Business Imitating Australian Parliament

General Electric is one of the world’s largest companies.  Its market capitalisation at the time of writing was US$177 billion.  This compares to the approximately US$136 billion for CBA.  The former CEO of General Electric was Jeff Immelt.

It was recently disclosed that when he was travelling on the company’s private jet, Immelt had another empty company private jet fly in convoy just in case there were any problems with the first jet.

According to the Wall Street Journal:

For much of Jeff Immelt’s 16-year run atop one of the world’s largest conglomerates, an empty business jet followed his GE-owned plane on some trips to destinations around the world, according to people familiar with the matter. The two jets sometimes parked far apart so they wouldn’t attract attention, and flight crews were told to not openly discuss the empty plane, the people said.

When asked about this practice, Mr Immelt said that it was within the rules.

Ms Bishop, sorry, Mr Immelt, lashed out at the media for its focus on his spending, which he defended as beingquite within the rules“.

When it was not in use, the back up plane was parked in the winner’s circle.

Mr Immelt said he was acting on the advice of the Australian Attorney General.  Although he suspected in his stomach it was wrong, he was just acting on advice.

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23 Responses to Business Imitating Australian Parliament

  1. Infidel Tiger 2.0 (Premium Content Subscribers Only)

    If we want to live in a righteous world, all large corporations must be smashed to smithereens.

    Corporatism is the worst of all worlds.

  2. H B Bear

    US Fortune 500 corporates would be worse than even the Lieboral government on this stuff. I remember reading Barbarians at the Gate when they started looking for cost cuts at R J Reynolds to pay off some astronomical debt level and the place was basically being run as a country club for the senior executives.

  3. It points to a problem in the capitalist model.

    Senior executives can use the resources of the corporation in ways not beneficial to the shareholder. They will even sideline shareholders by pursuing unprofitable policies driven by social politics. When forced to rationalise staff the inner circle is safely parachuted into a sister corporation, regardless of performance.

  4. tgs

    Senior executives can use the resources of the corporation in ways not beneficial to the shareholder.

    Agency costs exist in any system.

    The technocrats running socialist systems rarely operate in the interests of those they preside over.

    The solution is more effective incentivisation and monitoring of the agent. Agency costs are greatly reduced in a private equity context relative to a publicly listed company for example.

  5. max

    A corporation is a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.

    A company, is a legal entity made up of an association of people,

    problem is Morality of the people who run those companies and corporations

    problem is Morality of the people who who write constitution and laws

    problem is Morality of the people who interpret those laws

    problem is No Equality before the law

    problem is central bank

    fractional reserve

    fiat money

    to much centralization and taxation

  6. Paul

    Tee hee… so much envy in comments. Not your money, losers. Not your responsibility. Not your problem. You’re just jealous. Buy some shares and make your feelings felt at the Board elections, or would that involve spending your own money rather than other people’s.

  7. Shine a Light

    Nothing like confusing choices to confuse people.

  8. Empire GTHO Phase III

    Tee hee… so much envy in comments. Not your money, losers. Not your responsibility. Not your problem. You’re just jealous. Buy some shares and make your feelings felt at the Board elections, or would that involve spending your own money rather than other people’s.

    Fair point on the envy, but it isn’t the CEOs money either. Your proposed solution achieves nothing because share registers are typically controlled by institutions, that is agents investing other people’s money in corporations subject to agency costs as tgs notes above.

    Nicholas Taleb explains this well and he’s a very wealthy fella.
    https://www.project-syndicate.org/commentary/improving-managers–incentives-by-nassim-nicholas-taleb?barrier=accessreg

    What bugs me most is both our common and codified law addresses this issue of fiduciary duty, but nobody ever gets pinged.

    Fairfax is a classic example. The adoption of the charter of editorial independence was in effect the directors absolving themselves of responsibility for the quality of their product, yet everyone rolled over and nodded approvingly (including many shareholders) “freedom of the press…”

    Wrong!

  9. Chris M

    Well he needs to buy a better jet. No point running about in old ones you don’t have faith in.

  10. max

    “Early Corporate America: The Largest Industries and Companies before 1860

    Most early US corporations were created by individual acts of state legislatures. Two, the first and second Banks of the United States, were created by acts of Congress.

    Lacking information on revenues, we used authorized capitalization to come up with our 1812 rankings. For that year, 23 of the 25 largest corporations were banks. The other two were John Jacob Astor’s American Fur Company and the New York Manufacturing Company. In all, by 1812, the US had chartered 1,440 corporations.”

    people comes before corporations.

    blame is on people they have larceny in their hearts.

  11. Tel

    Nicholas Taleb explains this well and he’s a very wealthy fella.

    I like his theory and he does correctly point out the problem, but his solution is weak.

    The ancients were fully aware of this incentive to hide risks, and implemented very simple but potent heuristics. About 3,800 years ago, the Code of Hammurabi specified that if a house collapses and causes the death of its owner, the house’s builder shall be put to death.

    So decades after the house is built, because of poor maintenance it falls down and they chase the builder? Of course, the builder makes sure he is out of town well before then, because he ain’t stupid. Sooner or later every house comes down. If you attempt to trap the house builder and prevent their escape then you better have fun enjoying sleeping in a ditch, because no one will build any houses.

    The Romans had a system, it was known as “Caveat Emptor” so who found greater success in industry and commerce? Hammurabi or Rome?

    … they have an incentive to bury risks in the tails of the distribution – in other words, to delay blowups.

    The thing is, shares can be sold quite quickly and once sold, the problem is for the new owner. Thus, every single shareholder has a strong incentive to delay blowups. Now, the CEO generally will get information before the shareholders, but the CEO also acts on behalf of the shareholders and when given a choice between blowing up today and blowing up next year they will always pick next year… and all the existing shareholders want that! The CEO is helping shareholders by delaying blowups.

    If the company had only one owner who was also the CEO, it would still make sense to delay blowups and sell the company.

    That’s quite a separate problem to the agency problem where the CEO rips off the shareholders (made worse in Australia where people’s money is taken and fed to Superannuation funds, which go out and “buy the index” then pay no attention in any way to how the business is run). If anything, spending money on rubbish is pulling forward the blowup, not delaying it.

  12. Tel

    Hey Paul, if you have ever paid any tax to Washington… guess what? You’re the loser because it’s your money getting pissed away! How hilarious is that?

    All these subsidies explain why GE invested an average of $19.5 million each year from 2000-2010 not in creating affordable energy, but in lobbying the government for more subsidies. $300 million in energy grants (in addition to the millions in subsidies its other divisions receive) is apparently not enough for Immelt—it’s no wonder he prefers communist China’s energy policy where the government has no limits on how much they can redistribute wealth from productive to unproductive companies.

    http://instituteforenergyresearch.org/analysis/ge-gets-over-2-3-federal-energy-grants-every-month/

    I care about the principle here, I don’t care in specific terms how much you have lost exactly.

  13. EvilElvis

    How was GEs performance at that point? Shareholder returns?

    Envy on display here and shitting on capitalism, at least some of these big companies produce and provide despite their high flying managers. Name one socialist utopia that has done the same…

  14. Infidel Tiger

    Shitting on capitalism?

    That is not capitalism by any definition.

  15. EvilElvis

    Capitalism, corporatism? Who knows, Infidel.

    The distinction should be made that we have no choice but to fund government frogshit. At least you can choose a private investment to lose your money…

  16. Nerblnob

    There are many things that a big corporation can do that small companies can’t.

    But the hyper-regulation and compliancing that we have everywhere these days has the effect of funneling resources almost exclusively to the big.

    You need to be big enough to carry your own bureaucracy to deal with the bureaucracies of governments and big clients.

    Get Big or Get Out is the message and the root of the problem is Government.

  17. Driftforge

    I wonder what the reduction in risk associated with having the second jet available is worth to the CEO of General Electric. There is clearly some point at which not missing the next meeting is valuable enough to justify the cost.

    You would think that availability would have to be in the high 90%’s though. So he has to be getting in the order of 50 fold return on having the first one to make it worthwhile.

    Question then would be if GE is 50x larger than companies running a comparable single business jet for their CEO. If so, second jet could be justifiable as a risk reduction strategy.

    Thing is, an empty second jet doesn’t do much as a personal bonus for the CEO. He’s not using it, he has to stay quiet about it. It’s not exactly a perk.

  18. Hydra

    I think there is nothing wrong with this.

    It is like say Big4 accounting firms or industries where 2 executives don’t travel on the same plane.

    If he is flying to get to a meeting worth $1 billion, who cares if he spends an extra $10k on an extra plane?

  19. Hydra

    But the hyper-regulation and compliancing that we have everywhere these days has the effect of funneling resources almost exclusively to the big.

    You need to be big enough to carry your own bureaucracy to deal with the bureaucracies of governments and big clients.

    This is spot on.

  20. max

    A corporation is a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law. Early incorporated entities were established by charter (i.e. by an ad hoc act granted by a monarch or passed by a parliament or legislature). Most jurisdictions now allow the creation of new corporations through registration.

    The word “corporation” derives from corpus, the Latin word for body, or a “body of people”. By the time of Justinian (reigned 527–565), Roman law recognized a range of corporate entities under the names universitas, corpus or collegium. These included the state itself (the populus Romanus), municipalities, and such private associations as sponsors of a religious cult, burial clubs, political groups, and guilds of craftsmen or traders. Such bodies commonly had the right to own property and make contracts, to receive gifts and legacies, to sue and be sued, and, in general, to perform legal acts through representatives. Private associations were granted designated privileges and liberties by the emperor.

    In medieval Europe, churches became incorporated, as did local governments, such as the Pope and the City of London Corporation. The point was that the incorporation would survive longer than the lives of any particular member, existing in perpetuity. The alleged oldest commercial corporation in the world, the Stora Kopparberg mining community in Falun, Sweden, obtained a charter from King Magnus Eriksson in 1347.

    The progenitors of the modern corporation were the chartered companies, such as the Dutch East India Company (VOC) and the Hudson’s Bay Company, which were created to lead the colonial ventures of European nations in th 17th century. Acting under a charter sanctioned by the Dutch government, the Dutch East India Company defeated Portuguese forces and established itself in the Moluccan Islands in order to profit from the European demand for spices. Investors in the VOC were issued paper certificates as proof of share ownership, and were able to trade their shares on the original Amsterdam Stock Exchange. Shareholders are also explicitly granted limited liability in the company’s royal charter.[12]

    In England, the government created corporations under a royal charter or an Act of Parliament with the grant of a monopoly over a specified territory. The best known example, established in 1600, was the East India Company of London. Queen Elizabeth I granted it the exclusive right to trade with all countries to the east of the Cape of Good Hope.

    problem is Morality of the people who run those companies and corporations

  21. Empire GTHO Phase III

    I wonder what the reduction in risk associated with having the second jet available is worth to the CEO of General Electric. There is clearly some point at which not missing the next meeting is valuable enough to justify the cost.

    I had considered this and more so, that the story might be a beat up. Seems it might be – more info required.

    https://www.cnbc.com/2017/10/19/the-truth-about-jeff-immelt-and-general-electrics-corporate-jets.html

    For travel within NA (exc Mexico) EU or Asia it would be dificult to justify the second ship when safe dependable airline alternatives are available.

    For some missions, an alternate private aircraft might be justified on a charter basis. Operating a second company jet purely for backup seems a stretch.

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