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Flannery Embraces Role of Becoming the CEO Who Undoes Jack Welch’s Legacy

GE CEO John Flannery is shedding businesses that don't demonstrate the type of profit margin and core competencies he feels GE needs to lead it into the future.

Jeffrey Immelt took over from Jack Welch as CEO of General Electric with the expectation that he would cement his predecessor’s legacy as the ultimate conglomerate builder. But instead, Immelt now can be regarded as more of a transitional figure to the man who is actually fundamentally reshaping GE for the future: Jack Flannery.

“It’s show-[me] time,” Flannery said in an interview with CNBC on Tuesday. “I can say what I can say but the reality is investors deserve and expect and will wait for results.”

Barely weeks into the job after Immelt retired earlier than expected, Flannery this week announced a flurry of immediate moves and future initiatives that amount to no less than a surrender to the reality that the strategy forged by his two predecessors has failed.

Now, Flannery says, he’ll lead a GE that is “simpler and easier to operate.” So, with dispatch Flannery has already decided to make GE a smaller company with fewer businesses, not only deconstructing much of the empire built by Welch but also undoing some of the ambitious designs of Immelt. In fact, he has put up for sale GE operations that date back to the days of founder Thomas Edison, including light bulbs and railroad locomotives.

Flannery also underscored the seriousness of his intentions by cutting GE’s quarterly dividend in half, to 12 cents a share, demonstrating that he plans to take some of the corporate reshaping out of investors’ hides. GE long has been one of America’s biggest dividend payers, but that also was a legacy of Welch’s grand design.

“John Flannery is generally saying and doing the right things. But I was looking for more – faster and more aggressive moves, both on cost-cutting and thinning the portfolio of businesses.”

“We understand this is an extremely painful action for our shareholders, our owners,” Flannery said. “It’s not a decision we took lightly.”

Still, while suffering a share-price meltdown over the last several years, investors weren’t all that convinced even after Flannery’s presentation on Monday. Shares fell sharply again that day and are down nearly 40 percent for the year.

Flannery addressed the market’s implicit criticism in the CNBC interview. “I’m not surprised [at] the investor reaction because we had disappointing news,” he said. “But I’m very confident where we’re headed with the company and what we need to do and the team is ready to go.”

“John Flannery is generally saying and doing the right things,” Scott Davis, head of Melius Research, told the New York Times. “But I was looking for more – faster and more aggressive moves, both on cost-cutting and thinning the portfolio of businesses.”

Welch gained a reputation as a leadership titan and management guru by building a diversified industrial giant with operations that ranged from loans to jet-engine turbines, insisting that brilliant management grounded in a handful of principles – such as Six Sigma quality control and strict performance metrics – could efficiently and effectively handle a bunch of unrelated enterprises.

Immelt recognized that streamlining became necessary when he took over GE in 2001. But even though jettisoning some operations such as NBC Universal and home appliances, Immelt sought to maintain the essential diversity of the company while putting a new-era sheen on it. So he added software and sensors to industrial equipment to make “smart” machines and moved GE’s headquarters from leafy Connecticut to digitally kinetic Boston.

Now Flannery is biting the bullet in a big way, saying that GE will shed at least $20 billion in assets during the next couple of years, putting businesses up for sale while focusing on the remaining essentials such as electric generators, jet engines and medical-imaging equipment. He’s cutting the size of the board by 50 percent and shaking up executive compensation. That’s on top of moves he’s already made such as grounding the corporate jet fleet.

“My task really is to run the assets better, keep an open mind to the alternatives, and that’s what we’re doing,” Flannery told CNBC. “There’s a rush … to say, ‘Let’s just discard everything,’ and the reality is, [these are] incredible franchises built up over decades. [So] I think we should be thoughtful and deliberate about managing better and what we do with them going forward.”

GE will still “power the world,” “transport people safely” and “save lives,” Flannery noted. But it won’t be the same GE.


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