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General Electric picks a new boss

JEFF IMMELT looks as if he was born to be a chief executive. Tall, affable and energetic, he was picked to run General Electric in 2001 after an interminable and mildly sadistic selection process run by GE’s then CEO, Jack Welch, at the time America’s most celebrated boss. On June 12th Mr Immelt said he would retire, replaced by John Flannery, who runs the firm’s health-care arm. The departing boss has reshaped GE radically but his legacy is mixed.

Part of that reflects what he inherited. GE was not in nearly as good a shape as Mr Welch liked to pretend. Its share price was overvalued, pumped up by hype about Mr Welch’s talents. Its profits were inflated by gains from its pension scheme and its financial division, which had grown at breakneck speed and which contained big risks. Mr Immelt tried to take GE back to its core as an industrial firm that makes sophisticated products such as power equipment and jet engines. It has been a revolution of sorts. The firm is more global, with 57% of sales from abroad compared with 29% when Mr Immelt started.

But these efforts have been overshadowed by two mistakes. First, Mr Immelt was slow to recognise just how dangerous GE’s financial arm was. By 2007 it contributed 55% of profits and had racked up over $500bn of debt. When the crisis struck its funding dried up and its profits collapsed. Mr Immelt deserves plaudits for shutting most of it down in 2015, but by then the damage was done.

The second flaw is less widely understood but just as important: the performance of the non-financial business has been lacklustre. Mr Immelt’s reshuffling of it was huge, with disposals and acquisitions equivalent to 167% of its current capital employed. GE ditched its media arm, plastics division and kitchen-appliances unit, and bought into health care, energy and power infrastructure. But acquisitions and investments in new areas have been expensive; GE’s capital employed has ballooned but its returns have not. Weak operating performance, along with the costs from the restructuring, mean its cash flows are similar to what they were in 2001. GE has been running to stand still.

Can another consummate insider, Mr Flannery, who has been at GE since 1987, do better? The health-care business he runs contributes 20% of profits. Two big tasks await him. Mr Welch was a pioneer of offshoring and GE’s supply chains cross the planet, but the firm will have to guard against a protectionist backlash at home and abroad. That requires diplomatic and communication skills, which Mr Immelt had in spades.

The other task is to deal with GE’s soggy financial performance. Trian, an activist hedge fund, owns a stake in GE and, behind the scenes, has probably been agitating for change. Unless the numbers improve soon, pressure may mount for GE to break itself up. That would be a bad idea: what it now needs is less re-engineering and more consistent execution. At least Mr Flannery, unlike Mr Immelt, takes the helm when expectations are low.

find out more from: http://www.economist.com/news/business-and-finance/21723363-john-flannery-has-more-room-surprise-upside-general-electric-picks-new-boss