(FORTUNE Magazine) – Recuperating in his hospital room after an angioplasty in early May, General Electric CEO Jack Welch sent a memo to two dozen top executives. He pointed out that the day after news of his heart problem hit Wall Street, GE stock climbed nearly a dollar. While the run-up was convincing evidence of investors' confidence in GE's management team, Welch told the officers, he had no intention of pulling a stunt like that again just to prove them right.

It was a better joke than he knew: ten days later he underwent elective triple-bypass surgery. The stock has held steady since.

The market's confidence in GE's succession planning wasn't reflected in press coverage of Welch's misfortune, however. Business Week pointed out that "there is no apparent successor to Welch" and asked, "what happens when the boss departs?" The Wall Street Journal described GE as suffering from "a case of succession jitters" that has left it "scrambling to find a new leader."

That was a surprising description of GE, a company famous for keeping its eye on the managerial ball. Headhunter John Sibbald speaks for many when he describes GE in a new book as "North America's finest developer of senior-management talent." GE didn't help the publicity problem by refusing to give a glimpse of its inner workings. A spokesman told callers: "Like any well-run company, we have a succession plan. Obviously it's not something we discuss with the news media." Meanwhile, Welch continued to mend at home, declining all requests for enlightenment, including FORTUNE's.

So who is right, the market or the media? Interviews with insiders, former executives, business school professors, and consultants close to the company suggest that perceiving GE as a company in disarray misses the point. It is true that no single executive has yet been identified as the inheritor of Welch's mantle. But Fortune has learned that an envelope exists containing the names of two or three executives who, Welch and the board have agreed, are capable of immediately taking over the top job should Welch become incapacitated.

At many companies that might sound like no planning at all. But at GE, where senior managers run 12 diversified businesses ranging in sales from about $1 billion to $15 billion--enough to qualify most of them for the Fortune 500 list--it may well mean something altogether different. These executives have been shaped by a system for identifying and developing talent that Noel Tichy, professor at the University of Michigan's graduate business school, describes as "so comprehensive that it is rivaled only by the military."

What sets GE apart is its method for getting board members closely involved in a continual evaluation of the company's 130 highest-ranking executives. Twice a year, at organization and staffing reviews held in May and November, directors pore over dossiers on about 15 of these people. The documents are distilled from long interviews with the executives, their bosses, former associates, and subordinates. Directors probe the managers' strengths and weaknesses, contribute suggestions for their development, and debate future assignments. Should the day come to open the envelope, the board will be prepared to make a considered decision, rather than rubber-stamp an insider's recommendation.

This exhaustive approach, says a former senior GE executive--who, like most alumni interviewed for this story, asked not to be identified--was in place even before Welch took the top job 14 years ago. This executive estimates that far from ignoring the problem, Welch devotes more than 30% of his time to questions of management development. Adds Tichy: "Jack Welch has been thinking about succession since his first day in office."

Not that anyone underestimates the task of replacing Welch. During his tenure, the 59-year-old executive has re-sculpted the company, with $60 billion in annual sales, from a sprawling collection of unrelated businesses into 12 lithe units that dominate their global markets. But the question remains why, with the company's meticulous management-development program, he has not anointed a young Turk to take over in the year 2000, when he says he wants to retire. For one thing, explains a source close to the chairman, Welch disapproves of grueling succession marathons such as the 15-month test he endured in contention with two other vice chairmen before he was named CEO. Welch himself was publicly identified as heir apparent only three months before the previous chairman, Reginald H. Jones, departed. Furthermore, Welch built his career and achieved his business celebrity by anticipating--indeed embracing--change. Since the one constant he is sure of is that the future will look different from the present, he wants flexibility in selecting someone suited to the times.

And there is the King Lear problem: turn over your kingdom before you're gone, and all hell breaks loose. If Welch picks a successor now, some of the others are likely to bolt. That's what happened 16 years ago when he and two others were appointed vice chairmen. Three dispirited contenders soon decamped: Thomas Vanderslice, to become president of GTE; Stanley Gault, to take over as CEO of Rubbermaid; and Alva Way, to join American Express as president.

But the most compelling reason for keeping all the options open may be that GE's system is based on close, board-level analysis of performance over time. At any moment, the membership of the tiny group of executives deemed ready to take the helm may change. GE's directors and Welch believe that their system delivers just the kind of flexibility needed by this fiercely complicated organization in an accelerated business world.

So the most tantalizing question remains unanswered: Whose names are in the envelope? Eight executives often are mentioned as possibilities. Some believe the finalists include chief financial officer and board member Dennis D. Dammerman, 49, the person Welch dispatched to take over Kidder Peabody when it faltered. Others put their money on W. James McNerney Jr., the 45-year-old head of Asia-Pacific, because he is young and because Welch is captivated by opportunities overseas. Yet Welch gave a boost to Robert L. Nardelli, 47, recently, when he appointed him president of GE's Power Systems unit. Gary L. Rogers, 50, currently president of the plastics business, turned around the appliance unit; he was cited by executive recruiters in a recent survey as one of the 250 top prospects for a hypothetical CEO search. John M. Trani, 50, president of Medical Systems, is another of the headhunters' favorites. James W. Rogers, president of Motors and Industrial Systems and no relation to Gary, has had wide experience throughout the company and is still young at 44. Finally, the two best-known candidates are Gary C. Wendt, 53, president of GE Capital, and Robert C. Wright, 52, president of NBC. Wendt's unit provides much of GE's overall propulsion; in 1994 the $20 billion unit contributed more than one-third of pretax profits. But Wendt intimidates people, and his age may work against him. While Wright carries himself with the presence of a CEO and has turned NBC around, he is not considered a front-runner.

For all that talent, a source close to Welch believes that as long as his health holds up, the company will continue to refrain from publicly naming a successor. And that means that the people whose names are in the envelope today may well be displaced over the next five years by fast-track managers currently under surveillance, executives whose appointment would surprise everyone just as much as Jack Welch's did. "I think Jack will pick someone like himself," a company insider says. "Young, self-confident, with two brains and boundless energy."