A Secret Ingredient for Success at General Electric

General Electric's most valuable asset is too often ignored by the average investor.

Jan 4, 2014 at 1:00PM

Chummy Ge Employees

What factor is most critical for a company's long-term success? For value investors like Warren Buffett, it's a sustainable competitive advantage, or a "wide economic moat". Others look for a founder-led business where the entrepreneurs run the company with significant skin in the game.

Now, if you could boil everything down to a single, all-important ingredient that allows a business to endure, what would it be?

At first glance it seems like an impossible challenge, akin to finding the Holy Grail of investing. For me, however, nothing beats company culture. While they say in football that defense wins championships, I believe culture wins in the game of business. Or, as former Costco CEO Jim Sinegal stated, "Culture is not the most important thing in the world. It's the only thing."

With that said, evaluating a culture is not like looking up a P/E ratio on Fool.com. It takes time and diligence. I recently evaluated General Electric (NYSE:GE) – an industrial stock I've owned for years – to assess its company culture. What follows is an inside look at what makes GE tick.

Can you measure a culture?
For starters, what should we look for? How do we pinpoint a thriving company culture? After much deliberation, I've narrowed down my analysis to three key elements – core values, entrepreneurial spirit, and stakeholder focus.

These values capture specific organizational traits that I desire for a potential investment. There's overlap, to be sure, but I believe each is vital in running a well-tuned operation. Let's take a look at how GE measures up in these categories.

Core values. In short, core values represent a way of doing things that everyone can agree on within the company. Core values create unity, help teams solve problems, and provide a framework for conducting business. To instill these values throughout GE's workforce of 305,000, the leadership team must first define those values and then align them with the business's objectives.

In 2005, GE's CEO Jeff Immelt revisited the company's core values and specifically defined five objectives for all employees: External Focus, Clear Thinker, Imagination and Courage, Inclusiveness, and Expertise. GE elaborated even further on these basic principles (link opens a PDF), plotting a road map for its employees.

For GE, this blueprint looks like a good start. A quick read reveals core values that are outlined in a clear, sensible fashion. But, most importantly, do they permeate the entire organization? Herein lies the challenging part of this analysis.

Since regular investors like us don't have the opportunity to talk to management or spend time within the company's walls, we need a different outlet for this type of research. In my research, I found that the company ratings site Glassdoor fit the bill. Glassdoor provides a unique glimpse into life at GE, and the information on this site is available to everyone – for free. And, for an even broader perspective, Glassdoor agreed to team up with the Motley Fool and provide a more in-depth ratings history on select companies like GE.

A look at Glassdoor's data showed employee reviews at two levels – a company rating and a leadership (CEO) rating – over the past five years. What I found was a company rating for GE that dipped to a low of 3.3 out of five in 2010 during the aftermath of the financial crisis. Since then, however, GE's company rating has steadily climbed higher and stood at 3.8 as of the end of the third quarter.

Ge Glassdoor Company Ratings

Source: Glassdoor

The story was similar for CEO Jeff Immelt, whose approval ratings plummeted in 2010 but recovered from this low of 53% to reach 87% at the end of the third-quarter in 2013.

Ge Glassdoor Ceo Ratings

Source: Glassdoor

While these stats leave GE's company rating in the middle of the pack for manufacturing companies, the increasing satisfaction level among employees – especially toward leadership – is a sign that GE is in fact taking steps to align its core values with its business goals.

Entrepreneurial spirit. "Act like a start up." "Encourage bottom-up innovation." "Fail fast." No matter how they phrase it, large companies want their employees to act like entrepreneurs. GE's no exception. GE's leadership team recognizes that the marketplace is shifting, as Immelt recently stated: "Success in the 21st century will come to those that that can get in front of the trends, move quickly, innovate, and work together to deliver results."

Today, customers desire flexibility and local expertise instead of one-size-fits-all products and services. This requires a global company to encourage risk-taking and adaptability at all levels. So, how do we assess GE's success in this arena? By evaluating the company's communications and external projects, for starters.

For example, through his posts as a LinkedIn Influencer, Immelt promotes the idea of building a "WE not a ME organization." He continues, "You have to inspire people. An idea or initiative may start with that constituency of one, but eventually you need buy-in from a company of many (about 300,000, in fact, at GE)."

When leadership talks about cultivating the ideas of all personnel, that's a good thing. And GE has put its money where its mouth is in this regard. For instance, the GE Garages project brings technologists, entrepreneurs, and everyday people together to work on prototyping and small-scale manufacturing concepts in cities around the U.S. GE's also co-sponsored an entrepreneurship program in health care, supported the "Ideas Lab" website on jobs and innovation in manufacturing, and partnered with the social product development company Quirky to allow "at-home" inventors to tap into thousands of GE's lab-tested patents.

These pilot programs illustrate GE's willingness to make small, entrepreneurial bets. From this perspective, GE seems to live up to its slogan, "We bring good things to life."

Stakeholder focus. When businesses find ways to serve all of their stakeholders in a positive way, they find that profits tend to follow suit. That's the opinion of an increasing number of modern-day business leaders, including John Mackey, Richard Branson, and the Fool's very own CEO Tom Gardner.

What does a stakeholder focus imply? First off, stakeholders were originally defined as "those groups without whose support the organization would cease to exist." Thus, the list of stakeholders includes shareholders, employees, customers, suppliers, lenders, and society at large. Each of these entities allows GE to thrive; in return, GE's focus should be to advance the quality of life for all stakeholders involved. I believe that when all employees tune into the needs of stakeholders, what results is a strong and sustainable corporate culture.

So, how does GE measure up for stakeholders? In 2012, my Foolish colleague Charlie Kannel found that GE's past missteps in employee relations and its ongoing lobbying efforts overshadowed current efforts to bolster its workforce and communities while addressing environmental concerns. A year and a half later, I would venture to disagree slightly with the overall assessment.

When it comes to innovation in important arenas like energy and health care, GE's ecomagination and Healthymagination projects continue to grow in scope. Likewise, GE ranks as one of the top companies each year in green energy patents, an indication that the company strives to find better solutions.

Perhaps most importantly, GE's made a concerted push toward transparency with gecitizenship.com. If you want to know where the company stands – on anything from tax breaks to clean water usage – this site allows anyone access to GE's record. Overall, GE still has room to grow, but the company has built a foundation for continuous improvement.

Why you can't ignore it
For GE, this emphasis on culture has enhanced its growth strategy in recent years. A declining GE Capital has forced managers across the company to foster growth in their respective businesses, and the result has brought an entrepreneurial environment to once-stodgy, industrial operations. Managers willing to take calculated risks will allow the organization to thrive in diverse countries and markets.

As GE concedes, these investments in culture "cannot be measured in a traditional sense." However, the company "believes so strongly in cultivating its culture that efforts like these are not required to justify a return on investment."

When evaluating GE's stock, culture might be the difficult asset to quantify, but it also could be the most valuable one on the balance sheet.

How you can profit from it
When you take a look at GE's stock price, it closely correlates with its tumbling trends on Glassdoor in 2010 only to make huge gains in the following years. It might just be coincidence, but I would bet otherwise. Our legendary co-founder, Tom Gardner, believes Glassdoor offers tremendous insight into a company's operations. He uses it often to evaluate and rank his top stocks. For a limited time, he's allowed us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free for you to start the new year right. Just click here now to uncover the three companies we love for 2014 and beyond.

Isaac Pino, CPA owns shares of General Electric Company. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale and General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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