Sometimes change comes slowly, and sometimes it comes very, very quickly.
It had been coming slowly to industrial giant General Electric (NYSE:GE) as CEO John Flannery continued the restructuring process that had begun under his predecessor, Jeff Immelt. But apparently, that pace wasn't good enough for GE's board of directors, which earlier this month unanimously voted to replace Flannery with board member Larry Culp, effective immediately.
That was a head-spinningly quick turnaround for a CEO who had been in place for only a little over a year. And the way it happened offers some clues to investors that jarring changes may come even more quickly now that Culp is in the corner office. Here's why.
Turning the Titanic around
Flannery took the helm at GE at a tumultuous moment for the storied industrial giant. Immelt's investments in oil and gas services weren't paying off, thanks to the oil-price slump that had been going on since 2014. The company's flagship power division and its small but high-margin transportation division were beset by sagging sales. While the company's aviation and healthcare divisions continued to churn out impressive margins, it wasn't enough to buoy the company, which continued to miss earnings targets.
During his tenure, Immelt had begun the process of streamlining the company, selling or spinning off many of the company's GE Capital businesses that caused so many headaches during the financial crisis. He also sold the company's low-margin appliances business to Chinese company Haier and arranged the merger of the oil and gas business with Baker Hughes to form Baker Hughes, a GE Company.
When Flannery arrived, he made some even bigger moves, and made them more quickly, announcing plans to merge GE's transportation unit with Wabtec, and to try to sell its underperforming consumer lighting unit. He also ended Immelt's abortive efforts in digital and cloud-based Industrial Internet of Things (IIoT) solutions. And -- perhaps most importantly to investors -- he took the necessary if painful step of slashing the dividend.
The man with the plan
One big supporter of this effort was activist investor Nelson Peltz, head of Trian Fund Management, LP. Peltz took a $2.5 billion stake in GE in 2015, buying up about 1% of the company's shares. At the time, Peltz did not request a board seat, saying, "We invested in G.E. because it is undervalued and underappreciated by the market despite what we believe is a transformation that will allow its world-class industrial businesses to drive attractive shareholder returns."
Since then, of course, Peltz's gamble hasn't paid off, and his tune about a board seat apparently changed. In October 2017, shortly after Flannery took over, GE's board installed Trian co-founder and Chief Investment Officer Edward Garden on the board. At the time, Garden proclaimed his full confidence in Flannery, saying, "I have been impressed by John Flannery and I am excited to work with John and the rest of the Board in the same way that I've worked at other companies where I've been invited to join the board -- collaboratively and with the common goal of driving long-term value for all shareholders."
Garden was reportedly an active participant in the examination of GE's operations that led to the June 2018 decisions to spin off the oil and gas business completely, selling the company's 62.5% stake in Baker Hughes, and to sell the company's lucrative healthcare unit (possibly loading it up with debt in the process). At the time, Peltz seemed to be on board, with a Trian spokeswoman saying, "Trian supports the strategic initiatives announced today by G.E. and believes that these initiatives will create substantial value for shareholders."
So what happened in the last three months to cause Trian's confidence in Flannery to wane? After all, Garden was one of the board members who voted to push Flannery out.
The [board]room where it happened
Well, nobody knows exactly what happened except the board. This is one reason Peltz likes -- and in some cases, will go to great lengths to obtain -- a seat on the boards of companies in which he invests, like DuPont and P&G. Not only does he get insight into the company, but also the ability to convince other directors to make big changes.
There was an additional board shakeup at GE in April 2018: Three new members, including Larry Culp, the new CEO and former CEO of Danaher, and Thomas Horton, the new lead director, were inducted and the total board size was shrunk down from 18 to 12, including Flannery himself. This means that of the 18 board members who elected Flannery in 2017, only seven remained a year later.
It isn't clear exactly what Culp and Horton said or did in the boardroom that made the rest of the board willing to take a gamble on their leadership as opposed to Flannery's, but one would think it would have to be fundamentally different from whatever Flannery was proposing. Whatever it was, it was enough to cause Garden -- along with the rest of the board -- to want Culp in charge badly enough to make the sudden leadership change without any public hints that it was on the way. When Immelt stepped down, GE made it clear that his succession plan had been in the works "since 2011." Yet while some have speculated that there might have been some sort of scandal or accusation of improper conduct, there hasn't been any sign of that being the case, and it seems pretty unlikely to me.
How different can it get?
Obviously, we're not going to know exactly what's in store until it happens. Some analysts are predicting an impending dividend cut. Others have suggested that Flannery's ouster was more about convenience than strategic differences -- that he's basically being used as a fall guy and the new CEO announcement is a distraction from the company's abandoned cash flow guidance and the $23 million writedown taken by the company's power unit, which were announced concurrently.
It's also unclear exactly what "more drastic" measures Culp could take; ditching the majority of the company's business units and cutting the dividend -- as Flannery did -- are seismic shifts for a lumbering 126-year-old conglomerate. But if Flannery's pace of change wasn't satisfying to Peltz, Garden, and the rest of the board, investors should be prepared for something even bigger on the horizon...even if we're not sure what it looks like.