Paper On Management Question 4

Question 4: Please use the below article to guide your response. Minimum of 2 academic references and 1 data for appendix, it could be a graph or table or piechart (2 and half pages NOT double spaced).

GENERAL ELECTRIC: AN OUTLIER IN CEO TALENT DEVELOPMENT by W. Glenn Rowe and Roderick E. White and Derek Lehmberg and John R. Phillips

W. Glenn Rowe is the Paul MacPherson Chair in Strategic Leadership at the Richard Ivey School of Business, The University of Western Ontario.

Roderick E. White is the Associate Dean, Faculty Development and Research at the Richard Ivey School of Business, The University of Western Ontario.

Derek Lehmberg is a doctoral student at the Richard Ivey School of Business, The University of Western Ontario.

John R. Phillips is an assistant professor at the Odette School of Business, the University of Windsor.

A recent Ivey study confirms the commonly held view that General Electric is an excellent breeding ground for future business leaders. This article summarizes the study and its three conclusions: Firms led by CEOs who were trained at GE will outperform firms led by CEOs who were not; GE’s reputation for developing CEO talent is, in fact, well deserved and not mere hype; and GE appears to develop more CEO talent than other noted CEO talent-generating firms.

An outlier is an observation that lies outside the overall pattern of a distribution. Usually, the presence of an outlier indicates some sort of problem. In statistics, an outlier is an observation that is numerically distant from the rest of the data. Outliers may be indicative of data points that belong to a different population than the rest of the sample set. – Wikipedia

An outlier is something that is situated away from or classed differently from a main or related body; a statistical observation that is markedly different in value from the others of the sample. – Malcolm Gladwell1

The General Electric Corporation (GE) has long been known as an organization that excels at finding and developing managerial talent. In addition, GE managers are sought after by other organizations to serve as senior managers. Consequently, many GE managers leave the firm for employment elsewhere.

GE has developed a reputation as a breeding ground for CEOs, and a relatively large number of ex-GE executives have been at the helm of Fortune 500 companies over the last 25 to 30 years. In addition, many business press writers have commented that firms which hire an executive from GE for their Chief Executive Officer (CEO) position experience an immediate increase in their stock market valuation, an increase that is not apparent for firms that hire their CEOs from other firms.

This leads to several questions: Do firms that hire CEOs from GE perform better than those firms that hire from the general pool of CEO management talent? Does GE have a better reputation than other firms for developing CEOs, and is this reputation deserved? Are more CEOs developed in GE than in other firms that also have a reputation for being a CEO talent generator?

In a study recently conducted at the Richard Ivey School of Business2, we attempted to answer these questions. The results are intriguing and of interest to those interested in senior leadership development, selection and training. We discuss the results in this article.

To assess the performance implications of selecting a CEO from the talent pool at GE versus the general CEO talent pool, we assessed the cumulative abnormal returns to stockholders over the three-day period surrounding the date the appointment of a new CEO was announced by 78 firms – 39 who announced the hiring of CEOs from GE and 39 who announced the appointment of CEOs from the general CEO talent pool.

We searched GE’s annual reports from 1977 to 2002 to identify the company’s senior leaders over that period. We found 651 senior leaders. From this group we selected 39, based on the following criteria. They had to have spent a minimum of five years with GE and become the CEO of a publicly traded company after leaving GE. Further, there had to be no other significant events in a 20-day period surrounding the announcement of each CEO appointment. Examples of other significant events are renegotiation of bank loans, outcomes of major lawsuits, major changes in strategic direction and going ex-dividend.

In the following manner, we then searched for our comparison group of CEOs from the general talent pool for CEOs. First, for each ex-GE CEO, we found a group of CEOs from the general talent pool who were outsiders and who had been announced as their respective firm’s CEO within a one-month period of the ex-GE CEO’s announcement date. Second, for each of these groups of CEOs, we determined the market capitalization for the firm led by each CEO and selected the CEO whose firm had the closest capitalization to the firm led by the respective ex-GE CEO. Finally, we matched as closely as possible with respect to industry. These comparison CEOs also had to have served with their previous firms for five years or more. This gave us 39 ex-GE CEOs and 39 non-GE CEOs, all of whom were outsiders when appointed CEOs of their respective firms. This meant we had 39 pairs of CEOs (one from GE and one not from GE in each pair) whose appointments were announced within one month of each other and whose firm’s market capitalization were closely matched.

GE: An outlier

GE is an outlier in many respects and we discuss three of them. First, it is one of a very few successful U.S.-based conglomerates. While conglomerates were very popular in the 60s and 70s, they became less popular in the 80s. Today, there are very few conglomerates. GE has not only survived as a conglomerate, it has prospered and become one of the largest, most successful, diversified firms in the world.

Second, GE is an outlier from a performance perspective. During the period, 1993 to 2002, it had phenomenal success in creating value for shareholders. It ranked either first or second in the Stern Stewart Performance 1000 on Market Value Added (MVA). In 2001, it ranked first with a MVA of $427 billion.3 GE competed with Coca-Cola for top spot in the MVA rankings from 1993 to 1996. From 1997 to 2002, its main competitor was Microsoft.

Third, GE is an outlier in its ability to develop managerial and leadership talent. One business writer stated that GE’s managerial development system, in addition to producing senior managers for GE, produced “an astonishing number of CEOs of other major companies.”4

Of course, these three characteristics that help make GE an outlier are related. Several writers have detailed how GE’s performance is a result of GE’s executive development system. In addition, GE’s diversity in, and large number of, business units creates the necessity to deploy, and offers the opportunity to enhance, the general management and strategic leadership abilities of its middle and senior level managers. This capability is a very important source of sustained competitive advantage for GE.

Leadership development at GE

GE’s leadership development system is probably due to its informal, tacit, socially complex, and path-dependent nature. Numerous business press writers have hailed GE’s leadership and managerial capabilities. The corporation has been described has one of two legendary “caldrons of managerial brilliance.”5 One writer called GE a “CEO breeding ground.”6 Another business writer said that: “[w]when a bank needs a loan, it goes to a bank. When a company needs a CEO, it goes to GE.”7 Finally, it has been argued that executives at GE have been shaped by a system that is better than any other outside of the military, and that is unparalleled in its ability to identify and develop leadership talent.

Of course, GE has a long history of leadership development. A long succession of GE CEOs has emphasized the development of leadership talent. The John F. Welch Leadership Center at Crotonville, NY will be 53 years old in 2009. GE’s president in 1958, Ralph Cordiner, stated that: “Not customers, not products, not plants, not money but managers may be the limit of General Electric’s growth.”8 Jack Welch said it differently with his “people first, strategy second”9 mantra, but the emphasis was still on people.

An important point is that GE develops much more leadership talent than it needs or uses. The system selects and develops good leaders, and is combined with a disciplined evaluation and promotion system that is merit based. Those not selected for the highest leadership position at GE, or those who have inappropriate timing,10 leave GE for CEO positions with other firms – a process that is supported and even facilitated by GE. Two contenders to succeed Jack Welch, James McNerney and Robert Nardelli, were told by Welch to find CEO jobs outside GE when Jeff Immelt won the horse race to replace him in 2001. The timing of choosing a successor is inappropriate for some, as GE chooses relatively young CEOs (both Welch and Immelt were approximately 45 years old when selected) in its last two CEO succession processes.

The GE Effect

Stock prices generally change in accordance with the positive or negative expectations of shareholders when significant events such as the renegotiation of major bank loans, outcomes of major lawsuits, major changes in strategic direction, going ex-dividend and the announcement of a new CEO happen. We assume that these expectations are the result of information surrounding these important events and this information being made publicly available. In addition, these expectations are a function of the net present value of the expected future discounted cash flows of the firm as a result of these events. With current statistical techniques, we measure the cumulative abnormal returns to shareholders that are related to a particular firm event – such as the announcement of the appointment of a new CEO. When these returns are positive, it suggests that shareholders expect that the firm will perform better under the leadership of that CEO.

In our study, we measured the stock price increase surrounding each of the 78 CEO announcements over a three day period – the day before, the day of, and the day after each announcement. We then assessed whether each of these three-day cumulative relative returns was significantly higher than, equal to, or less than zero. Further, we examined if the average for the group of ex-GE executives was significantly different and higher than the average for the group of newly appointed CEOs who came from the general CEO talent pool.

The results in Table 1 are very telling. First, we see that the value of shares for the ex-GE CEOs ranged between -8.2 percent to 30.2 percent, while that for the CEOs from the general CEO talent pool was -23.6 percent to 26.0 percent. Second, the averages were 3.92 percent versus -0.61 percent, respectively. Third, the Z scores tell us that the average for the ex-GE CEOs was significantly different from zero and significantly higher than the average for the CEOs from the general CEO talent pool. A final interesting result was the plus/minus ratio. This shows that shareholders expressed confidence that 25 CEOs in the ex-GE CEO group would improve performance, while they expected that only 14 would not improve performance. The corresponding numbers for the group of CEOs who did not come from GE was 17 to 22.

These results suggest that shareholders believe that performance is more likely to improve under CEOs who have been developed in GE’s management development and training system. The majority of firms that hired CEOs who came from GE had a positive increase in stock price in the three-day period surrounding the announcement of their appointment. This more than offset the impact of the 14 firms whose stock price did not increase because performance was not expected to improve.

TABLE 1: Relative Returns for CEO Announcements over 3-Day Event Window

	N	Min	Max	Mean	Z Score	+/- Ratio
Ex-GE Executives	39	-8.20%	30.20%	3.92%	5.95	25:14
CEOs not from GE	39	-23.6%	26.00%	-0.61%	-0.53	17:22

GE’s reputation: Deserved or hype?

The second question we examined was whether GE deserved its reputation or whether it was hype created and sustained by the business practitioner press. We assessed this in two ways. First, we looked for as many lists as possible that highlighted firms which were considered CEO talent generators. We found nine such lists – one from 1981 and the rest from 2002 to 2007. These are listed at the bottom of Table 2.

There were 66 firms found on these nine lists. However, only six were listed five or more times. These six are listed in Table 2. GE is mentioned on all nine lists and IBM is next, being listed on seven of the nine lists. This suggests that GE has a reputation for the development of CEO talent that is recognized by those who compile these lists. But, is this reputation deserved or is it hype?

Our study found that firms which hire CEOs developed at GE have persistent positive abnormal returns. We considered this support for our notion that firms with CEOs from GE outperform their rivals. We know it is possible for shareholders in a market to make mistakes, but it is hard to believe that they would make mistakes consistently over the 25-year period of our study. If firms managed by CEOs from GE are unable to outperform rivals, we believe, over time, that shareholders will notice this failure to meet performance expectations.

This means that the abnormal returns to shareholders found in our study would decline over time. But, over the period of our study they did not decline – they persisted. If we are to believe that the observed GE effect is hype, it then requires us to believe that markets do not learn and are highly inefficient. The fact that the returns persist suggests that GE’s reputation is not hype but in fact is well deserved.

TABLE 2: Firms Considered CEO Talent Generators

Firm Name	1981	2002	2003	2005	2005	2006	2006	2007	2007	Total
General Electric	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	9
IBM		Yes	Yes	Yes	Yes	Yes	Yes	Yes		7
Proctor & Gamble		Yes	Yes	Yes	Yes		Yes	Yes		6
Johnson & Johnson		Yes	Yes	Yes	Yes			Yes		5
Dell Computer		Yes	Yes	Yes	Yes	Yes				5
Colgate-Palmolive		Yes	Yes	Yes	Yes			Yes		5
Source	Fortune	Hewitt Associates	Hewitt Associates	Hewitt Associates	Hay Group	Hay Group	Groysberg in HBR	Hewitt Associates	Hay Group

GE versus other firms

The final question asks: Does GE develop more CEOs than other firms that have a reputation for being a CEO talent generator? A corollary question is whether the CEOs from these other firms are expected to improve performance in a manner that is better than, similar to or worse than ex-GE CEOs? To answer this question we searched for all CEOs who had been developed in the firms listed in Table 2. We found 20 useable (see the sidebar for our criteria) CEO announcements – 13 from GE and 7from the other five firms. We then assessed the impact on stock price over a three-day period, when each firm announced its choice for CEO as we did for our earlier study. The results are shown in Table 3.

TABLE 3: Relative Returns for CEO Announcements over 3-Day Event Window

	N	Mean	Z Score	+/- Ratio
Ex-GE Executives	13	8.17%	3.39	12:1
Ex-Talent Generator Executives	7	-2.92%	-0.16	3:4

These results suggest that GE does develop more senior leaders who become CEOs than any other firm that is known for developing senior leaders. In addition, the impact on stock price when the appointment of each of these 20 CEOs was announced is even more dramatic than in our previous study. The average for our group of ex-GE CEOs is 8.2 percent while that for the CEOs from the other noted CEO talent generators is -2.9 percent. The Z scores suggest that these are significantly different from each other. Finally, the plus/minus ratio is 12:1 for the ex-GE group and 3:4 for the non-GE group. These results suggest that shareholders expected firms led by ex-GE CEOs to perform much better than firms led by CEOs from the other five firms that are considered to be CEO talent generators.

Conclusion

Shareholders expect that firms led by CEOs who were trained in the GE managerial-development and training system will outperform firms led by CEOs who came from the general talent pool for CEOs. Second, GE has a reputation for developing CEO talent that is deserved and not just the result of hype in the business press. Third, GE appears to develop more CEO talent than other noted CEO talent-generating firms, and these ex-GE CEOs are expected to lead their firms to better performance.

Is GE an outlier? Is it a firm that lies outside of the overall pattern of CEO talent generators? Is it possible that GE belongs to a different population than other CEO talent generators? Based on our studies, we believe that GE is a unique developer of CEO talent. It is an outlier. The emphasis on leadership development by successive CEOs, the merit-based promotion system, the ability to bring people in at the bottom and develop them, or have them leave if they are in the bottom ten percent, leads GE to develop many more leaders with a CEO capability than the corporation needs. This excess in CEO talent gets dispersed among the general population of firms and helps make GE an outlier in the development of CEO talent.