolo Fresco who really got us going. In 1986, he was named senior vice president of international, based in London and placed on an equal footing with all the business leaders—but without operating responsibility. Paolo epitomized the global executive. Tall, handsome, charming, and urbane, Paolo was known around the world. An Italian-born lawyer who joined GE in 1962, he had long dominated the old international organization. As vice president for Europe, the Middle East, and Africa, he also was one of the best negotiators in the company.

Paolo became Mr. Globalization, the father of all our global activity. He got up every morning thinking about expanding the company outside our U.S. borders. At every meeting, he’d press his colleagues for their global expansion plans. At times he was a nuisance, always bugging the business CEOs for details on their international operations and prodding people to do more deals that would make us truly global. He was a relentless globe-trotter, comfortable in any time zone, always out of the country at least once a month.

For 15 years, he and I traveled the world together. We’d go out for one or two weeks three times a year. We had a ball together, and on most trips we took our wives with us. All four of us became as close as family. Fortunately, our wives became best friends. While we were building relationships and doing deals, they were out exploring the sights and cultures of the countries we visited.

If there was a breakthrough year for globalization, it might have been 1989. It began with a phone call from Lord Arnold Weinstock, chairman of General Electric Co. Ltd. In the United Kingdom. (GEC had the exact same name as ours, even though there was never a connection between our two companies. It wasn’t until 2000 when they changed their name to Marconi that we were able to buy the full rights to the GE name.)

Weinstock called me because his company was being threatened with a hostile takeover and he wanted to see if we could help. Paolo, Dennis Dammerman, Ben Heineman, and I went to London to meet with GEC. The takeover attempt was front-page news, and business reporters followed our every move. As we got close to a deal, we broke and returned to our London offices while they mulled over our offer. We agreed that Weinstock would contact me using the code name of our vice chairman Ed Hood.

He called a couple of times and was told repeatedly by one of the office assistants that we were in meetings and would call him back. Weinstock finally reached Paolo’s secretary, Lin. She knew Ed Hood but nevertheless came into the conference room and said, “I think there’s a reporter on the line posing as Ed Hood. He has a strong British accent.”

“Oh no,” I said, “I forgot to tell anyone that Weinstock would be using Ed’s name as his code.”

It probably looked to Weinstock as though we were playing it cool.

Not that it helped. He was a cool customer himself, as shrewd, wily, and clever as anyone I ever met. In some ways, he was two different people. Outside the office, he was a great storyteller, charming and gracious. He had racehorses stabled with the Queen’s thoroughbreds, had elegant homes filled with great art, and had a spectacular wife. He was a generous and entertaining host.

Inside his drab office, he was the original “green eyeshade accountant.” GEC’s headquarters in London reflected his tightfisted ways. The lighting was dim, the furniture sparse, and the corridors so narrow that you had to walk sideways to get by an open door.

The entrance to the bathroom was on a narrow landing in front of an open staircase. If you were waiting to enter, there was always a chance that someone coming out could knock you down two flights of stairs.

At his desk, sitting directly under a hanging lamp, Weinstock in his suspenders seemed a formidable figure. He often peered over his glasses, hunched over massive financial ledgers. He’d mark them up in colored pencils, circling any numbers that were below expectation.

Complex as he was, I found him fascinating on the whole.

Our negotiations eventually led to a series of joint ventures and acquisitions with GEC in April 1989 in medical systems, appliances, power systems, and electrical distribution. The agreements gave GE a good industrial business, a foothold in power that kept us in the European gas turbine business, and a 50 percent share of GEC’s appliance business.

Later that same year, it was Paolo who helped to nail down our purchase of a majority interest in Tungsram, one of Hungary’s largest and oldest businesses. We had been searching for a spot in Austria to build a lighting plant near the Hungarian border when we discovered that Tungsram might be for sale. Even under the Communists, the company had a great reputation and a lot of technology. It was the biggest lighting company outside of the big three: Philips, Siemens, and us.

Paolo went to Hungary with a small team and began to negotiate. After spending the day at the negotiating table, he’d call back from the Hilton Hotel in Budapest to fill me in on the details. It didn’t take long for Paolo to notice some strange behavior during his negotiations. His counterparts seemed to begin reacting to things he had said privately to me on the telephone.

Paolo tipped me off that he believed the Hungarians were intercepting our conversations. So we began saying some crazy things to see if there would be a reaction at the table the next day. Sure enough, there was. So Paolo and I began using the telephone calls to set up the next day’s negotiations. He’d tell me they were asking $300 million for a majority interest.

“Listen, tomorrow, if they want you to pay more than $100 million, I want you to walk out.”

The next day, Paolo found them more realistic about the price. Whenever we had to make a secure phone call, a GE executive traveled by train across the border to Vienna or used the soundproof phone booth in the American embassy. Otherwise, we kept playing the game on the hotel phone. In the end, it didn’t hurt.

We closed the deal, paying $150 million for 51 percent of Tungsram and buying the remaining piece five years later. Paolo closed the deal at midnight over a bottle of vodka with the Communists.

The next day, the Berlin Wall fell. Without knowing it, we had done the first big deal in the new Eastern Europe. Since Thomas Edison put us in light bulbs, lighting had been almost exclusively an American business. The Tungsram deal, coupled with our 1991 acquisition of a majority of Thorn lighting in the United Kingdom, made GE the No. 1 light bulb maker in the world, with over a 15 percent market share in Western Europe.

Another memorable global event of that year was my trip to India during the end of September 1989. Paolo dragged me there for the first time, and I instantly fell in love with the people. Paolo had built a great relationship there with K.P. Singh, a prominent Indian real estate entrepreneur.

K.P. Singh was a true ambassador for India. Tall, natty, and aristocratic, he was a perfect gentleman. He lined up four days of wall-to-wall business meetings and evening celebrations for us.

After a day of meetings with business and government leaders in Delhi, including Prime Minister Rajiv Gandhi, a night had been arranged we would never forget. He had everyone who was anyone at his compound for a huge party. Two bands played music while hundreds of people mingled among pools filled with flower petals and tables of food from every country around the world.

What a welcome!

We continued our business meetings for two more days. During the trip, we were scheduled to select a high-technology partner who could help develop the lower-end, low-cost products in medical systems. Chuck Pieper, who had initiated the earlier Japanese deal with Fanuc, had been promoted to head GE medical systems in Asia. He had narrowed it down to two finalists, whom he brought in to see us at a hotel in Delhi. Both were successful Indian entrepreneurs: One was flamboyant, while the other was reserved.

Paolo and I loved the first presentation from the more flamboyant guy, who excitedly presented his plans. The quiet one, Azim Premji, came in after him and gave a thoughtful presentation as to why his company, Wipro, was the right partner for GE. Chuck was convinced that Premji was the one for us. K.P., who sat in on all our meetings, was neutral. He thought both entrepreneurs were terrific.

After we left, Chuck made his case for Wipro in writing. Paolo and I agreed to back off and go with Chuck’s 50/50 joint venture with Premji. The medical venture flourished, and Wipro went on to dramatically expand its software capabilities, becoming the poster child of India’s high-tech industry. Premji was worth billions, becoming one of the world’s richest businessmen.

For our final day in India, K.P. had arranged a visit to the Taj Mahal. The night before we flew to Jaipur. If we thought the first night in India was special, we hadn’t seen anything yet.

K.P. was about to outdo himself. We were greeted at the hotel, the former palace of the Maharaja, by colorful riders on elephants and horses. The entire front lawn of the hotel was done up in fresh flowers in the form of the GE logo.

That evening in Jaipur, the Maharaja hosted a dinner at his palace. After dinner, just about the largest fireworks display I ever saw was put on in our honor. We walked up long, winding passageways to the roof, where we sat on huge pillows and beautiful old carpets.

This was “pinch me” stuff. This was literally the “royal treatment.” They really wanted GE to love and invest in India—and were pulling out all the stops.

The next day, I was struck by the contrasts. Animals filled the dirt streets as our car wended its way to the Taj Mahal. The Taj exceeded my expectations in every way. It was a magnificent structure, glistening in the sun, which gave it an almost pinkish tint. Behind this beautiful creation, sitting across the river, was an enormous satellite communications dish—a picture of the old and the new in one glimpse.

The efforts of K.P. and his friends worked. They showed us an India and a people that we loved. We saw all kinds of opportunities there. After that trip, I became the champion for India.

At our annual officers meeting the next month, I portrayed the country as a great place to make a bet. I wanted to gamble on India because it had a strong legal system, a potential market, and an enormous number of people with great technical skills.

I saw India as a huge market, with a rapidly growing middle class of 100-plus million people out of an 800 million population. The Indian people were highly educated, they spoke English, and the country had lots of entrepreneurs trying to break the shackles of heavy government bureaucracy.

Highly developed from an intellectual standpoint, India was an underdeveloped country from an infrastructure perspective. I thought the bureaucracy would fix the infrastructure problems and loosen some of the red tape.

I was dead wrong. We tried to build lighting and appliance companies there. They went nowhere. Power generation has been a series of starts and stops. Financial services and plastics have had modest success. Only medical systems has flourished.

I was also dead right. The real benefit of India turned out to be its vast intellectual capability and the enthusiasm of its people. We found terrific scientific, engineering, and administrative talent that today serves almost every business at GE.

 

In the early 1990s, we kept pushing our global growth by acquisitions and alliances and by moving our best people into global assignments. In late 1991, we made two important moves. We appointed Jim McNerney, one of our best business CEOs, to a newly created position as president of GE Asia. Jim didn’t go out there to run any businesses, but to promote the region and demonstrate to the business leaders the region’s potential. His job was all about looking for deals, building business contacts, and being a champion for Asia. He was a helluva persuasive guy and had a huge impact.

Eight months after Jim’s move to Asia, we sent Del Williamson from our power generation business in Schenectady, where he was head of sales and marketing, to Hong Kong as head of worldwide sales. Moving the center of gravity there was logical because no one was buying power plants in the United States. The business opportunities were in Asia. Psychologically, the impact on the organization of seeing a senior guy like Del managing the top line away from “Mother Schenectady” was enormous.

The symbolism of these moves shocked the system. Suddenly we heard people say: “They really mean it. Globalization is for real.” The numbers would prove it. Our global sales went from $9 billion in 1987 or 19 percent of total revenues when Paolo was named a senior VP, to $53 billion, or more than 40 percent of our total revenues today.

 

Another key part of our strategy was taking a contrarian view of globalizing. We focused most of our attention on areas of the world that were either in transition or out of favor. We thought the best risk-reward activities were there.

In the early to mid-1990s, when Europe was slumping, we saw many opportunities, particularly for financial services. In the mid-1990s, when Mexico devalued the peso and the economy was in turmoil, we made over 20 acquisitions and joint ventures and significantly increased our production base. In the late 1990s, our financial services business moved into Japan, which had long excluded foreign investment. These were opportunistic moves, but not in the traditional sense. We were there to build businesses for the long haul.

Our acquisitions of CGR in France, Tungsram in Hungary, and Nuovo Pignone in Italy in 1994 involved taking over either unprofitable or barely profitable operations that had been state run. They gave us new distribution or good technology that helped to globalize our medical, lighting, and power systems businesses.

GE Capital began its global expansion in the early 1990s, mainly in Europe, by acquiring insurance and finance companies. The activity picked up when Gary Wendt hired Christopher MacKenzie in London in 1994. With great support from Gary, Christopher spearheaded a massive European expansion. Gary led the way on a similar effort in Japan in the late 1990s. From 1994 until 2000, $89 billion of the $161 billion in assets bought by GE Capital were outside the United States. GE Capital Services took a while to globalize, but when they did, they really went after it.

There was no overnight success. It took at least a decade to make the Thomson medical deal work. The same was true of our acquisition of Tungsram. Yet, one of our most satisfying accomplishments was taking over three government-owned companies—CGR, Nuovo Pignone, and Communist-controlled Tungsram—and transforming them into highly energized organizations and profitable companies.

Some ideas didn’t pan out. When we picked a business to crack the Chinese market, we started first with lighting. We thought that our typical global competitors would be the players in China. Instead, it turned out that almost every local mayor was putting up light bulb facilities. Today, there are more than 2,000 light bulb manufacturers in China.

Not all the global deals we tried to do got off the ground—and some experiences left a bitter taste. I can only think of one, maybe two times, when trust and integrity broke down. The worst example of that was in 1988, when Paolo and I went to Eindhoven in the Netherlands for a meeting with the CEO of Philips N.V. We had heard that he was interested in selling the company’s appliance business. That deal would have given us a strong position in the European appliance market.

He had become CEO of Philips in the mid-1980s and had some bold ideas on how to change his company. Over a dinner discussion at Philips House, he told us that he wanted to sell his major appliance business, where Philips was the second largest European player, and would consider selling Philips’s medical businesses. He wasn’t even sure about staying in lighting—even though the Dutch company was our biggest competitor in light bulbs.

He liked semiconductors and consumer electronics.

After the dinner, we were driving to the airport in the rain when I turned to Fresco.

“Have you ever been in a room where you heard two totally different perspectives on the same businesses? We both can’t be right. One of us is going to get our ass fired.”

Our meeting led to the start of a negotiation for Philips’s appliance business. The CEO arranged for his president to negotiate with Paolo. We agreed to a price and thought the deal was done, after spending weeks on due diligence. Then came the shock.

Only a day after they shook hands, the president came back with a big surprise: “Sorry, Paolo, we’re going to go with Whirlpool.”

I called the CEO. “This isn’t fair,” I said.

He agreed. “Send Paolo down here and we’ll work it out this week.”

On vacation in Cortina, Italy, at the time, Paolo left his wife and flew immediately to Eindhoven. He spent all of Thursday negotiating a new deal, agreeing to pay more for Philips’s appliance business. By Friday noon, the details were all worked out. The Philips team told Paolo to go back to his hotel.

“We’ll be over by four in the afternoon with the formal papers all typed so they can be signed,” the president said. “We’ll have a glass of champagne then.”

When he showed up at Paolo’s hotel about five, he threw the second bomb.

“I’m sorry. We’re going with Whirlpool. They came back and beat your offer.”

Paolo couldn’t believe it. When he called me around midnight, I was shocked. Having Philips shake on a deal once and walk was bad enough. The second negotiation was beyond anything I’d seen in a top-level business deal.

The nice thing is that in 20-plus years as CEO and literally thousands of acquisitions, partnerships, and deals, this happened rarely—and only once as blatantly as that time in Eindhoven.

 

Like our other initiatives, the seed bloomed into a garden. We moved from thinking of globalization in terms of markets to thinking of it in terms of sourcing products and components—and finally tapping the intellectual capital of countries.

Take India. I was optimistic about the country’s brainpower, but our use of it has far outpaced my wildest dreams. The scientific and technical talent in India to do software development, design work, and basic research is incredible. We opened a central $30 million R&D center in 2000, have gone to the second phase, and will more than triple our investment when it’s complete in 2002. It will be the largest multidisciplinary research facility in GE worldwide, eventually employing more than 3,000 engineers and scientists. Today we have over 1,000, including 250 Ph.D.s.

India has a wealth of highly educated people who can do many different things very well. GE Capital moved its customer service centers to Delhi, and the results have been sensational. Our Indian global customer centers have had better quality, lower costs, better collection rates, and greater customer acceptance than our comparable operations in the United States and Europe. All the GE industrial businesses have followed GE Capital there. We took Peter Drucker’s advice. We moved the GE “back rooms” in the United States to the “front room” in India.

We can hire a level of talent in India for customer service and collection work that would be impossible to attract in the United States. Customer call centers in the United States are plagued by heavy turnover. In India, these are sought-after jobs. Some contend that globalization hurts developing countries and their people. I see it differently. Globalization never looks better than when you see the bright faces of the people whose lives have been measurably improved for having these jobs.

In recent years, our globalization initiative has increasingly put a global face on the company as more local nationals take on leadership roles. In the early years of globalization, we had to use U.S. expatriates. They were critical to our successful start, but we were having trouble getting off this “crutch.”

We accelerated the development of a global face for GE by forcing a rigorous reduction of U.S. expatriates. We got two benefits from measuring the monthly reduction of expatriates by business: First, more locals had to be promoted faster to key jobs. Second, in the first year of doing this, we reduced our expenses by over $200 million. When we have someone from the United States in Japan on a $150,000 salary, it costs the company over $500,000. I constantly reminded our business leaders, “Would you rather have three to four smart University of Tokyo graduates who know the country and the language, or a friend of yours from down the hall?”

Globalization took a big step forward with an exciting promotion that showed our efforts are paying off. Yoshiaki “Fuji” Fujimori, a 1975 Tokyo University graduate, joined us in business development in 1986. Fuji was promoted in May 2001 from head of medical systems Asia to president and CEO of GE Plastics in Pittsfield.

He is the first Japanese national to lead a global GE business—a long way from the plastics business I started in 40 years ago.

20

Growing Services

Like just about everything at GE, growing services was all about people.

With the exception of our medical business, most of the people making the heavy hardware in the company thought of services as the “after market”—supplying spare and replacement parts for the aircraft engines, locomotives, and power generation equipment we sold.

“After market”—the name itself puts it in the backseat.

In our big-equipment businesses, the engineers liked to spend their time on the newest, the fastest, and the most powerful. They didn’t think much about the “after market.” They weren’t alone—our salespeople also focused primarily on the customers’ new equipment needs.

We had been pushing services without great success. When Three Mile Island forced our nuclear business to stop building new reactors, they had to build a service company to survive. They did it and transformed the nature of their business, getting double-digit earnings growth in a virtually no-growth market.

Medical has always had a strong service focus. The primary buyers were the radiologists, and they were also the ongoing users of the equipment. From the first introduction of our CT scanner in 1976, we sold our machines under “the continuum” banner. That slogan was meant to show radiologists that a software upgrade would get them to the “next-generation model.” They wouldn’t have to throw away a million-dollar machine and start all over again. The continuum concept helped increase service revenues and equipment market share as customers got longer lives out of their investments.

John Trani, who became medical CEO in 1986, built on that early foundation. He was a strong leader with an obsession for making the numbers. John saw services as an even bigger opportunity. Medical systems was the first business to introduce long-term service contracts. It was also the only business doing remote diagnostics. Medical set up global facilities to give 24/7 remote diagnosis of their installed equipment.

Customers from anywhere in the world could get an answer and often a fix directly online from a technical rep in Paris, Tokyo, or Milwaukee, depending on the time zone. With an equal focus on service as original equipment, medical got results. Overall medical revenues grew 12-fold from 1980 to 2000. Services were a big part of the growth, going from 18 percent of total medical revenues in 1980 to 31 percent in 1990 and to 41 percent of their $7 billion-plus revenues in 2000.

Other than those two businesses, we weren’t having much success. The Crotonville class that challenged us to redefine our markets in 1995 was a turning point. When other businesses defined their markets more broadly, the importance of services was self-evident.

At Boca in January 1996, I made the point that we had been a “new socket company to a fault.” We might have scores of executives debating whether we’d sell 50 or 58 gas turbines or several hundred aircraft engines a year while “we routinely handle the service opportunities for an installed base of 10,000 existing turbines and 9,000 jet engines.”

That had to change.

After the Crotonville class, we held a special Session C in November of 1995 to focus on services staffing. We made our first big unconventional organizational move in aircraft engines in January 1996. We created a new vice president of engine services and made the business a separate P&L center. We put a real change agent in the job, a true bull in the china shop, Bill Vareschi, who had been the chief financial officer of the aircraft engine business.

Bill was loud, opinionated, and tough-minded—just what I thought might make the initiative come alive. He hired Jeff Bornstein, a young finance star from the audit staff, who, like his boss, wasn’t afraid to take a swing at anything in his way. Bill and Jeff spent most of 1996 putting all the services pieces together.

They had several building blocks to work with. We had engine service shops located around the world. We acquired a large shop in Wales from British Airways in 1991 as part of a deal to sell BA our new GE-90 engines. It was an unprofitable operation that primarily serviced and overhauled Rolls-Royce engines, and British Airways wanted out of it. This shop was our first significant foray into servicing other manufacturers’ engines. In 1996, Bill, with Dennis Dammerman’s help, acquired Celma, a former state-owned service shop in Brazil that had been privatized. It gave us the capability to service Pratt & Whitney engines. Two years later, we’d buy Varig’s Brazilian service shop, which would give us the capability to service GE engines at lower cost.

In late 1996, the engine service business had $3 billion in revenues, up from $2.2 billion in 1994, and was on a good trajectory. However, the industry was starting to consolidate. In 1996, Greenwich Air Services in Miami had bought out Aviall, a jet engine overhaul operation. I asked Bill and others why we didn’t buy them. In mid-February of 1997, Greenwich was at it again, announcing their plans to buy another services company, UNC.

I called Bill again and asked, “What the hell is going on?” This new acquisition made Greenwich a big player. I wanted a hard look at them. Ten days after Greenwich announced its deal, I had a videoconference with aircraft engines CEO Gene Murphy and Bill Vareschi to find out what it would take to buy Greenwich. Bill was digesting Celma and thought we had enough facilities and could grow the business on our own.

But the more I thought about it, the more frantic I became. I didn’t want to take the chance that one of our competitors would buy Greenwich before us. I urged Gene and Bill to think about it overnight and arranged a follow-up videoconference the next day.

At this session, they agreed to take a shot at it. Vareschi, who had known Greenwich founder and CEO Gene Conese for some time, agreed to call him to set up a Sunday morning meeting for us. When I left the videoconference with Dennis Dammerman, I grabbed him by the arm and said, “We just have to get this thing.” He was as enthusiastic as I was.

On March 2, I flew down to Miami and went with Bill Vareschi to meet Gene Conese at his home. He was a gregarious bear of a guy, a clever entrepreneur who had built his company from scratch. As we sat down over coffee in his dining room, it was obvious he was interested in selling. Though Gene didn’t say it outright, I had the feeling that after he had put this service network together, he was thinking, “Where the hell have you guys been?”

That morning we talked about a deal, and with Greenwich stock trading at $23 per share, I made an offer to buy the company for $27 a share. Gene countered at $35, and as you can imagine, we ended up at $31 after a couple of hours. Over the week, our teams did the due diligence. Dennis showed up at midweek to keep things moving.

The next weekend, I went back down and we did the usual haggling on Friday and Saturday nights over last minute details. The deal came to $1.5 billion. When I called Conese shrewd, I wasn’t just casually throwing out a line. Gene wanted to be sure he got GE stock for his equity. He did, and since the deal closed, the price of the stock has tripled. The deal really put us on the map in aircraft services, increasing revenues by 60 percent overnight.

With Greenwich, we now had a real business, with over $5 billion in revenues. Bill had to take the business to the next level. To do that, he had to upgrade the overall organization. More specifically, he had to get the engineering mind-set away from designing new engines to upgrading the installed base of engines. We moved one of the best design engineers in the business, Vic Simon, from his design job to head of engineering for services. We also gave Bill a young “high potential” manufacturing manager, Ted Torbeck from GE Transportation, as manufacturing manager for services and upgraded the position to corporate vice president.

Both moves reinforced the message that services were important. Services went from under 40 percent of total aircraft engine revenues in 1994 to over 60 percent in 2000.

 

We used this same model and had the same results in power systems and transportation. Now we needed to broaden our base.

To spread the learning, we launched a council in 1996, bringing to Fairfield on a quarterly basis all of GE’s service leaders. Either Vice Chairman Paolo Fresco or I would be at every meeting. Once again, it became immediately obvious who was delivering and who wasn’t—and the next session usually corrected that. Idea sharing was particularly helpful in stirring up interest in acquisitions and structuring long-term service agreements.

Acquisitions played a big role in service growth. From 1997 through 2000, medical systems acquired 40 service companies, power systems 31, and aircraft engines 17. Even transportation got into the acquisition game in 2000, paying $400 million for Harmon Industries, a Kansas City railway signaling and service company.

Three separate businesses—transportation, power, and aircraft—set up 50/50 joint ventures with Harris Corp., a high-tech aerospace company. It was another great example of idea sharing. These information systems ventures let railroad companies know the location of a train or let a utility company learn where it was having grid problems. We’ve since amicably bought out Harris’ 50 percent in 2001 in power and transportation.

We pounded the idea of more technology investment at every step of the operating system. The businesses delivered—in most cases tripling our investments in service technology R&D to $500 million annually by 2000.

Investing heavily in technology for services has changed the fundamentals of our service business. Long-term service agreements wouldn’t be possible without these large investments in technology and our Six Sigma commitment. Taking on long-term agreements required sophisticated models to predict the reliability costs over 10 to 15 years. Since the business leaders have to eat any shortfalls if the equipment doesn’t perform as predicted, these contracts also reinforced the push to allocate more dollars to services technology.

These technology investments have greatly increased our intimacy with customers. The service upgrades that we provide today allow our customers to get increased productivity and longer lives for their installed equipment.

Doing this, we’ve learned a lot.

Some of our earlier technological upgrades were too sophisticated. Payback times for customers were measured in three to five years instead of the one to two or less that they needed to justify their investment. We’ve fixed that and now focus on rapid customer payback solutions across every business, whether it’s increasing the life of a jet engine, improving the power output of a utility plant, or increasing the throughput of patients for a CT machine. For example, Southwest Airlines in 2001 placed an order with us for 300 upgrade kits at $1 million each to increase the life and fuel efficiency of engines on several older versions of their Boeing 737s.

 

 

Nothing demonstrates the value of high technology in a hardware business better than a chart from our locomotive business (opposite). Locomotive units will drop from a 1999 peak of 905 to 490, their lowest level in eight years. Transportation shipped 440 locomotives, earning only $144 million of operating margin in 1993. This year, because of the growth of high-tech services, operating margin will be roughly equal to that of 1999 peak volume and three times the margin on approximately the same units shipped in 1993.

As always, the litmus test of how an initiative works is the numbers. Our product services business grew from $8 billion in 1995 to $19 billion in 2001 and should grow to $80 billion by 2010. Our long-term service backlog has grown tenfold, from $6 billion in 1995 to $62 billion in 2001.

Today, we’re spending as much time insuring our installed “sockets” are increasingly productive—as we are on finding new “sockets.”

21

Six Sigma and Beyond

In 20 years as CEO, I missed only one Corporate Executive Council (CEC) meeting. It was in June 1995, one of the most important meetings we ever had.

I had invited my friend and former colleague Larry Bossidy, then CEO of AlliedSignal, to come to Crotonville to talk about Six Sigma quality.

There was a good excuse for my not being there. I was home in bed, recovering from open-heart surgery.

After returning from India in late January, I couldn’t stop feeling tired all the time. I thought I’d just caught some kind of bug that was making me feel lousy. I never took an afternoon nap in my life, but I started taking them on the couch in my office. I went to doctors all over New York, and I must have had every test ever invented. They never found anything.

My complaining continued—so much so that Jane went to my doctor, described the symptoms, and walked out with a prescription for nitroglycerin pills, just in case.

One Saturday night in late April, Jane and I went out with our friends the LoFriscos for dinner at Spazzi’s in Fairfield. We ate a lot of pizza and consumed plenty of wine. Jane and I got home late and went straight upstairs. While brushing my teeth in the bathroom, I felt a bomb hit me in the chest. I’d had chest pains in the past, and with my family history of heart trouble, I’d imagined heart attacks at least 20 times before. But this was like nothing I had ever experienced.

This wasn’t a little angina or a sore arm. This was the real thing.

It felt like a massive rock sitting on my chest.

I yelled for Jane and she came into the bathroom and surprised me with the nitro pills. I slipped one under my tongue. Fairly quickly, I got some relief. Then my impatience took over. Instead of calling 911, I told Jane to get the car so we could drive straight to Bridgeport Hospital, where she served on the board of trustees. On the way, barreling up Route 25, I spotted a hospital sign and shouted for Jane to get off at the next exit.

It turned out not to be for Bridgeport Hospital, but rather St. Vincent’s Medical Center in Bridgeport. When Jane sped through a red light, a cop stopped us. After we explained what was going on, he escorted us to the hospital, with flashing lights and siren.

When Jane pulled up to the emergency room at 1 A.M., I rushed out of the car, ran through a crowded waiting area, and jumped onto an empty gurney.

“I’m dying!” I yelled. “I’m dying!”

That got the nurses’ attention—and they had me on intravenous nitro quickly. The pain subsided. Tests confirmed I had suffered a heart attack. On Tuesday, May 2, Dr. Robert Caserta did an angioplasty to open up my main artery. Bob was a sports nut, a UConn and Yankees fan. Since I went to UMass and was a Red Sox diehard, we had a lot to argue about. Shortly after the procedure, I was back in my hospital room when the rock landed on my chest again. The vein had closed. I was having another heart attack. As they rushed me down to the cardiac room for another procedure, a priest wanted to give me the last rites.

I watched on the monitor and saw Dr. Caserta having trouble trying to reopen the vein. The surgeon was standing by to do the bypass that I dreaded.

“Don’t give up!” I shouted. “Keep trying.”

I was being a pain in the butt again, giving orders—but fortunately the doctor stayed with it. He got the vein open, and I didn’t need the surgery at that time.

When I left the hospital in three or four days, I called a number of people for advice, including Henry Kissinger and Michael Eisner of Disney, who both had had bypass operations. Michael was encouraging, telling me that surgery was no big deal. Henry strongly pushed for having it done at Massachusetts General Hospital. So did Dr. Saul Milles, GE’s medical director, who flew to Boston with the films of my angioplasty.

Saul was a saint and a wonderful doctor. For years, I had bugged him with my chest pains and perceived heart attacks. Saul had to put up with three of the world’s biggest hypochondriacs: Larry Bossidy, Paolo Fresco, and me. All of us carried a pharmacy of pills wherever we went and were always ready to call the doctor at a moment’s notice to complain about every ache and pain. Together, we probably have been more responsible for GE’s increasing medical costs than a hundred other employees. For the last several years, Saul’s task has fallen to our current medical director, Dr. Bob Galvin, and his partner, Dr. Ken Grossman.

On May 10, 1995, in the middle of a business meeting with Paolo and Bill Conaty in my family room at home, Saul arrived with not-so-good news. He told me the films confirmed that I’d need open-heart surgery. He made an appointment for me to go to Mass General the next day and have the operation a day later. The suddenness of it all was actually a break. With my family’s history and my angina over the last 15 years, I had been dreading this moment, but I didn’t have much time to think about it.

On Wednesday night, I called the kids and told them the news. On Thursday, I was in Boston with Saul and Jane to meet Dr. Cary Akins, who would do the surgery. Jane remembers more about that Thursday night than I do. As she tells the story, at one point at 4 A.M. in the hospital, I turned to her and said, “If something goes wrong, don’t let them pull the plug. Even if they can’t tell, I want you to know I’ll be fighting like hell in here.”

Nothing went wrong. In fact, everything went right. I was lucky to have a great surgeon. Cary performed a quintuple bypass in three hours. Since then, he and I have become very good friends. We see each other once or twice a year—outside the hospital. Bypass surgery knocks you for a loop at first. Every part of you hurts like hell. Fortunately, you feel a lot better every day. I returned to the office on July 5, and I was back on the golf course by the end of the month. In mid-August, I won my first three matches but lost in the 36-hole finals of the Sankaty Head Club Championship in Nantucket.

When I was home recuperating from the surgery, Larry Bossidy called and suggested that he withdraw from the CEC meeting in June. He was concerned it might look like he was coming back to GE with me on the sidelines. I appreciated his sensitivity and told him not to worry.

“Go give them everything you’ve got on Six Sigma.”

I sensed we might be at an important moment. I knew Larry was the perfect person to help. For years as colleagues, neither of us had been fans of the quality movement. We both felt that the earlier quality programs were too heavy on slogans and light on results.

In the early 1990s, we flirted with a Deming program in our aircraft engine business. I didn’t buy it as a companywide initiative because I thought it was too theoretical.

The rumblings within GE were unmistakable. In our April 1995 employee survey, quality emerged as a concern of many employees. The “New Larry” had become fervent about Six Sigma. He said for most companies the average was 35,000 defects per million operations. Getting to a Six Sigma quality level means that you have fewer than 3.4 defects per million operations in a manufacturing or service process.

That’s 99.99966 percent of perfection.

In industry, things generally go right about 97 times out of 100. That’s between Three and Four Sigma. For example, quality like this means 5,000 incorrect surgical operations per week, 20,000 lost articles of mail per hour, and hundreds of thousands of wrong drug prescriptions filled per year. Not much fun to think about.

By all accounts, Larry made a great pitch to our troops. He demonstrated that Allied got real cost savings—not just “feel good” benefits. Our team loved what he said, and I received positive phone calls from several attendees.

I came back to work and concluded: Larry really loved Six Sigma, the team thought it was right, and I had the survey, which said quality was a problem at GE.

Once everything came together, I went nuts about Six Sigma and launched it.

We put two key guys on it. Gary Reiner, head of corporate initiatives, and Bob Nelson, my longtime financial analyst, ran a cost-benefit analysis. They showed that if GE was running at three to four Sigma, the cost-saving opportunity of raising this quality to Six Sigma was somewhere between $7 billion and $10 billion. This amounted to a huge number, 10 percent to 15 percent of sales.

With that opportunity, it wasn’t rocket science for us to decide to take a big swing at Six Sigma.

As with each of our major initiatives, when we decided to go forward, we did so with a vengeance. The first thing we did was appoint Gary Reiner as permanent head of Six Sigma. With his clear thinking and relentless focus, he was the perfect bridge to transmit our passion into the program.

We then brought in Mikel Harry, a former Motorola manager who was running the Six Sigma Academy in Scottsdale, Arizona. If there is a Six Sigma zealot, Harry’s the guy. We invited him to our annual officers meeting in Crotonville in October. I canceled our usual golf outing—a symbolic gesture if there ever was one—so that 170 of us could listen to Harry talk about his program.

For four solid hours, he jumped excitedly from one easel to another, writing down all kinds of statistical formulas. I couldn’t tell if he was a madman or a visionary. Most of the crowd, including me, didn’t understand much of the statistical language.

Nonetheless, Harry’s presentation succeeded in capturing our imagination. He had given us enough practical examples to show there was something to this. Most left the session that day somewhat frustrated with our lack of statistical comprehension but excited about the program’s possibilities. The discipline from the approach was particularly appealing to the engineers in the room.

I sensed it was a lot more than statistics for engineers, but I didn’t have any idea just how much more it would become. The big myth is that Six Sigma is about quality control and statistics. It is that—but it’s a helluva lot more. Ultimately, it drives leadership to be better by providing tools to think through tough issues. At Six Sigma’s core is an idea that can turn a company inside out, focusing the organization outward on the customer.

We rolled out the Six Sigma program at Boca in January 1996.

“We can wait no longer,” I said. “Everyone in this room must lead the quality charge. There can be no spectators on this. What took Motorola ten years, we must do in five—not through shortcuts, but in learning from others.”

I thought the short-range financial impact alone would justify the program. Longer-range, I thought it could be even bigger.

In my Boca close, I called Six Sigma the most ambitious undertaking the company had ever taken on. “Quality can truly change GE from one of the great companies to absolutely the greatest company in world business.” (Once again, I was going over the top.)

We left Boca that year really psyched to make Six Sigma a big hit. We told the business CEOs to make their best people Six Sigma leaders. That meant taking our people off their existing jobs and giving them two-year project assignments to qualify them for what were called “Black Belts” in Six Sigma terminology.

The first four months of the assignment would be taken up with classroom training and application of the tools. Every assigned project had to tie into the business objectives and the bottom line. Black Belt projects sprang up in every business, improving call center response rates, increasing factory capacity, and reducing billing errors and inventories. A fundamental requirement in our Six Sigma program was that we measured it. We had a financial analyst certify the results of every project.

We also trained thousands as Six Sigma “Green Belts.” Green Belts underwent a ten-day training period to learn Six Sigma concepts and enough tools to solve problems in their everyday work environment. They didn’t leave their current jobs. Instead, they gained a methodology to improve everyday performance.

In the top management classes, which I called “Six Sigma for little folks,” we did all kinds of experiments to capture the concept. We made paper airplanes, flung them across the room, and measured where they landed. I said to the Black Belt teacher that I hoped our employees weren’t looking in the window to see us playing with paper airplanes. Watching them land all over the room was our introduction to variance.

As with every initiative, we backed it up with our rewards system. We changed our incentive compensation plan for the entire company so that 60 percent of the bonus was based on financials and 40 percent on Six Sigma results. In February, we focused our stock option grants on employees who were in Black Belt training. These were supposed to be our best.

When the request for option recommendations went out in February, the phone calls started coming in. A typical phone call went something like this:

“Jack, I don’t have enough options. We didn’t get enough for the business.”

“What do you mean? You got enough options to make sure all the Black Belts were covered.”

“Yeah, but we couldn’t give options exclusively to our Black Belts. We had to take care of a lot of other people.”

“Why? I thought the black belts were your best people. They’re the ones that should be getting the options.”

“Well . . . they aren’t all our best,” they’d say.

My reply was: “Get only your best people in the Six Sigma program and give them the options. We don’t have any more to give you.”

I always wanted the rewards systems to make sure we were getting the best people into every initiative. No one wants to give up their best talent on a full-time basis. They’ve got high targets to reach and need their best managers to make them. We got push-back on the Six Sigma initiative. At first, only a quarter or perhaps half of the Black Belt candidates were the best and brightest. They faked the rest.

One of the more notable experiences came in an S-I strategy review with GE Capital’s commercial finance business headed by Mike Gaudino. This is a transaction business that deals mostly with non-investment grade companies. Finding a Six Sigma leader among these deal makers wasn’t easy.

This became apparent at the S-I in 1996. We asked all the CEOs to bring in their Six Sigma leaders to show their progress on the initiative.

Mike had found someone to fill the job. Now he had to sit through and watch his guy give an “air ball” presentation. It was clear to everyone in the room that Six Sigma wasn’t going anywhere in this business. The standard joke was that the Six Sigma leader “decided to leave” before the elevator reached the ground floor at headquarters.

The next time, Mike wasn’t going to take any chances. He put in one of his stars as a replacement. Steve Sargent took over and did a great job, later becoming GE Capital’s Six Sigma leader. In 2000, he was promoted again to be CEO of our European equipment finance business. The S-I review process worked. Mike got a better quality program and five years later GE had a new CEO for one of its businesses.

We also used the stock option program for Black Belts to smoke out the weakest links. If this or any initiative was going to be successful, it had to start with the best. I became a fanatic about it, insisting that no one would be considered for a management job without at least Green Belt training by the end of 1998. Even with my constant cheerleading and a lot of pounding in Session Cs and everywhere else, it took us three years to get all the best people into Six Sigma.

At one review, the nuclear business gave us the name of a candidate, Mark Savoff, to head up the services side. Their recommendation didn’t make his Six Sigma credentials clear. Bill Conaty, our human resources head, phoned out to California and said, “We’d like to have him come in and talk to us about his Six Sigma qualifications.” Mark flew from San Jose to Fairfield and convinced us that he was deeply committed to Six Sigma.

He got the job and has since been promoted to run the total GE nuclear business.

Today the Six Sigma qualifications are made clear before anybody is recommended for anything.

In the first full year we trained 30,000 employees, spent about $200 million on the training—and got somewhere in the neighborhood of $150 million in savings.

We had some good early success stories. GE Capital, for instance, fielded about 300,000 calls a year from mortgage customers who had to use voice mail or call us back 24 percent of the time because our employees were busy or unavailable. A Six Sigma team found that one of our 42 branches had a near-perfect percentage of answered calls. The team analyzed its system, process flows, equipment, physical layout, and staffing and then cloned it to the other 41. Customers who once found us inaccessible nearly one quarter of the time now had a 99.9 percent chance of getting a GE person on the first try.

GE Plastics gave us another great example. Lexan polycarbonate had very high purity standards, but it didn’t meet Sony’s requirements for its new high-density CD-ROMs and music CDs. Two Asian suppliers were getting all the Sony business, and we were out in the cold. A Black Belt team solved the problems and designed a change in the production process that gave us the color and static qualities Sony demanded. We went from 3.8 Sigma to 5.7 Sigma and earned Sony’s business.

In the first year, we used Six Sigma all over the company to attack costs, improve productivity, and fix broken processes. One business, admittedly an extreme, found that by using Six Sigma, it could increase the capacity of their factories, eliminating the need for any capacity investment for a decade.

The next phase was to use Six Sigma’s statistical tools to fix and design new products. Nowhere did this prove to be more important than in power systems. In the mid-1990s, when demand for power plants was modest, we were having forced outages in our newly designed gas turbine power plants. Rotors were cracking due to high vibration. A third of the 37 operating units in the installed base had to be removed in 1995.

Using Six Sigma processes, we reduced the vibrations by 300 percent and fixed the problem in late 1996. Since then, with a fleet of more than 210 units today, we haven’t had a single unplanned removal—better than Six Sigma. Solving this problem put us in the lead of the new technology gas turbine market just in time for the power surge that would come in the late 1990s. It gave GE the major share of the global market for new power plants.

In new product design, our medical systems business took the lead. The first major Six Sigma–designed product to hit the market was a new CT scanner called the LightSpeed, which came out in 1998. A chest scan that took a conventional scanner three minutes to perform took only 17 seconds with this new product. Even better, I got a letter from a radiologist who wrote that he was amazed that a $1 million machine could be taken out of a box, plugged into a wall, and it would work immediately. That was Six Sigma at its best. In the last three years, medical launched 22 new Six Sigma–designed products.

In 2001, 51 percent of medical’s overall revenues will come from Six Sigma designs, and every new product that hits the market has it. Today, all our businesses are aiming to do this.

 

We went from 3,000 Six Sigma projects in 1996 to 6,000 in 1997, when we achieved $320 million in productivity gains and profits, more than double our original goal of $150 million. The benefits were showing up in our financial results. By 1998, we had generated $750 million in Six Sigma savings over and above our investment and would get $1.5 billion in savings the next year.

Our operating margins went from 14.8 percent in 1996 to 18.9 percent in 2000. Six Sigma was working.

We liked the results, but too often we were hearing that our customers weren’t feeling the difference in quality. We thought the problem was that many of the products in the field had been in development for years before Six Sigma was started.

It took a trip to Spain to find a solution.

In June 1998, I was thinking of hiring a full-time vice president of Six Sigma, the first and only new staff job I created as CEO. I was visiting our new plastics facility in Cartagena, Spain, for a project review with Piet van Abeelen and his team. Piet was global manager of manufacturing for plastics and had demonstrated the power of Six Sigma in one of his factories in Bergen op Zoom on the coast of the Netherlands. Using Six Sigma, Piet and his team doubled Lexan output from 2,000 tons per week to 4,000 tons without adding significant investment. Piet had the best practical handle on just what Six Sigma could do and the skill to explain it in the simplest terms.

 

 

We were having lunch on the back porch of a hacienda on our Cartagena site. I asked Piet if he would be interested in coming to Fairfield to take a new staff job I was thinking about creating. I told Piet he would have a very small group, two to three people, established to teach and transfer Six Sigma learning across the company. The teacher in him—and there is a lot of it—found the job appealing, despite the fact that he was currently running a huge global manufacturing operation with thousands of employees.

Fortunately, he signed on.

It was Piet who came up with the answer to why our customers weren’t feeling our Six Sigma improvements. Piet’s reason was simple: He got all of us to understand that Six Sigma was about one thing—variation! We had all studied it, including me, in the class with the paper airplanes. But we never saw it the way Piet laid it out. He made the connection between averages and variation. It was a breakthrough.

We got away from averages and focused on variation by tightening what we call “span.” We wanted the customer to get what they wanted when they wanted it. Span measures the variance, from the exact date the customer wants the product, either days early or days late. Getting span to zero means the customers always get the products when they ask for them.

Internally, our problem was that we were measuring improvement based on an average—a figure that calculated only our manufacturing or services cycle without regard to the customer. If we reduced product delivery times from an average of 16 days to 8 days, for example, we saw it as a 50 percent improvement (see opposite).

Foolishly, we were celebrating.

Our customers, however, felt nothing—except variance and unpredictability. Some customers got their orders 9 days late, while others got them 6 days early. We used Six Sigma and a customer-oriented perspective involving span to guide us. That reduced the delivery span from 15 days to 2. Now customers really felt the improvement because orders arrived closer to their want dates.

Sounds simple—and it was—once we got it.

We were three years into Six Sigma before we “got” it. Span reduction was easy for everyone to understand and became a rallying cry at every level of the organization. It was just what we needed to take the complexity out of Six Sigma. Our plastics business reduced their span from 50 days to 5; aircraft engines from 80 days to 5, and mortgage insurance from 54 days to 1.

Now, our customers noticed!

Span also helped us focus on what we were measuring. In most cases, we were using promised dates of delivery made by a salesperson negotiated on both sides—with the customer and with the factory. What we weren’t measuring was what customers really wanted and when they wanted it.

Today, we take it a step further. We measure span from our requested delivery date to our customers’ first revenue: a CT scanner delivery cycle from the request date by the customer to the first scan of a patient; the turnaround time in jet engine service shops from the time it leaves the wing of an airplane to the time it takes to get back in the air; and power plant delivery cycles from the time of the order to the first generation of electricity.

Every order is tagged with the customer’s start-up dates, and charts tracking the variation are put up in every facility. Visibility is clear to everyone. Using these measurements makes variation come alive. Customers see and feel what we do.

Six Sigma is a universal language. Variation and span are as understandable in Bangkok and Shanghai as they are in Cleveland and Louisville.

We expanded the initiative further by taking it directly to our customers in what we called “Six Sigma: At the customer, for the customer” (ACFC). This means taking GE Black Belts and Green Belts and putting them in customer shops to help them improve their performance.

When we have customer receptivity, it really works. In 2000, aircraft engines had 1,500 projects at over 50 airlines, helping customers earn $230 million in operating margin. Medical systems had close to 1,000 projects, creating over $100 million of operating margin for their hospital customers.

By aligning what we measure internally with our customers’ needs, Six Sigma has given us better customer intimacy and trust.

 

We found out that Six Sigma isn’t only for engineers. A common misperception made in quality programs is thinking that it’s only for technical minds. It’s for the best and brightest in any function.

Plant managers can use Six Sigma to reduce waste, improve product consistency, solve equipment problems, or create capacity.

Human resources managers need it to reduce the cycle time for hiring employees.

Regional sales managers can use it to improve forecast reliability, pricing strategies, or pricing variation.

For that matter, plumbers, car mechanics, and gardeners can use it to better understand their customers’ needs and tailor their service offerings to meet customers’ wants.

While it’s worked in many functions at NBC, it hasn’t improved our batting average in picking sitcoms.

I must admit I have trouble getting examples for lawyers and consultants. It’s probably difficult for them to apply it because they make a living off of variance.

Overall, Six Sigma is changing the fundamental culture of the company and the way we develop people—especially our “high potentials.” We’ve always had great functional training programs over the years, particularly in finance. But the diversity of the company has made it difficult to have a universal training program. Six Sigma gives us just the tool we need for generic management training since it applies as much in a customer service center as it does in a manufacturing environment.

In 2000, 15 percent of GE’s executive band population were Black Belt trained. By 2003, that number should hit 40 percent. The high probability is that Jeff Immelt’s successor will be a Six Sigma Black Belt.

At my Crotonville sessions in the last couple of years, I used to joke that the reason I was so slow on the uptake for e-business was that we were perfecting Six Sigma first.

“When I eventually write my book,” I told the class, “I’ll write that we knew we had to adopt the Six Sigma initiative at GE before we tackled e-business. E-business relied on speed and accurate fulfillment. Six Sigma gave us that.”

The class would roar with laughter. They were younger and wiser and knew I had been slow to understand the impact of the Internet.

That transformation was next.