Introduction
“The Man Who Broke Capitalism,” by David Gelles should be required reading for all students of business and the economy. It is a searing indictment of the excesses that Jack Welch, his acolytes, and his fanboys inflicted on businesses and society over the last five decades. It also helps set the context and roots of the rising income inequality, the disregard for labour and puts a spotlight on the failure of trickle-down economics. The book also helps outline the fairly rapid deterioration of the harmony that existed between corporations, workers, and governments.
Whilst we cannot lay the blame entirely on Jack Welch, the book does provide a useful background to how we’ve got to where are now. Where the richest 1% of Americans possess almost 45 percent of the country’s wealth. A world where the top three richest men in the US own more than 50 percent of the rest of the country! These statistics represent the harsh realities of the environment perpetuated by Welch – one where there is a high-intensity war against fair wages for employees, increasing income inequality and reduced taxes paid by corporations.
This book forces an introspective review of the role of businesses, the social compact with workers, and the need for us to redefine how capitalism could serve society better and lead to a more sustainable environment and future for all.
General Electric in the beginning
General Electric (GE) started off as an industrial company steeped in manufacturing excellence and innovation founded by Thomas Edison. For most of GE’s early history, the workers shared in the prosperity of the company. GE was one of the first few companies in the world to offer employee retirement plans, profit-sharing, health and life insurance. Early GE CEOs, like Gerard Swope, were proud of what they described as ‘welfare capitalism’, where they used GE’s vast resources to take exceptional care of employees and in the process achieving superior outcomes for both shareholders and employees. As GE’s chairman in 1927, Owen Young, set out of his vision for leaders to “think in terms of human beings – one group of human beings who put their capital in, and another group who put their lives and labour in a common enterprise for mutual advantage.”
GE’s annual report from 1953 also sets out the vision for how GE worked in “the best interests of all,” and proudly declared how much taxes they paid, how they fulfilled obligations to their suppliers, and how critical it was to take of their employees.
The shifts in economic philosophy and the rise of Jack Welch
Jack Welch joined GE as a junior engineer in 1960 and got to the top of the corporate ladder in 1981 as CEO where he took over from Reginald Jones (who incidentally drew US$200,000 as his annual salary – or twelve times what new management recruits at GE earned). During Jones’ time as CEO, GE was considered a model corporate citizen, held in high regards by shareholders, GE employees and society at large.
Jack Welch was the CEO of GE from 1981 to 2001 and exerted unmatched influence on American businesses. Over his tenure as CEO, he posted phenomenal financial results – from an annualised share price growth of over 20 percent a year – taking the company’s valuation from $14 billion to over $600 billion. Welch took a company that was at its very heart an engineering and manufacturing company to one which became a financial company (albeit a giant unregulated bank) where GE Capital generated the bulk of the profits.
At the time Welch took over as CEO, it was the era of Reganomics – an era of neoliberal economic policies, including lower taxes, increased deregulation, and an overt wooing of Wall Street. Reganomics did not occur in isolation and the path to this philosophy of economics was led by the likes of Freidrich Hayek and later Milton Friedman, right-wing economic ideologues who believed that it was only free markets alone that could best meet society’s needs. Friedman’s famous slogan that ‘the social responsibility of business is to increase its profits,’ led to other economists such as Michael Jensen and William Meckling who felt that the only metric companies should be measured against was their share price. These beliefs and influence of these right-wing economic thought which insisted that companies should seek to maximise profit at the expense of all other concerns and that governments should stay out of the way of businesses and that societies should take care of themselves set in motion a warped and cruel approach to leadership. I would argue that this set in motion the broader economic problems of income inequality, lack of support for employees and workers, the increased attack on the environment with scant regard for climate change and sustainability, the hollowing out of the middle class, rising costs but stagnant wages and the rise of the rentier economy (where the factors of production were concentrated in the hands of an exclusive few and leading to the exploitation of an ever growing proportion of society.
The focus on share prices to the exclusion of almost everything else also led to the financial shenanigans which soon caught up with companies over time.
Welch’s playbook for GE included three main tools: downsizing, dealmaking and financialization.
Prior to Welch, employees were regarded a company’s greatest asset. For Welch, labour was a cost, not an asset. As a cost, he spent his lifetime minimising cost by downsizing. Downsizing meant improved profitability, a tool that helped him meet his quarterly earnings, never mind the damage to individual livelihoods or entire communities. Systematic culling of employees was a hallmark of Welch’s reign at GE where hundreds of thousands of people lost their jobs.
Another cruel approach to downsizing promoted by Welch was his ‘Vitality Curve’ which was also known as ‘rank and yank’ where the bottom ten percent of employees each year were let go. It was a Darwinian approach to people and which Gelles describes as a ‘smug conviction that those who don’t make it are to be blamed for their own misfortune, that the poorest amongst us ultimately deserve their own fate.’ Regardless of how well the company was doing, employees were ranked 20:70:10 – with 20 percent marked as ‘top-performers’, 70 percent deemed to be in the middle range and with 10 percent labelled the poor performers and to be let go.
Dealmaking was another Welch playbook tool that has been emulated by CEOs across the world. In 1985, there were 2,300 deals worth $200 billion in the US. By the time Welch retired in 2001, there were almost 10,000 deals worth over $1 trillion. In 2019, there were over 18,000 deals worth almost $2 trillion. As Gelles highlights, the rise of market concentration across the economy has real effects on ordinary people. Corporate consolidations have depressed average American salary by $10,000 a year. Companies in highly consolidated industries also spend less on capital expenditure, which tend to create jobs. When just a few big companies dominate an industry and have only nominal competition, prices are more likely to rise, a dynamic known as ‘monopoly rents.’ As Gelles says, “The dealmaking boom that Welch kicked off never really subsided, and we all keep paying the price.”
The third of Welch’s tools was financialization or earnings management. Welch’s genius was all about delivering consistent earnings growth and he used GE Capital to produce earnings on demand. In addition to smoothing earnings, the finance division at GE consistently lowered the taxes they paid and moved profits offshore to reduce their tax obligations. Earnings targets at GE were achieved using dubious accounting methods. Black box financial models and limited transparency meant nobody quite knew what was happening under the hood – a bid reason why financial institutions and banks failed during the financial crisis of 2008. Earning management, along with share buybacks (which does not actually translate into widespread economic prosperity) was weaponised by Welch to manage share prices increases effectively (and cynically).
All of this resulted in GE becoming one of the largest companies on the planet and Welch was venerated as a business guru with unmatched influence across American business and was declared to be the ‘Manager of the Century’ by Fortune magazine in 1999. However, the consequences of Welch’s methods and hubris soon made themselves apparent and we are still paying for it as the next section shows.
Jack’s and his boys’ legacy of destruction
Jack Welch became the doyen of CEOs across America, and the world and GE became the bellwether of American business and management practices. Tragically, this meant that CEOs across the US were trying to emulate Welch without understanding the pernicious consequences of Welch and his acolytes’ impacts on businesses. As Gelles put it, “The contagion had begun, and all of corporate America would soon be infected.”
Welch’s approach was all about short-termism and there was little focus on long-term strategy and a slavish devotion to meeting quarterly results. His successes were on the back of boosting results through fake reporting from divisions, misreporting inventory, inflating sales (for instance recognising intra-company sales as new revenues) – or old school fiddling of the books. All of this stemmed from a singular focus on boosting share prices at the expense of strategic growth. As Bill George, a former CEO of Medtronics said, “A lot of the GE leaders were thought to be businesses geniuses. But they were just cost cutters. And you cannot cost cut your way to prosperity.”
Welch unleashed a culture of downsizing that also radically altered the distribution of wealth across the US. Up until the late 70s, productivity and worker pay were strongly correlated. This has now changed, and it is the earnings of the CEOs which has skyrocketed with the growth of corporate profits and the wealth of workers has barely increased. As hundreds of thousands of people were being made redundant or were becoming unemployed, companies were making record profits, generating new value for business leaders and their investors.
Executive’s faith in the easy maths (and outcomes) of mass layoffs – that fewer employee meant higher profits, that labour is a cost, not an asset, persists despite the growing body of research debunking the dogma. As Peter Capelli, a professor at the Wharton School of Business says, “The research evident has not found any support for the overall idea that layoffs help firm performance. There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump.” One study showed that when retailers cut staff, any short-term cost savings were overshadowed by long-term losses. It turns out that when stores are staffed by a skeleton crew, sales dry up quickly.
Another big change led by Welch is the emphasis and focus on employees’ welfare. Corporations which once generously shared profits with their workers across the country are now funnelling the lion’s share of the wealth to institutional investors and executives. In the 80s, less than half of corporate profits were going back to investors. Over the past decade, that figure has soared to 93 percent.
Just to emphasise the point, the CEO of a major American company now makes in a year what it would take an average worker in the company 320 years to earn. The median annual salary amongst top CEOs is $12.7 million – and this is just for the middle of the pack! At top companies. CEOs make in a year what it would take a millennium for their employees to earn.
Welch and his boys (and they were almost exclusively only men in Welch’s leadership teams) wrought immense damage not just to GE. Their influences and consequences were felt across the corporate landscape in the US and beyond. This will be worthy of a whole separate article altogether! However, it is worth highlighting that the number of leaders who were either trained or influenced by Welch went on to damage value at a historic level across other companies. Chrysler (led by Lee Iacocca), AT&T (led by Robert Allen), Ford (led by Jacques Nasser) are just examples of companies that have been severely diminished by poor leaders seeking to ape Welch’s methods and who destroyed their companies whilst enriching themselves in the process.
Bob Nardelli, one of Welch’s potential successors at GE went on to lead Home Depot and by utilising Welch’s playbook of downsizing (particularly by removing long-serving staff), cutting costs without regard to the value they bring and focusing on short-term gains such as the reduction of inventory, ended up transforming a convivial culture at Home Depot into a Darwinian culture and which also destroyed the company’s performance and standing. Following his hit-job on Home Depot, Nardelli decided to put his anti-Midas touch to Chrysler which promptly went bankrupt.
More insidious is the performance of James McNerney, another of Welch’s potential successors at GE. McNerny left after Jeff Immelt was made CEO of GE. At first, his incompetence wasn’t quite so fatal. He decided that he will not be outdone by Nardelli’s disasters, and went on to 3M, then a thriving and successful company and managed to destroy value, disenfranchise employees, and degrade 3M’s strategic capabilities. McNerney was a faithful adherent of the Six Sigma methodology and advanced it under Welch at GE (a process which inspires much debate about whether it helps creates efficiency or just plenty of paperwork). He tried to instil it at 3M and failed spectacularly. As the new CEO of 3M who replaced McNerny, George Buckley, said, “Invention is by its very nature a disorderly process. You can’t put a Six Sigma process into the area and say, well, I’m getting behind on invention, so I’m going to schedule myself for three good ideas on Wednesday and two on Friday. That’s not how creativity works.”
McNerny, went on to Boeing, where his practices led to tragic and fatal consequences. He implemented his standard Welch handbook of cutting costs (regardless of the value they were generating), outsourced the development of aircraft parts (from 35 percent to over 70 percent), which led to significant quality and production timing issues. His predecessor, Harry Stonecipher, another Welch acolyte who started his career at GE and was hugely influenced by Welch, also decided not to focus on long-term strategic growth and instead focused solely on share price growth and ploughed profits back into dividends rather than investments.
McNerney’s culture of cost-cutting and making engineering compromises continued after he left and helped grow Boeing’s share prices (including McNerney’s stock options to around $250 million). However, this meant Boeing’s engineering and safety compromises led to poor design decisions which afflicted the design and build of Boeing Max aircraft that have led to tragic crashed leadings to the loss of hundreds of lives. The cost cutting (to help inflate share prices) cost lives and there has been little accountability to date.
What we can learn from the debacle that was the philosophy of Jack Welch.
In 2007, GE’s new CEO, Jeff Immelt hired McKinsey (Masters of the Universe ©) to produce a study to assess GE Capital’s vulnerability in the event of a sharp economic downturn. McKinsey gave GE Capital the green light and said GE Capital will be able to ride out any economic downturn. Immelt turned to Goldman Sachs (the other Masters of the Universe ©) who confirmed McKinsey’s opinion and said GE Capital (and GE) will be able to handle whatever challenges came their way.
Except this wasn’t quite right. When the financial crisis hit, GE needed a massive cash bailout to survive. It also put GE on the road to dismemberment and disrepair.
GE was one of the founding members of the Dow Jones Industrial Average (DJIA) in 1896 and were unceremoniously booted out in 2018, after a share price fall of over 80 percent from their peak around when Welch was in charge. GE never really recovered from the 2008 financial crisis and in 2021, a decision was made to split GE into three separate companies, which marked the end of GE as a 129-year—old powerhouse conglomerate that was once a global symbol of American business leadership and the most valuable company in the world. This was Jack Welch’s final legacy. Two decades of short-termism led to the long-term fracture of a storied company.
This is an opportunity for us to reflect on how Welch’s habits and culture degraded and eroded long-term value. The book provides a clarion call to radically revisit how we run businesses differently. Ignore the temptations of short-termism, focusing on long-term strategic growth. Thinking not just narrowly about the benefits to shareholders, but looking at how companies and businesses should aim to be part of a broader solution to resolving societal challenges including inequality, workers’ welfare and focusing on how we improve the natural environment we operate in. Ultimately, acting with integrity and accountability and serving the broader public interests.
As I said at the start, this book should be required reading for all business students and to have a better appreciation for how we can do better, deliver better and be better.
zodakreza 