As Flannery Completely Remakes GE’s Board, Insiders And Outsiders Will Take Notice

John Flannery’s decisive gambit to remove most directors of General Electric is one of the most dramatic takedowns of the board of a major American company by its CEO in memory.

And it’s likely to have long-term reverberations not only at one of the nation’s iconic industrial and technology conglomerates but also in boardrooms far beyond GE’s. If Flannery is doing it, maybe other CEOs will too.

Usually, boards of directors tell wayward CEOs their time is up. But in this case, last week Flannery announced a housecleaning of the General Electric board at the same time that he unveiled a flurry of other big moves designed to shake up GE on the inside, instantly boost perceptions on the outside, and get the year-to-date 42-percent decline in the company’s stock price going in the opposite direction.

Investors weren’t impressed initially, with some analysts saying Flannery needed to go further than the various operational moves he announced, such as halving GE’s dividend, putting traditional operations such as locomotive and light-bulb manufacturing up for sale, and shedding jobs.

“He should get board members who are supportive of where he wants to go and make the large organizational change that he needs to make.”

But no one said Flannery’s move to whack the GE board down to size was half-baked. The unusual shakeout will claim half of GE’s 18 directors and add three new ones to form a 12-member board after the 56-year-old chief said that he wants a smaller board “with some new members with key skills relative to where the company is going” – and without old-guard members who are most familiar with businesses that Flannery wants to exit.

“It’s courageous of him to make this change,” Dennis Zeleny, a consultant to CEOs and boards on compensation, culture and corporate change, told Chief Executive. “And if he’s going to make changes in the business portfolio, he’ll need less of certain expertise – and also will need to get more board members who are on the glide path of where he wants to take the company, not where it’s been. He should get board members who are supportive of where he wants to go and make the large organizational change that he needs to make.”

Zeleny, who has been chief human resources officer for companies including Caremark Rx and Sunoco Oil, said that it also makes sense for [Flannery] to go from 18 to 12 directors. “It’s a much more manageable number, and if you have the right people, that’s a big enough human portfolio of insights to constructively challenge him and give him good advice.”

Flannery seems to be moving in the direction of history by shaking up the GE board, streamlining it and making its expertise align more closely with how he’s reshaping the company. By contrast, Zeleny noted, Procter & Gamble CEO David Taylor is still resisting the efforts of activist investor Nelson Peltz to wrest a seat on the board of a company whose performance lately might suggest new blood is in order.

“You’ve got to give Flannery credit for being bold and taking on this kind of effort,” said Zeleny. “That’s what GE needs and what shareholders want.”

Interestingly, new research from PricewaterhouseCoopers suggests that a significant number of directors themselves would like to see some movement in board membership even at a time of record-high stock markets and an improving economy and corporate performance.

In fact, 46 percent of directors surveyed by PwC recently said that someone on their board should be replaced, and 21 percent said two or more people should go.

At GE, Zeleny said, Flannery’s move is “a cultural message to employees that even at the top, GE will do more things in a streamlined fashion.”