The General Electric Evolution Continues

Apr.18.14 | About: General Electric (GE)


General Electric posts strong quarter for its industrial businesses.

GE announced in March it was spinning off the consumer finance business later this year.

Talk has surfaced about keeping the CEO tenure for the company well below 20 years.

I have been very interested in General Electric Co. (NYSE:GE) over the past few years because of its move to restructure itself and become less dependent upon financial services. As is well known, General Electric at one time earned more than 50 percent of its profits from its financial business. And this from a company known for the production of physical goods.

General Electric, of course, was not the only manufacturing company to have taken this route. General Motors (NYSE:GM), for example, was just one of several that came to rely a great deal on the performance of its financial wings.

But, General Electric has moved to reduce the role that its finance side plays in its earnings performance. Last year, General Electric received only about 45 percent of its earnings from finance. It wants to get this ratio down to around 30 percent by 2016.

To accomplish this, GE in March announced its plans to spin off the consumer finance business into a company called Synchrony Financial (NYSE:SYF) in an initial public offering later this year. Although this strategy is expected to hurt the prospect for revenue and earnings growth in the near future, over the longer haul the belief is that this move will help the company concentrate and do better elsewhere.

Last year, General Electric earned almost $17.0 billion. The financial business it is spinning off has earned profits of around $2.0 billion.

I applaud the decision to move in this direction.

The other good news is that the industrial business is showing improvement in profits and good growth in sales. GE's industrial revenue jumped by 8.0 percent, year-over-year, and the profit the industrial businesses contributed rose by 12.0 percent.

This strong performance was achieved through growing sales in this area and cost cutting that improved efficiencies. This latter was especially helped by the increased focus of management.

Overall, GE reported a $3.0 billion profit for the first quarter. This number was 15.0 percent below a year earlier.

General Electric's return on shareholders' equity has not done real well in recent years, although it has been improving. It was well above 15.0 percent in the early years of Jeff Immelt's tenure as GE's Chief Executive Officer, but has been below 13.0 percent in most of the recent years. One could argue that the earlier years were a carry-over from the previous administration.

Furthermore, Mr. Immelt's leadership has not been appreciated by the investment community as General Electric's stock price, which, on Monday, was 37.0 percent below where it was when he took over the reins of the company. Of course, Immelt had to go up against the performance of his predecessor, Jack Welch, who was and is almost untouchable. Anyone would have suffered to follow him.

This is not totally unlike the general situation at Microsoft (NASDAQ:MSFT) where Steve Ballmer took over the CEO position from Bill Gates in 2000. Even though Microsoft earned well more than 15.0 percent on shareholders' equity during this time period, Microsoft's stock price basically "flat lined" for the full 13 years that Ballmer held the position.

General Electric has not performed as strongly under Immelt as Microsoft did under Ballmer, but in recent years, he has firmly started the restructuring that is taking place at GE. Things are moving in the right direction and there is good evidence that they will continue to do so.

However, an interesting topic has recently surfaced. The topic concerns the length of time the GE chief executive should stay in office. The Wall Street Journal published the article, "GE Rethinks the 20-year Chief." Apparently, Immelt "has led several board discussions about shortening the expected tenure of GE's next chief executive to between 10 and 15 years."

Welch was head of GE for 20 years. However, the two men that preceded Welch only served 9 years in the top spot.

Mr. Immelt has led GE for almost 13 years.

According to the article "directors increasingly expect that he will step down before reaching the two-decade mark…"

I could see that Immelt might want to stay for a few more years to see the consequences of his efforts to restructure the company. Then he could go out on a high note talking about how he turned around the company and got it refocused.

My own view is that a person should not be a Chief Executive Officer for more than 10 years and probably should exit a little sooner than that. Like the President of the United States, the CEO of a major company can do the most to implant her or his impact on the company in the first two years of his tenure. After that, the job becomes one of making sure that the changes are fully effective and achieving what was desired. The years after that, one generally rides the crest of efforts of the earlier years.

For myself, I have worked in several turnaround situations and once the company "got back on track" I began to lose my intense interest in the organization. I know others have told me that even in healthy companies that they start looking more at other interests once the time has passed when major changes can be introduced.

Unfortunately for Jeff Immelt he took over for the "magical" Jack Welch and faced a management community that didn't really want change because they liked everything the way it was… and they didn't want to tamper with success.

This situation is not like the one where someone had to follow on as the basketball coach of UCLA upon the retirement of the legendary John Wooden.

It took the financial crisis and the Great Recession to really shock GE and its management into the need for change. It was at this time that Immelt became more of a "turnaround" executive. He finally had the room to start making some changes and start restructuring the company.

But another argument for shorter terms for CEOs is the innovative environment of the 21st century. Things are changing and they are changing at an increasingly rapid pace. If a CEO stays too long she or he discourages a generation of bright, talented executives. Big companies have a major problem in giving managers an incentive to innovate. And, if the talent cannot move up the management ladder or believes that it will not be able to, internal change is stifled.

Anyhow, the topic of the CEO position is now in the public domain. Investors have applauded the restructuring that Mr. Immelt has begun as GE's stock rose more than 30 percent last year. Maybe on this up-note the discussion about a new CEO should gain speed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.