Jeff Bornstein could not control his emotions.
“I love this company,” began the tough-talking, hard-driving chief financial officer of one of the world’s most storied corporations.
Then he broke down in tears.
It was August 2017, less than a month after John Flannery, the brand-new CEO of General Electric, had taken the reins. Flannery and Bornstein had both devoted their entire careers to GE, like most of those present for this moment at the annual summer meeting for top executives in Crotonville, NY, a leafy campus where the company’s professionals spend months being indoctrinated in the corporation’s proud culture.
But what should have been a celebration felt more like a wake.
Days earlier, the two men had met in Schenectady to examine the books at GE Power, the century-old company’s most venerable and profitable division — and had found a dry well where they expected cash.
Power’s “solid profits … were illusory,” write Thomas Gryta and Ted Mann in “Lights Out: Pride, Delusion, and the Fall of General Electric” (Houghton Mifflin), out July 21. “The accounting tricks that looked like profits were actually just borrowing from the company’s future earnings.”
At that earlier meeting, Flannery wheeled on his CFO and tried to tamp down his rising panic.
“Did you f–king know about this?” he demanded.
Founded in 1892 by Thomas Edison, J.P. Morgan and several partners, General Electric’s corporate pedigree had been peerless. The company was a charter member of the Dow Jones Industrial Average, on board at its creation in 1907 and the only one that remained there 110 years later.
GE grew from the nation’s premier power and lighting company into a behemoth. By the turn of the 21st century it was valued at $600 billion, encompassing media, plastics, aerospace, energy, digital, financial services and more.
But in the months after the retirement of Jeffrey Immelt, Flannery’s predecessor, all its apparent wealth began to evaporate.
In Flannery’s first year on the job, more than $140 billion in value vanished from GE’s stock price — bigger by far than the losses incurred by the epic collapses of firms like Enron and Lehman Brothers. GE was unceremoniously booted off the Dow.
It turned out the problems at Power were not unique. For years, GE’s profits had been a mirage built on whirlwind mergers and accounting sleight of hand. The funds that had been doled out to shareholders as fat dividends — and had covered its managers’ lavish perks and pay — had largely been borrowed on the strength of the company’s golden credit.
The book’s authors paint a damning portrait of Immelt’s 16 years at the helm of GE, where a rubber-stamp board of directors allowed him to hemorrhage money almost unchecked.
Immelt was just 45 when he ascended to the top spot in September 2001, succeeding business legend Jack Welch. A charismatic, natural-born salesman, Immelt’s boundless optimism fueled a strategy of continual expansion, as he went fad-surfing after the buzziest new ventures.
At Immelt’s urging, GE’s many arms “overpaid for businesses they didn’t understand and then [were] crushed by the market,” Gryta and Mann write.
On his watch, GE bumbled into the subprime mortgage business shortly before the 2008 crash, leading to deep losses that pushed its stock into single-digit territory. Immelt spent $14 billion on an aggressive expansion of GE’s oil and gas holdings — just as the fracking boom cratered the price of crude oil. The digital division he set up in Silicon Valley and showered with $5 billion of capital never managed to produce the machine-learning platform he touted.
The board didn’t entirely understand how GE worked, and … Immelt was just fine with that.
– from “Lights Out,” on Jeffrey Immelt’s mishandling of GE
Meanwhile, GE’s corporate structure placed Immelt at the top of its board of directors, essentially making him his own boss.
“The board didn’t entirely understand how GE worked, and … Immelt was just fine with that,” the authors write. The well-compensated board members were chosen for their willingness to cheer Immelt on — and he readily ejected directors who objected to his plans.
At the same time, GE’s established divisions were expected to meet earnings goals far removed from reality. “Under Immelt, the company believed that the will to hit a target could supersede the math,” Gryta and Mann report.
It was a recipe for a disaster. Up-and-coming middle managers knew that a missed goal could stymie their climb up GE’s ladder; division heads “didn’t necessarily know how his underlings got to the finish line and it didn’t really matter,” the authors write.
Those toxic incentives drove the debacle that Flannery uncovered at GE Power. The division made its money not on the generators and turbines it built, but on the service contracts it sold to maintain the machines.
All a manager had to do was tweak the future cost estimates on those decades-long contracts to jack up profits as needed — and to paper over real losses from unsold inventory and declining demand.
All the while, as the Wall Street Journal reported, Immelt often jet-setted around the world with two corporate aircraft — one that actually carried him, the other flying just behind as a backup “shadow plane” on the off chance that a mechanical problem might delay his busy schedule. His aircraft was rumored to stock both lobster and steak so the boss could choose his midflight meal. Over his last dozen years as GE’s CEO, Immelt raked in an estimated $168 million.
At age 61, after a 35-year GE career, Immelt announced his retirement. He had long planned to depart at the end of 2017, and the board had been conducting an internal audition process for months. But after a contentious investors conference that May, when Immelt was forced to admit that the oil unit would likely drag down GE’s annual profits, he sped up the timeline.
In August 2017, Flannery took the reins. (His CFO Bornstein, who had apparently been unaware of the fiscal games that divisions like Power had been playing, had also been on the four-man shortlist.)
It took months for Flannery to take a complete inventory. Once he did, he ripped off the bandages with a public reveal at an investors update meeting that November.
“We’ve been paying a dividend in excess of our free cash flow for a number of years now,” Flannery confessed to a crowd of stock analysts and financial reporters in Midtown Manhattan. He revealed that Immelt had spent more than $150 billion on stock buybacks that artificially nudged GE’s per-share earnings higher, burnishing the company’s image on Wall Street — but had actually borrowed to pay out dividends.
GE would miss its annual earnings target by a shocking $5 billion that year, Flannery announced — and would slice its dividend in half. It was a cold splash of reality in the face of a stock market accustomed to Immelt’s breezy promises of boundless gains. Almost all of that year’s losses stemmed from the black hole at the heart of GE Power.
“No more success theater,” Flannery pledged.
The truth hurt — and sent GE’s stock price plummeting. But in the next few months, not even a wholesale housecleaning of the board and the removal of Flannery’s top deputies, including Bornstein’s ouster that October, was enough to turn the ship around.
The new board of directors voted to fire Flannery after just 14 months on the job, replacing him with the first-ever GE CEO to be trained outside its corporate culture.
New honcho Larry Culp promptly shed several divisions, including Immelt’s ruinous oil and gas venture. But GE’s slow bleed continues. In October, Culp froze pension contributions for 20,000 employees. In March, he promised to give up his 2020 salary while announcing a 10 percent layoff in the Aviation division. The company’s shares are still publicly traded on the New York Stock Exchange, but at less than a quarter of their former value.
Since leaving GE, Immelt, now 64, dove into venture capital, working with tech startups in California and chairing the board of a medical software company in Boston.
But he has been named in at least two shareholder lawsuits filed by angry investors who accuse him and other former GE execs of covering up its liabilities.
“GE still weighs on him,” Mann and Gryta report. “He feels misunderstood and unfairly portrayed” — and as he often reminds interviewers, he has held onto his GE shares, hoping against hope for an epic comeback.
Soon after Immelt stepped down, he published a self-congratulatory 6,000-word valediction in the Harvard Business Review titled “How I Remade GE.”
“It will take years for GE to fully reap the benefits of the transformations,” he wrote with his signature sanguine obliviousness. “I’m confident that I’m handing over a company that will flourish in the 21st century.”