The Legacy of Jack Welch's Managerial Capitalism
Heroes define a civilization, argues David Gelles in The Man Who Broke Capitalism. And of Americans, he says, “We put our chief executives up on pedestals.” No one has been more elevated than Jack Welch, the Chairman and CEO of General Electric (GE) from 1981 to 2001 and a media celebrity until his death in 2020. In 1999, Fortune magazine famously called Welch “The Manager of the Century.”
One response to such veneration, of course, is “So what?” After all, business has enormous scope and significance, not only in America but around the world. Commerce has lifted millions out of poverty. Thanks to free enterprise, we can pursue our vocations and contribute to our own good and the good of others. Who better to put on a pedestal than the leaders of capitalism?
According to Gelles, however, Jack Welch did not lead capitalism forward. By some narrow definition of fiduciary responsibility, Welch succeeded: GE’s posted annualized share price outpaced the S&P 500 even during a bull market, and its valuation went from $14 billion to several hundred billion. Such apparent success involved considerable sleight-of-hand, however. The head of enforcement for the Securities and Exchange Commission (SEC) summarized this sleight-of-hand by saying, “GE bent the accounting rules beyond the breaking point” which included what a GE executive called a “financial army” able to close the quarter precisely as promised.
Welch did not leave a good legacy for GE or its shareholders: its stock fell 25% during Welch’s final year, and if you held stock in GE from 1984 (three years into Welch’s tenure) until 2020, your total shareholder return was 745% versus 3,385% for the S&P and 10,254% for Colgate-Palmolive. The financial sleight-of-hand also merited several fraud charges by the SEC. GE was replaced by Walgreens in the Dow Jones Industrial Average and survived the 2008 subprime mortgage fiasco thanks only to bailouts from Warren Buffett and the federal government. GE is now being dissolved by the same logic Welch used to decimate other companies. It has become a hollow shell of the manufacturing giant whose coast-to-coast industrial footprint helped Ronald Reagan become a successful conservative politician.
But in addition to destroying GE, Gelles also charges that Welch destroyed corporate leadership culture. Insofar as GE was a huge and deeply admired American company, it inevitably influenced business leaders far and wide. Also, GE took mentoring so seriously that Fortune magazine said of it, “When a company needs a loan, it goes to a bank. When a company needs a C.E.O., it goes to General Electric.” Welch used GE’s culture to nurture acolytes who failed both shareholders and stakeholders at several companies including Home Depot, Albertson’s, Chrysler, 3M, and Boeing.
If Welch was an evangelist, his gospel was downsizing, dealmaking, and financialization. Downsizing meant not only cutting labor costs to inflate earnings but creating what is called “rank and yank.” Performance ratings (“stack ranking”) meant firing (“yanking”) the bottom 10% even when economic times were good. Welch also offshored, which meant sending jobs abroad. He wished that he could put his factories on a barge and float them to wherever costs were lowest. He also outsourced things like accounting and printing. In an era when the Fortune 500 fired over 3 million employees, Welch led the way with hundreds of thousands of layoffs. After decades wherein many firms, including GE, essentially guaranteed lifetime employment, one employee called Welch’s change of strategy a “campaign against loyalty.”
Dealmaking and financialization also departed from precedent. Welch mapped out primrose paths promising profits but diverted GE substantially from its core business. One associate said of Welch, “There’s no commitment to people or product.” GE’s thousands of mergers and acquisitions (including unrelated businesses like NBC) turned it into a dilettante conglomerate. Once a business became part of GE, Welch ordered his subordinates to “Fix it, close it, or sell it.” Most notable was GE’s foray into financialization: GE Capital’s venture into business lending, insurance, and credit cards, coupled with aggressive accounting methods, became a breeding ground for scandals, fines, and then tragedy in the subprime mortgage fiasco. They hid their condition well. In 2007, McKinsey & Company gave it a clean bill of health.
However legally or ethically questionable his strategies were, Welch and his team found this way more agreeable than managing factories and employees. Welch hit his promised earnings targets through a managerial revolution wherein stock buybacks increased earnings per share. Gelles cites William Lazonick to argue that manipulation of stock prices, or “earnings management” has depressed wages substantially: money spent on stock buybacks reduces research and development that could increase productivity and therefore wages.
Contrast this laser focus on earnings and share price with what GE promised in its 1953 annual report, for example. At that time, GE promised to work “in the balanced best interests of all” including employees, suppliers, and society more generally. In short, Welch redefined what it meant to be a successful business leader. One contemporary of Welch later remarked, “We all thought Jack was doing everything right and that success was defined by meeting quarterly earnings to the penny.”
Did Welch Break Capitalism?
Gelles convincingly demonstrates that Welch wreaked havoc on GE’s core business, but that story has already been told. In an insightful 2001 essay, for example, John Cassidy summarized it well when he called Welch “a Maoist in a blue suit, insisting that only permanent revolution could guarantee economic survival.” But Cassidy ended his essay with an excellent invitation for writers decades later: “The epilogue to the Jack Welch story has yet to be written.” Has Gelles successfully written that epilogue?
A transformation obliges a “before” that does not resemble the “after.” Gelles asserts the existence of a pre-Welch capitalism, supposed halcyon days when a “harmonious equilibrium” existed among corporations, workers, and the government. Taxes were paid, regulations accepted, and infrastructure provided as background to a flourishing economy enabling a strong middle class. So then how did we become, as Gelles summarizes it at least, a nation of deregulated corporate tax-avoiders concentrating greater wealth among a smaller percentage of Americans? And, more to Gelles’s point, is Jack Welch to blame?
Unfortunately, Gelles’s argument is premised on a minimalist history of American capitalism in the 1930s through 1950s. He ignores significant union upheavals among manufacturing giants like GE long before Welch, and erroneously characterizes a seminal work on corporate governance The Modern Corporation and Private Property (1932) as advocating a kind of proto-stakeholder theory. He even tries to argue that the public’s opinion of business fell thanks to Welch, but conveniently overlooks the fact that though 70 percent of the public in 1968 thought business struck a fair balance between profits and the public interest, that number had fallen to 15 percent by 1977, at least four years before anyone outside GE knew who Welch was. So, what happened before Welch?
Gelles tries to blame Milton Friedman for this shift, and in particular for the supposed influence of his 1970 New York Times essay “The Social Responsibility of Business is to Increase Its Profits.” However, not only did Friedman not prescribe how profits were to be maximized, he did not advocate profits “at any cost” (as Gelles summarizes him to say). Friedman did not even confine businesses to making money, recognizing that shareholders could ethically direct the corporation to any purpose it wished, even building a charity hospital or school. Furthermore, whatever purposes the shareholders dictated, Friedman argued, must still “conform to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” Even if one could convincingly argue that Welch made Friedman’s theory a reality, it is unlikely that Welch had Friedman in mind. Gelles also tries to blame Friedrich Hayek, though it is even more unlikely that Welch or anyone else in the 1970s or 1980s adopted earnings management or offshoring because of anything Hayek said.
What complicates Gelles’s argument further is a complex set of variables in the years up to and including Welch’s tenure. In the 1950s and 1960s, it was easy for Americans, many of them unionized, to enjoy a secure standard of living. The world’s industrial capacity was either recovering (e.g., Japan and Germany) or just developing (e.g., China or South Korea). That all changed. The yield curve of technology and automation made human labor increasingly “redundant.” Even when foreign corporations built factories in America, they chose right-to-work states. The industrial economy was changing considerably.
Also, one must ask how Welch’s permanent revolution got past the gatekeepers. How did Welch get appointed even after his decisions supposedly blew up a plant in Pittsfield and forced massive layoffs at a factory in Louisville? As GE Director Ken Langone expressed it, “Everybody was shocked when Jack got the job.” How did Welch’s acolytes get hired by boards and shareholders to lead not only GE but several other leading companies as well? Gelles relies on an old historiography wherein one man changes the world; this makes for great drama, but not a persuasive argument.
The more troubling argument Gelles offers is therefore not connected to economists or silly prose about Welch’s “toxic masculinity” or his “piercing eyes” helping him become a “pin-striped conquistador.” Instead, Gelles should focus on explaining the “profound changes in the zeitgeist.” In 1997, the Business Roundtable asserted shareholder value to be the proper goal of business, but Welch read the room long before that. To what degree the capitalist zeitgeist changed, and why and how it changed, all oblige a much longer and more detailed history than the one Gelles provides. Such a dramatic history of American capitalism would be a worthy project, especially if free of simplistic historiography or polemical style.
Capitalism or Managerialism?
Nevertheless, Gelles’s project remains an interesting window into the state of American business. He provides considerable indictments not only of Welch and his protégés but about corporate management generally. Among these brief case studies is an examination of Boeing’s failures, both the 787 Dreamliner and the deadly 737 Max.
The “takeaway” from such indictments must be more than that management is short-sighted in obsessively cutting costs. A much more systemic and critical change is evident in how managerialism crowds out both vocation and profession. For example, one employee described Boeing under Welch protégé Harry Stonecipher as moving from a “safety culture” to a “culture of financial bullshit.” Gelles describes a similar change at 3M under Jim McNerney wherein a hive of creativity was smothered by trendy Six Sigma cost-cutting dogmas. Even Welch acolyte Jeffrey Immelt, in hindsight, lamented the lack of innovation that hollowed out GE.
When Albertson’s hired Larry Johnston, for example, Johnston’s greatest virtue was that he came from GE and not that he knew the grocery business. One board member summarized the managerial zeitgeist well when he said that “our business isn’t that difficult.” What he really means is that anyone who has vocationally devoted himself to the grocery business is a fool: managerial skill sets are fungible, all costs and gains financial, and all vocations merely means to the end of quarterly earnings statements. Yale’s Jeffrey Sonnenfeld summarizes the problem as the presumption of an “interchangeability of management” that “ignored industry knowledge, customer relationships, culture, and skills.” One particularly laughable anecdote Gelles relates has a retired Jack Welch, hired by technocrats Joel Klein and Michael Bloomberg, arguing with NYC public school administrators about whether children are products.
Gelles’s recommendations to fix what Welch broke are a curiously mixed bag. He opposes tax breaks for corporations, though not out of economic conservatism. He often comes off as an economic nationalist but not a populist. Gelles’s emphasis on manufacturing over managerialism, however, clashes with his more fashionable (and predictable) endorsement of ESG (environmental, social, and governance), CSR (corporate social responsibility), and WEF (World Economic Forum) initiatives. To his credit, Gelles notes that the strongest proponents of such “reforms” (endorsed by the influential Business Roundtable in 2020) are likely just virtue signaling. Gelles also advocates for a higher minimum wage, though it is puzzling how a government-mandated price floor means companies are taking more responsibility for their employees.
What may be Gelles’s best evidence of a change in capitalism seems to escape his notice almost entirely. The pandemic and an increasingly volatile situation in Europe and Asia have revealed just how tightly we are all handcuffed to an overextended and “lean” global supply chain first forged in the 1980s under executives like Welch. CEOs have been more than happy to gamble on these fronts for decades and their bets are looking about as secure as Afghanistan in 2021. Paradoxically, these globalist gambits have run parallel with stifling bureaucracy and “risk-management” at home.
One must ask why it is that so many are so quick to consider changing jobs, abandoning traditional work, or leaving the workforce altogether. There are many motivations, but some of them are surely owed to what Gelles calls “Welchism” wherein wages are depressed, job security entirely unpredictable, professionalism subsumed to cost-cutting, and workplaces turned into hives of tedious conformity. If Gelles is at all right, something has definitely gone wrong not only with investing but, more importantly, with the workplaces where we spend our best years hoping to leave a legacy beyond the quarter.