Under New CEO Flannery, GE Faces a ‘Reset Year’ in 2018


GE CEO John Flannery“The GE of the future is going to be a more focused industrial company,” Chairman and CEO John Flannery said during his presentation at the company’s investor day on Monday. “It will leverage a lot of game-changing capabilities.”

Change is certainly on the agenda. The 125-year-old Boston-based industrial behemoth is slashing dividends, reducing board seats and restructuring its workforce of 300,000 employees  in an effort to restore consumer confidence and stave off Wall Street and investor skepticism in their performance.

Flannery is calling 2018 “a reset year,” one that will see an “extremely painful” cut to 12 cents a share of the quarterly dividend to set “a path to grow going forward,” marking the largest cut by an S&P 500 during a non-financial crisis year. The dividend cut is GE’s second since the Great Depression.

“This is the opportunity really of a lifetime to reinvent an iconic company,” he added. “I was forced to confront a lot of the sort of deeper questions about the company. What’s the essence of the company I love so much?”

A 30-year veteran of GE, Flannery’s agenda and style are a clear departure from that of predecessors Jeff Immelt—whose transformation of GE “from a classic conglomerate to a global technology-driven company” is a Harvard Business Review must-read—and “Neutron” Jack Welch—whose motto was “Fix it, close it or sell it”.

Flannery’s personal stamp on GE isn’t about getting bigger but getting smaller, with a narrower focus on three businesses—healthcare, aviation and energy—and scaling back from a current portfolio that includes railroads, chemicals, marine engines and banking.

“We understand the importance of this decision to our shareowners and we have not made it lightly.  We are focused on driving total shareholder return and believe this is the right decision to align our dividend payout to cash flow generation,” stated Flannery.
“The dividend remains an important component of GE’s capital allocation framework. With this action and others that we will be discussing this morning, we are acting with urgency to make GE simpler and stronger to drive growth and create more value for our shareowners.”

The transition to a leaner GE will be difficult, involving an exit from more than $20 billion of assets and all the employees and stakeholders involved in those businesses. It’s also planning to sell its iconic  lightbulb business, a defining product for the past 125 years.

The board of directors will be reduced from 18 to 12, with seats allocated to three new members “with relevant industry experience.” The new board will institute a committee focused on how the company spends money.

Also on the to-do list: Flannery will divest Baker Hughes, just one year after the merger of the two companies’ oil and gas businesses. GE has already divested NBCUniversal  as well its real estate portfolio, dishwasher and appliance business and its water business that makes electrical equipment for utilities.

Flannery’s vision is focused on modern industrials such as jet engines, power plants and MRI machines.

CNBC’s Jim Cramer, for one, needs convincing. “I don’t want to talk against my [investment], but I don’t know how it’s possible anyone thinks it should be worth $20,” he said of the share price. “There’s just a lot that’s wrong.”  That said, he called Flannery a “no-nonsense guy” who acknowledges the company’s challenges.

“Even though there is a lot that’s not great here, Flannery is going to make it look like a regular company,” Cramer said. “You’re going to be able to look at it and say maybe it’s not where Honeywell is but it can get there.” The GE rival has seen its stock surge 25 percent this year compared to GE’s 37 percent decline since in 2017.

In 2017, GE ranked #13 in U.S. firms by gross revenue in the Fortune 500. “It’s show-me time. We have to perform and execute,” Flannery said. Or as one of the founders of GE—Thomas E. Edison—said, “There’s a way to do it better – find it.”

Hear more from Flannery at GE’s recent Minds + Machines  event in San Francisco: