Missed Profit and Cash Targets Lead to Firing of CEO
General Electric is in trouble. Last week it announced the firing of CEO John Flannery after 14 months on the job as problems developed in its power unit causing GE to warn it would miss profit and cash targets. GE already announced a significant decrease in its dividend payments. Despite the bad news, GE’s stock price rose 7.1%. That sounds like a lot but is actually fairly meaningless when you start with a base share price below $12.00 per share.
GE also announced it planned to take an accounting charge as large as $23 billion for its power business, which makes turbines for power plants and has been struggling with weak demand. However, this isn’t the first time the company announced a write-down and/or reduction in the value of a business unit.
Last February, GE announced an after-tax charge of $6.2 billion and additional cash funding of $15 billion in statutory capital contributions to its insurance subsidiary on its earnings call. When GE first announced the charge, CEO Flannery told analysts he had “underappreciated the risk in this book.” What? A CEO admits to failing to see the forest from the trees? An honest assessment but one that brings into question leadership at the company. Writing for Market Watch, Francine McKenna points out that the company was forced to acknowledge a Securities and Exchange Commission investigation into the process leading to the charge, and an additional review of revenue recognition and controls over its long-term contracts.
I have previously blogged about the fact that GE has used the same external audit firm, KPMG, for 109 years. With all these accounting problems, it doesn’t take a genius to conclude the auditors’ have not acted in the best interests of the public. I have no doubt KPMG’s objectivity has been comprised by the overwhelmingly long tenure of the firm. It’s time for GE to bring in a new audit firm to give the audit a fresh look and ensure the audit opinion reflects a careful analysis of the generally accepted accounting principles used by GE.
I’ve examine GE’s statements about ethics and they made shake my head in amazement about how a company with clearly defined ethical standards could fail so miserably in putting it into practice. GE talks about “Being the Voice of Integrity.” Its statement on this issue is: Being the Voice of Integrity at GE isn’t always easy, but when we raise integrity concerns, we make our Company stronger and protect our colleagues from harm.
GE also provides channels for raising concerns – people to talk to—and other resources like a compliance leader or auditor, an ombudsperson or integrity hotlines, or the GE Board of Directors. And it talks about the “spirit” of ethics rather than compliance. Its code of conduct says things like: be honest, fair and trustworthy, obey applicable laws and regulations, and act with accountability.
This all sounds nice but is worth nothing more than the paper it is written on. It’s clear GE has failed to establish an ethical tone at the top, taken great liberties in overvaluing business units, and acted contrary to investors’ best interests.
GE purports to run its business with a strong set of values and principled behavior. However, GE is a poster child for companies that have failed ethical leadership. Absent ethical leadership, statements about integrity are hollow expressions of what the right thing to do is.