- - Sunday, October 12, 2014

This Friday, Jeff Immelt and the team that leads General Electric Company owe shareholders and the American public answers to a simple question: How will management restore consistent growth in revenues, profits and cash flow to a vaunted enterprise that has floundered since Jack Welch left in September 2001?

If Mr. Immelt and his team cannot make a jargon-free case, supported by relevant operating and financial metrics, they should go — surely there are numerous capable executives who might jump into the fray before it is too late. For all the moves Mr. Immelt has made, buying and selling businesses, GE is still an also-ran financial institution masquerading as a multinational industrial and services concern.

In 2000, the year before Mr. Immelt became chairman, president and chief executive officer, GE generated “free cash flow” of $15.5 billion on net revenues of $118.7 billion. For each dollar of sales, consolidated GE generated 13 cents.


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Finance sector

When you look more closely, though, you find that the large financial portion of GE (then called GECS) generated 8 cents of free cash flow (cash flow from operations less capital expenditures, net of property dispositions) for each of $55.1 billion in net revenue (revenues less financial interest expenses). Meanwhile, the remaining industrial and services portion of GE generated 17 cents of free cash flow for each of $63.7 billion in revenues.



Full-year results in the financial portion seemed unexciting, while results outside finance seemed strong.

From 2001 through 2013, Mr. Immelt and his senior management team completed acquisitions worth $157.2 billion, business sales worth $95.4 billion and arranged trillions of dollars in financings and refinancings, no doubt enriching many Wall Street firms and bankers.

For all this effort, have GE’s reported financial fortunes manifestly improved?

In 2013 GE generated free cash flow of $21.0 billion on net revenues of $136.8 billion; for each dollar of sales, GE generated 15 cents.

When you look more closely, you find that the slimmed-down financial portion of GE (now called GECC) generated 45 cents of free cash flow for each of $34.8 billion in net revenue, whereas the remaining industrial and services portion of GE generated just 5 cents.

Outsize returns in a smaller, yet still large, finance business make sense given the regime of suppressed interest rates since 2008. But for how much longer can central banks continue these policies?

Meanwhile, GE’s nonfinance businesses evidently suffered, even as they were supported by extraordinary stimulus measures that also must abate eventually. Why do the directors of General Electric, many of whom began discharging their solemn duties in the Welch era, still give Mr. Immelt so much latitude even after he fails to perform?

External pressures build

Tremors now in capital markets, and spreading geopolitical hostilities, augur poorly for long-suffering shareholders in General Electric under the status quo.

In October 2014, unlike September 2008, governments everywhere are overstretched financially, central banks have little room left to maintain benchmark interest rates below price inflation, and voters are unlikely to extend additional extraordinary support to GE and pretend such action truly helps Main Street.

People struggling to meet obligations they incurred when 40-hour weeks, overtime, pensions and truly affordable health care were reality do not understand how highly paid GE executives collect such exorbitant compensation, benefits and perquisites following more than a decade of chronic underperformance.

On American Main Streets, and around the world, anger builds when hardworking people understand there is one set of rules for politically connected cronies and much tougher justice for everyday folk.

Mr. Immelt took his chances and more — and unless a miracle happens this Friday, the world should conclude it is past time for he and his supporters at GE to go.

Acting alone, or in league with our government, stewards of the national interest must press to shake up management and realign governance at GE before this storied enterprise fails abjectly and requires public assistance yet again.

Charles Ortel serves as managing director of Newport Value Partners (NewportValue.com), which provides economic research to executives and to investment firms.

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