GENERAL ELECTRIC

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GENERAL ELECTRIC
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Overview

• General information
• History of the company
• Financial highlights
• Stocks
• Corporate governance
• Board of directors
• Governance actions
• Corporate governance principles
• Committees
• Management Development and Compensation Committee
• MDCC Responsibilities,
• Key Practices.
• CEO Selection
• Starting the Process of CEO selection
• CEO Candidates
• Advantages of the new CEO
• Other Finalists
• Was the choice correct?
• What was different?

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GE general information

• GE is a diversified technology and services
  company dedicated to creating different products
  from aircraft engines and power generation to
  financial services, medical imaging, television
  programming and plastics,
• GE operates in more than 100 countries, including
  250 manufacturing plants in 26 different nations
• GE employs more than 315,000 people worldwide,
  including 168,000 in the United States

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GE History

• In 1878 Thomas A. Edison established Edison
  Electric Light Company.
• In 1892, a merger of Edison General Electric
  Company and Thomson-Houston Electric Company
  created General Electric Company.
• GE was incorporated in New York State on April
  15, 1892.

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GE Financial Highlights

• Revenues 131.7 Billion
• Net Earnings 15.1 Billion (1.51 per share),
  which is a 7 increase over 2001
• International Revenues 52.9 Billion (40 of
  total revenues)
• RD Expenditures 2.6 Billion
• Total Assets 575.0 Billion
• Company achieved record earnings and cash
  generation in 2001, with 11 increases in
  earnings and earnings per share (EPS) and 12
  growth in cash flow from operating activities.
• "2001 was an especially challenging year," said
  GE Chairman and CEO Jeff Immelt. "Despite a
  global recession and the September 11 terrorist
  attacks, we delivered double-digit earnings
  growth. This is a tribute to our great global
  team and the strength of the GE business model."

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GE Stocks

• First issue of company stocks was on April 15,
  1892 when 1,000 shares of 100 par value were
  sold for 100 per share
• GE was traded on the NYSE for the first time on
  June 23, 1892. There was one trade of 50 shares
  at 108 per share
• Now the company has
• Shares Outstanding 9.947 Billion
• Number of Share Owners 4 Million
• Dividends 0.19 per share quarterly. Dividends,
  paid every quarter since 1899, have increased
  every year since 1975.

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GE Stocks
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GE Corporate Governance

• The Board of directors of the company consists of
  17 members.
• As a result of the 2002 changes, 11 of GEs 17
  directors are independent under a strict
  definition, with a goal of two-thirds.
• At the core of corporate governance is the role
  of the board in overseeing how management serves
  the long-term interests of share owners and other
  stakeholders.

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GE Corporate Governance
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GE Corporate governance

• GOVERNANCE ACTIONS TAKEN BY GE IN 2002 INCLUDE
• GEs test of independence for members of the
  Management Development and Compensation Committee
  and the Nominating and Corporate Governance
  Committee is stricter than required by new
  regulations
• GE has appointed a presiding director who will
  lead independent meetings of non-employee
  directors at least three times a year. Each
  non-employee director will visit two of GEs
  businesses each year without the presence of
  corporate management so that directors can have
  direct exchanges with operating leadership.
• The responsibilities of the Audit Committee will
  increase, and it will meet at least seven times
  per year.
• To help further align directors interests with
  those of share owners, the equity portion of
  directors pay will be in Deferred Stock Units
  (DSUs), replacing stock options. DSUs will be 60
  of the annual director compensation and will not
  pay out until one year after a director leaves
  the board. When directors exercise existing stock
  options, they will be subject to the same
  one-year holding period that applies to GE senior
  management.

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GE Corporate Governance Principles

• Role of Board and Management
• GE's business is conducted by its employees,
  managers and officers, under the direction of the
  chief executive officer (CEO) and the oversight
  of the board, to enhance the long-term value of
  the company for its shareowners.
• Functions of Board
• The board of directors has 8 scheduled meetings a
  year at which it reviews and discusses reports by
  management on the performance of the company, its
  plans and prospects, as well as immediate issues
  facing the company. Directors are expected to
  attend all scheduled board and committee
  meetings.
• In addition to its general oversight of
  management, the board also performs a number of
  specific functions, including.
• selecting, evaluating and compensating the CEO
  and overseeing CEO succession planning
• providing counsel and oversight on the selection,
  evaluation, development and compensation of
  senior management
• reviewing, approving and monitoring fundamental
  financial and business strategies and major
  corporate actions
• Qualifications
• Directors who also serve as CEOs or in equivalent
  positions should not serve on more than two
  boards of public companies in addition to the GE
  board, and other directors should not serve on
  more than four other boards of public companies
  in addition to the GE board.
• Directors will not be nominated for election to
  the board after their 73rd birthday, although the
  full board may nominate candidates over 73 for
  special circumstances.

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GE Corporate Governance Principles

• Independence of Directors
• The board has determined that 11 of GE's 17
  directors are independent.
• The company will seek to have a minimum of ten
  independent directors at all times, and it is the
  board's goal that at least two-thirds of the
  directors will be independent.
• Size of Board and Selection Process
• The directors are elected each year by the
  shareowners at the annual meeting of shareowners.
• The board also determines the number of directors
  on the board provided that there are at least 10.
  Between annual shareowner meetings, the board may
  elect directors to serve until the next annual
  meeting. The board believes that, given the size
  and breadth of GE and the need for diversity of
  board views, the size of the board should be in
  the range of 15 directors.
• Board Committees
• audit
• management development and compensation
• nominating and corporate governance and
• public responsibilities.

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GE Corporate Governance Principles

• Independence of Committee Members
• members of the audit committee must also satisfy
  an additional NYSE independence requirement.
• Members may not directly or indirectly receive
  any compensation from the company other than
  their directors' compensation.
• Self-Evaluation
• the board and each of the committees will perform
  an annual self-evaluation. Each November, the
  directors will be requested to provide their
  assessments of the effectiveness of the board and
  the committees on which they serve. The
  individual assessments will be organized and
  summarized by an independent corporate governance
  expert for discussion with the board and the
  committees in December.
• Compensation of Board
• The nominating and corporate governance committee
  shall have the responsibility for recommending to
  the board compensation and benefits for
  non-employee directors.
• The committee believes these goals will be served
  by providing 40 of non-employee director
  compensation in cash and 60 in deferred stock
  units starting in 2003.
• At the end of each year, the nominating and
  corporate governance committee shall review
  non-employee director compensation and benefits.

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GE Corporate Governance Principles

• Succession Plan
• The board shall approve and maintain a succession
  plan for the CEO and senior executives, based
  upon recommendations from the management
  development and compensation committee.
• Annual Compensation Review of Senior Management
• The management development and compensation
  committee shall annually approve the goals and
  objectives for compensating the CEO.
• That committee shall evaluate the CEO's
  performance in light of these goals before
  setting the CEO's salary, bonus and other
  incentive and equity compensation.
• Access to Senior Management
• Non-employee directors are encouraged to contact
  senior managers of the company without senior
  corporate management present.
• To facilitate such contact, non-employee
  directors are expected to make two regularly
  scheduled visits to GE businesses a year without
  corporate management being present.

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Management Development and Compensation Committee

• The management development and compensation
  committee of the board of directors of General
  Electric Company shall consist of a minimum of
  three directors.
• The committee meets at least 8 times a year.
• All members of the committee shall be independent
  directors.
• The purpose of the committee shall be to carry
  out the board of directors' overall
  responsibility relating to executive
  compensation.
• The committee's judgments regarding senior
  executive officer compensation are primarily
  based upon its assessment of each senior
  executive officer's leadership performance and
  potential to enhance long-term shareowner value.

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Management Development and Compensation Committee

• The committee relies upon judgment about each
  individual, not upon rigid guidelines or
  formulas, or short term changes in our stock
  price, in determining the amount and mix of
  compensation elements for each senior executive
  officer.
• Key factors affecting the committee's judgments
  include
• the nature and scope of their responsibilities
• their contribution to the company's financial
  results
• their effectiveness in leading our initiatives to
  increase customer value, productivity and growth
  
• their contribution to the company's commitment to
  corporate responsibility including their success
  in creating a culture of unyielding integrity and
  compliance with applicable law and our ethics
  policies, and
• their commitment to community leadership and
  diversity.

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MDCC Responsibilities

• The committee shall assist the board in
  developing and evaluating potential candidates
  for executive positions, including the chief
  executive officer, and to oversee the development
  of executive succession plans.
• The committee shall evaluate at least once a year
  the chief executive officer's performance in
  light of these established goals and objectives.
• The committee shall evaluate the performance of
  the company's senior executive officers and shall
  approve the annual compensation, including
  salary, bonus, incentive and equity compensation,
  for such senior executive officers.
• The committee has shall review company's
  incentive compensation and other stock-based
  plans and recommend changes in such plans to the
  board as needed.
• The committee shall report its actions and any
  recommendations to the board after each committee
  meeting and shall conduct and present to the
  board an annual performance evaluation of the
  committee.

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MDCC key practices

• Executive Compensation Program
• Salary,
• Annual Bonus,
• Stock options,
• Restricted Stock Units,
• Contingent Long-Term Performance Awards.

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MDCC key practices

• Stock Ownership Guidelines
• To help demonstrate the alignment of the personal
  interest of senior management with the interests
  of shareowners, in September 2002, the committee
  established the following guidelines for the
  amount of GE stock, as a multiple of the
  executive's base salary, that should be held by
  senior management
• Position Multiple Time To Attain
• CEO 6X 3 years
• Vice Chair 5X 4 years
• Senior VPs 4X 5 years

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Starting the Process of CEO selection

• Formally in June 24, 1994
• Agenda of the MDCCs meeting - succession
• Welch discussed 24 candidates (all white males)
• Obvious Field
• Contenders
• Broader Consensus Field

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Starting the Process of CEO selection

• Formally in June 24, 1994
• Agenda of the MDCCs meeting - succession
• Welch discussed 24 candidates (all white males)
• Obvious Field
• Contenders
• Broader Consensus Field

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Starting the Process of CEO selection

• Obvious Field
• 7 men running GEs largest businesses
• Had to be considered due to their positions
• Could be eliminated due to age
• None made to the final

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Starting the Process of CEO selection

• Contenders
• 4 executives below the top-tier
• None became finalists

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Starting the Process of CEO selection

• Broader Consensus Field
• 13 other executives from various positions
• Spotted by Welch for their talents
• Included all 3 finalists

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CEO Candidates

• Robert Nardelli
• Age 52.
• Chief of the GE business that makes turbines and
  generators for electric utilities.

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CEO Candidates

• W. James McNerney
• Age 51.
• CEO, GE Aircraft Engines (ran several other
  divisions during his 15 years in GE).
• In 1997 media guessed he would be a top
  vote-getter.

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CEO Candidates

• Jeffrey Immelt
• Age 47.
• Began his GE career in 1982.
• Held a series of leadership roles in GE Plastics,
  Medical Systems, GE Appliances.

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CEO Selection

• Testing the ability to grow.
• Rotating CEO candidates through different
  divisions of the company.
• GEs advantage over many other companies
  -reputation of skillfully training internal
  talents for the top job.
• mainly due to GEs large portfolio of businesses
  which provide broad developmental experiences for
  its executives.
• not every company ranking equally high the GE is
  able to cultivate internal CEOs (eg. IBM, ATT).

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CEO Selection

• Directors getting a feel to the human side of the
  contenders.
• Annual festive occasions with serious purpose
• playing golf
• Welch personally worked out the golf foursomes
• informal dinners
• seating directors and CEO candidates carefully
• Candidates encouraged to contact board directors
  directly when needed

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CEO Selection

• Follow-up Discussions
• Usual review of the companys top 20-30
  executives, including all CEO candidates
• Welch gave an assessment of each executive from
  his HANDWRITTEN notes
• Directors received a book that detail executives
• We might spend an hour on the first page. Its
  not what most people are used to W. Conaty, GE
  Human Resources Chief

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CEO Selection

• MDCC Visits to GE Businesses.
• In 1996-1997 MDCC decided to know more about the
  candidates and visited several GE businesses with
  and without Welch.
• with a cover story of wanting to understand
  their businesses.
• very rarely practiced in the corporate world.

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CEO Selection

• Cutting the Field.
• At the intensive talent review in 1997, after 3
  years of getting to know the contenders, Welch
  and directors cut the list of candidates to
  eight
• finalists
• David Calhoun, GE Lighting.
• David Cote, GE Appliances.
• Dennis Dammerman, CFO.
• John Rice, Transportation Systems.
• Gary Rogers, GE Plastics.

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CEO Selection

• Endgame begins
• Starting from June 1998, all contenders left in
  their jobs until the winner is chosen
• Time to watch...

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CEO Selection

• Field Narrowing
• Dammerman
• replaces the CEO of the GE Capital who resigned
  in Dec. 1998
• Calhoun
• leaves Lighting to run Employers Reinsurance
  business in GE Capital in July 1999
• David Cote
• resigned in Nov. 1999 to become a President and
  CEO of TRW

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CEO Selection

• Without drama and horce race!
• Welchs experience while running for CEO
• Airplane Interviews
• Welchs predecessor Reginal H. Jones called
  abruptly each contender to his office and asked
  Who should be the next chairman if both were on
  a plane and it crashed?
• top contenders were brought together to the
  headquarter jobs, where the atmosphere became
  political and poisonous

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CEO Selection

• Finalists announced
• In mid 2000 Welch was ready to announce the names
  of the finalists
• Immelt
• Nardelli
• backed up by John Rice
• McNerney
• backed up by Calhoun

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CEO Selection

• Last meeting of MDCC.
• Welch and MDCC talked about succession for about
  4 hours.
• Seemed like Immelt is the one, but no firm
  decision could be made.
• Other guys were doing fabulous things Conaty.

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CEO Selection

• Final Choice
• Welch is still determined not to make the process
  public until then end.
• The right time - Thanksgiving weekend.
• After two hours of discussion between Welch and
  MDCC Immelt was chosen, Board agreed with the
  recommendation.
• Welch calls Immelt

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Advantages of the new CEO

• Age was his advantage.
• Well-liked and popular.
• can keep managers who might be tempted to leave,
  when Welch leaves.
• Demonstrated capacity to grow.

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Other Finalists

• Both McNerney and Nardelli instantly became the
  two most intensively recruited executives
• McNerney, CEO at 3M
• Nardelli, CEO at Home Depot

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Was the choice correct?

• GE keeps ranking as the worlds most respected
  company according to Financial Times annual
  surveys
• Welch era - longest bull market in the US history
• Immelts early tenure - bear market, terrorist
  attacks, war in Iraque.

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What was different?

• Never looked at an outsider.
• Formed no long-term strategic vision.
• No common template for measuring candidates.
• A lot of time devoted by the board to getting to
  know the contenders.
• Choosing the new CEO took almost 6.5 years.
• A lot of human interaction.

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Conclusions

• The more time spent on succession planning, the
  better.
• The Board is deeply involved in succession.
• CEO and Board communicate frequently reviewing
  their choices.
• Human interaction between board and the
  candidates is essential for good assessments.

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Conclusions (cont.)

• Less drama of succession and horse races among
  top contenders - ethical issues.
• CEO assigns candidates jobs to broaden their
  skills.