5. Are We Husbanding Our Capital?
A key factor in the decline of GE was its misallocation of capital. Significant and strategic acquisitions were made at the wrong times (at the peak of business cycle) in the wrong amounts (premiums too high), with divestitures and share buybacks occurring at the opposite end of the spectrum.
GE’s Finance committee was disbanded in 2002 shortly after Immelt became CEO. It was not until Flannery succeeded Immelt in 2017 that GE re-established a board Finance & Capital Allocation Committee.
The board should consider the tradeoffs between investing capital for growth and returning it to shareholders. With inadequate board oversight, Immelt returned to shareholders 100% of GE’s earnings during his tenure (Welch returned 66%) while declining acquisitions that may have revived growth and the pension fund swung from being $14.6 billion overfunded to $29 billion underfunded.
6. Does Our Balance Sheet Match Our Strategy?
The balance sheet should support the strategy in the near, mid and long-terms. It is a fundamental error in capital structure to finance long term assets or capital needs with short term capital vehicles as GE did under both Welch and Immelt. The resulting liquidity crunch when the commercial paper used to finance Capital’s long-term loans and GE’s acquisition projects dried up in the financial crisis was avoidable. Sensitivity analysis and stress testing should answer the question, “Does the maturity of our debt or capital match the expected life of the assets we are acquiring with it?”
7. Do Our Compensation Plans Align with Our Strategic Objectives?
It is the role of the Compensation Committee to ensure that the remuneration of the company’s top leaders is aligned with shareholders’ long-term interest. During Immelt’s tenure the S&P 500 Index increased by 133%, GE’s share price fell by 30%, and yet Immelt’s total compensation rose by 600%.
Admirably, Immelt declined his annual bonus on multiple occasions. However, in 2011, Institutional Shareholder Services (ISS) recommended shareholders vote no on his remuneration package, stating “there is a misalignment between long-term company performance and the compensation of [GE’s] CEO.” Don’t ignore them just because you don’t like them.
The question for the compensation committee in evaluating the CEO’s compensation package – how should the CEO’s remuneration be impacted by failure to achieve pre-established objectives over both the short and long term?
8. Does Our Board Have the Right Perspective and Experience?
Use Diversity to Your Advantage.
The most effective means of avoiding groupthink and cognitive dissonance is a diverse board. Diversity of age, gender, ethnicity and geography is powerful and can be a competitive advantage. Although the quick consensus of homogeneity may make decision-making more efficient, it also threatens the board’s ability to detect threats and recognize opportunities. Diversity also brings unique experiences that can foster innovation, provide deeper consumer understanding, and richer brainstorming.
Link Board Makeup to the Future
Experiential diversity is also an important link to strategy. Most companies’ boards reflect their past, yet the most important threats, opportunities, and decisions are future-looking. Under Immelt, GE’s strategy included becoming a global top ten software company by 2020. Yet, only one person of sixteen on the GE board had significant experience in the tech industry. In order to provide evaluation of the company’s strategy and oversight of its execution, the Board should have adequate industry-specific knowledge to be able to constructively challenge the CEO.
9. Are We Asking the Right Questions?
Board members are elected to represent shareholders in the guidance and oversight of the company and its management team. To do so effectively requires directors to ask questions and not merely cheerlead for management’s proposals. Directors who do not ask questions, identify potential problem areas or risks, or do not otherwise actively participant in discussions are not doing the jobs they are being paid to do. When a long-term GE director was asked by a new director, following approval of a series of management proposals with little debate, what the role of a GE board member was, he replied “Applause”. There could be no greater indictment of a board of directors.
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