Coverage: GE replaces its CEO with an outsider

General Electric Co. ousted Chief Executive Officer John Flannery in a surprise move on Monday, replacing him with outsider and board member Larry Culp, and said it would take a roughly $23 billion charge to write off goodwill in its power division.

Alwyn Scott and Arunima Banerjee of Reuters had the news:

The struggling energy, health and transportation conglomerate also said it would fall short of its forecast for free cash flow and earnings per share for 2018 due to weakness in its power business, something analysts had expected.

GE shares jumped 7 percent to close at $12.09 as investors bet that Culp could re-energize the GE brand and more quickly transform its portfolio. The stock was the top percentage gainer on the S&P 500. The shares had more than halved since Flannery, a three-decade GE veteran, became CEO in August 2017 to replace Jeff Immelt, who had led GE since 2001. With a market capitalization below $100 billion as of Friday, GE was worth less than a fifth of its peak value a generation ago.

GE Power’s falling profits last year forced GE to slash its overall profit outlook and cut its dividend for only the second time since the Great Depression.

Thomas Heath and Jena McGregor of The Washington Post reported that GE’s market cap has shrunk dramatically in the past decade:

GE also ran up against a seismic shift in the business world that has catapulted technology companies over traditional manufacturers.

In 2007, before the financial crisis, GE was the second-most-valuable company in the world, joined by the likes of Exxon Mobil, Royal Dutch Shell and Toyota. Now that list is dominated by tech giants such as Google, Facebook and Microsoft.

As Apple and Amazon.com have crossed the threshold as the first trillion-dollar U.S. companies, GE’s market capitalization has shrunk to $100 billion.

“You need to adapt and evolve when you are a large company,” Feinseth said. “GE adapted and evolved, but in the wrong direction.”

Anders Melin and Alicia Ritcey of Bloomberg News reported that Flannery may not get much in the way of severance:

Many senior executives at large public companies have contracts that promise severance payments if they’re terminated prematurely. But GE’s top bosses are employed at will and don’t have such benefits clearly defined. That gives the board’s compensation committee flexibility to decide the terms based on the “facts and circumstances,” according to GE’s most recent proxy statement.

What’s more, if GE terminates an executive before retirement because of performance and the person is in line to receive severance worth more than 2.99 times the sum of his or her salary and bonus, the board must get shareholder approval for the payout.

Under those terms, the threshold for Flannery, 57, would be $15 million, based on his $2 million annual salary and $3 million target bonus.

Executives typically get severance of up to three times the annual average of salary plus bonuses paid to them in the past few years if they’re dismissed, as long as the departure isn’t caused by a violation of company policy. That can amount to tens of millions of dollars, even if they’ve not done particularly well.