GEWatchers (3) Results of "eliminating the bureaucracy"...

In my book The Secret to GE's Success, I describe that one of GE's historical great strengths was its strong financial and auditing organizations. These organizations enabled the company to spot problems before they became public and to avoid embarassing surprises. I also pointed out that one of Jack Welch's first actions when he became CEO was to was to attack what he called the "bureaucracy", which included finance and the auditing staffs. He reduced the auditing staff.

During the Welch era, the lack of a strong auditing staff resulted in the Kidder fiasco, in which one of the traders was able to loss over $350 million without the company's knowledge. The result was the GE had to divest Kidder.

However, it appears the lack of a strong auditing staff is still a major problem. The February 19, 2008 Wall Street Journal reported that GE has been under investigation for improperly reporting revenues since 2002. These are few of the highlights as reported in the WSJ:

• " In each of the past three quarters, GE has corrected financial statements because it improperly booked income at its rail, aircraft engines, health-care, enegery and water units". It is important to note that these are GE's major growth businesses and continually lauded by Immelt and his executive team as the great hopes for the future.

  "In the fourth quarter of 2003, for example, GE locomotive unit overstated revenues by 22.6% and profit by 16.6% according to SEC filing".

  To show the severity of this situation, the General Electric Company has hired Wilmer-Hale LLC's William McLucas, a former head of SEC's enforcement division to investigate the situation and, simultaneously, the GE Board's auditing committee has hired its own investigative group, Cravath, Swaine and Moore, LLP. In short, there are "investigators investating investigators and everyone is trying to protect themselves."

GE has fired a number of people involved and the company will make changes including: "adding staff incorporate accounting to review revenue matters and bolstering the internal-audit department". Obvious, not creative solutions!

As a GE stockholder and fan, I have three major concerns.

• First, is the fact this has happened and that GE must have reduced the strength and power of its internal auditing staff so that it is didn't know what is going on and was surprised. Surprise is one the major fatal flaws of any organization.
• Second, I am even more concerned that GE's increasing complexity, which I have discussed in my book and in several GE related articles and blogs, will make it worse. As GE moves globally, transfers facilities overseas, it will become even more difficult to know what is happening. Further, each country has different accounting and financial regulations and the employees in these countries may not be aware of the regulations and so it is likely that more surprises will occur. Like or not, GE is still a US corporation and subject to US laws.
• Third, everyone wants to look good and it is not uncommon to find that people will book sales before they happen or hide the real numbers. This is just human nature and will require strong financial and strategy review organizations.

I entitled the last section of my book about the Immelt era, "Back to the Future" since I believe it is critical that GE build on its past strengths as it moves into the future. I think that GE should take a close look at some of the reasons why it has been successful in the past and they will find that the financial, auditing and strategic thinking disciplines of the past were key to this success and must not be neglected.

GE and all CEOs must not classify those who do their job and bring up unpleasant issues as bureaucrats but recognize they need people who are willing to identify potential problems, help to avoid them and being surprised.

Bill Rothschild, author: "The Secret to GE's Success" and "Putting It All Together-a guide to strategic thinking and decision making". Both books emphasize the need to "avoid surprises, especially surprising yourself". They are available on http://www.strategyleader.com/.