1
Off a Cliff

Schenectady, New York, 2017

JOHN FLANNERY PULLED into the little city on the Mohawk River in late July with numbers on his mind, passing beneath what had once been the largest electrified sign in the world. The storied logo had been surpassed by taller structures long ago, but it still glowed from atop the mammoth brick shoebox of Building 37 as Flannery passed through the gates and into the birthplace and spiritual home of the General Electric Company.
     Schenectady'the electric city'had been home to the Edison Machine Works. It was there that GE was incorporated in 1892, assembled by bankers out of the nonperforming attempts of inventors to translate their brightest ideas into business.
     What had blossomed in Schenectady was the stuff of cultural legend'inventions, manufacture, mass production, unstoppable growth'but there was a sense of cavity now to the giant old industrial grounds. More than forty thousand men and women had worked there at GE's peak. It was a tenth of that size by 2017.
     History, however, wasn't Flannery's mission. His focus was inside. Schenectady now was the headquarters of GE Power, the largest and oldest division of what had long been America's most famous conglomerate.
     And John Flannery, just weeks away from taking over leadership of the most famous C-suite in American business, had come to see GE Power leaders on their home turf and to take stock of the heart of the company he was about to lead.
     Flannery was like a president-elect, the incoming chief executive officer of one of the most famous and well-respected companies on earth. Just ten other men had held the job he was preparing to take on. With the formal and official announcement made, Flannery was organizing his team and girding himself to take on the hardest challenge of his professional life.
     To an outside eye, nothing more than another orderly and carefully planned corporate succession was under way, one as smooth as those GE had prided itself on in the past. Flannery's predecessor, Jeff Immelt, was overseeing a peaceful transfer of power before making way for a new manager to rise up from GE's ranks and carry on the company's traditions for another decade or so.
     But appearances were deceiving. What was actually unfolding behind the scenes at GE was dysfunction tending toward chaos and a confrontation with the past that was mere weeks from spilling into public view. Beneath the placid surface, GE was in total disarray.
     Flannery had barely had a moment to reflect after the company's board tapped him to be the new CEO. That whirlwind weekend opened into a week of press conferences, media interviews, internal town hall'style meetings, and multiple executive briefings'all compulsory steps in the process of preparing Flannery to take the reins of one of the world's biggest and most closely watched companies.
     And prepare he would. Flannery was a voracious reader, his wide-ranging tastes reflected in his conversations, but he didn't ooze arrogance as some corporate chieftains do. He was a man constantly reexamining himself, his curiosity often reflecting inward as he reviewed his past calculations and decisions like an analyst poring over a slide of film.
     That same banker's instinct to endlessly search for new angles and to weigh his options, to crunch and recrunch every number, flowed from the same quietly adventurous source that led him to venture down dirt roads with his wife in exotic locales. He was a hunter'for killer deals and hidden risks, for undiscovered roadside taverns serving lunch.
     Flannery stood a little under six feet tall. He was slightly stout and usually wore dark suits that reflected his finance roots. He wasn't shy, but he wasn't one to work a room either, in contrast to some of those he had outmaneuvered to win the new job. Some GE executives glad-handed as aggressively as candidates for Congress. Flannery was self-deprecating, though possessed of a disarming confidence. At company events for investors and the press, a wry smile often played at the corners of his mouth, a contrast with the brand of GE earnestness exuded by his colleagues.
     He would have to adjust to his new stature, however, as he took on a kinglike role in a company that took itself just as seriously as a kingdom. But he hadn't yet. Like a world leader, Flannery would need to get used to being whisked from one place to another, having a full security detail, and constantly having a car, plane, or helicopter waiting to deliver him to the next stop. In the hours before his predecessor, Immelt, arrived for one of his innumerable visits to GE facilities all over the world, telltale trappings would begin to appear at his destination: hard candies and a plentiful supply of his favorite diet soda appeared on shelves in conference rooms, always there before anyone in Immelt's entourage even had to ask. Rumor among stock analysts held that he flew with his own treadmill, lest the hotel gym prove insufficient. No one knew yet what soda John Flannery liked. And Flannery certainly wasn't used to any of this.
     When he walked to the elevator bank in GE's Boston office, an assistant immediately scrambled over to hit the Down button, apologizing that the elevator hadn't been waiting for him. Flannery appreciated the effort, but the royal treatment seemed a bit overboard and he told people so.
     Working closely with Immelt, he had seen these trappings before, but now, Flannery told people, he found them slightly suffocating, and occasionally a little silly. Nevertheless, this was the job. With its vastness came complexity, the crammed agenda, the aides and meetings, the planes and guards. Although he wasn't going to be able to ditch the entourage anytime soon, at least he had a good excuse to get away from headquarters on trips like this one to Schenectady. No one challenged his need to get acquainted with the details of the business.
     A road trip was also good for clearing the head. John Flannery had been announced as the new CEO on June 12. His father, John, a retired banker in West Hartford, Connecticut, had died just twelve days later. It was some comfort to the younger Flannery that he had been able to share the news of his promotion, and that his father had lived to see his son tapped to land one of the most prominent jobs in American business. Still, his dad's passing hurt. Loss shaded his satisfaction and pride.
     Flannery had outperformed three rival GE executives to win the contest to succeed Immelt. The latter had served sixteen years as CEO, but had shown very little outward sign that he was ready to retire, even to those aiming to succeed him, until just before his departure was announced.
     Flannery was a finance whiz, a veteran of GE's large lending business, which made him a dark horse at first in the race for CEO, given the company's traditional reverence for its industrial businesses and their leaders. But the board knew that GE needed a fresh assessment. Immelt's strategy was stuck in the mud, and his supremely optimistic mantras simply weren't falling to the bottom line.
     Even from his first moments on the job, Flannery wanted his tenure to be defined not just by what he would do but by what he wouldn't do. He wouldn't just kick the can down the road. Instead, he would rip off Band-Aids and expose some of the festering ailments within the company to fresh air and sunshine. That meant dealing with the truth, no matter how harsh it might be and no matter the consequences. Flannery would be brutally honest, even though, as he was well aware, that would mean changing the company's tone. Under Immelt, there had been a buzzy, vague, optimistic spin that not only often failed to hold up under scrutiny but had eroded GE's credibility with Wall Street and its workers alike.
     Flannery knew that his tenure as CEO would last at least a few years. The GE board of directors would give him some time. But he also had to set a new tone from the start and get started right away on changing what needed changing, even purging where needed. And he knew there was plenty to purge.
     Flannery had taken to uttering a new mantra around the company's shiny new offices in Boston: 'No more success theater."
     Now, with just weeks to go before officially starting his new job, he was working around the clock to assess the company. Like any CEO, Flannery wanted to survey his new territory so that he could make decisions on strategy and assess performance based on his own firsthand observations of the company'its factories, its offices, its profit-and-loss statements, its debts. He had already met with more than one hundred investors and financial analysts in the previous weeks. Now he was visiting the GE Power division, before heading to the GE Aviation facility in Cincinnati.
     He wasn't alone, physically or emotionally. In fact, finding a way to be alone in order to think was sometimes difficult. And it was also sometimes difficult to see what he needed to see. GE was a siloed organization, in contrast to the image it presented to outsiders. By the standards of a normal business career, Flannery had been all over the GE corporate map, making stops in financial services, running operations in Asia, India, and Latin America. He had run the business development team when it bought one of GE Power's biggest global competitors.
     But that wasn't the same as having worked at Power itself.
     He didn't know the intricacies of the markets, the products, the cycles, or the people. He didn't know the myriad ways in which executives in that unit had adjusted accounting, calculated estimates, or weighed risks before they reported their figures up to the places in the company where an executive like Flannery could have seen them. Even for a GE lifer, the only way to know what the Power unit was actually up to was just to show up at its headquarters and look around.
     So there they were: Sitting in a conference room in the heart of the Power business. Flannery and his team sitting on one side of a long table with the Power management group facing them. As they discussed the business, the expressions of the two sides began to look vastly different.
     Flannery was comfortable with numbers, especially financial statements, and that was where he began his search in Schenectady. It didn't take long to see the problem: as Flannery paged through the financials, he realized that GE Power had somehow run out of cash. This discovery wasn't just shocking'it was unthinkable. GE's largest industrial business was stretched thin. Its profits, on close examination, seemed to exist mostly on paper. Years of pro forma adjustments had given the appearance of a business that was turning decent profits selling power turbines and the services that kept them running, but in fact there was relatively little actual money coming in the door from customers. Even worse, Power was building inventory'making more of its huge, expensive machines'even as the global market for turbines was slowing. "It was like they drove off a cliff," Flannery later told an observer, 'and there were no skid marks."
     The gas turbines that made up the core of GE's business were essentially cousins of their aircraft engines: enormous spinning rotors moving equally titanic generators not that different from those first installed in the early days of Edison in Lower Manhattan. And no one made more turbines'the massive machines at the center of power plants'than General Electric, whose equipment still generates about one-third of the world's electrical power.
     The GE Power unit that Flannery inspected in 2017 was under new management. Its leader of the past dozen years, another GE lifer named Steve Bolze, had put in for his retirement soon after losing out to Flannery in the contest to be GE's next CEO.
     Bolze's exit wasn't surprising once the succession contest had ended. But the decision to deprive him of the GE crown was shocking for some'primarily for Bolze himself. He had the tall, square-jawed looks and charisma of an Ivy League quarterback or TV weatherman and had been telling people he had the job just days before the GE board made its decision.
     On paper, Bolze had looked like an obvious candidate to succeed Immelt. He ran the biggest division and had helped close GE's biggest-ever takeover, and his résumé looked like a decades-long campaign for the job. Like most ambitious GE executives, Bolze had made stops at other businesses across the conglomerate. He had run GE Healthcare's overseas operations. He had worked out of headquarters on the deals team that did mergers and acquisitions. He had allies on the board. And Bolze had presided over enough growth in his twelve years running Power to justify a place on the short list for CEO.
     But Flannery's review of the GE Power books now raised the question of just how real that growth had been. Had Bolze thought that the condition of this business was sustainable? Did he think that the power market could come around? Or was he planning to deal with GE Power once he was GE's CEO and not beforehand, when reporting bad news'especially to a CEO like Jeff Immelt'would have killed his chances at the top job?
     Or was he unaware of the true condition of the division, hardly a forgivable offense, until it was too late? The pressure to perform inside GE is omnipresent, and missed goals can be fatal, a tradition true at all levels of the company. Even as head of the division, Bolze didn't necessarily know how his underlings got to the finish line and it didn't really matter. Such details are fixable at GE, but missing the financial target for your business causes irreparable damage.
     In any event, with Bolze now gone, Flannery needed to get his arms around the Power business and fast. He needed Jeff Bornstein, who came along for the trip. The chief financial officer was in some respects Bolze's opposite: short, punchy, funny, and ensconced at the top of an intracompany network of financial chiefs that pervaded every last tentacle of the corporation. Like Bolze, Bornstein was another of the finalists Flannery had beaten out to become CEO. Unlike Bolze, Bornstein had stayed on, pledging to help the new CEO get GE back into shape.
     Sitting in Schenectady, surrounded by newly crunched copies of Power's numbers, Flannery's mind reeled. The more he dug into the numbers, the more the problems grew and worsened as they built on each other. Not only was the Power business poorly positioned for any turn that might happen in the market, but it didn't have the cash to fix itself. To GE investors, Power seemed to have been making its numbers and putting up solid profits. But those were illusory. The accounting tricks that looked like profits were actually just borrowing from the company's future earnings to cover up problems in the present.
     Power had sold service guarantees to many of its customers that extended out for decades. By tweaking its estimate of the future cost of fulfilling those contracts, it could report boosts to its profit as needed. Flannery shook his head; he couldn't believe that a major GE division had dug itself such a deep hole.
     The world wasn't going green overnight, but as more alternative power sources came online, natural gas turbines were used less and needed less frequent service, which was the real cash cow of the Power division.
     In the coming weeks and months, demand continued to drop for gas-fired power turbines. Competition from wind and solar had been growing for years and was only getting fiercer. Meanwhile, the division was sitting on too much unsold inventory, which was just capital that the company couldn't access without selling the equipment. And selling it wouldn't be an option as the market continued to sour. Somehow a potentially fatal spiral in GE's biggest business had been gathering force out of sight of GE's generously paid board of directors and many of its top executives, save a small circle that included Bolze and Immelt himself.
     Now, just weeks before becoming CEO of the General Electric Company, John Flannery sat in Schenectady watching disaster approach on the horizon. Combing through the books of the sprawling conglomerate in preparation for taking on the job of his life, Flannery looked into the biggest and most important industrial business of them all'the unit that was the reason for GE's existence'and found a deep, empty hole where there should have been cash.
     The reported profits were aspirational, if not fraudulent. And the accounting devices that had hidden this disarray from the public were beginning to fail. Thirty years into a career at America's most iconic company, John Flannery had reached the pinnacle. But now the whole corporation was about to plunge into the abyss.
     Flannery was understated, even in panic. Still, a palm upturned, an eyebrow raised, made the incoming CEO's thought clear to anyone in the room as he turned from the charts to the financial chief he had known for two decades.
     'Did you fucking know about this?'