They’d reported their numbers by working backward: starting with a profit target and then working out what their sales figures would have to show to get there, rather than simply running the business and reporting their results to headquarters every three months.” Lights Out “The problems stemmed not from any single action but from the practices of accountants on staff at the dozen or so plants in the division. This practice had been ingrained at GE from the days of Welch.” Lights Out
Under Immelt, the point of the exercise was determining how his executives would get to their financial targets - though not how they would determine what output the business would produce as a starting point. It was here that GE hammered out targets for sales and profits, setting the underlying assumptions for the financial estimates it would give investors. “The Growth Playbook a grueling annual examination of GE’s eight major business leaders. In the superb book, ‘ In Search of Excellence,’ Tom Peters noted, “ We found that companies whose only articulated goals were financial did not do nearly as well financially as companies that had broader sets of values.” S&P500 vs General Electric Normalised - 2000 - 2021 Financials Above Purpose Notwithstanding the accounting misconduct, most of the tell-tale signs of trouble are qualitative and behavioural in nature. Below I’ve called out some red flags and accompanying lessons from GE. Perhaps unsurprisingly, the company’s travails were strikingly at odds with the traits that have defined the great businesses we’ve reviewed in the past.
Gates Notes - ‘5 Ideas for Summer Reading’ 2021 If the expression, ‘ an institution is the lengthened shadow of one man’ rings true, this isn’t a book for Immelt’s trophy cabinet. Characterised with an incessant focus on the share price, always coveting Wall Street’s admiration, ignorant of tail risks, obstructive to feedback, turning a blind eye to questionable accounting and an absence of humility were the hallmarks of a failed leadership tenure. While a toxic culture of ‘ making the numbers’ seemed ingrained at the time Jack Welch handed the reigns to Jeff Immelt, Immelt’s sixteen year term atop GE earned him a scathing review. Once a storied industrial leader, the last few decades have been nothing short of brutal for GE. “I like to study failure… we want to see what has caused businesses to go bad." Warren Buffett An easy read, the book details the multitude of problems which beset GE coupled with a cornucopia of red flags to look out for in your own investments. With this insight in mind, and having read a short synopsis in Bill Gates Summer Reading List, I looked forward to reading the book, ‘ Lights Out - Pride, Delusion and the Fall of General Electric’ by Ted Mann and Thomas Gryta. Armed with the foresight of what not to do can help an investor avoid the key risk to any investment program - the permanent loss of capital. Warren Buffett and Charlie Munger have long espoused the benefits of studying failure.
And whilst a solid working knowledge of these success stories is vital for any investor to know, its also incredibly valuable to look at the other side of the coin - those businesses that have failed. Those companies that have forged not only stellar reputations in their fields, but also those who have succeeded in industries where success is not a common commodity. MastersInvest has spent a lot of time studying businesses and business leaders that have been successful, some remarkably so.
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