How a CEO responds to a crisis is the true test of leadership.
General Electric GE CEO Jeff Immelt is stepping down in August, ending his 16-year tenure as the leader of the $120 billion company. It’s a textbook case of succession that could greatly improve the chances of success for John Flannery, the 30-year GE veteran tapped to replace him.
This sets up a quick and seamless transition as Immelt has promised, contrasting sharply with the drawn-out way GE’s iconic CEO Jack Welch chose his successor, which took more than six years—much of it in the public eye. Eventually, it came down to a three-way “horse-race” among internal finalists. At the time, it was called the “most closely watched, highly anticipated, and frequently second-guessed corporate succession drama ever.” The process was so public, the other two finalists ended up leaving GE for leadership positions in other companies after Immelt was chosen in 2001, creating a void for him without these strong executives. This time around, after Flannery was announced, Steve Bolze, head of GE’s Power business, has announced his retirement after not nabbing the top job.
While Immelt has been under pressure recently, particularly from activist investor Trian Fund Management, which pressed for cost cutting and higher profits in the industrial business, his departure is clearly a planned succession. For one, as The Wall Street Journal reported, Trian was neither involved in the succession nor briefed about the executive changes. And as a former chairman and CEO of Baxter International, who took over after the long tenure of my predecessor, I can attest to how an orderly succession works. The process involves reviewing and assessing multiple candidates, often over a period of several years, and grooming a few top candidates.
GE’s CEO succession speaks to the leadership values of all involved. From Flannery’s becoming CEO on Aug. 1 to Immelt’s retirement as chairman at year-end, there will be a five-month transition period in which the two leaders will work together and meet with large investors, policymakers, and other key stakeholders. Then Immelt will depart, a clean break that will enable Flannery to carry out his own assessment of GE’s businesses and embark on his strategies. This puts Flannery in a favorable position to work closely with GE’s board, without anyone looking “down the table” at Immelt for reaction or approval.
While CEO transitions always create some degree of uncertainty, choosing an internal candidate usually results in lower risk compared to when an outsider is hired and needs to learn everything about the company. The 55-year-old Flannery currently heads GE’s health care business, a key unit for the company. His prior experiences include working in GE Capital in Latin America and Asia, and running GE’s India business. This international experience is huge for Flannery, since GE now derives nearly 70% of its revenue globally. (Immelt has noted that in 1982, when he started at GE, 80% of the company’s revenue was generated in the U.S.) Flannery took over mergers and acquisitions in 2013, a process that no doubt put him in the thick of GE’s transformation of its portfolio of businesses, which Immelt spearheaded.
While GE, the oldest component in the Dow Jones Industrial Average, has been its poorest performer of late, the company’s share price alone does not capture the value generated by Immelt’s strategies, including divesting and spinning off businesses, and plans to create new ones, such as by combining its oil and gas business with Baker Hughes, creating a new publicly traded entity.
GE’s reshaping, which operated as a conglomerate under Welch, is the cornerstone of Immelt’s legacy. When Immelt became CEO in 2001, GE’s businesses spanned pet insurance, media, industrial, and plastics. GE exited media and moved away from consumer electronics—and reportedly wants to sell its 125-year-old lightbulb business, which accounts for only about 2% of its revenues.
Immelt divested GE Capital, and refocused the company on industrial, with an emphasis on digital technologies and the “Industrial Internet of Things” to capture the massive data available across the supply chain. As Immelt noted in his 2016 letter to shareholders, over the past decade, the company increased the share of earnings from industrial businesses from about 45% to 90%, with a major focus on digital.
What Immelt should also be recognized for is steering GE through two crises. The September 11th terrorist attack occurred a few days after Immelt took over as CEO. Then came the financial crisis of 2008-2009, which created major concerns for its GE Capital lending operation. In a 2011 interview with The Wall Street Journal, Immelt called his first decade as CEO “a mess from a macro standpoint.”
No leader can choose the external circumstances they’ll face, nor the challenges they’ll have to surmount. How a CEO responds to a crisis is the true test of leadership. But Immelt has proven himself to be an effective CEO by responding to crises with strategies that transformed GE into an industrial leader for the future.
The real test, though, will be in how he carries out the responsibility that faces every CEO: succession. In GE’s board’s choice of Flannery and the promise of a smooth and quick transition, Immelt is likely to be remembered as a leader who helped position the company for a stronger future.
Harry Kraemer is a professor at Kellogg School of Management and former CEO of Baxter.