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Does this high-pressure, inbred management system work? In terms of the figures that Geneen loves, it certainly seems to work splendidly. Between 1959 and 1971, ITT's revenues multiplied almost ten times, to $7.3 billion, and operating profits 14 times. (Earnings per share showed a much smaller rise because ITT has issued so much new stock to pay for acquisitions.) But in the recent intense re-examination of ITT, financial experts are beginning to ask some probing questions to which the figures disclose no answers.
One question is how ITT will fare after the 62-year-old Geneen retires. That will happen three years from now, unless Geneen exempts himself from a general company rule specifying retirement at 65. There is no clear successor. Some former ITT executives express the heretical thought that the company is too big and complex for anyone else to manage effectively. Certainly the organization contains the potential for turning into an unwieldy bureaucracy. The system that Geneen has crafted so carefully might well need someone with his extremely rare blend of drive, decisiveness and astonishing capacity to absorb figures.
Even now, there is some doubt whether the figures that Geneen is producing are all that precise as a guide to ITT's profitability. The company's earnings have benefited enormously from its acquisitions, particularly because ITT, like most conglomerates, uses the "pooling of interest" method of merger accounting. That allows a company that acquires another firm to count as its own all profits the acquired firm earns for the whole year, even if the acquisition is made late in the year. But how well have ITT's component companies done after they were acquired? That question is gaining importance now that ITT is legally prevented from buying up U.S. companies as freely as in the past.
The few figures available for companies after acquisition by ITT indicate that they have maintained strong profit-growth rates of about 10% a year. But it is impossible to determine how much of that resulted from changes that ITT made in their accounting systems as soon as it took them over. Whenever Geneen's company has faced a choice between two accounting methods, it has selected the one that enables it to report the highest immediate profits. Depreciation, interest costs, changes in pension plans, investment tax credits, foreign exchange losses, to name only a few items —all are treated in ways that minimize deductions from current profits or maximize additions to them.
High Risk. ITT has also chosen frequently to report as operating income gains from the sales of assets; a more conservative course would be to report such gains as nonoperating profit, or extraordinary income. An example is the $36 million that Hartford Fire Insurance earned last year by selling stocks from its investment portfolio. By counting the $36 million as operating profit, ITT inflated the picture of its operating success. All together, ITT last year reported as operating income more than $54 million in gains from sales of assets. Some expert accountants calculate that if ITT chose relatively conservative accounting procedures (such as, for example, those used by General Electric), its internal rate of profit growth might be substantially reduced. Slower growth would lead to a lower price for ITT stock—and less opportunity for making acquisitions on favorable terms.