General Electric CEO
An Epic Meltdown
On October 1st of 2018, General Electric (GE) made the unexpected announcement that John Flannery would no longer be their CEO; he was being replaced by beloved board member, Larry Culp. For the sake of context, over the last decade or so, GE has suffered what could possibly be considered the greatest meteoric downfall of any corporation in the history of American business. They are currently at rock bottom – hopefully.
Culp is inheriting the byproduct of a slew of irresponsible decisions made by executives past; he only joined the board about a year before being named Chief Executive, making him the first outsider to ever gain the typically coveted GE position. Chink’s in the industrial conglomerate’s armor have been identified by wall street analysts as far back as the boom days of celebrated CEO Jack Welch – under his tenure, GE beat out Microsoft as the world’s most valuable corporation while charging into the 21st century.
“It grows earnings not so much by the brilliance of management or the diversity of their operations, as Welch and Immelt [Welch’s successor] claim, but through the acquisition of companies — more than 100 companies in each of the last five years,” explained PIMCO founder and self-made billionaire, Bill Gross, in 2002. “Normally companies that borrow in the [commercial paper] market are required to have bank lines at least equal to their commercial paper, but GE Capital has been allowed to accumulate $50 billion of unbacked [commercial paper] because of the lack of market discipline.”
This sandy pecuniary foundation would wreak havoc on GE during the financial crisis of 2008. According to the Wall Street Journal, General Electric was on the brink of collapse. The market for short-term loans, the lifeblood of GE Capital, had frozen, and there was little in the way of deposits to fall back on. The Federal Reserve stepped in to save it after an emergency plea from Immelt.
Jeffrey Immelt was handpicked by Jack Welch in 2001 to be his successor and lead GE toward another promising 100 years. In reality, what awaited him was an unrelenting onslaught of adversity that forced the company to redefine itself and forever alter the core of what it was – largely a financial institution dependent on constant acquisitions.
The great recession caused investors to begin thinking of GE more so as a bank, an entity that could be vulnerable to any kind of financial sector turbulence. Immelt, hoping to ease their understandable worries, carved up GE Capital and sold it cut by cut to Wells Fargo, Blackstone, Capital One, and others until a division that once accounted for 38% of GE’s total revenue in 2008 would only generate about 10%. He accepted that the business model had to change and planned to pivot the trajectory of this iconic American brand.
Immelt hoped to light the unlit corners of the Earth, transitioning GE from an acquisition strategist, to the world’s largest power company. He imagined crushing competitors for gas-fired power turbines such as Germany’s Siemens and Japan’s Mitsubishi, and winning bids to build power plants across the Middle East, Africa and South Asia. Having already made substantial investments in a soaring and largely considered dependable oil market, he purchased Alstom’s (A France-based European rail transportation company) power and grid divisions for a whopping $10.6 billion in 2015.
It is also important to add, the Insurance division was once GE’s second greatest revenue generator, only behind Capital, and was sold off and discontinued by 2006. In a deal announced at the end of 2009, Forbes documents that GE sold 51% of NBC Universal (NBCU) to Comcast in order to focus more heavily on manufacturing pursuits and get their hands on some cash to payout cherished investor dividends. About four years later, Comcast bought all remaining equity of NBCU to become the sole owner; in retrospect, Immelt is criticized for this deal as many consider it shortsighted decision making.
The oil market began taking a tumble around 2015 and, as a result of the North American fracking boom, industry leaders, such as Chevron CEO Mike Wirth, have since announced plans to scale down operations with the hopes of focusing on more profitable and easy to reach drilling projects. GE’s substantial bet on oil hasn’t kept up with original expectations for demand as it is becoming clear that a once-unimaginable abundance of fossil fuels is available to humanity.
Alstom’s profit margins were low to begin with but GE figured they could raise them. That acquisition alone added 30,000 high-cost employees across the pond that executives hoped would pay for themselves. As Fortune points out, GE doubled down on fossil-fuel-fired turbines just as renewables were becoming cost-competitive. Result: Global demand for GE Power’s products collapsed, while GE had bet heavily the other way. GE Power’s profit plunged 45% as a result of the deal.
Realizing he had lost investor confidence and avoiding getting pushed out, in his 16th year as CEO, Immelt let the board know he was resigning. 30-year General Electric veteran John Flannery took his place as Chief Executive in August of 2017 – the blows didn’t stop coming. When GE sold off their insurance arm back in 2006, there was a chunk of the business, long-term-care insurance, that became difficult to offload. To make their deal more attractive, GE agreed to cover any losses. For whatever reason, this small detail in the fine print went seemingly unnoticed.
Their insurance for insurers covered about 300,000 policies by early 2018, about 4% of all such policies written in the country. Incoming premiums weren’t covering payouts. Therefore, it took many by surprise when, during Flannery’s tenure, it was revealed to the public: GE needed to prepare over $6 billion to cover these losses and also had to come up with $15 billion in reserves regulators required it to have to account for possible costs in the future.
As the fallout mercilessly continued, Flannery sought the help of a little known but highly regarded conglomerate Chief Executive, Larry Culp – adding him to General Electric’s board in April of 2018. An adviser warned Flannery that Culp would be the man to replace him atop GE if things continued going south. Flannery said he didn’t care; he needed the best people to help him right the listing ship.
Hard Times Get Harder
Although there are a plethora of market factors and terrible decisions that contributed to GE’s plummeting stock value during Flannery’s tenure, it didn’t help that he cut investor dividends in half, openly considered breaking the conglomerate up, and watched his company get taken off the Dow Industrials. Having inherited a stock price in the low $30 dollar range, by the time investors ousted him, GE was trading under $10 per share.
In accordance with GAAP standards, General Electric’s annual report discloses that the conglomerate posted a $20.6 billion loss in 2018. Like a diamond in the rough, the only bright spot gleaming from their portfolio of industries was the aviation division, which manufactures commercial jet engines.
In need of a miracle, the board fired Flannery in October of 2018, placing all of their hope in his successor. Since, then, GE’s aerospace business took a hit following the tragic crashes of two Boeing 737 Max aircraft. Upon the onset of COVID-19 pandemic lockdowns, airline companies were forced to receive government financial aid and until guidelines begin to loosen, the entire industry hangs in the balance.
As these events unfold, an aviation division that accounts for 25% of General Electric’s revenue and 45% of their operating profit could now face dire straights. If there was ever a man who could lift this company from its largely self-inflicted ruins, it is one Larry Culp.
Born in March of 1963, Larry Culp is the son of a welding company owner and grew up in the Washington D.C. area. Other than that, all that is publicly available concerning his early personal life is his father shared the same name – hence, he is a jr.
After earning a Bachelor’s degree from Washington College in 1985, Larry soon found himself in the midst of a lackluster technology consulting career at Arthur Andersen – now known as Accenture. Harboring doubts about his choice of work, he explains his thoughts at the time, “I wanted to be closer to a traditional business where we had customers and not clients, where we had a real sense of daily competition.”
Harvard Business School
Therefore, Culp applied to Harvard Business School with hopes of earning an MBA that could open more doors for a broader higher-level management role. “I can remember very vividly getting that [acceptance] letter,” he reminisces, “back in the day when it was a letter.”
This transitional period of his life wasn’t easy. “Make no mistake – for me HBS was challenging,” Culp admits, thinking back to the torrent of cases he initially encountered, “I was nobody’s Baker Scholar.” The summer following his first year, he took on a manufacturing project in Racine, Wisconsin for Case Corporation.
Harbus points out that working in a big factory where tractors and construction equipment were built was a stark contrast to anything he had previously experienced. “The Japanese model and German model of manufacturing were seen as the future and there were very few people who felt that US manufacturing had a future, which made it even more interesting. Perhaps it was the contrarian in me,” reveals Culp.
Going into his second year at Harvard, Larry Culp began tirelessly searching for a company that featured a leadership team and operating model he felt could compete with the organizations he admired overseas. With this being said, only 10 days into his new job as Danaher CEO, George Sherman, received a cold-call from him and invited the budding student out to Washington D.C. for a visit. The two hit it off.
Sherman’s vision to bring about world-class manufacturing and innovation at Danaher inspired Larry so much so that he agreed to take on a position at the firm without fully understanding what he’d be doing or where he’d have to live. Part of that excited him though, it was a leadership opportunity that offered near-boundless potential both functionally and geographically.
Larry Culp Early Career
Danaher was founded in 1980 by brothers Steven and Mitchell Rale as an investment vehicle originally named Equity Group Holdings. Together, they hoped to acquire businesses that functioned within a reasonably defined niche, generated predictable cash profits, and sported experienced management with an entrepreneurial zest. Some of their first purchases included a vinyl siding manufacturer and Mohawk Rubber Company.
The Rale brothers renamed their company in the early-80s to Danaher, after a favorite fly-fishing spot the family frequented in western Montana. Following this name change, Steven and Mitchell went on a shopping spree, buying more than a dozen businesses over the course of two years; many were manufacturers of tools, controls, precision components, and plastics.
When Culp came along in 1990, Danaher was already a publicly-traded corporation on the Fortune 500 list. He started off as Marketing Projects Coordinator, one of his first big assignments involved overseeing a product launch at a recently acquired company. The experience quickly taught him the kind of intangible business lessons that one can’t learn in school.
“It’s not about being the smartest person in the room. It’s not about having a Harvard MBA,” he shares. “It’s about bringing everybody around a particular objective or goal, having them feel good about it and catalyzing around that action.” While working hard to move up in the ranks, Larry was granted hands-on exposure to international expansions, innovations across operating companies as well as Mergers & Acquisitions.
Similar to General Electric, Danaher quickly transformed into a robust conglomerate featuring businesses all over the world and in a variety of industries. “Folks who were delivering and compatible with the culture were recognized and rewarded,” says Larry. “[It wasn’t] anything close to political behavior.” Where Danaher far exceeded GE, however, is the consistent way in which they implemented their “DBS” process to successfully foster organic revenue growth within the companies they acquired.
Danaher Business System
The Danaher Business System (DBS) engine drives the firm through a never-ending cycle of change and improvement: exceptional people develop outstanding plans and execute them using world-class tools to construct sustainable processes, resulting in superior performance. Superior performance and high expectations attract exceptional people, who continue the cycle. Guiding all efforts is a simple philosophy rooted in four customer-facing priorities: Quality, Delivery, Cost, and Innovation.
“In essence, it requires every employee, from the janitor to the president, to find ways every day to improve the way works get done,” describes an outsider. “In a typical Danaher factory, floors are covered with strips of tape indicating where everything should be, from the biggest machine to the humblest trash can. Managers determine the most efficient place for everything, so a worker won’t have to walk an extra few yards to pick up a tool, for instance.”
In a weeklong “Kaizen” event, managers are taken to any one of the company’s factories to discover the power of efficiency by improving the process flow of a single piece on the production line – some overachievers manage to decrease the floor space required to produce the item by more than half!
“We really don’t care if it’s manufacturing focused or not; the goal is to get newcomers to appreciate elements like single piece flow, visual maps, and so on. It is action learning,” Culp explains in a Harvard case study. “Furthermore, having the president of the company put on jeans and work boots and get involved with a broom on the shop floor can be powerful in setting expectations. It is an opportunity to touch a lot of people quickly.”
Upon the news of Sherman’s retirement, Larry Culp was appointed Chief Executive of Danaher at the age of 37 in 2001. He remembers the early uncertainty of juggling both long and short term goals for a business of such size, lamenting, “CEOs are paid to have the longest time horizon of anybody on the team, but CEOs are often the ones who get fired when you miss a couple of quarters.”
Persevering in the wake of a shakey post-9/11 economy, Culp steadied his ship, hanging on tight to the DBS principles put in place by those who came before him. When the financial crisis of 2008 hit, like every American business, Danaher needed to brace for impact. They were forced to eliminate over 5,000 positions and shutter 30 factories in a move that saved them $300 million annually.
Having refused to make cuts to their R&D divisions, Business Week noted that “in spite of the economy, Danaher introduced a large number of key new products in 2009 and has recovered more quickly than it would have otherwise.” Additionally, the corporation avoided drastic cuts to sales and marketing in emerging markets while also deploying $2 billion of capital to acquire 18 new companies over the course of 2009.
Culp’s calculated navigation through the great recession paid off, especially for shareholders, who during his tenure from 2001 to 2015, enjoyed a return of 465%, compared with about 105% for the S&P 500 during the same period. His executive team’s commitment to foreign markets ultimately led to a jump in international sales from 40% to 60%; which included growing sales in China from $300 million to $3 billion.
All in all, under Culp’s leadership, Danaher executed a disciplined capital allocation approach, including a series of strategic acquisitions and dispositions, a focus on investing for high-impact organic growth and margin expansion, and delivering strong free cash flow to drive long-term shareholder value. During his 14 years at the helm, the company’s market capitalization and revenues grew five-fold.
“I’m a lifelong student of Thomas Jefferson,” he told analysts in an April 2014 conference call to explain his early retirement, “and have always been struck by the wisdom of what he’s written about the benefits of revolution, every 20 years or so.”
Harvard LEAD Professor
Also Citing a growing attraction to education and fishing, Larry Culp officially stepped down from his position as CEO of Danaher in 2015. It didn’t take long for him to return to Harvard Business School, this time becoming a LEAD professor. “Learning to teach is no small challenge,” he discloses. “Just because I was the CEO of a highly successful company doesn’t mean I waltz into the classroom and magic happens. There’s work to do!”
While he finds the rarified air and curriculum offered at Harvard second to none, Larry very clearly maintains, “I’m a big believer in getting real reps in real leadership situations as being the best preparation for ultimately being a general manager, or otherwise, running a business. through the course of two years at HBS you get a lot of exposure to different companies, different industries, different topics, but at some point you have to jump in the pool.”
In the spring of 2018, considering their headquarters was now in Boston and the situation made sense location-wise, Larry Culp accepted an invitation to be added onto the board of General Electric. The company, under John Flannery, was facing some serious operational challenges as well as being highly levered on the balance sheet. Eventually came a time when the board collectively thought bringing in a new CEO may be more challenging towards a turnaround over an experienced CEO.
The board had several people to choose from, but the view was that their own Larry would likely be the best candidate to pursue the necessary changes at GE. He had experience in industrial portfolio management and had also worked with them as a colleague while on the board, so they were confident in his quality of work.
General Electric CEO
“I will have to say I was very happy with my post-CEO life. I was teaching at HBS, doing some private equity, fishing and skiing a lot. Some friends said: ‘Why put your legacy at risk?’ And I thought that is exactly why I should do it,” Culp explains in an interview with Harbus. “At 55, preserving legacy is not the mental framework I am living by. I strongly believe GE as a company matters to the world: we employ 300,000 people who need leadership. I have spoken to Warren Buffett and to the President about how GE is so important for the entire country.”
Picking back up where our story first left off, in the fall of 2018, Flannery was finally fired and replaced by Larry Culp, a complete outsider to GE and the first of this sort to ever be named Chief Executive of the 128-year-old company.
“Larry Culp has a proven track record in company transformation and delivering shareholder value. He is a strong leader with deep knowledge of industrials and technology, and an intense focus on execution, organization, and talent development,” exclaimed the board’s Lead Director, Thomas Horton.
Culp immediately got to work on executing a plan to get General Electric going in the right direction. Tapping into resources he could use to chip away at the corporation’s crippling debt, he slashed GE’s cherished dividend, sped up its divorce from oil-and-gas giant Baker Hughes, and sold the BioPharma business for $21 billion to his former company.
“At Danaher, being an active buyer made sense because shareholders trusted us re-investing cash into the business to be the right long-term strategy. Ultimately though, serving the customer was at the center of everything Danaher did. And I want to bring the same focus to GE,” Culp said while pondering how his career experience might influence changes at GE. “I want to concentrate on strong daily management. Setting priorities at a large massive organization is difficult—how do you best establish processes and how do you enforce? Some examples are Toyota production-like efficiency, agile product development, lean methodologies.”
In the Fall of 2019, GE announced it would freeze its US pension plan for about 20,000 workers and take other steps aimed at slashing the company’s alarming pension deficit by up to $8 billion. GE’s pension plans were about 75% funded as of the end of last year. The steps announced would lift that funding status to about 80% or higher.
By February 2020, GE’s share price had substantially increased from $10.85 when Culp was hired to $13.16. Then the COVID-19 pandemic wreaked havoc on the world’s economy and particularly the airline industry – which in turn, deals a blow to GE because manufacturing commercial jet engines accounts for a quarter of their revenue and 45% of operating profits. As a result, GE’s share price has collapsed by 43% this year to $6.28. Which is disheartening to see, considering the turnaround was gaining such momentum!
“An Impossible Situation”
“It’s an impossible situation. There is no magic wand you can wave,” said Andrew Obin, an analyst at Bank of America Merrill Lynch. It took decades of intricate misguidance at unbelievable scale to reduce GE to ruins, and frankly, if prosperity is reestablished in just as much time, shareholders ought to open the church of Larry Culp for Sunday services.
Regardless of the current tragic economic circumstances, GE’s board is committed to keeping Culp around – they’ve lowered expectations through the pandemic as nobody seems to have a grip on what the future could look like. With this being said, the company promised to award him shares worth $124 million if Culp boosts the stock by 200% from current levels. According to CNN Business, the big payday will come though if GE’s share price spiked by 250% to $16.67. Under that scenario, Culp would cash in with shares worth more than $230 million.
Is General Electric fighting just to stay alive? Yes. Is there a better person than Larry Culp to nurse them back to health and potentially world-class profits? Probably not.