Ousted CEO John Flannery pays the price for taking out GE’s trash
Ousted General Electric Co. Chief Executive John Flannery was asked to clean a house that turned out to have been dirtier than expected, then got blamed for creating all the trash that he was taking out. No good deed goes unpunished.
When Flannery took the reins at GE from Jeffrey Immelt in August 2017, GE’s stockGE, +7.09%was down 19% on a year-to-date basis while the Dow Jones Industrial AverageDJIA, +0.73%had rallied 11%. The stock was by far the worst Dow performer during Immelt’s 16-year tenure. Flannery was tasked with righting a ship slowly sinking under the weight of a deteriorating balance sheet, too many unrelated businesses, questionable accounting and acquisitions gone wrong.
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But it seemed as if every time he tried to pull back the curtain, investors didn’t like what they saw. And, eventually, he paid the price for not cleaning up someone else’s mess fast enough.
When Flannery announced GE’s transformation plan in November 2017, which included detailing some of the businesses’ problems, narrowing the company’s focus and cutting the dividend in half to preserve cash, the stock suffered its biggest one-day decline in 8½ years.
But that plan came barely two months after Flannery took over, not enough time for him to have created his own problems.
Then, after Flannery disclosed massive losses in GE’s legacy insurance business from its long-term-care portfolio, the stock slumped 15% over the next five sessions, the worst five-day stretch for the stock in nine years. But the large insurance losses were a result of a decision made during Immelt’s tenure to retain its North America Life & Health reinsurance business.
Even when GE did the right thing by taking a full retrospective approach to the adoption of new revenue-recognition standards, rather than taking a modified approach as many companies did to minimize the negative impact of the change, Flannery couldn’t catch a break. The stock zigzagged lower amid widespread misapprehension among investors and the media — MarketWatch was an exception — that GE’s recasting of prior-period numbers was the result of an error or misstatement rather than a choice to be more transparent.
Read more: GE shares zigzag on confusion about impact of new accounting rules
Then after Flannery spoke at an industry conference this May, the stock suffered the biggest selloff in nine years as he unsettled investors by not standing behind GE’s dividend at the time, basically saying the company will pay out only what it can afford.
Flannery and Chief Financial Officer Jamie Miller then pledged to be more transparent and straightforward with investors, and the Securities and Exchange Commission, regarding earnings releases, after years of confusing and potentially misleading reports. And while GE followed through on that pledge, the stock was rocked again after the latest quarterly report as investors registered displeasure with Flannery’s frank concession that the issues at GE Power would be a “multiyear fix, with some volatility.”
Also: Investors who paid attention to GE’s accounting saw trouble coming
That volatility may have included Monday’s announcement of an impairment charge of “substantially all” of the $23 billion goodwill balance at GE Power. But keep in mind the large goodwill balance was a consequence of acquisitions gone wrong, including the $17 billion purchase of France’s Alstom, during Immelt’s reign. Read more in GE’s latest annual report at SEC.gov.
Basically, it’s like a coach being fired after one season, for losing with bad players signed and drafted by a previous regime.
But Flannery knew what he was getting into. And he even admitted that one concern of investors, and therefore GE’s board, was his style of being “deliberate and then moving when things make sense as opposed to moving just because somebody wants us to.”
And it’s safe to assume that a 55% decline in GE’s stock in a little over a year with Flannery in charge means there are a lot of people who wanted a more fiery response.
Removing a CEO after such a brief tenure was certainly a surprise, given the company’s history of long CEO reigns, but so was the manner in which Flannery’s departure was announced. When Immelt stepped down, the press release included five paragraphs describing Immelt’s accomplishments and the ways in which he had positioned GE for success.
In Monday’s release announcing Culp as chairman and CEO, by a “unanimous” vote of its board of directors and “effective immediately,” Flannery was mentioned in just two sentences in two different paragraphs:
• “Mr. Culp will succeed John Flannery as chairman and CEO.”
• “On behalf of the board, I thank John for his significant contributions and long service to GE.” (Quotation attributed to lead director Thomas W. Horton.)
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