An Engaging Story:
General Electric (GE) was a significant brand as I grew up and not an insignificant player in my Electrical Engineering undergraduate course. So, I am interested in understanding how such a great company could have gone off the rails. Uncharacteristically, I chose to listen to the audio version rather than purchase the electronic version of this book. But, as I listened, I remembered why I prefer electronic books—I had a devil of a time making notes and relistening to passages that weren’t clear. That notwithstanding, this is an excellent book for learning about corporate governance and the need for effective Boards of Directors.
Too Complex to Understand
The history of GE goes back to Edison’s workshop. While that history is fascinating, my focus is on the lessons this book contains for today’s business leaders. The first lesson is that a business is likely too complicated to manage if it is too complex for business people and investors to understand. Between Jack Welch (CEO from 1981 to 2001) and Jeffrey Immelt (CEO from 2001 to 2017), GE purchased and sold businesses in sectors including aviation, entertainment, power, renewable energy, digital industry, weapons manufacturing, locomotives, and venture capital and finance. Neither Welch nor Immelt was willing to insist on accurate financial reports, instead opting for creative accounting to show continued corporate growth. Immelt was fond of pointing out that investors didn’t understand GE, and he was the only one who did.
I believe it was Warren Buffett who stated that “Investment must be rational; if you can’t understand it, don’t do it.” Perhaps the corollary for business is “If the business is too complex to understand, then it should be simplified.”
Immelt shaped his board with people who would not question him. Besides his position as CEO, Immelt was also Chairman of the Board. The demise of GE points out why it is ridiculous to have a CEO also manage the very committee that hires him. So, the second lesson from this book is that good corporate governance for a public company requires an active and engaged board with an independent Chairman.
Throughout this story, the authors point out how the board rarely challenged Immelt, and when someone did seriously challenge him, he found a way to sideline the challenger. Instead, the board catered to whatever Immelt wanted and took his word about the benefits of reorganizations, acquisitions, and divestitures.
No one on the board thought it strange that GE stock price was the most critical measure of operational success. Most business decisions, press releases, and branding statements were evaluated based on their positive effect on the stock price.
Ego, Hubris, and Delusion
GE’s management and employees had a great deal of pride in the company. They believed that GE brought “good things to life,” and they felt a part of that mission. But the outsized ego of Immelt led him to make decisions that made him look good regardless of the impact on the business. He would not admit to being wrong unless it benefited him somehow. He believed that he was always the most competent person in the room regardless of who else was there—world leaders, politicians, other CEOs, no one was as smart as he was.
The culture at GE was that there was no task they could not do, no market they could not conquer, and no challenge they could not meet. And once Immelt made the decision, he rarely was dissuaded by logic or facts.
Immelt lobbied to get H. Lawrence Culp Jr. on the GE board. A colleague informed Immelt that he likely hired his replacement. And indeed, Culp took over as CEO of GE in September of 2018. He has been selling off parts of GE and dealing with the fallout from federal investigations.
On August 15, 2019, Harry Markopolos, a financial fraud investigator known for discovering a Ponzi Scheme run by Bernard Madoff, accused General Electric of being a “bigger fraud than Enron,” alleging $38 billion in accounting fraud. GE denied wrongdoing.
On October 6, 2020, General Electric reported it received a Wells Notice from the Securities and Exchange Commission stating the SEC may take civil action for possible violations of securities laws.
That all seems like a sad end to a once-great company. As the book’s subtitle indicates, the fall is due to pride and delusion. Lights Out is a cautionary tale for all business leaders, especially those leading public companies. I highly recommend this well-written and well-researched book.
See this book on Amazon
More information on GE at Wikipedia