May 31, 2022 - Economy

Jack Welch's questionable legacy

Book cover of The Man who broke capitalism

Book cover: Simon & Schuster

Once dubbed the best manager of the 20th century, former General Electric chief executive Jack Welch takes the blame for much of what's wrong with businesses in the 21st, in a new book by New York Times business reporter David Gelles released today.

Why it matters: Welch retired from GE in 2001 and died in 2020, but his style of leadership lives on at some of the biggest companies in the U.S., Gelles explains in "The Man Who Broke Capitalism."

  • Welch's legacy turns up everywhere in the corporate culture, from celebrity CEO worship — Elon Musk's Twitter feed carries on his legacy — to outrageous pay packages to a relentless focus on shareholders and stock buybacks at the expense of long-term innovation and worker well-being.
  • "Jack is the apotheosis of everything that is wrong with capitalism over the last 50 years," Gelles said in an interview with Axios' Felix Salmon and me over the weekend.

Details: Downsizing and outsourcing were a key part of Welch's business strategy. He laid off more than 250,000 employees during his two-decade tenure — earning the nickname "Neutron Jack," which he hated.

  • "Before Welch, employees were considered a company's greatest asset," Gelles writes.
  • His policy of stack ranking, where the bottom 10% of performers were fired annually, established a cutthroat "Survivor"-like culture long emulated by other firms, most infamously Microsoft.
  • Welch's focus on GE’s share price meant ensuring the company met its targets even if that entailed doctoring the books.
  • Wall Street loved him, GE's stock, and basically any executive he worked with. His proteges went on to run many Fortune 500 firms, including Albertson's, Home Depot, Honeywell and Chrysler, often replicating Welchism but without the financial success.

One of the more damning connections Gelles draws in his book is from Welch to Boeing.

  • Since 1997 the aviation company was run by three Welch proteges who deliberately shifted the company's culture from one that was always "engineering first" to one focused on the bottom line.
  • Ultimately, that commitment would come to haunt the company, writes Gelles, leading to two deadly plane crashes in 2019 of its 737 Max, which killed 346 people.
  • Last year, Boeing agreed to pay more than $2.5 billion to resolve criminal fraud charges related to the Max. "Boeing’s employees chose the path of profit over candor," said a Justice Department official at the time.

Yes, but: Welch's defenders say he turned around a "bloated institution," doing the unpopular work of making it lean and profitable.

My thought bubble: One of the most bedrock pieces of Welchism — the idea that a company owes little to its employees — seems passe at a moment when labor shortages are pushing up wages and benefits.

  • It remains to be seen if the business world returns to the status quo, as the economy cools off.

The bottom line: Welch's legacy ultimately helped destroy General Electric, a former giant of American industrialism. A combination of scandals, terrible deal-making and the financial crisis drove the company into a ditch.

  • Soon, it won't exist in its current form anymore current leadership plans on dividing the company into three parts.

Editor’s note: This story has been updated to clarify that GE in its current form won’t exist anymore after the company divides into three parts.

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