General Electric, the iconic manufacturer that halved its dividend as cash flow shrank, is nominating three new directors to a smaller board that will allow each member more input on strategy.
With the changes, Chairman and CEO John Flannery is delivering on a promise to shrink the number of directors to a dozen from the previous 18. He said the move would foster sharper, more focused leadership after a challenging year for a business that dates to the late 19th century, when it was founded by inventor Thomas Edison.
“Many people have lost faith in us. I have not,” Flannery, 56, said in his annual letter to investors on Monday, published in tandem with the announcement of the board shakeup. “We have a lot to work on, but we have a lot to work with.”
The new board nominees, former Danaher Corp. CEO Lawrence Culp, former American Airlines CEO Tom Horton and former Financial Accounting Standards Board Chairman Leslie Seidman each bring expertise in pivotal fields for GE, the company said.
Culp, 54, reshaped Danaher from an industrial manufacturer to a science and technology business while Horton, 56, led the post-bankruptcy restructuring of American Airlines and its merger with US Airways into a leading airline that’s an important customer for GE’s jet-engine business. The 55-year-old Seidman’s know-how will prove useful to a company switching from unique financial metrics to more standardized ones.
“They tried to sprinkle in some guys with good operating experience, good customer experience and obviously, given the need to enhance transparency and accountability, a good accounting background,” Nick Heymann, an analyst with William Blair, told the Washington Examiner.
A smaller board will enable much more involvement, accountability and proactive effort by directors in the wake of questions about the board’s inaction in the past, Heymann said.
GE’s current challenges “evolved over time, and for whatever reason, the board never really plugged into or acknowledged the ongoing degradation,” he added.
Improving engagement and accountability have been focal points for Flannery, who succeeded longtime GE head Jeffrey Immelt last August as the company grappled with slowing cash generation and pressure from activist Trian Partners to meet ambitious earnings targets. Just months later, Flannery slashed the company’s quarterly payout to 12 cents — the second such cut in 10 years — and reduced profit targets as markets wilted for power-generation equipment, one of GE’s largest divisions.
Revenue in that business alone fell 15 percent at the end of last year, pushing GE toward a $9.8 billion net loss fueled largely by a $3 billion charge from the Republican-led tax overhaul and billions more for insurance liabilities. That compared with a profit of $3.49 billion a year earlier.
For 2018, GE now expects profit of $1 to $1.07 a share, about half a previous target of $2 and far short of the $2.33 that Trian had argued might be possible.
The lower targets, combined with developments such as a Securities and Exchange Commission probe of the $6.2 billion charge for accumulated insurance liabilities at GE’s finance business, has dragged the stock price down 19 percent this year to $14.10. That compounds a 45 percent drop in 2017 even as leading U.S. indexes spiked amid optimism that President Trump and a Republican Congress would buoy the economy with tax cuts and looser regulations.
“While I am not proud of our performance, I am incredibly proud of this company,” Flannery wrote in his letter. “If anything gives me faith in our future, it is the passion and resolve of our teams. On one level, many of them are disappointed and frustrated. I get that. On another level, I see a competitive drive aflame in them. The passion to be the best we can be for our customers. To win in the marketplace. To fight for our reputation. People who bet against that do so at their own peril.”
