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Jeff Immelt to Retire as General Electric C.E.O. A Stagnant General Electric Will Replace C.E.O. Jeff Immelt
(about 7 hours later)
General Electric, the sprawling maker of jet engines, light bulbs, M.R.I. machines and countless other products, is getting new leadership for the first time in 16 years. General Electric, the 125-year-old industrial giant whose jet engines propel air travelers around the globe and whose electrical generators light millions of households, declared on Monday that it would be installing its first new leader in 16 years.
The company said Monday that its longtime chairman and chief executive, Jeffrey R. Immelt — who worked to refocus G.E. on its industrial roots after the 2008 financial crisis made its vast financing business much less attractive — would retire and be succeeded by John Flannery, the chief executive of the company’s health care division. Jeffrey R. Immelt, 61, the departing chief executive, transformed G.E. over the past decade, jettisoning most of its once-huge financial business, which seemed to threaten the company’s survival after the 2008 economic crisis. Wall Street applauded those moves, but investors grew disenchanted as the company’s stock price and profits stagnated in recent years.
The shift could augur further changes at the company, whose history reaches back more than a century to the laboratories of the famed inventor Thomas Edison. While G.E. ranks among the world’s great industrial powerhouses, its stock price has languished and the company has been under particular pressure since Trian Fund Management, which is run by the billionaire investor Nelson Peltz, took a big stake in it nearly two years ago. His successor, John Flannery, 55, is a longtime G.E. executive who has spent much of his career in finance and deal making, raising expectations among some observers that he might look to sell off pieces of the sprawling company. Mr. Flannery told analysts that he would embark on a “comprehensive review” of all G.E. businesses “with speed, urgency and no constraints.”
Mr. Flannery stated in a video broadcast on Facebook that he would “take a fresh look at the company” with a “sense of urgency.” He set a goal of presenting his recommendations later this year. Mr. Flannery’s tenure may well determine the shape and the economic role of conglomerates like G.E. — expansive companies with seemingly limitless business ambitions — that once defined an American industrial era. Now, G.E. is among the last of the breed.
“No one’s happy with the stock price now,” Mr. Flannery said. He added that the health care sector in particular offered “so much long-term growth,” saying that G.E. was “just scratching the surface of what we can do in that business.” The company’s roots reach back more than a century, to the laboratories of the storied inventor Thomas A. Edison. G.E. today sells magnetic resonance imaging machines, provides financial and data services, manufactures light bulbs and performs drug research, among myriad other activities.
Mr. Flannery, 55, will become chief executive of G.E. on Aug. 1. Mr. Immelt, 61, will remain as chairman until he retires on Dec. 31. Mr. Flannery will then add the role of chairman on Jan. 1, 2018. But as a rule, Wall Street does not like conglomerates. Instead, investors tend to prefer the clarity of companies with simpler product lines and fewer moving parts.
G.E. also said that Jeff Bornstein, its chief financial officer, would be promoted to vice chairman. The company said its board had overseen a succession planning process since 2011. Mr. Immelt had spoken in the past of stepping down this year. But no successor had been formally named, and in recent months, G.E.’s lagging stock performance brought increasing pressure from investors and new urgency to questions about when he might depart.
“During this time of dynamic global markets and relentless focus on technology and operational excellence, there is no better person to lead G.E. than John Flannery,” Jack Brennan, the company’s lead independent director, said in a news release. “He brings unique experience and a strong skill set to the job.” Those questions were being addressed by the G.E. board on May 13 at a trendy hotel in downtown Manhattan, a location selected in part because it was a place where people seemed unlikely to recognize G.E. board members. There, four contenders for Mr. Immelt’s post lined up and made their case to claim the top job.
Like Mr. Immelt, Mr. Flannery is a veteran of G.E., beginning at GE Capital in 1987 with a focus on evaluating risk for leveraged buyouts. He has held other posts across the wider conglomerate, running its corporate restructuring and workout group, leading its GE Equity business and working with GE Capital in Latin America and Asia. G.E. said its succession planning had been in the works for about five years, with a target of this summer. Activity accelerated in the past year, once the leading candidates had gathered wider experience across the company.
In 2013, he took over business development at the corporate level, where he was involved in G.E.’s acquisition of Alstom, the shrinking of GE Capital and the sale of GE Appliances. Mr. Flannery joined GE Healthcare in 2014, overseeing a turnaround of that business, the company said. The company’s lead independent director, Jack Brennan, said that there had been an “ongoing dialogue” about the timing but that, in the end, everything “happened to marry up with the schedule we had in place,” which Mr. Immelt had agreed to.
“John is the right person to lead G.E. today,” Mr. Immelt said in the company statement. “He has broad experience across multiple businesses, cycles and geographies. He has a track record of success and led one of our most essential businesses.” Mr. Flannery will become chief executive on Aug. 1. Mr. Immelt will remain as chairman until he retires on Dec. 31. Mr. Flannery will then add that role on Jan. 1.
The announcement caps a long career for Mr. Immelt, who joined the company in 1982 and who has navigated several crises during his tenure as G.E.’s top executive. He replaced Jack Welch, G.E.’s legendary chairman and chief executive, just days before the Sept. 11, 2001, terrorist attacks in the United States. Mr. Brennan has fielded calls recently from frustrated shareholders, according to two people familiar with those conversations. In an interview, Mr. Brennan — a former chief executive of Vanguard, a large mutual fund firm — said: “I talk to investors all the time. And given my background, I get a lot of unsolicited advice.”
Mr. Immelt later steered G.E. through the global financial crisis and oversaw the sale of the bulk of its sprawling finance arm, GE Capital. Though focused on its industrial businesses, G.E. has retained some financing operations related directly to those businesses. Investors’ calls for change increased noticeably two years ago when Nelson Peltz, an activist shareholder, and his investment firm, Trian, bought a $2 billion stake, making it one of G.E.’s largest shareholders. In an 80-page presentation at that time, Mr. Peltz and his team called on management to cut costs, buy back shares and further shrink G.E.’s finance business, GE Capital. Trian said its plan would sharply increase G.E.’s share price, to $40 or more by the end of 2017.
Under Mr. Welch, G.E. aggressively expanded in the finance business through its GE Capital arm, becoming one of the largest lenders in the United States and regularly generating strong profits. But that business — and the regulatory demands that came with it — became much less attractive and a riskier bet after the financial crisis in 2008. G.E. has taken some of the proposed steps, and its shares had risen more than 10 percent from the beginning of Trian’s campaign through Friday. Still, rival industrial firms did far better over the same period: United Technologies shares rose 43 percent, and Honeywell’s stock was up 46 percent.
GE Capital was called a “systemically important financial institution” in the years that followed — the official name for a lender that the government considers too big to fail. The designation cut into potential profits by imposing additional restrictions and requirements upon its operations. On Monday, G.E. closed at $28.94 a share, up 4 percent but still below Trian’s target range. Trian was not consulted on the leadership change and learned about it Monday morning when the company made its announcement.
Since announcing plans to sell off the bulk of that business two years ago, G.E. has sold about $200 billion of GE Capital noncore businesses, including a number of its finance operations in Europe. The “systemically important” designation was removed from GE Capital last year. Even investors who praise Mr. Immelt for drastically reducing G.E.’s dependence on finance and shedding its nonindustrial businesses, like the media company NBCUniversal, welcomed the change. “Frankly, it’s the right thing to do,” said Robert Atchinson, managing director of Adage Capital Management, a $30 billion fund that holds G.E. shares. “G.E. needs to go to the next level of change.”
The wider company has come under pressure in recent years, since Mr. Peltz’s Trian took a 1 percent stake in G.E. in 2015. The investment was worth about $2.5 billion, with Mr. Peltz saying at the time that the company’s stock was “undervalued and underappreciated” and could be transformed to “allow its world-class industrial businesses to drive attractive shareholder returns.” Mr. Immelt had to guide G.E. through significant shocks during his tenure. Just after he became chief executive, in 2001, the terrorist attacks on Sept. 11 battered the airline industry and other buyers of its equipment.
But G.E.’s stock price slumped late last year and Trian said that it “intensified its dialogue” in March with G.E.’s senior management “regarding new initiatives to help ensure that G.E. can meet its financial commitments.” Later, the global financial crisis of 2008 delivered a severe blow, one partly self-inflicted. For years, G.E. had chased the seemingly easy profits to be made in everything from American home mortgages to credit-card financing in Japan. In some years, that business made up as much as half the company’s income, and G.E. became one of the largest lenders in the United States.
After discussions with Trian, G.E. said it would seek to reduce costs by more than $2 billion in its industrial arm by the end of 2018 and improve profit. G.E. also said it would seek to link bonuses for senior managers to achieving those cost-cutting and profitability goals. The finance buildup was begun by Jack Welch, the legendary chairman and chief executive and Mr. Immelt’s predecessor, who served for two decades and oversaw an era of tremendous global expansion. That emphasis on financial businesses continued for years under Mr. Immelt — until the 2008 crisis.
Still, during Mr. Immelt’s tenure, the company has not shied away from making headline-grabbing moves. Three years ago, it made a $13.5 billion deal to take over the power business of the French giant Alstom. Suddenly, finance and the regulatory demands that came with it became riskier and less attractive. GE Capital’s size meant that it was deemed a “systemically important financial institution” in the years that followed, the official name for a lender that the government considers too big to fail. The designation cut into potential profits by imposing additional business restrictions.
The move was part of efforts to extend G.E.’s reach in providing electrical utilities with generating equipment and power-grid distribution systems. G.E. and competitors like Siemens see big opportunities in that sector as the world moves away from coal and toward cleaner natural gas, solar power and wind energy. Since announcing plans to sell off the bulk of that business two years ago, G.E. has sold a significant chunk, including a number of its finance operations in Europe. The “systemically important” designation was removed from GE Capital last year.
And in October, G.E. agreed to merge its oil and gas division with another services provider, Baker Hughes, as it sought to create an entity that could profit from a recovery in oil prices. The 125-year-old G.E. has also sought inroads in software, quietly opening a software center in California in 2011. Mr. Immelt had said he wanted G.E. to be a “top 10 software company” by 2020. In the past few years, G.E.’s profit performance has suffered because lower oil prices have hurt the company’s big oil-field-equipment business. In October, G.E. agreed to merge its oil-and-gas unit with Baker Hughes in an effort to create a stronger business that could benefit from a recovery in oil prices.
Shares of G.E. were more than 4 percent higher in afternoon trading in New York on Monday. A major part of Mr. Immelt’s strategy to unify G.E.’s many businesses was to invest heavily to transform it into what it has called a digital industrial company. He had said he wanted G.E. to be “a top-10 software company” by 2020.
The idea would be that, for instance, software could harness the data produced by a jet engine to predict when the engine needed maintenance, saving time and money. The technology could be used across G.E.’s businesses, whether medical equipment or wind turbines.
“It’s an open question as to whether that pays off,” said Karim Lakhani, a professor at Harvard Business School.
Like Mr. Immelt, Mr. Flannery is a company veteran, having begun at GE Capital in 1987 with a focus on evaluating risk for big corporate lending deals. In 2013, he took over business development at the corporate level, and he was involved in G.E.’s sizable acquisition of Alstom’s energy businesses and the shrinking of GE Capital. Mr. Flannery joined GE Healthcare in 2014, overseeing a turnaround of that business, the company said.
In an interview, Mr. Flannery took issue with the characterization of him as a financial engineer. Much of his time in finance, he said, was assessing businesses, their managements and whether to make investments. “It wasn’t trading derivatives,” he said.
Mr. Flannery was one of the four candidates who made presentations to the board at the May 13 meeting at the Beekman Hotel in Manhattan. Their day started at 7:30 a.m. and lasted till 4 p.m.
The other three competing for the job were Jeffrey S. Bornstein, the chief financial officer (he will become vice chairman, G.E. said Monday); Steve Bolze, the president of G.E.’s power-generation business; and Lorenzo Simonelli, the president of G.E.’s oil-and-gas unit, according to a person briefed on the meeting who was not authorized to speak publicly.
Before the meeting, the board members received folders of documents detailing the history, track record and executive reviews of the candidates. One by one, each made a presentation of more than an hour and a half on the subject “the road forward for G.E.,” Mr. Brennan said.
The board knew them all well. In the past few years, G.E. board members, in groups of three to five, had visited each of the executives in their businesses. One visit to Mr. Flannery was in Uppsala, Sweden, where GE Healthcare has a life sciences unit, doing biological research for new therapies.
On Friday morning, the board met again to vote, this time at the Boston Harbor Hotel. The conference room had been swept for listening devices the night before, and security guards were stationed outside overnight.
The vote, Mr. Brennan said, was unanimous in favor of Mr. Flannery. He got the call a bit after 1 p.m. in Chicago, the headquarters of GE Healthcare, to tell him he would be the next chief executive.