Document Sample
• General information
      – History of the company
      – Financial highlights
      – Stocks
• Corporate governance
      –Board of directors
      – Governance actions
      – Corporate governance principles
      – Committees
             •Management Development and Compensation Committee
                      – MDCC Responsibilities,
                      – Key Practices.
•CEO Selection
      – Starting the Process of CEO selection
      – CEO Candidates
      – Advantages of the new CEO
      – Other Finalists
      – Was the choice correct?
      –What was different?

              GE general information
•   GE is a diversified technology and
    services company dedicated to creating
    different products from aircraft engines
    and power generation to financial services,
    medical imaging, television programming
    and plastics,

•   GE operates in more than 100 countries,
    including 250 manufacturing plants in 26
    different nations

•   GE employs more than 315,000 people
    worldwide, including 168,000 in the
    United States
                      GE History
• In 1878 Thomas A. Edison
  established Edison Electric
  Light Company.
• In 1892, a merger of Edison
  General Electric Company and
  Thomson-Houston Electric
  Company created General
  Electric Company.
• GE was incorporated in New
  York State on April 15, 1892.
            GE Financial Highlights
•   Revenues: $131.7 Billion
•   Net Earnings: $15.1 Billion ($1.51 per share), which is a 7% increase over
•   International Revenues: $52.9 Billion (40% of total revenues)
•   R&D Expenditures: $2.6 Billion
•   Total Assets: $575.0 Billion
•   Company achieved record earnings and cash generation in 2001, with 11%
    increases in earnings and earnings per share (EPS) and 12% growth in cash
    flow from operating activities.
•   "2001 was an especially challenging year," said GE Chairman and CEO Jeff
    Immelt. "Despite a global recession and the September 11 terrorist attacks, we
    delivered double-digit earnings growth. This is a tribute to our great global
    team and the strength of the GE business model."
                                   GE Stocks
•   First issue of company stocks was on
    April 15, 1892 when 1,000 shares of
    $100 par value were sold for $100 per
•   GE was traded on the NYSE for the
    first time on June 23, 1892. There was
    one trade of 50 shares at $108 per share
•   Now the company has
      – Shares Outstanding: 9.947 Billion
      – Number of Share Owners: 4
     –   Dividends: $0.19 per share quarterly.
         Dividends, paid every quarter since
         1899, have increased every year since
GE Stocks
        GE Corporate Governance
• The Board of directors of the company consists of 17 members.

• As a result of the 2002 changes, 11 of GE‟s 17 directors are
  ”independent” under a strict definition, with a goal of two-thirds.

• At the core of corporate governance is the role of the board in
  overseeing how management serves the long-term interests of share
  owners and other stakeholders.
           GE Corporate Governance
                                       Nominating and                             Public
                           Audit                            Development and
                                     Corporate Governance                     Responsibilities
                         Committee                           Compensation
                                          Committee                             Committee
Outside Directors
James I. Cash               X                                                        X
Ann M. Fudge                X                                                        X
Claudio X. Gonzalez        Chair              X                   X
Andrea Jung                                   X                   X
A. G. Lafley                                  X
Kenneth G. Langone          X                 X                   X
Ralph S. Larsen                               X                   X
Rochelle B. Lazarus                           X                                      X
Andrew C. Sigler            X                 X                  Chair
Robert J. Swieringa         X
Douglas A. Warner           X               Chair                 X
Material Relationships
with GE
Sam Nunn                                                                           Chair
Roger S. Penske                                                                     X
Inside Directors
Management Directors
Jefferey R. Immelt                                                                   X
Dennis D. Dammerman                                                                  X
Gary L. Rogers                                                                       X
Bob Wright                                                                           X
          GE Corporate governance
    –   GE‟s test of ”independence” for members of the Management Development and Compensation
        Committee and the Nominating and Corporate Governance Committee is stricter than required by new

    –   GE has appointed a presiding director who will lead independent meetings of non-employee directors
        at least three times a year. Each non-employee director will visit two of GE‟s businesses each year
        without the presence of corporate management so that directors can have direct exchanges with
        operating leadership.

    –   The responsibilities of the Audit Committee will increase, and it will meet at least seven times per year.

    –   To help further align directors‟ interests with those of share owners, the equity portion of directors‟ pay
        will be in Deferred Stock Units (DSUs), replacing stock options. DSUs will be 60% of the annual
        director compensation and will not pay out until one year after a director leaves the board. When
        directors exercise existing stock options, they will be subject to the same one-year holding period that
        applies to GE senior management.
GE Corporate Governance Principles
• Role of Board and Management
    –   GE's business is conducted by its employees, managers and officers, under the direction of the chief executive
        officer (CEO) and the oversight of the board, to enhance the long-term value of the company for its

• Functions of Board
    –   The board of directors has 8 scheduled meetings a year at which it reviews and discusses reports by
        management on the performance of the company, its plans and prospects, as well as immediate issues facing
        the company. Directors are expected to attend all scheduled board and committee meetings.
    –   In addition to its general oversight of management, the board also performs a number of specific functions,
           • selecting, evaluating and compensating the CEO and overseeing CEO succession planning;
           • providing counsel and oversight on the selection, evaluation, development and compensation of senior
           • reviewing, approving and monitoring fundamental financial and business strategies and major corporate

• Qualifications
    –   Directors who also serve as CEOs or in equivalent positions should not serve on more than two boards of
        public companies in addition to the GE board, and other directors should not serve on more than four other

        boards of public companies in addition to the GE board.
    –   Directors will not be nominated for election to the board after their 73rd birthday, although the full board may
        nominate candidates over 73 for special circumstances.
GE Corporate Governance Principles
• Independence of Directors
    –   The board has determined that 11 of GE's 17 directors are independent.
    –   The company will seek to have a minimum of ten independent directors at all times, and it is the board's goal
        that at least two-thirds of the directors will be independent.

• Size of Board and Selection Process
    –   The directors are elected each year by the shareowners at the annual meeting of shareowners.
    –   The board also determines the number of directors on the board provided that there are at least 10. Between
        annual shareowner meetings, the board may elect directors to serve until the next annual meeting. The board
        believes that, given the size and breadth of GE and the need for diversity of board views, the size of the board

        should be in the range of 15 directors.

• Board Committees
    –   audit;
    –   management development and compensation;
    –   nominating and corporate governance; and
    –   public responsibilities.
GE Corporate Governance Principles
• Independence of Committee Members
    –   members of the audit committee must also satisfy an additional NYSE independence requirement.
    –   Members may not directly or indirectly receive any compensation from the company other than their directors'

• Self-Evaluation
    –   the board and each of the committees will perform an annual self-evaluation. Each November, the directors
        will be requested to provide their assessments of the effectiveness of the board and the committees on which
        they serve. The individual assessments will be organized and summarized by an independent corporate
        governance expert for discussion with the board and the committees in December.

• Compensation of Board
    –   The nominating and corporate governance committee shall have the responsibility for recommending to the
        board compensation and benefits for non-employee directors.
    –   The committee believes these goals will be served by providing 40% of non-employee director compensation
        in cash and 60% in deferred stock units starting in 2003.
    –   At the end of each year, the nominating and corporate governance committee shall review non-employee
        director compensation and benefits.
GE Corporate Governance Principles
• Succession Plan
   –   The board shall approve and maintain a succession plan for the CEO and senior executives, based upon
       recommendations from the management development and compensation committee.

• Annual Compensation Review of Senior Management
   –   The management development and compensation committee shall annually approve the goals and objectives
       for compensating the CEO.
   –   That committee shall evaluate the CEO's performance in light of these goals before setting the CEO's salary,
       bonus and other incentive and equity compensation.

• Access to Senior Management
   –   Non-employee directors are encouraged to contact senior managers of the company without senior corporate
       management present.
   –   To facilitate such contact, non-employee directors are expected to make two regularly scheduled visits to GE
       businesses a year without corporate management being present.
            Management Development and
             Compensation Committee
•   The management development and compensation committee of the board of directors of
    General Electric Company shall consist of a minimum of three directors.

•   The committee meets at least 8 times a year.

•   All members of the committee shall be independent directors.

•   The purpose of the committee shall be to carry out the board of directors' overall
    responsibility relating to executive compensation.

•   The committee's judgments regarding senior executive officer compensation are primarily
    based upon its assessment of each senior executive officer's leadership performance and
    potential to enhance long-term shareowner value.
             Management Development and
              Compensation Committee
•   The committee relies upon judgment about each individual, not upon rigid guidelines or
    formulas, or short term changes in our stock price, in determining the amount and mix of
    compensation elements for each senior executive officer.

•   Key factors affecting the committee's judgments include:
     –   the nature and scope of their responsibilities;
     –   their contribution to the company's financial results;
     –   their effectiveness in leading our initiatives to increase customer value, productivity and growth;
     –   their contribution to the company's commitment to corporate responsibility including their success in
         creating a culture of unyielding integrity and compliance with applicable law and our ethics policies,
     –   their commitment to community leadership and diversity.
                      MDCC Responsibilities
•   The committee shall assist the board in developing and evaluating potential candidates for
    executive positions, including the chief executive officer, and to oversee the development of
    executive succession plans.

•   The committee shall evaluate at least once a year the chief executive officer's performance in light
    of these established goals and objectives.

•   The committee shall evaluate the performance of the company's senior executive officers and
    shall approve the annual compensation, including salary, bonus, incentive and equity
    compensation, for such senior executive officers.

•   The committee has shall review company's incentive compensation and other stock-based plans
    and recommend changes in such plans to the board as needed.

•   The committee shall report its actions and any recommendations to the board after each
    committee meeting and shall conduct and present to the board an annual performance
    evaluation of the committee.
                MDCC key practices

• Executive Compensation Program
   –   Salary,
   –   Annual Bonus,
   –   Stock options,
   –   Restricted Stock Units,
   –   Contingent Long-Term Performance Awards.
                      MDCC key practices

• Stock Ownership Guidelines
•   To help demonstrate the alignment of the personal interest of senior management
    with the interests of shareowners, in September 2002, the committee established the
    following guidelines for the amount of GE stock, as a multiple of the executive's
    base salary, that should be held by senior management:

•   Position                Multiple                Time To Attain
•   CEO                      6X                          3 years
•   Vice Chair               5X                          4 years
•   Senior VPs               4X                          5 years
  Starting the Process of CEO selection

• Formally in June 24, 1994
  – Agenda of the MDCC„s meeting - succession

  – Welch discussed 24 candidates (all white
     • „Obvious Field“
     • „Contenders“
     • „Broader Consensus Field“
  Starting the Process of CEO selection

• Formally in June 24, 1994
  – Agenda of the MDCC„s meeting - succession

  – Welch discussed 24 candidates (all white
     • „Obvious Field“
     • „Contenders“
     • „Broader Consensus Field“
  Starting the Process of CEO selection

• „Obvious Field“
  –   7 men running GE„s largest businesses
  –   Had to be considered due to their positions
  –   Could be eliminated due to age
  –   None made to the final
  Starting the Process of CEO selection

• „Contenders“

  – 4 executives below the top-tier

  – None became finalists
  Starting the Process of CEO selection

• „Broader Consensus Field“

  – 13 other executives from various positions

  – Spotted by Welch for their talents

  – Included all 3 finalists
               CEO Candidates
• Robert Nardelli

   – Age 52.

   – Chief of the GE
     business that makes
     turbines and generators
     for electric utilities.
              CEO Candidates
• W. James McNerney
  – Age 51.

  – CEO, GE Aircraft Engines
    (ran several other divisions
    during his 15 years in GE).

  – In 1997 media guessed he
    would be a top vote-getter.
                 CEO Candidates
• Jeffrey Immelt
   – Age 47.

   – Began his GE career in

   – Held a series of leadership
     roles in GE Plastics,
     Medical Systems, GE
                CEO Selection
• Testing the ability to grow.
  – Rotating CEO candidates through different
    divisions of the company.
     • GE„s advantage over many other companies -
       reputation of skillfully training internal talents for the
       top job.
         – mainly due to GE„s large portfolio of businesses which
           provide broad developmental experiences for its executives.
         – not every company ranking equally high the GE is able to
           cultivate internal CEOs (eg. IBM, AT&T).
               CEO Selection
• Directors getting a feel to the human side of
  the contenders.
  – Annual festive occasions with serious purpose
     • playing golf
        – Welch personally worked out the golf foursomes
     • informal dinners
        – seating directors and CEO candidates carefully
  – Candidates encouraged to contact board
    directors directly when needed
            CEO Selection
– Follow-up Discussions
  • Usual review of the company„s top 20-30
    executives, including all CEO candidates
  • Welch gave an assessment of each executive from
    his HANDWRITTEN notes
  • Directors received a book that detail executives
     – „We might spend an hour on the first page. It„s not what
       most people are used to“ W. Conaty, GE Human
       Resources Chief
             CEO Selection
• MDCC Visits to GE Businesses.
  – In 1996-1997 MDCC decided to know more
    about the candidates and visited several GE
    businesses with and without Welch.
  – with a cover story of „wanting to understand
    their businesses“.
  – very rarely practiced in the corporate world.
                      CEO Selection
• Cutting the Field.
  – At the intensive talent review in 1997, after 3
    years of getting to know the contenders, Welch
    and directors cut the list of candidates to eight:
     •   finalists
     •   David Calhoun, GE Lighting.
     •   David Cote, GE Appliances.
     •   Dennis Dammerman, CFO.
     •   John Rice, Transportation Systems.
     •   Gary Rogers, GE Plastics.
              CEO Selection
• Endgame begins

  – Starting from June 1998, all contenders left in
    their jobs until the winner is chosen

  – Time to watch...
                 CEO Selection

• Field Narrowing
  – Dammerman
     • replaces the CEO of the GE Capital who resigned in Dec. 1998
  – Calhoun
     • leaves Lighting to run Employers Reinsurance business in GE
       Capital in July 1999
  – David Cote
     • resigned in Nov. 1999 to become a President and CEO of
               CEO Selection
• Without drama and horce race!
  – Welch„s experience while running for CEO:
     • „Airplane Interviews“
        – Welch„s predecessor Reginal H. Jones called abruptly
          each contender to his office and asked „Who should be the
          next chairman if both were on a plane and it crashed?“
     • top contenders were brought together to the
       headquarter jobs, where the atmosphere became
       political and poisonous
              CEO Selection
• Finalists announced
  – In mid 2000 Welch was ready to announce the
    names of the finalists
     • Immelt
     • Nardelli
        – backed up by John Rice
     • McNerney
        – backed up by Calhoun
              CEO Selection
• Last meeting of MDCC.
  – Welch and MDCC talked about succession for
    about 4 hours.

  – Seemed like Immelt is the one, but no firm
    decision could be made.
     • „Other guys were doing fabulous things“ Conaty.
              CEO Selection
• Final Choice
  – Welch is still determined not to make the
    process public until then end.
     • The right time - Thanksgiving weekend.
  – After two hours of discussion between Welch
    and MDCC Immelt was chosen, Board agreed
    with the recommendation.
  – Welch calls Immelt
    Advantages of the new CEO
• Age was his advantage.

• Well-liked and popular.
   – can keep managers who might be tempted to leave, when Welch

• Demonstrated capacity to grow.
            Other Finalists
• Both McNerney and Nardelli instantly
  became the two most intensively recruited
  – McNerney, CEO at 3M

  – Nardelli, CEO at Home Depot
      Was the choice correct?
• GE keeps ranking as the world„s most
  respected company according to Financial
  Times annual surveys
• Welch era - longest bull market in the US
• Immelt„s early tenure - bear market,
  terrorist attacks, war in Iraque.
       What was different?
– Never looked at an outsider.
– Formed no long-term strategic vision.
– No common template for measuring candidates.
– A lot of time devoted by the board to getting to
  know the contenders.
– Choosing the new CEO took almost 6.5 years.
– A lot of human interaction.
• The more time spent on succession planning,
  the better.
• The Board is deeply involved in succession.
• CEO and Board communicate frequently
  reviewing their choices.
• Human interaction between board and the
  candidates is essential for good assessments.
         Conclusions (cont.)
• Less drama of succession and horse races
  among top contenders - ethical issues.
• CEO assigns candidates jobs to broaden
  their skills.