Immelt's Gentleman's C

GE's stock is down 14% since Immelt took over during which time the S&P 500 rose 25%. Some argue that the CEO cannot control a company's stock price, only its financial performance. As I've posted, I believe we're in a beat and raise market -- which means that for a company's stock price to rise it must regularly exceed quarterly earnings expectations and raise its guidance.

While Jack Welch regularly exceeded double digit earnings expectations and raised guidance, Immelt has had a much choppier record. As I posted in 2003, Welch accomplished his beating and raising through some accounting techniques that look questionable in today's post-Enron world.

For example, under Welch GE's pension plan was a source of artificial earnings smoothing. A 1999 column by Alan Abelson in Barron's, pointed out that GE's pension plan had been fully funded for years; it was invested in stocks and fixed-income securities, and when gains in the fund exceeded the amount GE was required to pay, the difference was added to reported income.

Nevertheless, under Welch, GE's market value increased 5,096%, inclusive of dividends, during Welch's 20 year tenure as CEO which began in 1981. This represents an average annual increase in GE's shareholder value of 21.3% a year. The S&P 500 increased 1,433% over the same period, or about 14.3% a year, also inclusive of dividends.

An investor who purchased $10,000 of GE stock at the beginning of Welch's tenure as CEO and held it until its end would have earned $677,000, three-and-a-half times more than the $194,000 resulting from an identical investment in the S&P 500.

In terms of financial performance, Immelt's record is also lame compared to Welch's. Under Immelt, GE's revenues have grown at a 2.9% compound annual rate to $156.5 billion and its profits have climbed at a 7.5% compound annual rate to $19.2 billion

This is a far cry from Jack Welch's performance -- during his tenure GE profit increased eight-fold -- at a compound annual rate of 11% -- revenues rose five-fold during Welch's CEO tenure -- at a compound annual rate of 8%. GE's 2000 earnings of $12.7 billion were more than eight times the $1.5 billion profit it reported in 1980. GE's revenue more than quintupled to $129.9 billion.

My biggest recommendation to Immelt is to take control of GE's stock price. As the USA Today article point out, Immelt's excuse is that Wall Street has the "blue chip blues." This is nonsense -- the article points out that the stock of 3M Company (NYSE: MMM), another blue chip run by Immelt's GE-CEO-race-rival, Jim McNerny, was up 45% under his tenure.

If Immelt stops making excuses and takes responsibility for GE's stock price, he needs to alter GE's mix of businesses -- shedding those with limited growth potential and investing in those likely to grow more rapidly. This transformation could come from buying and selling business units and -- even better -- from inventing new businesses which GE can dominate.

If Immelt can rise to this challenge, GE's stock price will rise and his legacy will look better relative to Welch's than it does now.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He owns GE shares and has no financial interest in 3M.