General Electric is an American conglomerate currently ranked #9 on the Fortune 500 list. The firm operates in four primary business segments; Energy, Technology Infrastructure, Capital Finance and Consumer / Industrial. Headquartered in Fairfield, CT, General Electric has grown over the past 122 years into a financial behemoth realizing revenue in excess of $146 billion in 2013. Throughout its existence, General Electric has demonstrated an inconsistent record in terms of ethical governance and responsible business practices. Like many of its peers, the firm endured a number of scandals, particularly in the late 1990’s and into the 2000’s. In response to these issues and in accordance with the Sarbanes-Oxley Act passed in 2002, General Electric has transformed its business practices and is now recognized as one of the more respected players in the world of corporate governance and honorable business practices. Contemporary business practices exercised by the firm have earned numerous accolades including: – #6 Best Global Brand (Interbrand)
– #10 Most Admired Company (Fortune)
– #180 Greenest Company (Newsweek)
To understand how this corporate evolution occurred, we need to understand the organizational structure and managerial best practices utilized by General Electric and the nature of the legislation that necessitated this institutional change. What is Sarbanes-Oxley?
The Sarbanes-Oxley Act of 2002 (SOX) is a federal law that mandated new or enhanced standards for all U.S. public company boards, management and public accounting firms. Drafted in response to a number of high-profile corporate scandals that occurred in the late 1990’s and early 2000’s by U.S. Senator Paul Sarbanes and U.S. Representative Michael Oxley; the legislation imposed several powerful mechanisms designed to curb corporate malfeasance and to protect investors. The most significant of these mechanisms included individual certification of corporate financial statements by top management, increased penalties for fraudulent activity and the separation of auditing and consulting functions in outside business agencies. (www.soxlaw.com) The overarching effect of this legislation was the increased scrutiny of financial statements submitted by publicly traded companies and growing corporate auditing expenditures. (Sidime, 2007) Board Composition: structure and governance
General Electric has been a progressive company in terms of Board composition and governance. (see composition matrix – attached)For decades, the company has demonstrated a desire to promote diversity in governance from three primary perspectives: gender, race and age. In addition, General Electric had historically satisfied many of the obligations outlined in the Sarbanes Oxley legislation well in advance of its passage including listing the definition of individual committees and the number of committee meetings. (General Electric Annual Report – 2000) One potential conflict that exists with the General Electric governance strategy is the combination of President / CEO and Chairman roles. This is a practice that the company has exercised since Ralph Cordiner combined these responsibilities in 1958 and continues today with Jeffrey Immelt serving in the role since 2001. An additional challenge that exists within the Board structure of General Electric is the lack of term limits. Nominated individuals are approved annually through a majority of votes present and may continue to serve indefinitely. This issue was debated recently when shareholders proposed a 15 year term limit of Board service along with separation of the CEO / Board Chair role. The measure was defeated in a lopsided vote held during the company’s April 2013 Board meeting. (Catts, 2013)
Consisted of outside directors. Held 5 meetings in 2000. Reviewed the activities and independence of GE’s independent auditors as well as the firm’s financial reporting processes. Composed of independent directors. Held 11 meetings in 2003. “to review the activities and independence of GE’s external auditorsand the activities of GE’s internal audit staff…also reviewed GE’s system of disclosure controls and procedures.” Composed of independent directors. Held 12 meetings in 2013. Primary responsibilities include: selection of independent auditor, review the independent audit, oversee the firm’s financial reporting activities and accounting standards. Tenure
Combination of cash & stock. $75,000 annual base plus $2,000 per meeting. Combination of cash & stock. $250,000 base, 10% premium for service on auditing or compensation committee. Removed contingent service reward of 5,000 shares. Combination of cash, stock & other. $250,000 base. Average compensation = $302,457
The moral of the story as it relates to Board structure and Governance within General Electric is that while the firm did work to shore up its
regulatory and oversight positions post SOX; the company had exercised the basic principles outlined in the legislation for some time. Performance Metrics & Executive Compensation
General Electric has functioned for decades under the philosophy of hiring, motivating, rewarding and retaining its executive leaders through compensation. The company has maintained an executive compensation model that includes salary, bonuses and stock options as the vehicle to achieve this goal for decades. While the total compensation packages at the highest levels of leadership are not as lucrative as they once were – General Electric has adapted its compensation policies in order to remain competitive and compliant in an evolving business environment. 2000 – Jack Welch
In the year 2000, Jack Welch stood without peer in the world of American business. Recently named “Manager of the Century” by Fortune Magazine, (Colvin, 1999) General Electric increased revenues to nearly $130 billion. During this year Mr. Welch earned $16,700,000 in salary and bonus. In addition, Mr. Welch was granted 3,000,000 stock options which became exercisable upon retirement as well as 850,000 restricted stock options. The later options were granted by the board in appreciation of 20 years of service to GE. Furthermore, Mr. Welch was granted a split-dollar life insurance policy contingent upon execution of a personal consulting contract (up to 30 days annually) at the discretion of the acting CEO. Final terms of the consulting contract and retirement package are not listed, but the value is estimated to be north of $420 million.
2003 – Jeffrey Immelt
Jeffrey Immelt emerged as the new CEO of General Electric following a highly publicized succession process in 2001. Perhaps due to his relatively short tenure to this point, but more likely due to the passage of the Sarbanes-Oxley Act; overall executive compensation was revised at General Electric in 2003. In addition to a more responsible base salary, executive bonuses and stock options were much more clearly outlined and defined in the 2003 proxy statement. While the Board Compensation Committee does state: “We rely upon judgement and not rigid guidelines or formulas or short-term changes in our stock price in determining the amount and mix of compensation elements for each executive officer” official documents include an element of specificity not previously available to investors. Mr. Immelt was paid a $3,000,000 base salary and bonuses totaling $4,325,000 – a 10% increase from the previous year.
In addition, Mr. Immelt was granted 250,000 performance share units in lieu of stock options. This is the most significant change related to executive compensation policies that occurred at General Electric post SOX. From the 2003 GE Proxy Statement: “These performance share units are intended to recognize the unique position of the GE CEO. The committee believes that the CEO of GE needs no retention compensation, and that his equity compensation should be focused entirely on performance and alignment with investors.” This change in policy effectively linked 50% of the CEO’s equity compensation directly to the company’s cash generation performance; the remaining 50% would only convert to shares if specific shareholder return metrics were met. In short; the better the performance of the firm – the better the compensation for Mr. Immelt. Finally, select executives at GE (including Mr. Immelt) were granted 3-year performance incentive awards. These awards would be paid only upon achievement of unlisted specified goals related to: earnings per share, revenue growth, return on total capital and cumulative cash generated.
2013 – Jeffrey Immelt
Today, the evolution of executive compensation continues at General Electric. The 2013 Proxy Report provides a thorough and defined description of all elements and metrics used to determine final executive compensation. Following essentially the same compensation model initiated in 2003, Jeffrey Immelt realized total compensation (including projected pension value) of $20,592,769. Leadership, Ethics & Firm Values
General Electric is a perfect case study in the evolution of an American business. Formed in 1892 primarily as an electric company, the firm has grown into a global dynamo. Today the company operates in several areas including finance, appliances and power systems. This type of evolution and growth does not happen by accident, it is the result of visionary leadership – a quality that has existed within GE for a century. Founded by one of this country’s greatest innovators, General Electric has embodied the vision of Thomas Edison since its inception. The company has dabbled, innovated and revolutionized a number of industries throughout its existence. This truth is a testament to the men that have lead the organization throughout the years. (see past leaders – attached) More recently, present-day General Electric has been molded primarily by two individuals who utilized their personal skill to direct the company through a challenging time. Jack Welch (1980 – 2001)
Jack Welch joined GE in 1960 as a junior chemical engineer. Early in his tenure, Welch considered leaving the organization citing a frustration with an overwhelming bureaucracy that existed within the firm. Welch was convinced to stay and worked his way up the ranks becoming Chairman and CEO in 1980. Welch became one of the most successful executives in the history of the United States during his tenure, growing the value of the company by 4000%. He accomplished this by imposing leadership efficiency practices throughout the company. Welch promoted strong businesses by limiting bureaucratic inefficiencies, trimming inventory and closing factories. His governing philosophy at GE was that a company should either be number 1 or number 2 in a particular industry or it should get out of that business.
Welch adopted Motorola’s Six Sigma quality program in 1995 to further streamline operating efficiencies. In addition, Welch instituted a rigorous method of assessing organizational performance and leadership termed Session C. The goal of this program is to provide feedback and identify talent to managers within the organization. During Jack Welch’s tenure, General Electric became wildly profitable and became recognized as the preeminent organization in terms of operating efficiency and profitability. Mr. Welch’s methods, while successful were generally autocratic and focused on two specific issues: profitability and legal compliance. Jeffrey Immelt (2001 – present)
Jeff Immelt was groomed to lead General Electric from a young age. Immelt’s father worked for GE in the Aircraft Engines Division. After receiving his A.B. in Applied Mathematics from Dartmouth College, Immelt earned an M.B.A. from Harvard. Jeffrey Immelt formally joined General Electric in 1982 and began his professional ascent. Following a public and high-profile transition; Immelt was challenged with the difficult task of replacing legendary GE CEO Jack Welch in 2001. Immelt was immediately dealt two unparalleled challenges upon assuming the position – the terrorist attacks of September 11, 2001 and to a lesser extent the public backlash attached to the prominent accounting scandals that occurred at the turn of the century. Immelt began to create an impact immediately, adopting a more people-oriented approach to management than the efficiency-minded approach that had governed GE for the preceding two decades. Immelt launched a series of effectiveness-oriented measures that encouraged innovation and risk-taking. Immelt also began to look to developing markets in search of opportunity.
Finally, Jeffrey Immelt moved GE’s operational focus to areas not previously considered: concentration on long-term growth over short-term gains, infrastructure development with an emphasis on green energy and increased marketing efforts focused on social responsibility. The contrast between these two vastly different yet extremely effective leaders provides an interesting snapshot of the effects of the evolution in American business following the corporate scandals of the late 1990’s and early 2000’s. While General Electric was not directly attached to a major scandal during that era, the timing of GE’s leadership transition was fortuitous. While there is certainly room for a chicken vs. egg debate regarding the change in managerial philosophy at GE; the change in leadership at the top of the company definitely provided an opportunity to shift course in the post-SOX business world. Corporate Sustainability & Social Responsibility
Similar to many traditional American manufacturing powers, General Electric did not exercise sustainable business practices for the bulk of its existence. This, of course, was not uncommon in American industry. However, at the turn of the century, the first mention of social responsibility appeared in a GE company document. “Integrity: the Spirit and the Letter of Our Commitment” was a comprehensive document outlining the company’s policies related to privacy, supplier relationships, working with governments, environment, health and safety. The initial draft of this document was essentially a rule book seeking to achieve legal compliance in the various nations where General Electric conducted business. The following year, (2001) two share owner proposals sought to amend and bolster the “Integrity” statement – Share Owner Proposal No. 2; which attempted to “improve the quality of life for employees and their communities” by allowing collective bargaining, eliminating discrimination & intimidation and promoting free labor, as well as Share Owner Proposal No. 3 which called for the Board to discontinue and renounce a PR campaign initiated by the General Electric Company that downplayed the dangerous effects of PCB’s dumped in the Hudson river by the company.
The GE Board of Directors voted against both proposals. The reality of the Board’s actions demonstrates that the early years of General Electric’s sustainability and social responsibility programs were based in superficial statements only. In 2003, General Electric launched an interactive, electronic version of its Annual Report. This new medium included a section devoted to the “Citizenship” initiatives active within the company. The two paragraph overview acknowledged the need for a modern corporation to practice environmental compliance, leadership in corporate governance and high ethical standards. The document lists various social programs supported by the organization and its employees including nebulous philanthropic and volunteer efforts. While a step in the right direction, an outside observer may still question the level of commitment GE expressed to its sustainable programming. The strategy did not contain the measurable, quantifiable objectives required to effectively execute a large-scale sustainability program. (Epstein, 2003)
Today, General Electric has created and maintains a robust, independent website dedicated to corporate sustainability. www.gesustainability.com outlines GE’s commitment to long-term sustainable business practices including: internal processes, (people, governance, compliance and health & safety) sustainability initiatives (health, energy & climate, water and natural resources) and progress (public policy, grassroots activism, lobbying, human rights and research). Most importantly, the site lists and outlines performance metrics used to govern their processes including the GRI G3 Sustainability Reporting Guidelines. The end result of the GE sustainability program has been a complete remake of the GE brand identity. Today; General Electric is recognized as a leader in corporate and social responsibility, receiving accolades from: The Human Rights Campaign, (Corporate Equality) CR Magazine, (100 Best Corporate Citizens) Dow Jones Sustainability Index (Sustainable Business Practices) and the US President’s Volunteer Service Award amongst many others. In summary, General Electric is not a company without fault. Issues with comingling of responsibility at the top, lack of diversity in executives, and a series of accounting scandals in the early 2000’s are a few of the complications that the organization has witnessed. However; in terms of the ability of a large corporation to evolve in order to remain relevant throughout time, GE has fared better than most.
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www.sec.gov/archives/edgar/data – The Spirit & The Letter (.pdf). GE.com. Retrieved from www.ge.com/files/usa/commitment – www.soxlaw.com