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The Problem with PoliticsConcerns voiced in your brief editorial [“Why Do Some Politician Still Not Get It?”, March 2008] are …

The Problem with Politics

Concerns voiced in your brief editorial [“Why Do Some Politician Still Not Get It?”, March 2008] are well-founded. Not one of the paltry choices vying for the U.S. presidency has ever sat in a CEO or COO chair, nor dealt with the survival and growth of a commercial enterprise. So it is not surprising that none are promoting changes to the tax code or recommending reductions in either personal or corporate taxes, both of which would act as an economic catalyst, as has been demonstrated in administrations past. However, all have offered criticism and some level of government interference in private sector industries and markets with onerous proposals inclusive of price controls, additional burdensome regulation, and tax increases to support a plethora of government-controlled entitlement programs.

All have at least alluded to, if not offered, outright control of markets, corporate interests and replacement of private sector functions with “government solutions.” One only has to look at the out-of-control spending inside the 495 Beltway and the shabby state of programs like Social Security to realize the utter insanity of the arguments of these economic deadheads. Milton Friedman said it best: “Underlying most arguments against the free market is a lack of belief in freedom itself.” What he did not add was that throughout history those who promoted such government “solutions” in lieu of capitalism and freedom were in reality broadening the power of the government to ultimately control the masses.

History does repeat itself. May God help us through this quagmire of political stupidity that seems to be upon us for the foreseeable future, regardless of who ends up residing in 1600 Pennsylvania Avenue.

Dennis A. Grahl
Founder and CEO

You present a point of view that mirrors my own frustration with our modern day political process. Why can we not get some real constructive debate and discourse on the real issues facing this country?

We face a competitiveness crisis, an education crisis and a health care crisis, as well as the others you mentioned, and I cannot find any serious discussions on real actions to address any of it. And to add to your list, what about the trillions we spend on the war? What if that money was applied to Social Security or health care?

Perhaps I am too young (just 60 years old) or maybe it is because I am not an avid student of history, but as best as I can discern, it seems we in this country are seriously headed in the wrong direction, and it has never been like this before in our 232-year history.

I cannot think of any CEOs or business executives who would be able to move along in their career addressing the challenges they face in the same fashion we, as a people, seem to allow our political leaders to do. In fact, the irony is that when business leaders make a fraction of the mistakes, or act with certain misconduct, they are sent to jail for 25-year prison terms.

I know that the game of politics is different than the game of business, and I do not even suggest that the two should be considered the same. Yet I have come to believe that leadership is leadership and good decision making is good decision making-period. And good decision making is not looking good in front of cameras with canned sound bites that, if said often enough, people will believe have substance.

Substantive discourse is what we need. Perhaps CEOs of this country can get together and do what we do best, solve real, live problems, even very complex problems, with very [practical] solutions.

Or maybe we are just destined to go the way of other former great powers-Spain, England, Rome-and cede power to a new force, which is looking more and more like China.

Hey, maybe if we relinquish our role of being the caretaker of the world and let China become the next superpower, we can focus on making this country at least competitive again.

Norman Wolfe
Quantum Leaders
Irvine, Calif.

Immelt Under Fire

Editor’s Note: In an online column, “If Not Immelt, Who?” Chief Executive‘s editor explored Welch’s initial criticism of his successor and his subsequent climb-down, leaving many GE observers wondering about the sustainability of GE’s leadership and current business model. Opinions about Immelt’s predicament and about Welch himself are anything but neutral.

Here, basically, is an example of a poor promotion, and the board should change its CEO. If, after seven years, Immelt has a record like this and cannot tell us what happened in the last quarter, he should be gone.

You talk about his investment and belief in GE; that is small compared to what he is paid. These CEOs are paid big dollars to perform; the board should look for a new CEO. They have that responsibility to the shareholders. Jack Welch’s criticism is well placed on Immelt! Chrysler will learn the same lesson from another former top dog at GE as well.

Neale Schad
Aviation Technologies
San Antonio, Texas

Who is Jack Welch to criticize Jeff Immelt? Near the end of Welch’s career, he made so many stupid mistakes where he should have known better:

_ He couldn’t control his emotions and committed adultery, and it became public.

_ He couldn’t control the press during the divorce proceedings, and his excessive pension benefits became public.

_ He selected three (according to him, cream of the crop) candidates to replace him upon retirement, and in all his years of experience couldn’t find a way to keep all three on board, so he threw out two of them.

_ His two bounced potential candidates proved to be ineffective at other companies. One became so money-hungry he mismanaged the corporation (Home Depot). The other, as a board member, couldn’t control the ethics of the CEO who committed adultery and had to resign.

_ Welch, in his last year, wanted to buy Honeywell as a last hurrah. He got approval for the U.S. unit but not the European, and the deal was scuttled. He should have done his homework.

Welch was a good teacher but a lousy student. What CEO would have put up with an employee like Welch, with all those mistakes? Hang in there, Jeff. You are the only good choice Welch made. Stay the course.

Wess Schmidt
Maywood, N.J.

Having just conducted the Global Innovation Survey, I can tell you that GE ranked near the top on all dimensions. The subjective data was tracked against medium-term metrics like organic revenue growth, margin expansion and raw EBIT numbers. I want to emphasize medium term as, at times, things happen to totally throw all metrics askew.

Immelt’s comments on the importance of the financial services side of GE’s business and the chaos that is being experienced cannot be discounted by anyone-especially Jack Welch.

I actually thought that Welch had handled the “former CEO” role quite well until now. Perhaps what Jack misses the most is being a headline grabber. This comment was blurted out, satisfying his short-term need for notoriety.

The real issue is the relatively short time between saying things were OK and the quarterly announcement. I am sure whatever comes out of GE over the months ahead will have a lot of caveats (as they should).

The simple fact is that the fallout of sub prime debt cannot be the singular focus. It can only be viewed as a precipitating event. So many instruments were created, which now cannot be priced, that the bloodbath is likely to continue.

The true floor will come only when every instrument can be properly marked to market on a balance sheet based on re-establishing an orderly market. The consumer is the question. In the U.S., consumers are 70 percent of GNP, and the real challenge is that we are at the tail-end of a 30-year cycle (which actually parallels the adult years of the postwar baby boomers), not events of the last year.

If the housing market were as efficient as the stock market-where order matching creates a tight market on the bid and ask-we might see a “work-out” more quickly. However, too many Americans have a for sale sign on the front lawn and are crossing their fingers that a bidder may appear. Immelt may be using cautionary language for a long time as the consumer meltdown continues to ripple through the economy.

Mike Hagerman
Partner, Stratage

As a business owner and a private investor, I take great pride in how I can analyze a 10-K or 10-Q. I have been trying to dissect GE’s financials for years, and I have given up out of total disgust.

If you look at how they segment their reporting, it changes virtually every quarter, so it is very difficult to compare one period to another. Also, GE is into so many sectors of the economy, that what you have for an investor is equivalent to a mutual fund. I don’t think that even the “smartest guys on this planet” could extract the highest value from all of GE’s businesses.

I have always suspected that GE has historically “managed” earnings. Most of GAAP, especially in the capital goods services area, which is one of their most profitable segments, is very loose.

Compounding this looseness is the fact that it is auditors-who are often 25-year-olds-that provide investors with the due diligence as to the validity of period profitability and balance sheet reporting of these services; this is not a reassuring thought. And don’t get me started on GE’s outrageously low tax rate, which probably adds an extra 15 percent to 20 percent to its market cap-one of the great mysteries of GE.

In the end, it is my suspicion that GE took so big a hit on its financial services segment that it couldn’t “manage” the impact on its aggregate results.

Immelt inherited a culture of meeting the Street’s EPS expectations at any cost. The real issue is what other skeletons in the closet have they been able to hide through aggressive accounting? In addition, if GE were to pay a “normal” tax rate of 35 percent, its profit after tax (PAT) percent of revenue would be about 9.5 percent, rather than its current 11.5 percent, which is driven by a 15 percent tax rate.

Now, if GE’s financial businesses make up about 50 percent of revenues and the typical financial services company makes about 15 percent PAT as a percent of revenue with a 35 percent tax rate, or 7.5 percent weighted PAT, that would mean the rest of their businesses would be 2 percent weighted or 4 percent; very strange. If so, this would indicate that GE is really losing its shirt in one of its non-financial business segments, or it is being marginally run-another great mystery.

On the other hand, I could be missing a part of this analysis that could make me rethink this conclusion.

Ron Giuntini
Executive Director
OEM Product-Services Institute
Lewisburg, Pa.

“If Not Immelt, Who?” is a premature question until one can determine where, if anywhere, he’s fallen short. Otherwise it is a snap, visceral response, not a reasoned, rational one.

By all qualitative measures-except the share price-he has performed well. Yes, the first quarter’s 13 percent shortfall was a surprise, but a $4.4 billion profit in the quarter isn’t sliced baloney. Clues to what may be missing in the iconic Immelt persona are subtle, intangible factors, not the sort of thing the Street measures, although they unconsciously react to them. For instance, his record of meeting or exceeding forecasts consistently (in 10 of the last 13 quarters) is by itself suspicious because that isn’t what happens in the real world without some manipulation.

Analysts obviously knew he was doing this by picking up a penny a share here, a nickle there at quarter’s end to meet promises. Nothing illegal; many do it, but it is a slippery slope as, indeed, he found out this past quarter when he couldn’t sell anything and was caught.

Is this why the cognoscenti of Wall Street have always been skittish

about the quality of GE’s earnings?

Evidenced by the stagnation of the stock, the fact is that thus far, Immelt has been unable, despite commendable performance and an unusually aggressive investor “education” campaign (350 analyst meetings in one year alone) to even meet the share price level he in herited from his mentor and predecessor Jack Welch. Presently it is about 20 percent below the Plimsoll line.

Next, look at the 2007 annual report. Two things strike one-perhaps small, but pivotal in building positive relationships with investors. Of 71 senior executives and operating managers featured, 60 are male and all are tieless! An obvious attempt to appear “cool.” Phony! Besides, casual is out. Senior partners at major law firms, it has been reported, refuse to take junior associates with them to meet clients unless they are dressed in a business- like manner. Trifling? Perhaps, but it reflects the marketing mindset, which is self-validating, subjective and unrealistic.

Further, among the executive and operating councils (a GE term), including the board’s 16 directors, there is no one with specific responsibility or experience in monitoring and/or assessing the effectiveness of external relations-someone with access to Immelt and the board that’s qualified to suggest ways to smooth the interchanges between board actions and policies and the public’s perception of them.

The nomenclature is irrelevant-call it public affairs, public or corporate relations-in today’s volatile 24/7 communications environment, rare is the CEO who denies himself (or herself) the potential value of one qualified to counsel on the very ticklish and thorny process of coping with misunderstandings and perceptions, facts notwithstanding. Again, this no doubt stems from Immelt’s predilection of exploiting marketing tactics (his first assignment at GE) to communicate. It is a myopia that unnecessarily handicaps him.

John F. Budd, Jr.
The Omega Group
New York, N.Y.

GE has not managed the current business climate well. Bad decisions of the last five years are now rearing their ugly heads, and current management has been slow to respond. Welch and many other executives are strong leaders during good economic conditions. Managing the downturn is an art few have experience leading.

Frank H. Migliore
Abundant Ventures LLC
Metamora, Mich.

The article about GE raised an important point in evaluating a business.

Mainly, the point is that one should stay in a business when the ROI is better than what you can get from putting the money in the bank. Based upon the last three quarterly reports I have read regarding GE, they are still giving better returns than putting the money in the bank.

It is important to understand that due to big changes in energy prices and the competition for energy resources worldwide, the optimization of an organization will become greater.

As an example, at Kanecki Associates, we have adopted a nearly paperless and green operating environment because it was in the best operation to do so. Our sales are streamlined through online partner channel portals-thus, our shipping and delivery is mostly digital since software is digital.

Therefore, until organizations and companies in the U.S. change their operational strategies to meet new energy constraints, it will affect the bottom line. The point is not to go green because it is the in thing to do, a company should do it because it offers a better alternative and operating strategy/response to what they can achieve now.

David Kanecki
Kanecki Associates
Kenosha, Wisc.

Knowing how the press lifts things out of context in order to create drama, I doubt if Jack Welch said what’s been attributed to him. He is much too intelligent!

Furthermore, with Jack Welch’s high profile, it is almost impossible for a person like him to not occasionally make a slip, but I do not think he slipped on this one. Immelt was his choice, and a good one.

The market reality and dynamics have changed considerably since Jack Welch was CEO.

James A. Eiting
Midmark Corp.
Versailles, Ohio

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