By Gunnar Schifley, Contributing Writer
The General Electric Company has been in the news constantly during this quarter and Q4 2017, and the news about GE has been overwhelmingly negative. The company has been experiencing serious internal issues and has seen its share price plummet over 50 percent in the last 12 months. This begs one to ask the question, “What is happening inside of GE, and how are they going to fix it?” Many analysts have varied and numerous conclusions to this question have been made.
A few headlines have been major blows to GE and have shown investors a different internal picture than what investors had previously expected. The company revealed its capital segment is a mess with heavy losses, including a recapitalization fee of over $15 billion over the next few years. In addition to this expense, GE also has to address a $31 billion underfunding in its pension plan that must be resolved over the next few years. In recent GE reports, there is now an SEC investigation underway into the $6.2 billion loss in insurance. On top of this, GE has halved its dividend to shareholders the last two quarters, showing increasing internal financial strain.
When looking into these big events that have had such a negative impact on the company and its share price, mismanagement comes up time and time again. It was revealed last year that the previous CEO, Jeff Immelt, was taking two private jets on multiple occasions for business trips – one flying almost completely empty as a “backup.” This kind of poor judgement is a reflection of the overall culture within the company. Management has historically been well intentioned and the company managed properly, despite the poor record in the merger and acquisition space.
GE has reacted to this recently with a new CEO, John Flannery, who took over in August 2017, as well as board member changes. Since his arrival, Flannery has stated he is focusing heavily on cost cutting in the organization in an attempt to streamline operations and find value within the segments they operate that was otherwise overlooked. He even went as far as saying full segments of the business portfolio may be sold off in order to bring that value into GE’s coffers. The company has also announced changes to the board. The board is reducing in size from 18 to 12 members, and three new board members were voted in during the last shareholder meeting on Feb. 19. Hopefully, this leads to a more direct impact from a now more focused board, but time will tell as they settle in and learn to operate under this new structure.
Management is an often overlooked aspect of a company’s valuation, and, as seen with GE, management can have some serious impacts when issues within a company come to light. Recent examples of large management issues in companies, such as Uber, Twitter and Papa John’s, demonstrate the importance of monitoring company executives and having proactive board involvement to address these issues before they become big newspaper headlines. Going forward, I anticipate more conversations about the importance of watching management more closely, as well as discussions on the power of the board versus the power of an active investor who comes in to fix things.
Disclosure: I am currently long GE and do not plan on changing my position within 72 hours of this article being published.
SIMM
