Share this post

🔑 Key Takeaways

  1. Succession planning and listening to advice from experts are crucial for the survival of an organization, even for highly successful companies like GE.
  2. General Electric (GE) was not founded by Thomas Edison, but by a merger backed by Boston venture capitalists. JP Morgan's financial engineering saved the company from a financial crisis in 1893, highlighting the importance of understanding the true history of an organization.
  3. Decentralization can lead to lack of accountability, but a command and control approach can stifle innovation. Finding the right balance is important in leadership and business success.
  4. Business success can come from ethical leadership and wise financial decisions, not just M&A expertise. Transparency and integrity are crucial in preventing conspiracies and corruption.
  5. Jack Welch's leadership style was polarizing, with a focus on increasing market value at the expense of employee well-being. Despite this, he maintained a strong connection with people and left a lasting impact in the industry.
  6. Jack Welch, known for creating successful cable networks, was a decisive leader but also had flaws in his decision-making. Despite his denial, evidence suggests he may have manipulated earnings in certain deals.
  7. As a CEO, there is immense pressure to meet earnings projections. Balancing industrial and financial aspects is vital, but questionable decisions may lead to eventual consequences. Managing investor expectations is crucial.
  8. Even successful CEOs like Jack Welch make mistakes and have regrets. Abandoning potential acquisitions and firing key players can have long-term consequences. It's important to consider all factors before making decisions with far-reaching impact.
  9. It's important for leaders to listen to expert advice, even if they believe they understand the risks themselves. Neglecting expert advice can lead to negative consequences for the company, as seen in the downfall of GE Capital.
  10. Despite once being an industrial powerhouse, GE's unregulated financial operations ultimately led to its downfall. Listening to experts, like Jim Grant, on credit market risks is crucial.
  11. Companies must prioritize protecting their credit ratings and understanding credit markets to avoid costly mistakes. Board members must hold CEOs accountable for the benefit of stakeholders, even if it means challenging them. Even major investments cannot save a company from failure if these steps are not taken.
  12. No company is immune to failure. Consistent innovation and financial discipline are necessary for sustained success. Prioritize investing in core operations over risky investments and always remain vigilant.
  13. Choosing a successor based on merit is vital for the success of a company. Leaders should be open-minded, listen to dissenting views, and value warnings from those who understand the business. Charm should not outweigh competence.

📝 Podcast Summary

The Rise and Fall of GE: Insights from an Insider

GE was once the most valuable and admired company in the world, responsible for numerous innovations like electricity, diesel locomotives, jet engines, and more. However, its decline started with the CEO succession from Jack Welch to Jeff Immelt. Immelt could have saved the company by listening to advice from Bill Gross and Jim Grant, but he didn't. Now, GE is being spun off into three separate companies. Author William Cohan, who had worked at GE Capital, wrote this nearly 800-page book using his insights and research to uncover the company's history and the reasons for its fall.

The Unknown Truth Behind the Origin of General Electric (GE)

General Electric (GE) was not actually founded by Thomas Edison, despite what the company promoted, but by a merger between his company, Edison General Electric, and Thomson Houston Company, backed by Boston venture capitalists. Thomas Edison, who was just a shareholder and not a great businessman, was against this merger and quickly sold his small shares after the announcement. GE's origin story involves legends like JP Morgan, Charles Coffin, and others. In 1893, the company faced a financial crisis, and if it wasn't for some clever financial engineering by JP Morgan, GE would've gone down the tubes. Understanding the true history of GE is essential to cut through the myths created about Jack Welch and the company.

The Rise and Fall of GE's Leadership Innovations

Charles Coffin was a major innovator and CEO of GE who created a system of genius that did not depend on him. He recognized the potential of generating electricity and merged his company with Edison General Electric, which became GE. There was resistance to adopting the technology, but Coffin resolved to have a fortress balance sheet and became a great leader of men. Decentralization at GE led to executives breaking the law and using circuit breakers. While a command and control approach can stifle innovation, decentralization can lead to lack of accountability. GE's growth became stagnant, and Ralph Coner tried to push down responsibility into the organization and pull back on the command and control nature of the business.

The Dark Side of GE's History: Collusion, Jail Time, and Dismantling

The manufacturers of GE's electric equipment were caught colluding on the prices that they would charge customers- this elaborate signaling was done through codes and they met at industry offsites instead of learning industrial wisdom. This conspiracy went on for a decade until GE executives were put in jail. Ironically, Larry Culp was brought onto the GE board, who would later dismantle the company's big corporate apparatus spending billions a year. Jack Welch was heralded for buying back RCA, but he was just buying back a business that GE had started, and was forced to divest. Jack was a master at M&A, however, there were major issues with his leadership styles.

The Mixed Legacy of Jack Welch: A Leader with Charisma and Controversy

Though Jack Welch was a great leader who increased market value, influence and reputation of GE, he could be cruel to employees and make fun of them. He was once known as Neutron Jack for his tendency to fire employees. He could be a womanizer and treated his first two wives poorly. He is contrasted with Jeff who was more sensitive to social causes. Even then, people who were fired by Jack still admired him and attended his funeral. Though he could be harsh, he could also have a real connection with people and be incredibly charming and open. His management style would have been an asset very early on in his career and needed to change as time went on.

The Successes and Failures of Jack Welch's Leadership Style

Jack Welch, the former CEO of GE, was a legendary figure capable of seeing around corners. He started two important cable networks- CNBC and MSNBC, and had the ability to change his mind when presented with a clever and reasonable argument. However, his personal behavior wasn't always admirable, and he did make a few missteps like merging GE and GE Capital with Kidder Peabody, which was an unmitigated disaster. Despite this, his decision-making skills were usually on point, and he tended to make the right decision, unlike his successor Jeff Immelt. He vehemently denied managing earnings or manipulating earnings, but evidence suggests otherwise, particularly around the first Kidder Peabody deal.

Balancing Industrial and Financial Aspects in Leadership - The Case of Jack Welch and GE

As CEO, there is immense pressure to meet earnings projections to maintain credibility and create shareholder value. For Jack Welch, this meant sometimes manipulating earnings or monetizing assets to fill gaps. While this may be seen as negligence or manipulating earnings, Welch saw it as a responsible way to fulfill his obligations. GE was a complex company with both industrial and financial aspects, and Welch's leadership aimed to balance both. Despite questionable decisions, such as selling off the computer business and later trying to buy back Honeywell, Welch led GE to be a highly valued company. However, eventually, the market came back to reality, and GE faced breakup. Similar to Tesla today, the market rewarded GE with an absurd multiple of earnings, showing the importance of managing investor expectations.

Jack Welch's Regrets as CEO of GE

Despite being a successful CEO, Jack Welch regretted his decision to appoint his successor. He did not regret his move into insurance but regretted getting out of the computer industry. Jack's biggest mistake was abandoning the acquisition of Honeywell, which could have tilted the earnings power back to the industrial side. His decision to abandon the Honeywell deal was due to EU's demand for selling various assets that he didn't want to sell. He also regretted firing Dave Cody, the former CEO of Honeywell. GE Capital was once a golden goose that later became an albatross due to arbitraging price that GE had to pay to borrow money.

Ignoring Expert Advice - The Downfall of GE Capital

GE Capital was a profitable business that understood the risks it took, pricing them properly and getting paid for them, unlike other financial institutions that didn't understand risks. Despite warnings from experts, Jeff Immelt, who took over as CEO, ignored the risks and overestimated his own understanding of them. This eventually led to problems for GE Capital during the financial crisis, which Jeff had to beg the Treasury Secretary to solve. In retrospect, Jeff should have listened to his experts and sold GE's real estate business, which would have made a lot of money, instead of waving off their advice. Leaders should not ignore expert advice even if they think they know better, it could lead to negative consequences for the company.

GE's downfall and the importance of credit market understanding

GE, once considered an admired and respected industrial company, was one of the largest unregulated financial companies in the country. After the global financial crisis, they had to beg to be backstopped by the government as other financial institutions were and were subsequently declared a cfi and regulated by the Fed, which cost them over $2 billion a year. Jeff Immelt decided to get out of GE Capital, which he thought was brilliant but resulted in his being fired from the company. Jim Grant saw the risks that GE and GE Capital were taking, which would ultimately lead to their downfall, but Jeff Immelt failed to listen to his warnings. Understanding credit markets is important, and Jim Grant was insightful in picking up on issues going on in those markets.

The Importance of Protecting and Understanding Credit Ratings for Companies

Credit ratings are crucial for a company's credibility and must be protected at all costs. However, understanding credit markets is still a challenge for many despite borrowing money and having interactions with banks. Jeff Immelt's failure to understand this cost GE its AAA credit rating. Additionally, GE's board failed to hold Immelt accountable despite their job being to challenge CEOs for the sake of shareholders, creditors, and stakeholders. Buffet's quote that CEOs go shopping for pit bulls but end up with cocker spaniels speaks volumes about the board's lack of action. Finally, getting a huge investment from Buffet did not save GE from becoming part of the death knell.

GE's Fall: Lessons for All Businesses

Key lesson from GE's fall from grace is that no company is invincible, and the seeds of a company's downfall can be sewn early on. It's important for businesses to not take their success for granted and to consistently innovate and adapt to changing market conditions. Jeff Immelt's mistake of using the proceeds from selling GE Capital to buy back stock instead of paying down debt proved to be a wrong investment of capital. Companies should always prioritize investing in their core operations and maintaining financial discipline instead of making risky investments. In the end, even the most dominant companies can fall from grace if they don't stay vigilant.

The Importance of Choosing the Right Successor and Understanding the Business

Choosing the right successor and understanding the businesses you are inheriting are crucial for the success of any CEO. It's important to consider dissenting points of view and not surround yourself with yes men. Don't ignore warnings from people who understand the business you are in charge of running better than you do. Open-mindedness and willingness to listen to others can prevent failures like the one at General Electric, which could have been prevented. Succession should be based on merit and not just charm. Company leaders need to choose the best person to take the company forward, rather than the one who is politically adapt or charms their way to the top.