General Electric

However, GE has several major problems as well.  The most important one is that one person, currently Jeff Immelt, shares the CEO post and the Chairman of the Board post.  To make matters worse, the Chairman/CEO has the right to sit in on any board committee meetings, even on the ones pertaining to his compensation.  A strict read of the bylaws also allows him to sit in even on the meeting of independent directors. This leaves a critic of the CEO nowhere to hide.  Additionally, although special meetings of shareholders are allowed, the threshold to call such a meeting is 25% of outstanding shares. This is practically impossible to obtain in GE, especially that the shareholder lists would not be available for such initiative.

Although we are not in favor of shareholders telling management exactly what businesses they have to divest, the size and “diversification” of GE also gives us a pause.  This gigantomania, we believe, is a symptom of inadequate governance.  The company would focus better if the board were comfortable asking CEO questions.  We have to note the recent announcement of GE's intention to sell MSNBC to Comcast as a positive, but not an adequate sign that the management is at least thinking about shedding some unrelated business.  

Another issue may be largely getting resolved by regulation, but should have been resolved by the company.  GE shareholders do not have the right to the advisory vote on management compensation.  In 2009, the “Say on Pay” proposal was defeated by 1.8 billion-vote margin (3.5 vs 2.7 billion votes).  A regulation being considered by the SEC will require all companies to hold advisory votes on compensation.  However, even if this measure is not adopted by the SEC, this measure is likely to be adopted by the company under shareholder pressure.

We believe GE is a great company.  It has also made some strides in its corporate governance practices.  However, there is more to squeeze.  Separating the CEO and the Chairman positions and the improved special meeting provision are very important.  In a company this big, titular managers should not have their cake and eat it too.  Say on Pay is very likely to be adopted.  Other governance improves are likely to follow too.

There is a lot of value waiting to be unlocked through corporate governance improvements.  By setting limits on the CEO, giving shareholders the power to call a meeting and rationalizing the compensation structure a great thing can be brought back to life.  This is worth three lemons.

We also believe that all the required changes are probable.  There is a lot of agitation already.  Institutional investors have largely shown support for these changes.  Taking broker non-votes at least partly off the table will improve the chances as well.  This is why we feel that all three lemons should be juicy.  GE gets no rotten ones.  The next two or three years present an opportunity to make lemonade before the lemons rot.