MIT Sloan Senior Lecturer Robert Pozen
From Harvard Business Review
During Jeff Immelt’s tenure as CEO of General Electric, from 2001 until 2017, the company’s stock price fell by over 30%, a decline of roughly $150 billion in shareholder value. Since Immelt’s departure, GE’s stock is down another 30%, as its new CEO, John Flannery, has struggled to cope with the cash flow drain from years of problematic acquisitions, divestitures, and buybacks. Because of these dubious decisions, GE’s ratio of debt to earnings has soared from 1.5 in 2013 to 3.7 in early 2018, according to Moody’s.
So, during GE’s long and steep decline, where was the company’s board of directors? Composed almost entirely of independent directors, it was a distinguished and diversified group of former top executives and other leaders with relevant experience. In my view, however, the structure and processes of the GE board were poorly designed for effectively overseeing Immelt and his management team. There were three problems in particular:
During most of Immelt’s tenure, the GE board was much too large, with 18 directors. The average size of U.S. public company boards is 11 members, with most boards having between eight and 14. Smaller boards are significantly correlated with better stock performance — 8% to 10% higher, according to a GMI study.
Why? After studying meetings of various sizes, researchers have concluded that the optimal number of participants is seven or eight — small enough for good discussions, but large enough for a diversity of opinions. Sociologists observe that many participants in large meetings engage in “social loafing”: Because of the large size, they do not feel responsible to contribute, and instead are content to rely on others to carry things forward. Read More