GE Finds Its Vaunted Management Team on Trial

GE has long enjoyed an enviable reputation for producing superior managers at its Leadership Center at Crotonville in Ossining, New York. Since the 1950s Crotonville attained near mythical status in management circles as GE prospered under Jack Welch and other gifted company trained CEOs.

“Management development is definitely what GE is known for,” said Rosabeth Moss Kanter, a professor at the Harvard Business School. “But the bloom is off the idea that any one company has the magic formula and any one manager from that company automatically makes a great CEO.”

Now that GE is close to becoming a penny stock, GE closed at a bone chilling level of $6.66 a share on Friday, March 6th, 2009, the effectiveness of GE’s Crotonville training facility is being called into question.

As talented as GE’s team of managers may be they made a tragic error in getting heavily involved in finance. Its massive finance arm, which accounted for more than half its profits in 2007 before coming under stress in 2008, is the big problem. Instead of providing financing for only products that it manufactured GE dabbled in everything from subprime mortgages to private-label credit cards. The extension of the finance company’s arm into bank and mortgage company like financing may turn out to be a fatal management decision as the derivatives market implosion continues.

In some ways GE’s downward near death spiral is just another flash point in the global financial crisis. But GE’s decision to ramp up profits by getting itself heavily involved in financing items that it probably didn’t understand very well has proven to be its undoing as a well managed organization. Now the value of it’s toxic waste investment portfolio is very much in question. That accounts in large part for GE’s stock falling to 17 year lows.

There is another factor to consider. Warren Buffet, who has his own troubles in this Long Crisis, said it best when he said something like “when the tide goes out you can see who is swimming naked”. Jack Welch and Warren Buffet achieved their legendary reputations as fantastic managers and investors when the tide was raising at historic rates. Now that the various bubbles have popped, and the tide is rushing out, the companies that they built are not looking so infallible.

Jack Welch was smart enough to retire while he and GE were at the peak of success. Warren Buffet is not so fortunate. At 80 years of age the renowned investor is still in charge of Berkshire Hathaway, which has fallen in price by more that 50% over the last year. There must be moments when Buffet must think that retiring a couple of years ago would have been a great decision.

To be fair to the GE management team the present downturn is not just another normal recession and decent performance by any broad based company like GE would be hard to maintain in a crisis environment. Still it is the responsibility of management at GE and every firm to correctly assess the economic climate that they are confronted with and to correctly evaluate risk factors. The Long Crisis we are now faced with is a depression that will likely last for many years. It is highly unlikely that the American and the world economy will ever return to the happy boom boom go go years of 2003 to 2006 that unfortunately began to be thought of as normal.

Management teams that fail to recognize the severity of the current depression are unlikely to be able to navigate the difficult financial white water rapids just ahead. Even GE’s vaunted Crotonville trained management team may lose their reputations for generating successful outcomes as the tide rushes out. The Long Crisis may sink almost every debt heavy boat before a new class of equity powered boats can be constructed.