GENERAL ELECTRIC Overview • 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? •Conclusions 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 2001 • 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 share • 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 Million – Dividends: $0.19 per share quarterly. Dividends, paid every quarter since 1899, have increased every year since 1975. 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 Management Nominating and Public Audit Development and Corporate Governance Responsibilities Committee Compensation Committee Committee Committee Outside Directors Independent 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 • GOVERNANCE ACTIONS TAKEN BY GE IN 2002 INCLUDE – 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 regulations – 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 shareowners. • 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, including. • selecting, evaluating and compensating the CEO and overseeing CEO succession planning; • providing counsel and oversight on the selection, evaluation, development and compensation of senior management; • reviewing, approving and monitoring fundamental financial and business strategies and major corporate actions; • 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' compensation. • 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, and – 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 males) • „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 males) • „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 1982. – Held a series of leadership roles in GE Plastics, Medical Systems, GE Appliances. 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 TRW 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 leaves. • Demonstrated capacity to grow. Other Finalists • Both McNerney and Nardelli instantly became the two most intensively recruited executives: – 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 history • 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. Conclusions • 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.