NO ONE BLAMED Flannery for the insurance mess, but he was the one who had to steer the ship through the wreckage. Ever the realist, he painted a grim picture, his frustration obvious. Like Immelt, he thought he was making progress, but things didn’t go quite as planned.
He described the insurance situation like a city engineer worried about a dam breaking. The damage was bad, but GE Capital was “buttressed” by the lucrative airplane leasing business. “We strongly believe this is contained inside of the GE Capital framework,” he told investors.
But the debacle had evaporated GE’s remaining credibility about its financial situation. The insurance problem prompted Flannery, who had declared in November that no stone had been left unturned, to reconsider his course. Like many longtime GE executives, his love for the organization ran deep, and he struggled with the prospect of being the one who would have to dismantle it.
At the advice of the board, he also signaled that the review of the entire GE business would continue, including a real consideration of breaking up the company. Subsequently, Flannery was upset that his statement was interpreted to mean GE might break up—partly because he didn’t use those actual words—but there was no mistaking the implication: any consideration of the separation of the major units would be the end of modern GE.
Inside the company and on the board, it was clear that everything was now on the table. The insurance charge was crippling, and Trian was calling for a complete reconsideration of all parts of the business in order to recover something for shareholders.
Flannery was constantly putting out fires, and then finding more fires. In addition, there was tension between the board and Flannery, as well as between Jamie Miller and Flannery.
Overall the directors supported Flannery as he worked to get the damage under control. In the minds of his supporters, Flannery was making all the right moves, even if a little more slowly than hoped for. He kept saying he just needed time. And with the board changes, the directors knew that new help was arriving to assist Flannery. After an extensive search, it had added three members who could all bring tools to solve GE’s ongoing problems in its management and in its boardroom. But in the turnover, there was little love lost between the newer board members and the older ones.
GE’s board of directors was unquestionably weakened from having the CEO as the chairman of the board. Many companies still cling to this structure, but it openly violates basic corporate governance principles. The CEO shouldn’t also be in charge of the committee that employs him. Some GE directors would challenge Immelt, but that usually was fruitless and could land them in the penalty box, or sometimes off the board entirely.
Directors had often been chosen to join the GE board without a comprehensive search, or confirmation that they understood how the board worked. In addition, GE board meetings were often a whirlwind production. With eighteen directors and another dozen regular attendees, the room was packed, and it was impossible to tackle all of the vast number of issues on the agenda. In fact, executives and advisers had occasionally looked up to see some of the directors drifting off to sleep.
While Immelt said that he encouraged debate, meetings often lacked rigorous questioning. One executive recalled being in a board meeting in which Keith Sherin was presenting the quarterly financial results to the group. The Power business had missed badly, but little specific detail was provided on what went wrong. This executive braced for the reaction from the directors, but it never came—none of them asked what went wrong.
When Flannery committed to renewing and shrinking the board of directors, it included half a dozen current or former CEOs, the former head of mutual fund giant Vanguard Group, the dean of New York University’s business school, as well as a former chair of the Securities and Exchange Commission. The seventeen independent directors got a mix of cash, stock, and other perks worth more than $300,000 a year. The terms had been even more generous when GE still made appliances; the company allowed directors to take home up to $30,000 worth of GE products in any three-year period. The company matched the directors’ gifts to charity, and upon leaving the board, a director could send $1 million in GE money to a charity.
Some directors admitted to having been sold by Immelt’s sweeping optimism, even if they knew he wasn’t the best deal-maker. But they knew he had a hard job, was playing with a tough hand, and had survived multiple major crises. Plus, they liked him.
Immelt said that he did his best to keep directors informed, noting that he required them to make trips to GE divisions on their own, but he also knew that the complexity of the business limited their input. As they’d done under Welch, the board usually tended to approve his recommendations and follow his lead.
Some felt that Immelt manipulated the board, and it was whispered that members were chosen and educated to see the company through his visionary eyes. There was concern that the board didn’t entirely understand how GE worked, and that Immelt was just fine with that. Like many CEOs who are also their company’s chairman, he made sure that his board was aligned with him.
In 2016, for instance, Immelt pushed out Sandy Warner, a twenty-four-year GE director and the former CEO of JPMorgan, after the two clashed over Immelt’s succession plans. Warner thought that the succession should be speeded up, and that Steve Bolze, head of GE Power, was the man for the job. Immelt, at odds with Bolze and dissatisfied with his results at Power, felt that he had to force Warner off the board in order to torpedo Bolze’s chances.
Warner appealed to his fellow directors in a closed session. He argued that they should at least allow a debate on whether it was time to replace the CEO. But the board stuck by Immelt. Warner left the GE board embittered after nearly a quarter-century. GE told investors in a securities filing that Warner left because of new term limits; the company never disclosed the real reason.
Immelt often made it a point to go around the board table to ensure that everyone had a chance to comment on a strategic decision, but directors rarely challenged him. To Immelt, this was proof that he solicited input and encouraged debate. But what the Federal Reserve had seen, when it was supervising the company, was a board that needed to push back more on the chairman. The Fed, including Immelt’s nemesis Caroline Frawley, urged them to do so.
Just like Welch and Immelt, Flannery wanted to make the board his own, but he also wanted to strengthen its membership while shrinking its size. Flannery relied on the board for guidance; he didn’t want people just rubber-stamping his decisions. He truly sought genuine debate, which was one of the reasons he welcomed Ed Garden onto the board.
Flannery also recruited Larry Culp. The former CEO of a smaller conglomerate called Danaher Corporation for fourteen years, Culp had run a tight ship when it came to deal-making and capital allocation. Danaher shares surged during his tenure, and he had retired at fifty-two, after making more than $300 million. The company sometimes came up at GE board meetings as an example of a conglomerate with a more streamlined and functional model.
Culp, a tall Maryland native with a full head of thick gray hair pushed to the side, wears suits that sometimes seem a size too large, speaks with a hint of a southern accent, and isn’t easily flustered. His reputation had extracted respect from investors in industrial companies, but wider recognition was yet to come, partly because of his aversion to media attention.
In naming Culp to the board, Flannery was fully aware of the possible future that appointment might bring about. Before Culp joined the board in April, an adviser had warned Flannery that Culp would be the man to replace him atop GE if things soured. He didn’t care, Flannery said. He just needed the best people to help him right the listing ship.