First Friday Book Synopsis

Note: General Electric was dropped from the Dow in 2018, and three years later, the once-dominant conglomerate revealed that it planned to split its businesses into three public companies focused on aviation, energy, and health care. Its market cap is now $81 billion — roughly 20% of what it was under Welch’s leadership.

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Welch was revered as the greatest CEO of all time.  …At the end of his illustrious career, Fortune magazine dubbed him ‘Manager of the Century.”  — In 1984, Fortune magazine named him the Toughest Boss in America. — In the end, Welch possessed a staggering 21 million shares in GE, which, at their peak, were worth roughly $ 1 billion.

Welchism has at its heart the conviction that companies must prioritize profits for shareholders above all else, that executives are entitled to enormous wealth and minimal accountability, and that everyday employees deserve nothing more than their last paycheck.  Welchism ascribes moral worth to material success, bestowing millionaire CEOs with the veneer of virtue almost entirely irrespective of their actions.   

Welchism’s three main features, downsizing, dealmaking, and financialization, are all endemic in the modern economy, producing an endless font of negative externalities all their own.  

Gig economy companies have taken Welch’s fantasy to have every plant you own on a barge to an extreme he likely would have relished. Now they can operate while having practically no employees at all. 

No one had so far possessed the right combination of ambition, power, and charisma to take full advantage of a vulnerable workforce and impatient investors. No one had yet dared to explicitly, relentlessly put shareholders ahead of employees, communities, and the environment. No one until Welch. He would be the first CEO of a major company to truly embrace the agenda of shareholder primacy.

We all thought Jack was doing everything right, and that success was defined by meeting quarterly earnings to the penny.

David Gelles, The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America — and How to Undo His Legacy

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This post is about Jack Welch, the famed former CEO of General Electric.  This post includes major portions of my synopsis of the book by David Gelles.  This post is a lament for what has happened in our country, in the business world that surrounds us all, because of Welchism.

Of course, Jack Welch was a powerful CEO.  Of course, he had some brilliant ideas.  And, yes, he was maybe the first true Celebrity CEO, as David Gelles posits in his book:  The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America — and How to Undo His Legacy.  But, with the advantage of years of reflection, and with the clear reality that his actual profitable ways did not last at General Electric, we realize that Jack Welch may very well be the man who broke capitalism.

The usual criticism of Welch begins with his practice of “rank and yank,” firing the bottom 10% every year.  That had plenty of bad consequences.  But, in my view, it was his outsourcing, offshoring, and closing down entire plants and even companies, that brought the most destructive results.

I presented my synopsis of this book at the August First Friday Book Synopsis.  It was worth reading!  It is worth pondering; and heeding.

As always, I begin with “what is the point” of the book?  Here is the point for this book:  Jack Welch led General Electric to an unprecedented run of dominance and financial success. But his ways could not last, and time has shown that he did plenty of harm in the process.

I especially appreciate the imagery behind this quote, from the book:

The Greeks had their philosophers, searching for the truth.  Our heroes reflect our collective aspirations, offering clues to our deepest desires, idealized behaviors, and societal priorities. …Generations from now, when future anthropologists try to make sense of this moment in the American experiment, looking to our idols for clues about our priorities, they will need to contend with a perplexing but undeniable fact:  in America, we worship our bosses. …We put our chief executives up on pedestals, granting them wide latitude to influence our national discourse and endowing them with vast wealth while absolving them of accountability. …We elevate the richest among us to positions of moral authority letting CEOs, not religious leaders or philosophers, shape our views on the fraught political and social issues of the day. 

In my synopses, I ask, why is this book worth our time?  Here are my three reasons for this book:

#1 – This book is a chronicle of the Jack Welch years at General Electric.

#2 – This book explains why what Welch did worked…until it didn’t.

#3 – This book is a cautionary tale, and provides a challenge for the days to come.

I always include a few pages of Quotes and Excerpts from the book – the “best of” my highlighted Passages.  Here are a number of the best of the best from this book: 

In a nation made powerful by its staggering industriousness ad titanic economy, captains of industry are the very embodiment of American success. …There is one CEO above all others who was revered as a cultural and economic hero in his own time, who radically transformed the world around him and continues to hold sway even after his demise, who seized on changes in the zeitgeist and used them to rewrite the rules of our economy:  Jack Welch. …he was lauded as a visionary.  He identified the promises of globalization and rapidly reshaped GE to compete on the world stage.  He could see around corners and pushed GE into the media and finance industries at just the right time. …The financial results he delivered were undeniable great. …When Welch took over, GE was worth $14 billion.  Two decades later, the company was worth $600 billion – the most valuable company in the world.  

Welch championed offshoring and sent thousands of union jobs overseas to countries like Mexico, where labor was cheap.  And he reveled in outsourcing, turning to other companies to provide back-office functions like accounting and printing.  In was enough to earn him the nickname “Neutron Jack,” a reference to the neutron bomb, which purportedly kills people while leaving buildings intact.  Welch’s affinity for downsizing, which his own employees called the “campaign against loyalty,” fundamentally altered GE.   

His strategies ultimately destroyed what he loved so dearly.  Not long after he retired, GE fell into a spiral of decline set in motion by Welch’s short-term decision-making. 

At the time of Welch’s retirement, sixteen public companies were run by men who had studied at his knee.  …Yet inevitably, whether in months or years, many of the failed.   

As Welch’s lawyers did their best to pay the IRS the absolute minimum necessary under the law, the share of taxes U.S. corporations paid to the government steadily fell.  When Welch became CEO, the effective tax rate on capital income was 46 percent.  Twenty years later, it was down to 35 percent, and could continue to fall.  Today it is just 21 percent. 

Whereas CEOs made less that 50 times the annual worker salary when Welch took over, they were making 368 times as much by the end of his term.  Put another way, CEO compensation has grown by 940 percent since 1978.  During the same time, the average worker’s wage has increased by 12 percent.  

When Welch took over, half of GE’s earnings came from businesses dating back to the Edison era: motors, wiring, and appliances.  Yet Welch, an extremist in all he did, drastically overcorrected.  Instead of trying to fix American manufacturing, he effectively abandoned it.    

Welch simply moved jobs away from pro-labor areas whenever he could, thereby drastically reducing the proportion of the GE workforce that was unionized.  …Welch was making good on his words during these years, shifting work from unionized factories in America to foreign countries wherever he could. In the late 1960s, 27 percent of American workers belonged to labor unions. By the early 1990s, union membership was down to 13 percent, and would eventually dip below 10 percent. 

Welch had zeroed in on a fundamental truth about the modern economy that other CEOs only dimly understood at the time: the real money was going to be made not in the factories of the American heartland, but in the office towers of Wall Street and Madison Avenue. As GE deepened its push into finance, investors began to grasp what he was up to, and the stock began ticking up. By 1987, shares in the company had risen a full 250 percent from the time Welch took over.  …They proved to Welch that growth could come from buying, rather than building. He could acquire his way to the top, rather than innovate his way there. 

In practice, however, research has shown that buybacks exacerbate inequality. 

Boeing is doomed to mediocrity, the business scholar Jim Collins said in 2000. There’s one thing that made Boeing really great all the way along. They always understood that they were an engineering-driven company, not a financially driven company. If they’re no longer honoring that as their central mission, then over time they’ll just become another company.  

In 1965 CEOs were paid about 20 times as much as an average employee at their company. That ratio began to balloon around the time Welch took over GE. CEOs started getting paid 50 times as much, then 100 times as much, then 200 times as much as their average employees. 

While Nardelli was toiling away at Home Depot, McNerney was trying to reinvent 3M, and Immelt was wrestling with GE, Welch was living it up.   

He suffered from the delusion that his money was representative of some greater intelligence, as if his ability to wring profits from a hyper-financialized multinational corporation bestowed him with the gifts of an educational reformer. It’s a delusion common to the wealthy. pg. 156 

GE survived the financial crisis, but only barely. Had Buffett not come to the rescue, had Washington not backstopped its loans, GE Capital could have collapsed, taking the General Electric Company, and a significant swath of the broader economy, down with it.   

On June 19, 2018, with all of Welch’s bad decisions catching up with the company, GE was removed from the Dow Jones Industrial Average, the bluest of blue-chip indexes and a bellwether for the American economy. …Bethlehem Steel, Sears, and Kodak all enjoyed turns in the Dow. Yet for the entirety of the twentieth century, through the Great Depression, two world wars, the dot-com bubble, and other upheavals, GE remained. In the end, however, Welchism caught up with the company. Decades of underinvestment had left GE with no breakthrough new products. Over the previous year, GE shares had fallen 55 percent, while the Dow itself had gained nearly 50 percent, despite GE weighing it down. The company that would replace GE was Walgreens Boots Alliance, the drugstore chain.   

He was the first CEO to take a healthy company and treat it like a turnaround job.

Many of our biggest companies still prioritize short-term gains, devalue workers, fudge the numbers, and heap unjustifiable rewards upon CEOs.   

And then, in my synopses, I include key points from the books I present.  Here are quite a few of the ones I pointed out in this synopsis: 

• About David Gelles
• a New York Times business reporter; columnist for The Corner Office; and now a climate reporter.

• About Jack Welch:
• CEO of General Electric from 1981-2001.
• He received a severance package of $417 million

• A brief history
• corporations are for the greater good, to…
• corporations are solely for the purpose of providing profits to the shareholders (Milton Friedman), to…
• companies ought to maximize profits for shareholders at any cost, markets should be free, and the rest of society out to take care of itself.
• Welch was the embodiment of the shareholder primacy dogma hatched by Milton Friedman.
• corporations are for a greater good to all stakeholders:employees, communities, society overall, and shareholders…

• A cautionary tale:
• Boeing abandons its roots… and forgets devotion to safety in pursuit of the short-term stock gain… 

• Jack Welch employed three great tools:
• downsizing – it was generally true that once you got a job at a company like GE, you could keep it until you retired.  This was blasphemy to Welch.  He found the notion that a company should be loyal to employees to be laughable.
• dealmaking – many, many acquisitions (and, many businesses sold off to others…)
• financialization – GE was an industrial company when Welch took over. By the time he retired, toe company derived much of its profits from GE Capital, which was essentially a giant unregulated bank.

• For Jack Welch, every business had to be either #1 or #2 in its category.
• If it couldn’t achieve that, it would be jettisoned.  “Fix it, close it, or sell if,” he would say.

• Neutron Jack — Welch earned the nickname he would never shake, as Newsweek dubbed him Neutron Jack. The buildings were still standing, but all the people were gone.
• Jack Welch would get rid of every possible job he could rid of; through outsourcing, or offshoring, or what he later called differentiation.
• Before Welch came along, employees were regarded as a company’s greatest asset. Without the rank and file, it was understood that there would be no business at all. But to Welch, labor was a cost, not an asset. And as a cost, it was to be minimized. 

• He saw costs; not human beings…
• And throughout his career, he often employed violent rhetoric when discussing layoffs. His favorite way to describe firing someone was to say that the person should be shot. Shoot them, he would say, when discussing an employee he didn’t like. They ought to be shot.

• Welch could not become #1 with products or services; it had to be through financial services (money moving)…
• If Welch was going to make GE the most valuable company on earth, he knew he would have to do it with GE Capital. 

• With the financial arm, Welch could always hit his target (another quarter of financial growth):
• More than any other factor, it was GE Capital that allowed Welch to deliver the consistent earnings growth that he knew, even before he was named CEO, would prove so critical to his success. Thanks to the sprawling finance division, he could produce earnings on demand, as one analyst put it at the time. …The global marketplace for loans is always open, and in the last days of each quarter, GE Capital would often unleash a flurry of activity, adding profits and taking restructuring charges as needed to help the parent company meet Wall Street’s expectations.
• Many other American companies saw GE’s success with financial services and got in the game as well. John Deere, Caterpillar, and Hewlett-Packard created finance divisions, and made substantial profits not by selling their products, but by lending money.

• After he retired:
• he defended “differentiation”(firing the bottom 10 percent each year) — Welch implemented a brutal mandate: each year, the lowest-performing 10 percent of GE’s employees should be laid off. 20 percent in the top tier, 70 percent in the middle, and 10 percent at the bottom. Welch referred to these groups as the A, B, and C players.
• he changed his message (i.e., he lied about what he had done).
• and most of his acolytes (those who became CEOs of other companies)…failed.
• Only two CEOs, Jim McNerney at 3M and Tom Tiller at Polaris, had managed to boost their company stock prices. The rest had run their companies into the ground, driving down share prices by 25 percent at Albertsons, 45 percent at Great Lakes Chemicals, and 48 percent at Intuit. …Boards get overenthusiastic about the GE glow.
• and…GE failed (under Jeffrey Immelt’s leadership). . 

• I had not realized…
• Welch hired Roger Ailes:  CNBC; then the channel that became MSNBC…

• What did Welchism bring?
• the loss of job security
• greater inequality
• short-term gain over long-term health

• And ultimately, it was all short-lived – GE’s dominance did not last past Jack Welch.
• Yet in the end, what was being taught was not sound business practices designed to deliver long-term value. …Instead, it was a crash course in bare-knuckled cost cutting and profit maximization. Welchism 101 and the curriculum informed a generation of CEOs that was about to reshape the economy.
• But remember… Mr. Welch clearly said that it would be what happened after he left that company that would reveal the true test of his leadership… …When Welch retired, he suggested that his success will be determined by how well my successor grows the company in the next 20 years. By that measure, he was shaping up to be a failure. 

• The self-reinvented Jack Welch:
• Welch:  “Your main constituencies are your employees, your customers and your products.” Coming from Welch, the assertion was laughable.
• But just as he had reinvited himself in retirement, he was now rewriting his history as CEO, too.

• There could be a better way. Consider Paul Polman, Unilever
• Soon after taking over, Polman took his management team to Port Sunlight for a multiday retreat, where he tried to recapture the benevolent spirit that had animated Unilever a century before. …So at Port Sunlight, in addition to the normal strategic planning, Polman had his executives reflect on Lord Lever and what had made Unilever great in the first place. Going back to our roots gave me the permission to drive change, Polman said. — We needed to provide the environment for people to be successful. You cannot solve issues like poverty or climate change or food security with the myopic focus on quarterly reporting.

• Many companies manipulate their behaviors, their spending, to avoid missing expectations. …Polman noted that the former GE chief was only able to post such stellar returns thanks to his accounting games.

And here are my five lessons and takeaways:

#1 – Yes, Jack Welch was wildly successful  But what he built…did not last.

#2 – You can focus on short-term profits for the stockholders; or long-term care of employees, with focus on the greater good.  You cannot do both.

#3 – Sometimes, a person/leader simply cannot be replicated.

#4 – The ripple effects of harm can cause lasting difficulty.

#5 – Studying what did happen can help us think about what could happen; maybe what should happen.

I intend to write a blog post soon on “lip service.”  Today, many companies claim to care about more than just the stock price for the shareholders.  But, maybe, that claim is just lip service.  As Mr. Gelles hints that it is.

Jack Welch was great.  Until…he wasn’t.  And the ripple effects of what he did, what he stood for, what he pioneered have led to the loss of stability, security, jobs, and maybe even mental health (in the communities where his outsourcing and offshoring, and closing of plants and businesses, had such devastating consequences).

We have paid a huge price for the decisions made by Jack Welch, and all of those who followed in his footsteps.  And we are still paying that price today.

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My synopsis of The Man Who Broke Capitalism, with the audio recording of my presentation, and my comprehensive, multi-page handout, will be available soon on this web site.  Click here for our newest additions.

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