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GE’s Board Did Something Right For Once: Brooke Sutherland

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These translations are done via Google Translate
Dec 10, 2018, by Brooke Sutherland
(Bloomberg Opinion)

General Electric Co. is grappling with a crisis that’s shredded the conglomerate’s share price and credibility. And that’s why it’s so important that its new chief executive officer, Larry Culp, has corralled the services of Paula Rosput Reynolds as he attempts to turn GE around.

GE announced that Reynolds had joined its board on Dec. 7, replacing former Vanguard Group Inc. CEO Jack Brennan. (Brennan has served on GE’s board since 2012 and planned to retire in March.) Reynolds is an expert in the two business at the heart of GE’s fall from grace: utility-class power generation and insurance.

Reynolds was CEO of Duke Energy Corp.’s energy power services subsidiary in the late 1990s and then led gas-distribution company AGL Resources (now called Southern Co. after a 2016 merger) until 2006. She then jumped to the insurance industry where she led property and casualty insurer Safeco Corp. before selling it at about a 50 percent premium in 2008, right before insurance stocks plunged as the financial crisis mushroomed. Within days of that deal closing, she was tapped to become American International Group Inc.’s chief restructuring officer and charged with raising cash via asset sales to repay a government bailout.

There aren’t may executives or directors who have expertise in both power and insurance. Reynolds jumped to Seattle-based Safeco in part to be closer to her husband — who was then the CEO of Bellevue, Washington-based Puget Energy Inc., according to a Bloomberg News report. That said, very few CEOs can leap successfully into a completely different industry. GE, which has long espoused the idea that anyone with an MBA can run any business, learned that lesson the hard way. Reynolds is clearly someone who can adapt and learn quickly — qualities that will come in handy as she tries to help Culp revivify GE.

Her tenure as AIG’s chief restructuring officer during the financial crisis is instructive. She had to divest a broad portfolio of insurance assets at a time when potential buyers were sidelined by their own woes. She championed the idea of alternatives to a traditional sale, including public offerings or deals that offered stock payments or contingent value rights tied to an acquired business’s future performance. She stepped down in 2009 after only about a year on the job after AIG named Robert Benmosche as CEO — a job for which she was thought to be a leading candidate. Even after she left, AIG continued to follow her strategy, taking businesses such as Transatlantic Holdings public and selling its aircraft leasing unit to AerCap in a cash and stock deal.

GE’s situation isn’t nearly as dire as AIG’s, but given AIG’s near-death experience that doesn’t set a high bar for GE. GE reported a $631 million operating loss in its power unit in the third quarter and said it’s too unsure of that division’s trajectory to update its 2018 cash flow and profit guidance. Meanwhile, it’s grappling with a $15 billion reserve shortfall at a legacy long-term care insurance business that could swell further under annual stress-testing practices and new accounting rules.

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Culp has vowed to attack the company’s bloated debt load, and that will mean selling off even more pieces to raise cash. The challenge is that even assets that are considered crown jewels within GE have potential complications — and even successful divestitures will undercut the company’s ability to generate cash in the future.

Selling off GE’s life-sciences business, for example, could raise more than $20 billion, but that would remove one of the most robust parts of the healthcare unit the company plans to take public. A high percentage of assets in GE’s aircraft leasing business, known as GECAS, are tied to a less desirable mix of regional jets, helicopters, wide-body planes and engines. Rival helicopter lessor Waypoint Leasing Holdings Ltd. filed for bankruptcy last month, raising questions about whether GE would need to write down its 2015 purchase of Milestone Aviation for $1.8 billion. GE pushed back on comparisons to Waypoint and says Milestone is profitable.

One of the biggest weights on GE’s stock price right now is that shareholders simply don’t know how large the company’s liabilities are, particularly in the long-term care insurance business. The company has said it’s looking at ways to offload that business or limit its funding obligations. Pulling that off will require a big upfront cash payment to compensate counterparties for the risk. Or perhaps Reynolds has some some tricks up her sleeve.

Thus far, Culp has tended to work within the confines of GE’s pre-existing management team and breakup plan. Brennan served as lead director from 2014 until this past June when he was replaced in that role by Culp.  It always struck me as a mistake that former CEO John Flannery allowed Brennan to stay for that long; it sent mixed messages about Flannery’s willingness to overhaul GE’s culture. Reynolds’ arrival heralds other possible board changes. Reynolds’ appointment also gives GE an outside observer to help steward the turnaround of its power division, which I think will help offset Culp’s head-scratching decision to have a trio of veteran GE insiders running the unit.

Reynolds will have to prove herself now, of course, but her presence on GE’s board suggests that Culp is finding his footing.

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