What's So Great About GE?
Plenty. But now that smoothly rising earnings are suddenly suspect, our most admired company is too.
FORTUNE
Monday, March 4, 2002
By Justin Fox


Accounting in Wonderland

It's All Yours, Jeff. Now What?




There it is again, perched atop FORTUNE's Most Admired Companies list for the fifth year in a row. But when the guys who run General Electric go out among their public these days, they don't exactly get to bask in adulation. Instead, they have to explain why their company is not like Enron. Or Global Crossing. Or Tyco.

At one level, that's a pretty easy argument to make. GE is not about to collapse, or break up. It has tons of cash, and its businesses generate upward of a billion dollars every month. It has a triple-A credit rating. It makes real things like turbines and fridges that people spend real money to buy. It has a 120-year history of thriving through economic thick and thin (well, actually a 110-year history--the company muddled through the 1880s as a money-losing high-tech startup--but you get the idea).

GE also has an enviable record of pleasing Wall Street. Quarter after quarter, year after year, GE's earnings come gushing in, usually at least 10% higher than the year before, and almost invariably in line with analysts' estimates.

This used to be seen as a good thing. As the consensus estimates compiled by First Call and Zacks rose to prominence during the 1990s,"making the numbers" became the most watched measure of corporate performance. By missing only once in the past ten years (by a penny, in the fourth quarter of 1997, according to First Call), GE and CEO Jack Welch assured themselves a hallowed place in the corporate pantheon.

Sure, there were other reasons GE came to be so admired--its long history of training great managers, its straight-talking celebrity CEO, its vaunted culture of entrepreneurship and achievement. But when it came to actually imitating GE, the closest most companies got was to try to keep Wall Street happy by beating the analysts' earnings estimates.

Now, with the collapse of one of those would-be imitators, Enron--which in 1998 began delivering consistently above-target earnings that were, it turned out, fabricated--that kind of near perfection is suspect."It's kind of like smoking," says Jack Ciesielski, whose Analyst's Accounting Observer newsletter chronicles the contortions companies put their income statements through to keep meeting those estimates."Smoking used to be chic and fashionable and cool; now it's not. The companies that reliably deliver 15% earnings growth year after year are the new smokers."

All of which means that GE's new chief executive, Jeff Immelt, after months of assuring interviewer after interviewer that no, he's not overawed by the shadow of his famously successful predecessor, now finds himself having to tell interviewer after interviewer that no, he's not an earnings cheat.

"Would a miss be more honest?" Immelt asks, with exasperation in his voice."I think that's bullshit. I think that's terrible. That's where the world has gotten totally turned on its head, where somewhere I'd walk up to a podium and get a Nobel Peace Prize for saying, 'I missed my numbers--aren't you proud of me?'"

At GE, you don't get to be CEO by missing your numbers--at least not by missing them twice. In an anecdote from Welch's memoir, Jack: Straight from the Gut, already recounted once in this magazine (see It's All Yours, Jeff. Now What?), Welch tells of cornering Immelt, then the young chief of GE's plastics division, at a company retreat in early 1995. Rising costs had made plastics miss its 1994 earnings target by $50 million, and Welch issued a stern warning:"I love you, and I know you can do better. But I'm going to take you out if you can't get it fixed."

Immelt got it fixed. That's how GE works. Targets are set, initially at a three-year planning meeting every summer known as"session one," and then refined for the coming year at"session two" in November or December. Some adjustments are made for economic conditions and industry-specific difficulties, but the true GE heroes are those who make their numbers even when times are tough. And if you're able to help out with something extra to let the company meet its overall goals when other divisions are struggling, well, that's even better.

To relate another anecdote from Jack: In April 1994 the escapades of rogue Kidder Peabody trader Joseph Jett left GE with a $350 million hole in its earnings."The response of our business leaders to the crisis was typical of the GE culture," Welch recalls in the book."Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said they could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise."

Immelt has continued the tradition. He explains that when it became clear last year that GE's"short-cycle" businesses like appliances and light bulbs weren't going to meet their targets because of the weak economy, he asked the"long-cycle" businesses (power systems, medical systems) to"do better." What did Immelt mean by"do better"?"They sold more CT scanners, they sold more turbines, they cut costs harder, they had the opportunity to grow faster in China. You don't ask a little elf to go in and stir the pot, and out comes ten million bucks." Or, to quote a favorite phrase of former CEO Welch:"We don't manage earnings, we manage businesses."



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