What does GE’s exit from the Dow index mean?
Corporations ought to reboot once every decade, and GE is now rebooting its operating system 2.0. That was overdue
General Electric Co. (GE), founded by Thomas Edison, was part of the select group of companies that was part of the Dow Jones Industrial Average when it was launched in 1896. It has been part of that blue-chip 30-company index since 1907, the only company to survive there for more than a century. The history of GE is in many ways an important lens to America’s business history.
GE was the dominant industrial giant, maker of a wide variety of products, from light bulbs and refrigerators to locomotives and aircraft engines. It went far and wide to distant shores and geographies. The company has been the golden benchmark for a successful conglomerate, and known for its almost ruthless meritocracy. GE’s image as an incubator of managerial talent was due to its emphasis on continuous training and innovation. Indeed, GE leaders who failed to reach the top took on leadership positions elsewhere. GE was, thus, an important leadership factory, not just to American, but global, businesses.
There was a famous incident when US president Richard Nixon told Israeli prime minister Golda Meir that he would any day trade three American generals for Israeli general Moshe Dayan, to which she asked for “General Motors, General Electric and General Dynamics”.
That iconic GE was dropped from the Dow this month, ending its unbroken 111-year historic tenure. Its stock has fallen more than 80% since 2000, with 40% of the decline coming just this year. The Dow index committee could no longer justify its presence in the 30 elite stocks that are representative of the broad stock market. What a fall for a company which just 20 years ago was the world’s most valuable! What went wrong? Strategy or structure or markets? Maybe conclusions should not be drawn so soon. GE is actually hiving off its profitable healthcare business into a separate company, 80% of which will continue to be owned by existing shareholders. So GE’s fall from Dow may be just because there will be two different companies.
GE is probably the only non-family owned company in the world which has had long tenures of executive chairmen. Between them, the previous two chairmen were at the helm for nearly 40 years out of the company’s 126-year history. Jack Welch, called “Neutron Jack”, was chairman from 1981 to 2001 and represented the golden period of stock value. He earned that moniker for his practice of firing the bottom 10% low performers every year. This was GE’s famous culling, and direct application of the bell curve, which it followed religiously. Both Welch and his successor Jeff Immelt, who was chairman from 2001 to 2017, were quintessential GE insiders, with meteoric rises from apprentice to chairman. That good guys made it to the top was the meritocratic theme.
So does the booting out of GE from Dow have any great significance? The GE camp says it reflects more on the Dow index (which is not representative enough, like the widely followed S&P 500). Nevertheless, GE’s ouster has triggered several debates. Some observations are as follows.
First, you can never be too big to fail. Since 1993, GE had been the most valuable company, ahead of Microsoft and Exxon Mobil, in an era prior to FAANG’s (Facebook, Apple, Amazon, Netflix, Google) ascendance. But contrary to its own conservatism, it ventured aggressively into financial services under Welch. His autobiography admits that this was a big mistake. It was initially hugely successful as a non-banking financial company. At one time, during the heyday of uber-finance, they used to call GE the biggest bank which wasn’t a bank. GE also pioneered business process outsourcing, which led to the hiving off and listing of Genpact. At one time, more than half of GE’s profits came from its financial services business. But then Lehman crashed in 2008, and the financial services business imploded. Big was not big enough to remain insulated. Overexposure to financial services cost the industrial giant dearly.
Second, the power of the conglomerate may be overestimated. In a globalized world, the power of scale and market dominance is inherently curtailed. As explained in a recent article in the Harvard Business Review, such conglomerates cannot fight the might of China, which uses state power to propel its industries. Indeed, in one of the rare off-the-record speeches (later leaked), Immelt surmised that China wouldn’t let foreign businesses like GE win. He recanted those words, but the spirit of what he said was manifested in the fact that GE accepted a junior position in its partnership with a Chinese firm to make jet engines in China, agreeing to unusually stringent conditions like localization and transfer of technology.
Third, in a hyper-connected networked world, technology diffuses much faster. Many emerging-market mini-conglomerates are challenging the might of GE-like large companies out of developed countries. In fact, large conglomerates may not be nimble-footed enough to meet the challenge of “three billion new capitalists on the scene”, as Clay Christensen calls the advent of India and China. Under Immelt, GE’s famed corporate centre grew just too big and unwieldy.
Lastly, maybe large non-family owned companies ought not to let chairmen reign for such a long time. Hubris can set in, as was seen with Welch in the finance business, and Immelt in oil and gas (despite lip service to “greening and environment”). Corporations ought to reboot once every decade, and GE is now rebooting its operating system 2.0. That was overdue. Who knows, in a few years it may be back in the Dow.
Ajit Ranade is an economist and a senior fellow at the Takshashila Institution, an independent centre for research and education in public policy.
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