A Rare Skeptic Takes On The Cult of GE
By Andy Serwer

(FORTUNE Magazine) – By now we've all heard plenty about the job Jack Welch has done running General Electric for the past 20 years. Is there any CEO or company more lionized than Welch or GE? Seems like it gets more plaudits than all the other 499 companies in the S&P combined! Here's a big reason why: Since Welch took over on April 1, 1981, GE stock has climbed 3,098%, an annual average growth rate of 18.9% (compared with 896% and 12.2% for the S&P). And Welch has done this not with a hot product or sector but by banging away at the oldest of old-school conglomerates. For the fourth straight year, GE tops FORTUNE's list of Most Admired Companies (see story in this issue). Welch could be the Michael Jordan of management--the best who's ever played.

But I think all this laudation has gone too far. After all, GE isn't the Red Cross or the MacArthur Foundation, or even Ben & Jerry's. It's just a big, aggressive, successful corporation. And Welch is no Socrates or Abraham Lincoln--just a tough, smart, successful CEO. Right about now I can hear Welch screaming that he never claimed to be Socrates! That may be true, Jack, but others seem to think you are. So to give some perspective, I decided to delve into three of GE's flaws. One caveat: Each of these is a big, complicated issue that would take pages to flesh out. This is simply my take on them.

1. Managed Earnings. Critics contend that GE, which has produced 101 straight quarters of earnings growth, uses accounting tactics that obfuscate its true performance. The claim is that GE uses gains and losses from certain businesses--particularly its financial-services arm, GE Capital--to offset gains and losses in other divisions, whether they ought to belong in that quarter or not. This produces earnings growth that is uncannily consistent. The problem: If GE ever stumbled and chose to hide a shortfall, some critics say, it could take many quarters for investors to find out. This kind of earnings management isn't illegal, maybe not even immoral. The concern, rather, is that it's not transparent.

For example, GE recorded a $1.3 billion gain by selling its Paine Webber shares (sold to UBS in its buyout of Paine Webber). But according to a GE release, this gain was, coincidentally, "more than offset by one-time charges." Meaning another quarter of the steady, predictable earnings growth that Wall Street knows and loves. Although this strategy worked just fine in the Welch era, often when capital markets were zipping along, what happens now that the boom times appear to be over? For a more detailed account of this controversy, see "Lies, Damned Lies, and Managed Earnings," in the fortune.com archive, and the November 2000 issue of Money. A GE spokesperson called these assertions "ludicrous," and added, "We manage businesses, we don't manage earnings."

2. The Hudson River. The issue here is whether GE should pay to remove dangerous PCBs from the Hudson River. GE doesn't dispute that it discharged these chemicals. For 30 years, until 1977, New York State allowed it to do so. The Hudson is now cleaner than it was then, but there are still PCBs in the water, and the New York State Department of Health advises that children under 15 and women of child-bearing age not eat fish caught in the lower Hudson. This past December the EPA ordered GE to dredge parts of the river and clear it of PCBs, a $460 million project. But GE is vigorously fighting the order, saying that dredging will only make the problem worse. Without getting into reams of science here, doesn't this sound like the kid who says he can't clean up his closet without scattering toys all over the bedroom floor? GE says it has already spent $200 million to clean the Hudson. Big money, but how much more has it spent on lobbying and legal bills fighting the Feds? A piece of unsolicited advice for incoming CEO Jeffrey Immelt: Third day on the job, call a news conference and announce that GE will clean up the river. Spend the $460 million. Just do it.

3. Honeywell. This is Welch's biggest acquisition--and it could be his toughest. Skeptics question the wisdom of the deal, saying it runs counter to Welch's strategy of shunning industrials in favor of higher-margin businesses like GE Capital and NBC. Indeed, shares are down 20% since the Honeywell deal was announced. And in January, Honeywell's earnings came in below expectations, pulling down both HON and GE. It's possible Welch's legacy could be tarnished by the last deal under his command.

If you turn back the clock, you may recall that GE didn't always enjoy the sterling reputation it has today. Welch used to be "Neutron Jack," the man who cleared buildings of employees. For years GE lagged in hiring and promoting women and minorities, and it had troubles with the Pentagon in the 1980s and early 1990s, pleading guilty to defrauding the government on defense contracts. Years of incredible stock performance have made us forget those episodes.

You're probably saying I'm being unfair. Every big company and every CEO has weak spots that a magazine columnist can take potshots at. But that's just my point. GE and Welch may be head and shoulders above the crowd, but we should keep some perspective here. There's more to it than simply measuring stock gains. GE is just a company, albeit a very successful one. And Welch is just a CEO, albeit a very good one. Let's just leave it at that.