A Stagnant General Electric Will Replace The C.e.o. Who Transformed It
General Electric, the 125-year-old industrial giant whose jet engines propel air travelers around the globe and whose electrical generators light millions of households, declared on Monday that it would be installing its first new leader in 16 years.
Jeffrey R. Immelt, 61, the departing chief executive, transformed G.E. over the past decade, jettisoning most of its once-huge financial business, which seemed to threaten the company’s survival after the 2008 economic crisis. Wall Street applauded those moves, but investors grew disenchanted as the company’s stock price and profits stagnated in recent years.
His successor, John Flannery, 55, is a longtime G.E. executive who has spent much of his career in finance and deal making, raising expectations among some observers that he might look to sell off pieces of the sprawling company. Mr. Flannery told analysts that he would embark on a “comprehensive review” of all G.E. businesses “with speed, urgency and no constraints.”
Mr. Flannery’s tenure may well determine the shape and the economic role of conglomerates like G.E. — expansive companies with seemingly limitless business ambitions — that once defined an American industrial era. Now, G.E. is among the last of the breed.
The company’s roots reach back more than a century, to the laboratories of the storied inventor Thomas A. Edison. G.E. today sells magnetic resonance imaging machines, provides financial and data services, manufactures light bulbs and performs drug research, among myriad other activities.
But as a rule, Wall Street does not like conglomerates. Instead, investors tend to prefer the clarity of companies with simpler product lines and fewer moving parts.
Mr. Immelt had spoken in the past of stepping down this year. But no successor had been formally named, and in recent months, G.E.’s lagging stock performance brought increasing pressure from investors and new urgency to questions about when he might depart.
Those questions were being addressed by the G.E. board on May 13 at a trendy hotel in downtown Manhattan, a location selected in part because it was a place where people seemed unlikely to recognize G.E. board members. There, four contenders for Mr. Immelt’s post lined up and made their case to claim the top job.
G.E. said its succession planning had been in the works for about five years, with a target of this summer. Activity accelerated in the past year, once the leading candidates had gathered wider experience across the company.
The company’s lead independent director, Jack Brennan, said that there had been an “ongoing dialogue” about the timing but that, in the end, everything “happened to marry up with the schedule we had in place,” which Mr. Immelt had agreed to.
Mr. Flannery will become chief executive on Aug. 1. Mr. Immelt will remain as chairman until he retires on Dec. 31. Mr. Flannery will then add that role on Jan. 1.
Mr. Brennan has fielded calls recently from frustrated shareholders, according to two people familiar with those conversations. In an interview, Mr. Brennan — a former chief executive of Vanguard, a large mutual fund firm — said: “I talk to investors all the time. And given my background, I get a lot of unsolicited advice.”
Investors’ calls for change increased noticeably two years ago when Nelson Peltz, an activist shareholder, and his investment firm, Trian, bought a $2 billion stake, making it one of G.E.’s largest shareholders. In an 80-page presentation at that time, Mr. Peltz and his team called on management to cut costs, buy back shares and further shrink G.E.’s finance business, GE Capital. Trian said its plan would sharply increase G.E.’s share price, to $40 or more by the end of 2017.
G.E. has taken some of the proposed steps, and its shares had risen more than 10 percent from the beginning of Trian’s campaign through Friday. Still, rival industrial firms did far better over the same period: United Technologies shares rose 43 percent, and Honeywell’s stock was up 46 percent.
On Monday, G.E. closed at $28.94 a share, up 4 percent but still below Trian’s target range. Trian was not consulted on the leadership change and learned about it Monday morning when the company made its announcement.
Even investors who praise Mr. Immelt for drastically reducing G.E.’s dependence on finance and shedding its nonindustrial businesses, like the media company NBCUniversal, welcomed the change. “Frankly, it’s the right thing to do,” said Robert Atchinson, managing director of Adage Capital Management, a $30 billion fund that holds G.E. shares. “G.E. needs to go to the next level of change.”
Mr. Immelt had to guide G.E. through significant shocks during his tenure. Just after he became chief executive, in 2001, the terrorist attacks on Sept. 11 battered the airline industry and other buyers of its equipment.
Later, the global financial crisis of 2008 delivered a severe blow, one partly self-inflicted. For years, G.E. had chased the seemingly easy profits to be made in everything from American home mortgages to credit-card financing in Japan. In some years, that business made up as much as half the company’s income, and G.E. became one of the largest lenders in the United States.
The finance buildup was begun by Jack Welch, the legendary chairman and chief executive and Mr. Immelt’s predecessor, who served for two decades and oversaw an era of tremendous global expansion. That emphasis on financial businesses continued for years under Mr. Immelt — until the 2008 crisis.
Suddenly, finance and the regulatory demands that came with it became riskier and less attractive. GE Capital’s size meant that it was deemed a “systemically important financial institution” in the years that followed, the official name for a lender that the government considers too big to fail. The designation cut into potential profits by imposing additional business restrictions.
Since announcing plans to sell off the bulk of that business two years ago, G.E. has sold a significant chunk, including a number of its finance operations in Europe. The “systemically important” designation was removed from GE Capital last year.
In the past few years, G.E.’s profit performance has suffered because lower oil prices have hurt the company’s big oil-field-equipment business. In October, G.E. agreed to merge its oil-and-gas unit with Baker Hughes in an effort to create a stronger business that could benefit from a recovery in oil prices.
A major part of Mr. Immelt’s strategy to unify G.E.’s many businesses was to invest heavily to transform it into what it has called a digital industrial company. He had said he wanted G.E. to be “a top-10 software company” by 2020.
The idea would be that, for instance, software could harness the data produced by a jet engine to predict when the engine needed maintenance, saving time and money. The technology could be used across G.E.’s businesses, whether medical equipment or wind turbines.
“It’s an open question as to whether that pays off,” said Karim Lakhani, a professor at Harvard Business School.
Like Mr. Immelt, Mr. Flannery is a company veteran, having begun at GE Capital in 1987 with a focus on evaluating risk for big corporate lending deals. In 2013, he took over business development at the corporate level, and he was involved in G.E.’s sizable acquisition of Alstom’s energy businesses and the shrinking of GE Capital. Mr. Flannery joined GE Healthcare in 2014, overseeing a turnaround of that business, the company said.
In an interview, Mr. Flannery took issue with the characterization of him as a financial engineer. Much of his time in finance, he said, was assessing businesses, their managements and whether to make investments. “It wasn’t trading derivatives,” he said.
Mr. Flannery was one of the four candidates who made presentations to the board at the May 13 meeting at the Beekman Hotel in Manhattan. Their day started at 7:30 a.m. and lasted till 4 p.m.
The other three competing for the job were Jeffrey S. Bornstein, the chief financial officer (he will become vice chairman, G.E. said Monday); Steve Bolze, the president of G.E.’s power-generation business; and Lorenzo Simonelli, the president of G.E.’s oil-and-gas unit, according to a person briefed on the meeting who was not authorized to speak publicly.
Before the meeting, the board members received folders of documents detailing the history, track record and executive reviews of the candidates. One by one, each made a presentation of more than an hour and a half on the subject “the road forward for G.E.,” Mr. Brennan said.
The board knew them all well. In the past few years, G.E. board members, in groups of three to five, had visited each of the executives in their businesses. One visit to Mr. Flannery was in Uppsala, Sweden, where GE Healthcare has a life sciences unit, doing biological research for new therapies.
On Friday morning, the board met again to vote, this time at the Boston Harbor Hotel. The conference room had been swept for listening devices the night before, and security guards were stationed outside overnight.
The vote, Mr. Brennan said, was unanimous in favor of Mr. Flannery. He got the call a bit after 1 p.m. in Chicago, the headquarters of GE Healthcare, to tell him he would be the next chief executive.