Bob Nardelli and the Jack Welch legacy
Apr 23rd 2009 9:05AM
Updated Dec 4th 2009 12:11PM
In 2006, I wrote a post on the possible successors to General Electric Co. (GE) CEO Jack Welch, giving the winner of the succession battle a gentleman's C. Jeff Immelt, who took the baton from Welch, was presiding over a steady decline in GE's stock price -- it's down 70 percent since he took over. Bob Nardelli, another contender who lost to Immelt, had driven Home Depot Inc. (HD) into a ditch with his cost cutting and strategic shift to an unprofitable business. The best of the triumvirate was Jim McNerney, who took over Boeing Co. (BA) and was driving up its stock price quite nicely.
Today, it's clear that Nardelli is the worst of the lot. He wrecked Home Depot by cutting costs to the point that its poorly paid store employees lacked sufficient product knowledge to help customers and store shelves lacked the products customers wanted so they walked across the street to competitors. Not only that, but Nardelli pushed Home Depot into the thin-margin wholesale supply business that tanked along with the housing market.
His reward for that failure was to run Chrysler after a couple of private equity firms took it over. It looks like he's going to leave Chrysler by the end of the month, assuming that Fiat takes it over. Nardelli's problem is that he is a hard-nosed cost cutter who pushes out people who disagree with him, and he can't get people to come up with revenue-generating ideas. I hope for the sake of future investors that Chrysler is his last management gig.
And despite big problems with Boeing, McNerney is still the best of the Welch acolytes. McNerney ran 3M (MMM) for five years after losing out to Immelt and took its stock price up 32 percent during a time when the S&P 500 fell 12.8 percent. Then he took over Boeing in July 2005 when its stock traded at $64.68 -- its stock price peaked at $105 on September 28, 2007 the day I signed a book contract for You Can't Order Change.
For investors, it's been downhill from there. Since then Boeing stock has fallen 65 percent and it's down 42 percent since McNerney took over. Despite what I think of as a significant mistake -- the two year delay in delivering its breakthrough 787 -- Boeing is also a victim of the financial crunch, which is cutting into airline passenger traffic and making it hard for airlines to finance new aircraft. The result is that Boeing just reported a 50 percent profit decline, but it's still forecasting a 2009 profit of between $4.70 and $5.00 a share, giving it an attractively low forward P/E around 8.
Despite these problems McNerney is still the top performer of the three who vied to succeed Welch. (And he's the only one of the three whose company has not gotten billions in government assistance). As I wrote, the reason for McNerney's strength is that he does the basics of managing a large organization better than just about anyone. He excels at motivating individuals and groups, he makes smart investments in growth, he can cut costs surgically without damaging the customer franchise, and he operates ethically and in a way that respects the environment.
I can't get into the mind of Jack Welch but there is no doubt that he picked the wrong person to run GE. To his credit, he passed over Bob Nardelli -- but he should have picked Jim McNerney.
While it's popular to bash leaders these days, the simple fact remains that we need good ones now more than ever. And Jack Welch's final legacy is that we ought to get better at picking them.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns GE stock and has no financial interest in the other securities mentioned.