In Gelles’ new 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, he chronicles how Welch’s laser focus on maximizing shareholder value by any means necessary - including layoffs, outsourcing, offshoring, acquisitions, and buybacks - became the new playbook in American business. The book demonstrates how this shareholder maximizing version of capitalism has led to the greatest socioeconomic inequality since the Great Depression and harmed many of the very companies that have embraced it.
I just finished reading this book.
Jack was one of the first in offshoring. He moved appliance manufacturing plants to Mexico in the early 1980’s.
He had his mangers fire the lowest rated 10% employees annually. Turning employees into competitor from collaborators.
He turned industrial GE into a financial company in which financial returns were massaged quarterly, in reality gamed, to drive increasing profits quarterly to drive the stock price largely benefiting himself & high executives & shareholder whom shares are largely held by the top 10%. Jack also ruthlessly cut costs to boost profits.
The “Black Box” GE Capital ultimately led to GE downfall. Under federal scutiny the wheels came off.
GE Capital got the official designation of being a SIFI, which imposed even more substantial scrutiny from the Federal Reserve.*
Long suspected as a “black box”. GE Capital – and by extension, GE had an incentive to open the door for the Fed as a primary regulator to turn over every financial and internal control rock, stone, and pebble of GE Capital’s and GE’s governance, risk and controls. Compounding this scrutiny was the inherent conflict of interest of GE’s entry-level auditor-to-business CEO rotation program, which challenged whether GE’s auditors were sufficiently independent to assess GE’s internal accounting controls.
Gilles goes into the Alumi from the Jack Welch executive school that went on to other corporations to run them into the ground though they all received golden parachutes to great wealth.
James McNerney-Boeing & Robert Nardelli-Hime Depot/Chrsyler are 2 prime examples.
Jack Welch did have the eye in making good acquisitions. Jeff Immelt not so much. Thus accelerating the fall of GE.
Welchism is in the pantheon of business management that is emulated throughout the US corporate world. It does build wealth for the shareholder & CEOs but does strengthen a nation industrial might & well being? Certainly leads to a supply chain weakness & offshoring of jobs.
Business reporters/writers fawned over Jack Welch. Who could argue with the rising share price. But what was the real cost of that result.
I acted as a management consultant from 1967 to 1976. Jack Welch became GE’s CEO in 1981. Back then, before Jack Welch, GE was considered one of the best run conglomerates. I didn’t follow GE after that.
Jack Welch might have been ruthless but that was not the cause of GE’s downfall. Fragility was the proximate cause. In the 1980s it became customary for industrial companies to finance their clients instead of letting banks do the job. The interest income was attractive and liberal financing improved revenues not just from financing but also from increased product sales.
The problem is that until a product is paid for the sale is not a sale, it’s just a loan! GE imploded during a financial crisis which brought down GE Capital.
Ever hear the admonition, “Beware margin?” Same problem, fragility! Debt has the bad habit of causing chain reactions as covenants are breached.
Take this into account when buying stocks, debt is fragility.
We could argue that, rather than “breaking” capitalism, he “took it to the next level”, fully embracing the underlying principle of “supply side economics”, where the sole objective is the enrichment of the “JC”, regardless of cost to anything, or anyone, else.
Given the incentives that have been arranged, the ultimate goal is an economy built entirely on financial speculation, with no need to invest in real assets, no need to produce real product, and, especially, no pesky employees wanting to be paid for their work.
You could but it would be of no help to me. I want to know why GE was on the verge of bankruptcy. Cutting thorough the noise, it was debt, which is why I ended my post with…
Take this into account when buying stocks, debt is fragility.
Buy stocks that bounce back.
The Captain
was very happy with his GE brand washer and dryer, over two decades of service with only two or three minor repairs
The “move manufacturing out of the US” point is not often linked to Volker’s inflation busting FED rate, and the recession that followed.
Add to the list, the trickle down economics tax cuts for the wealthy.
And union busting (ex: air traffic controllers?).
Today, there is reported re-shoring of manufacturing jobs.
Unions are resurging?
Taxes are rising?
A recession followed 1980 Fed rate raises, in an environment of don’t tax the rich, destroy labor negotiations, and move high pay jobs to lowest labor cost countries.
That was a horrible idea. Everyone complains about people with poor communication and teamwork skills. This forced ranking policy is the Trojan horse that undermines the motivation to develop better communication and teamwork skills by transforming the workplace into a giant game of musical chairs. Forced ranking promotes the rampant political manipulation that everyone complains about but nobody seems to be able to fix.
I’m glad that this forced ranking policy is on the decline.
I agree. Another factor to consider is where that debt came from. Debt could come from heavy investment in breakthrough technology that would give a company a competitive advantage. Ford Motor did not go BK when GM and Chrysler did, because Mulally had borrowed heavily to restructure the company, before the economy collapsed. OR debt could come from a slow motion liquidation of the company to juice the price of the stock. What a Welch acolyte did to Boeing is now abundantly clear. Recently, I have been commenting on McDonald’s, a great business, very popular with customers, quick adapter of new technology, but the company is also being hollowed out by management.
Right. And why was GE in debt? Jack Welch management. He squeezed every dollar he could have of GE and left one of the world’s greatest companies a rotting, shallow, shadow of its former self. His protégées’ are doing the same thing in other companies.
I think GE got into financing when it realized financing was a major part of closing the deal whether its jet engines for airlines or new power plants. Plus their bond rating gave them lower borrowing costs than many customers. Hence they could lease the product and make a profit. They merely expanded that function into many other areas. Unfortunately they were over extended when the crunch came.
The other problem is as leading businesses went through down cycles (or matured) they were unable to fill in the dips with alternative sources of income. That is supposed to be one of the advantages of conglomerates. One day the midas touch stops working.
I got insanely low priced loans to finance buying copier/printers and some PC’s for a gay rights business that had red numbers all over. I could not believe my good luck, and told all my friends to abandon GE as fast as possible because it had gone insane.
Yes, the gay business went bankrupt the moment the good times stopped rolling. GE was no really a business, but a scam, and we were not really a business but a temporary locale of gay rights outreach.
A nearly perfect summary. Westinghouse, where I worked, had a similar division, which helped large industrial customers buy things like generators and ships and stuff, and it worked well for many decades.
At one point some smarties realized how easy it was to push the numbers around to achieve whatever result you needed at the time and they began loaning to (almost) anybody who walked through the door. At a time when banks were still demanding at full collateral plus cash down (skin in the game) to secure a loan, some brilliant guys started fronting the unsecured “last” 30% to developers so they could get funding, in return for a fat fee. (You are familiar with the concept if you’ve ever taken a home mortgage, it’s called “points”.) It worked great, big fees rolling in, times were good, then suddenly (and as is so predictable) the times got not so good, and the unsecured 30% disappeared while the bank got it’s collateral and anything else it could salvage. It’s hard to have a business lending 30% and getting back zero.
There were other games being played, but Westinghouse had long outgrown the boring business of serving its other segment customers and started lending to shopping centers, golf course developers, restaurants, and who knows what else.
Welch’s finance arm just started later - after Westinghouse had already shown what a mistake it was - and managed to last until he retired, so . Victory?
Wow, I just cannot imagine intentionally making a bad hire just to have someone to sacrifice at the altar of forced ranking. It’s horrible in so many ways to everyone involved! Here are the ways:
It doesn’t do the bad hire any favors. He/she is disoriented or has a false sense of productivity, which is even worse than no productivity. Nobody really wants this new hire to step up his/her game, because that would mean someone else would have to be the sacrificial lamb instead. Any such sacrificial lambs who beat the odds to become a productive member of the team would be perceived as a threat and encounter a hostile environment.
The bad hire would be bad for the team. Who wants to be stuck working with some airheaded underperformer? The worst case scenario would be if the bad hire were terrible at the job but the best at political manipulation.
The company as a whole suffers, because too many teams put more effort into political manipulation rather than productivity.
