The Man Who Broke Capitalism

Key Takeaways

Under Consideration — to be added.

Interconnections

Under Consideration — to be added.

Highlights

• To understand a civilization, consider its heroes. Ancient Egyptians glorified the pharaohs, intermediaries between gods and men. Romans celebrated their generals, who expanded the empire through conquests abroad. The Greeks had their philosophers, searching for the truth. Other great societies were defined by their poets, their painters, their sculptors, and composers. More recently, explorers, scientists, and civil rights leaders have emerged as the iconic figures of their eras. Our heroes reflect our collective aspirations, offering clues to our deepest desires, idealized behaviors, and societal priorities. They bend the arc of history, defining their times and influencing events long after they are gone. 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.
• Our faith in bosses is so absolute that we even elected a failed businessman who played a successful one on television as president of the United States.
• 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.
• The changes he unleashed at GE transformed the company founded by Thomas Edison from an admired industrial behemoth known for quality engineering and laudable business practices into a sprawling multinational conglomerate that paid little regard to its employees and was addicted to short-term profits. And we all went along for the ride.
• Then in the 1970s, the established order came under attack. A cadre of economists including Milton Friedman reimagined the purpose of the corporation and its role in society, laying the philosophical groundwork for an upending of the economic order. In their view, companies ought to maximize profits for shareholders at any cost, markets should be free, governments should stay out of the way, and the rest of society ought to take care of itself.
• Welch employed three main tools in his crusade: downsizing, dealmaking, and financialization.
• For generations, 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, and he undertook a crusade to disabuse workers of the belief that GE owed them anything more than yesterday’s wages.
• To codify this new, transactional relationship between employer and employee, Welch developed a new policy, colloquially known as “rank and yank.” Each year, managers rated their employees. Those who were in the bottom 10 percent were let go.
• Welch’s affinity for downsizing, which his own employees called the “campaign against loyalty,” fundamentally altered GE. No longer was it a model employer, the kind of company where successive generations of machinists could prosper. Instead, it became the kind of place where even a long-tenured employee might find themselves suddenly out of a job just before retirement, a company where what mattered most was not the quality of its people, but the quantity of its profits.
• GE made nearly 1,000 acquisitions during Welch’s tenure, spending some $130 billion buying up companies. At the same time, GE sold some 408 businesses for about $10.6 billion. No company had ever done so many deals so quickly.
• “Fix it, close it, or sell it,” he would say. By selling companies—even ones that were regarded as central to GE’s identity—Welch was able to retain only what he believed were the most profitable businesses, even if they had little to do with GE’s legacy manufacturing operations.
• The third dark art that Welch mastered was financialization. GE was an industrial company when Welch took over. By the time he retired, the company derived much of its profits from GE Capital, which was essentially a giant unregulated bank. Welch got the company into all manner of risky debt instruments, insurance products, and credit cards. The finance division became GE’s center of gravity, ultimately accounting for 40 percent of revenues and 60 percent of profits.
• With so much money coursing through the finance division, Welch used it to his advantage, shifting zeros throughout a sprawling international web of subsidiaries, and extracting whatever he needed to meet or beat analysts’ estimates for nearly eighty quarters in a row, an unprecedented run.
• Welch had a lust for money, yes. He wanted GE to be as profitable as possible. But simply reducing what motivated Welch to greed is insufficient. He was possessed with a world-beating ambition, a drive to make his GE a company for the ages. He believed he had the skills, the means, and the divine right to make General Electric the greatest generator of profits in history, and he harbored extreme prejudice against anyone who doubted him, stood in his way, or couldn’t contribute to his relentless pursuit of financial glory.
• Welch was the personification of American, alpha-male capitalism, a pin-striped conquistador with the spoils to prove it. His exploits were so over-the-top, his personal wealth so enormous, it was impossible for other executives not to try and emulate him.
• Without anyone quite realizing it was happening, Welch redefined how corporations measured success, setting the standard for a generation of business titans.
• Within months of his departure, it became clear that GE was deeply troubled, and in a matter of years, the corporation was falling apart.
• Although Welch’s legacy was tarnished by the collapse of GE, his worldview continues to shape much of corporate America to this day. The methods he devised nearly a half century ago are still in use, the priorities he established still shape decision-making in boardrooms across the country, and some of his disciples are still in charge of major multinational corporations.
• 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.
• The closest historical analog to Welchism is probably imperialism. The empires of yore had a comparable multinational reach to today’s biggest corporations, a similar willingness to confer absolute power upon their rulers, and the same tendency to exploit their subjects. Yet unlike imperialism, which has largely faded into history, Welchism still thrives today.
• In time, those executives went on to lead dozens of other major companies—including Boeing, 3M, Honeywell, Chrysler, Home Depot, Albertsons, and many more—where they seeded new clusters, spreading Welchism across the whole of corporate America.
• There is capitalism in America before Jack Welch, and after him. His career serves as a line of demarcation, a split between the past and the present. Look at the trend lines for any number of key economic indicators—wages, mergers and acquisitions, manufacturing jobs, union representation, executive compensation, corporate tax rates—and it’s clear that right around 1981, the year Welch took over, things started to go off the rails.
• Wealth grew more concentrated during his reign. Before Welch, corporate profits were largely reinvested in the company or paid out to workers rather than sent back to stock owners. In 1980, American companies spent less than $50 billion on buybacks and dividends. By the time of Welch’s retirement, a much greater share of corporate profits was going to investors and management, with American companies spending $350 billion on buybacks and dividends in 2000.
• Whereas CEOs made less than 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.
• The myth that Welch’s way of doing business was a winning strategy lived on. Over the years, his influence reshaped the economy, eroding this country’s middle class, sowing distrust in once revered institutions, chipping away at the tax base, and exacerbating inequality.
• In recent years, some business leaders have come to realize the damage that Welchism has wrought. Instead of pursuing profits at any cost, a new generation of executives is beginning to express a renewed commitment to serve not just shareholders, but all stakeholders, including workers, communities, and the environment. They recognize that if they don’t pay wages that create a strong middle class, the economy will ultimately grow weak. They understand that companies that leave their communities polluted and impoverished will wither before long. And by gently downplaying the importance of the stock market, they are even questioning the very measure of success that was so sacrosanct to Welch.
• The young, tempestuous, ambitious son of a train conductor and a homemaker, Welch would be just the eighth man to lead GE since the company was founded by Thomas Edison nearly a hundred years earlier, at the dawn of the Electric Age.
• On June 24, 1980, NBC aired a prime-time documentary that captured the nation’s gnawing self-doubt. Titled If Japan Can, Why Can’t We?, the hour-long special explored the extraordinary manufacturing advances taking place abroad, and turned the mirror on a nation grappling with its diminished standing in the world. That same year, Jones and Welch acknowledged the need for urgent change, coauthoring a letter to shareholders. “U.S. business today finds itself challenged by aggressive overseas competitors,” they wrote. “National productivity has been declining and, in industry after industry, product leadership is moving to other nations. Companies that refuse to renew themselves, that fail to cast off the old and embrace new technologies, could well find themselves in serious decline in the 1980s. We are determined that this shall not happen to General Electric.”
• 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, and would soon start shuttering factories around the country and shipping jobs overseas.
• GE was hardly in trouble when Welch took over. Jones had overseen a steady rise in earnings, and the company had just reported an annual profit of nearly $1.5 billion. But GE’s stock price hadn’t budged in years, and that, to Welch, was a problem. In a memo to Jones outlining his approach should he be selected as CEO, Welch made explicit his contention that Wall Street should come first. “What we have to sell as an enterprise to the equity investor is consistent, above-average earnings growth through the economic cycle,” he wrote. “The discipline to balance both short and long term is the absolute of such a strategy.”
• It was an unprecedented run of corporate innovation and economic growth, and for the most part, workers shared in the bounty. GE was among the first American companies to offer its employees retirement plans, a share of profits, health insurance, and life insurance. GE created the first research and development lab, the first industrial park, and in 1913 the company built one of the first true corporate campuses, on a ninety-two-acre site outside Cleveland. In addition to a light bulb factory and a research center, there was a swimming pool, a bowling alley, a gym, tennis courts, a rifle range, and baseball and football fields. Dentists and doctors were on hand, as was a bank. In the evenings, employees stuck around to enjoy tap dancing and live music. A hundred years before Silicon Valley companies like Google and Facebook began showering their employees with perks, GE understood the value of taking excellent care of its workers.
• Gerard Swope, who became GE’s chief executive in 1922, practiced what he proudly called “welfare capitalism,” using the corporation’s vast resources to take exceptional care of its employees—providing a profit-sharing plan, health benefits, higher wages, and more—all in an effort to boost morale and inspire workers. With the thievery and excess of the Gilded Age still fresh in the collective consciousness, GE was trying to distinguish itself as an upstanding corporate citizen, and in 1927, GE’s chairman, Owen D. Young, used a speech at the Harvard Business School to excoriate businessmen who “devise ways and means to squeeze out of labor its last ounce of effort and last penny of compensation.” Instead, Young called for CEOs 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 labor in a common enterprise for mutual advantage.”
• Only after enumerating all the ways in which it was helping the government, suppliers, and employees did the company mention how much it allocated for investors.
• And then in the 1970s, Jones introduced the phrase, “We Bring Good Things to Life.” It wasn’t just talk. Under Jones, the company invested 10 percent of its profits into research and development, spending heavily in a bid to invent more good things.
• Companies weren’t just talking a good game back then. They were actually sharing their profits with their employees. From 1948 to 1979, worker pay grew in tandem with worker productivity. That is, as companies became more efficient and profitable, and the economy expanded, employees saw their compensation increase at roughly the same rate. Paying workers well, paying taxes, and investing for the future were seen not just as the right things to do, but as sound business practices.
• To use today’s corporate parlance, it was a moment when all stakeholders could expect to benefit. The company wasn’t being run just for investors, but for employees, customers, and communities, too. And it worked. The middle class grew, consumer spending ballooned, and new companies were founded, creating yet more jobs. It was a virtuous cycle that turned America into the world’s greatest economic engine.
• “He hated losing, even in touch football,” remembered a childhood friend. “Jack wasn’t blessed with a lot of grace or athletic ability. He trounced people by trying harder.”
• “Compared to the industrial operations I did know, this business seemed an easy way to make money,” he explained. “You didn’t have to invest heavily in R&D, build factories and bend metal.” Instead, he realized that what mattered most was how clever your accountants were and how much money they had at their disposal. He began bolstering GE Credit’s staff and looking for ways to grow the division, the beginning of a transformation that would remake the company, and ultimately the economy at large.
• Welch told the analysts he wanted GE to be number one or number two in each business it was in. If it couldn’t achieve that kind of dominance in an industry, the company would have to ask itself a tough question. “If you weren’t already in the business, would you enter it today?” he said. “And if the answer is no, face into that second difficult question: ‘What are you going to do about it?’ ”
• During the question-and-answer session, one analyst asked how the price of copper would impact earnings in the next year. “What the hell difference will that make?” Welch shot back. “You should be asking me where I want to take the company!” The speech was a flop. As the analysts filed out of the ballroom, one remarked: “We don’t know what the hell he’s talking about.”
• Though the analysts might not have appreciated it, Welch was tapping into profound changes in the zeitgeist. In the years before he took over as CEO, an intellectual revolution had been coursing through academic, economic, legal, and political circles. It began as a backlash to European socialism during the Cold War, as scholars including Friedrich A. Hayek, an Austrian economist, began to advance the theory that free markets alone were the best way to address society’s needs. Only when businesses were allowed to compete unencumbered by regulation would the best ideas rise to the top, their thinking went. The profit motive, they believed, was the perfect sorting mechanism, capable of distinguishing the good ideas from the bad, and giving rise to the products, services, and systems that would benefit society at large. Competition was the paramount way to organize human activity, they stressed, and it was imperative that people stopped relying on the government—or worse, their employers—to ensure their well-being. Welfare, social safety nets, and excessive protections for workers would inevitably lead to mediocrity and apathy, they believed. These theories gained purchase in European intellectual circles starting in the postwar years, and they eventually came to influence an up-and-coming economist at the University of Chicago named Milton Friedman.
• In a seminal essay published in the New York Times in 1970, Friedman declared that “the social responsibility of business is to increase its profits.” That simple twist of logic—that companies should maximize profits before all else—became one of the most powerful ideas of the late twentieth century, providing intellectual justification for a wholesale rewriting of the social contract.
• The same year that Friedman published his essay in the Times, a corporate attorney named Lewis Powell delivered a speech to an audience of Southern businessmen that set the stage for a new era of corporate meddling in politics. Quoting Freidman, Powell told the executives that their way of life was under siege, that radicals, communist sympathizers, and enemies of free enterprise were poised to undermine the very ideals that made America the greatest country on earth. The next year, Powell turned the speech into a memo that made its way to the U.S. Chamber of Commerce, the influential lobbying group that represents the interests of corporate America.
• All the while, Friedman’s central premise—that companies exist solely to enrich their shareholders—continued to gain clout. In 1976, two professors expanded on the Friedman doctrine in their paper “Theory of the Firm,” a groundbreaking work that radically transformed the way executives thought about their responsibilities. In it, Michael Jensen and William Meckling argued that if companies were insufficiently focused on maximizing profits, they might get distracted and devote undue attention to frivolities such as “the kind and amount of charitable contributions” and “personal relations (‘friendship,’ ‘respect,’ and so on) with employees.” That is, companies should disregard their communities, and even their staff, and instead focus on the bottom line to the exclusion of all else. Jensen and Meckling also revamped the notion of whom executives were supposed to serve. According to their theory, shareholders were the “principals” and executives were the “agents.” That is, the CEOs were working on behalf of the investors, and ought to maximize shareholder returns at any cost. Finally, Jensen and Meckling laid the foundation for the coming era of excessive executive compensation, positing that CEOs should be richly rewarded with stock to align their own incentives with their company’s financial performance.
• Roger Martin, the former dean of the Rotman School of Management at the University of Toronto, who knew Welch. “That moral argument really went a long way with CEOs like Welch. They were like, ‘You’re telling me that this is my job. This is a yardstick I should measure myself with.’ It may be sad that I’ve got to shut down this town, shut down this factory, but it’s the moral thing to do.”
• And in 1980, just as Welch took over, PBS ran a ten-part miniseries about Friedman and his theories called Free to Choose. The broadcast, beamed into millions of homes around the country, praised unfettered competition, sounded the alarm on excessive regulation, disparaged labor unions, and blamed the government for everything from declining educational performance to inflation.
• From a fringe idea hatched during the Cold War, the free market dogma had emerged as the dominant intellectual force shaping politics and economies in the West. The economic right was ascendant, and the era of financial deregulation had begun in earnest.
• “Jack sort of invented it, this shareholder focus,” said Gary Sheffer, who ran communications at GE for years. “When it came to the stock price, there was really nothing that got in the way.” And whether or not Welch read Milton Friedman’s original texts, there is no doubt about the source of his inspiration. In his autobiography, when he summarized his view of the role of business in society, he simply parroted Friedman. “A CEO’s primary social responsibility,” Welch wrote, “is to assure the financial success of the company.”
• Employment at the company peaked at 411,000 in 1980, the year Welch was named CEO. By the end of 1982, the company had shed 35,000 employees, or almost 9 percent of its workforce.
• The “Neutron Jack” moniker stung him, but he knew it was more or less accurate. “I hated it, and it hurt,” he recalled. “But I hated bureaucracy and waste even more.”
• “The psychological contract has to change,” he said. “My concept of loyalty is not ‘giving time’ to some corporate entity and, in turn, being shielded and protected from the outside world. Loyalty is an affinity among people who want to grapple with the outside world and win.”
• 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.
• Managers were instructed to divide their workers into one of three groups: 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. The bottom tier was to be let go. It was a heartless edict, ensuring that no matter how well GE might be doing, tens of thousands of its employees would be shown the door, year after year. Welch called it the “Vitality Curve.” Employees, who weren’t fooled by this aspirational euphemism, called it “stack ranking” or, more accurately “rank and yank.”
• “It was a Jack Welch idea and it got adopted by a lot of people,” said Dennis Rocheleau, who led labor negotiations for Welch. “It created horrible decisions in some instances, but it got mimicked by everybody. Jack Welch was larger than life, and people just said, ‘If he’s doing it, well, let’s do it.’ ”
• He memorably said that “ideally, you’d have every plant you own on a barge to move with currencies and changes in the economy.” That way, Welch imagined, GE factories could move around the world, chasing favorable exchange rates, tax breaks, incentives, and low wages in a seaborne race to the bottom. This was the Platonic ideal of a free market enterprise to Welch—stateless, beholden to no community, and able to hire labor in a completely opportunistic way.
• As one manager told Welch in 1988: “If this is the best business in the world, why do I go home feeling so miserable?” It was a sentiment shared widely across GE’s remaining workforce.
• His leadership style had all the hallmarks of toxic masculinity. He belittled the weak, demanded total fealty, and was perennially dissatisfied, even as he grew enormously wealthy. Collegiality had been replaced with competitiveness. Loyalty was out. In its place was anxiety, a fearful understanding that the man in charge was unpredictable and merciless.
• “The model Jack had was really the Pac-Man model,” said Beth Comstock, a longtime GE marketing executive. “Just eat up companies. Acquire growth, acquire growth, acquire growth.”
• In the years that followed, Welch would buy anything that seemed like it might turn a quick profit. “We screwed up,” said Rocheleau, the longtime GE executive who worked with Welch on labor relations. “We bought businesses where we didn’t succeed, and bombed in a few areas. But Welch had a vision. He was saying, ‘Hey where are the markets moving? Where are we going to make higher margins?’ ” The constant acquisitions came at the expense of research and development, organic growth, and in-house innovation, as Welch himself acknowledged. “We are not interested in incubating new businesses,” he said. Indeed, during his long tenure, the closest thing to a breakout new product that GE recorded was the debut of CNBC, the all-business cable news network that turned stock watching into prime-time entertainment.
• “GE is a venture capital company,” said Grossman, the former president of NBC News, and dealmaking, he added, was “what makes the light shine” in Welch’s eyes. “There’s no commitment to people or product.”
• From the moment he first worked with the finance division in the late 1970s, he understood a simple but powerful truth: it was easier to make money by shifting around ones and zeros than by manufacturing refrigerators. “Since I had been involved in making things all my life, pounding and grinding it out to make a nickel, I couldn’t believe how easy this ‘appeared’ to be,” he recalled of his first exposure to the world of investment banking, leveraged buyouts, and loan financing.
• In a memo to the company’s chief financial officer, Welch wrote that finance, not manufacturing, represented the future of the company. “There is no place that quantum change is needed more than in Finance,” he wrote. “Finance is not an institution—it has to be… the driving force behind making General Electric ‘the most competitive enterprise on earth.’ ”
• There was no master plan. The finance division grew by chasing money wherever it could be found. Even Welch admitted as much. “We never had a great strategic vision for GE Capital,” he conceded. The result was a hydra-headed monster that grew increasingly difficult to control, let alone keep tabs on.
• 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.
• Welch had a different idea for what this back-office function could achieve. No longer would the investor relations department simply be the link between the company and Wall Street, keeping analysts updated on the company’s performance. Instead, Welch decided, the investor relations team would become “the chief marketing officer for GE stock, constantly on the road visiting investors and selling the GE story.” Once again, GE was shattering norms and ushering in a new era of unbridled corporate self-promotion. Welch said it himself. His investor relations team wasn’t selling products. They were selling a narrative. Emphasizing the investor relations function had an immediate effect on priorities across the company. Suddenly, Welch said, employees “got up every morning and felt they were measured by the price of GE stock.”
• Welch seized on this opportunity, and he would go on to announce what was at the time the largest stock buyback program in the history of American business—some $10 billion in share repurchases. It was his down payment on a strategy that would push GE shares ever higher. Using so much capital for buybacks—rather than research and development, capital improvements, or worker wages—was alien to many business titans of the day. As Welch forged ahead with buybacks, the CEO of U.S. Steel, one of the few American companies as iconic as GE, likened the practice of buybacks to “eating your own mother.”
• As William Lazonick, the author of one influential study on buybacks, summarized: “Corporate profitability is not translating into widespread economic prosperity.” When assessing where to lay the blame, Lazonick identifies buybacks and dividends as a main culprit. Looking at the S&P 500, he found that between 2003 and 2012, companies deployed a full 54 percent of their earnings—some $2.4 trillion—to buy back their own stock. Another 37 percent of earnings during that period was spent on dividends paid out to shareholders. “That left very little for investments in productive capabilities or higher incomes for employees,” he wrote. And as for those 401(k)s? At the end of the day, workers don’t benefit from buybacks and dividends because on balance, they own relatively little stock. So why then, were executives so enamored with buybacks and dividends? Lazonick had an simple explanation: “Stock-based instruments make up the majority of their pay,” he said, “and in the short term buybacks drive up stock prices.” Given these dynamics, “the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity.”
• 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.
• At Microsoft, workers had an application preinstalled on their computers that displayed a cartoon face on their screens—when the MSFT ticker was going up, the face smiled; when it was going down, the face frowned.
• Financial services became an ever-larger portion of America’s gross domestic product, rising from just under 5 percent in 1980 to nearly twice that in the years that followed.
  • What is it today?
• “Jack was very competitive,” said Martin, the former Rotman School dean. “The game had been established, and he wanted to win. He knew the rules and he was going to modify his behavior in whatever way was necessary to succeed. Even though from a business strategy standpoint—in terms of the long-term sustainability of the company—he was doing the wrong thing, he was doing anything legal that would make the shareholders better off.”
• “When a company needs a loan, it goes to a bank,” Fortune once wrote. “When a company needs a CEO, it goes to General Electric, which mints business leaders the way West Point mints generals.”
• The refurbished Crotonville was known as “Jack’s Cathedral,” and its centerpiece was a 110-seat amphitheater where executives hashed out management techniques and argued about strategy. Welch dubbed it “The Pit,” named after the hardscrabble playground in North Salem where he had learned, as an undersized boy, to tangle with neighborhood kids older and bigger than he.
• 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.
• During his twenty years as CEO, Welch personally groomed an army of protégés who internalized his tactics and took them to dozens of companies around the country. They ran industrial and medical companies like 3M, Amgen, Arctic Cat, Boeing, Chrysler, Fiat, Goodyear, Great Lakes Chemical, Honeywell, Medtronic, McDonnell Douglas, Owens Corning, Polaris, Rubbermaid, SPX, and Stanley. They led media and technology companies like Discovery Communications, Intuit, Nielsen, Nortel, Symantec, and TiVo. They ran financial firms including Ceridian, Conseco, and Equifax. And they took over retailers such as Albertsons and Home Depot. For a time in the early 2000s, five of the top thirty companies in the Dow Jones Industrial Average were run by men who had worked for Welch.
• It was all part of what he saw as his sole mandate: “I want to maximize shareholder value,” he said.
• Welch did have his virtues. He had boundless energy and inspired others to work ceaselessly. He demanded excellence, and often got it. Underlings were fearful that Welch himself would know more about their business than they did, which drove them to master their facts and do their homework. He reduced bureaucracy, often resulting in job losses, but also boosting efficiency and speeding up decision-making. He was brutally honest. He had a knack for strategy and a keen sense of emerging trends.
• Welchism wasn’t going to work at Polaris, and Tiller knew it. “I’m not a communist,” Tiller said. “But there’s a much more competitive model, and I think Polaris exemplifies it. The maniacal focus on cost cutting really hollows out a lot of the business. We were going to do what was right for the long term. That’s what America needs.”
• For most of the twentieth century, Boeing was a company run by and for engineers. Employees—from rocket scientist PhDs to machinists on the factory floor—enjoyed strong contracts with union protections, good benefits, and a sense of purpose. Quality and safety were paramount in decision-making processes, and costs were practically an afterthought. Many talked about the company as if it was a family, and plenty of men and women spent their entire careers there. It was common for several generations of the same family to be employed by Boeing, with fathers and sons sometimes working side by side. Pilots loved Boeing planes and often refused to fly other models, saying, “If it’s not Boeing, I’m not going.” The same spirit prevailed at the highest levels of the company. Executives came up through the engineering ranks and didn’t pay much heed to Wall Street—Boeing leadership was more focused on making good airplanes than on generating returns for investors.
• Even at the time, luminaries in the business world foresaw what was to come. “If in fact there’s a reverse takeover, with the McDonnell ethos permeating Boeing, then 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.”
• And Stonecipher was proud of it all. “When people say I changed the culture of Boeing, that was the intent, so it’s run like a business rather than a great engineering firm,” he said in 2004. “It is a great engineering firm, but people invest in a company because they want to make money.”
• During his final years at GE, some 8,000 English language articles appeared annually about Welch, most all of them fawning in tone.
• But Welch was never held to account for his company’s transgressions. Instead, he mastered the art of taking credit for his organization’s successes while avoiding responsibility for its failures.
• Unbridled capitalism, powered by Reaganomics, appeared to have delivered just what Friedman and his followers had promised, unleashing a roaring bull market for the better part of twenty years. The Dow Jones Industrial Average rocketed from under 1,000 to over 11,000 during Welch’s tenure, making it hard for other CEOs to dispute the notion that maximizing shareholder value worked.
• When Milton Friedman died in 2006, Larry Summers, treasury secretary for Clinton and a senior adviser to President Obama, conceded that shareholder primacy was now dogma among not just Republicans, but Democrats, too. “Any honest Democrat will admit that we are now all Friedmanites,” Summers said.
• These changes had a profound effect on the national psyche. Shortly after Welch took over, a large survey of Americans employed by major corporations revealed that just 14 percent were anxious about being laid off. But as American workers were asked the same question over the years, their anxiety levels steadily rose, and by 1995, even as the economy was humming, approximately half of Americans were concerned about losing their jobs, and with good reason. During the 1990s, America lost some 848,000 manufacturing jobs. The campaign against loyalty, which had begun at GE, had gone nationwide.
• Some contrarians sounded the alarm even as the party was in full swing. With the dot-com bubble inflating, Alan Greenspan, then the chairman of the Federal Reserve, famously warned of “irrational exuberance.” William Bennett, who served in the administrations of Presidents Reagan and George H. W. Bush, raised the prospect that Welch’s tactics, left unchecked, could ultimately do profound damage to the fabric of the country. “What I’m concerned about is the idolatry of the market,” Bennett said in 1998. “Unbridled capitalism,” he said, was “a problem for human beings. It’s a problem for the realm of values and human relationships because it distorts things.”
• In 1998, the chairman of the SEC, Arthur Levitt, cautioned that companies were treating quarterly earnings as “a numbers game.” Levitt called out corporations that were chasing quarterly profits and warned that tougher enforcement was needed. “Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices,” he said. “Too many corporate managers, auditors, and analysts are participants in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation. As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation. Integrity may be losing out to illusion.”
• Inspired by the Japanese notion of kaizen, or continuous improvement, Six Sigma used a complex system of feedback and buzzwords to try and root out any lingering vestiges of inefficiency. Whether it actually helped or just created a lot of paperwork was a subject of fierce debate.
• “A lot of GE leaders were thought to be business geniuses,” said Bill George, the former CEO of Medtronic and a board member at Goldman Sachs. “But they were just cost cutters. And you can’t cost-cut your way to prosperity.”
• But inevitably, Welchism exacted its price. There was little focus on long-term strategy, and a slavish devotion to meeting quarterly results. “They wouldn’t know strategy if it hit them in the head,” said Roger Martin, the former Rotman School dean. “All they know how to do is take what they’ve got and refine it, make it operationally more effective.”
• With McNerney gone, 3M reverted to its old, eccentric ways. Innovation was once again more important than financial planning. Engineers were encouraged to tinker with new products, not budgets. And 3M management said the quiet part out loud: financial engineering is ultimately a losing strategy. “Invention is by its very nature a disorderly process,” said the new CEO, George Buckley. “You can’t put a Six Sigma process into that 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.”
• “My second day as chairman, a plane I lease, flying with engines I built, crashed into a building that I insure, and it was covered with a network I own,” Immelt said. The fallout went even further. Stock markets plunged, dragging down shares of GE, as well as the value of other assets held by GE Capital.
• When the stock markets finally opened after being closed for a week, GE’s largest investor sold off half its position. Immelt called the investor to ask for mercy. “Hey, give us a break here,” he said. “This is a tough day.” The investor had no sympathy, instead making a startling revelation to Immelt. “Look,” the investor said, “we had no idea that GE was so big in the insurance business.” The fact that GE’s own investors didn’t know how the company made its money was no accident. Welch had deliberately made it hard for them to understand GE’s unnaturally smooth quarterly results, limiting the information the company disclosed. The consistent earnings growth Welch engineered had put them in a trance. But in the wake of the attacks, investors were snapping out of it, and Immelt, too, was coming to a stark realization about what kind of shape GE was really in.
• Bill Gross, one of Wall Street’s savviest investors, a billionaire known as “the bond king,” was about to turn on Immelt. Gross, the cofounder of Pacific Investment Management Company, or Pimco, a major institutional investor, was known for his discursive memos and prescient timing. Six months into Immelt’s tenure, in early 2002, he posted a bombshell on his company’s website. Pimco had just sold off $1 billion of GE bonds because, he believed, GE’s “honesty remains in doubt.” Gross was smarting over some of GE’s recent financial decisions, which had hurt investors like himself. But he also leveled a more fundamental critique that clearly impugned Welch’s credibility as well. “GE has been shrouded in mystery for a number of years,” Gross said on CNBC. “Institutional investors have wondered why a company can continue to produce 15 percent earnings growth year after year, quarter after quarter.”
• After decades when it seemed like big business could do no wrong, the relentless trickery had tarnished corporate America’s sterling reputation. Some of the country’s most illustrious companies were found to be deeply corrupt. The lust for short-term profits often led executives to bend the rules, and sometimes break the law. And while Welch, newly retired, didn’t seem to appreciate his own role in creating a culture where such malfeasance was commonplace, it was clear even to him that something had gone awry. “It seemed to the public as if all of business was filled with bad people—a whole orchard of rotten apples,” he said. “The long running boom economy brought out terrible excesses, and dishonest acts were perpetuated by handfuls of people.”
• At its best, the Boeing engineering culture thrived on radical transparency, a willingness to call out mistakes and a freedom to spend time—and money—to get things right. It was the kind of laborious, innovative work for which McNerney had exhibited little patience at 3M, where he was accused of stifling innovation by imposing Six Sigma and cutting costs. And soon after taking over Boeing in 2005, he began making similar moves.
• During a panel discussion with Nobel Prize–winning economist Joseph Stiglitz, Welch made the risible assertion that no successful industry had ever flourished with a highly unionized workforce, disregarding the glory days of the American auto and steel industries, to name but two examples.
• At one point, he was promoting the notion that teachers’ compensation should be tied to their students’ test scores. It was the kind of accountability he’d expected as CEO, and he couldn’t imagine why it wouldn’t work in a classroom. But the concept was anathema to the educators, who knew firsthand that children learn in different ways, and not all of them test well. “Children are not products,” said one aspiring principal during an exchange with Welch at Crotonville. “Oh yes they are!” Welch shot back, silencing her.
• Welch had believed that he could help fix the New York City public schools not because he was an expert in public education. He thought he could do it because he had been a successful CEO. 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, and Welch has hardly been the only one to turn his attention to repairing our public schools. The Bill and Melinda Gates Foundation, flush with a $50 billion endowment made possible by Microsoft’s early monopolizing, tried to use technology to overhaul curriculums in Washington State. Amazon founder Jeff Bezos has launched the Bezos Academy, a preschool designed to cultivate entrepreneurial thinking. Facebook founder Mark Zuckerberg donated $100 million to revamp the Newark public school system, an effort later deemed unsuccessful. And Adam Neumann, the WeWork cofounder, started a high-priced school for his children and their friends and let his wife design the curriculum. These expensive efforts were largely unsuccessful, making clear that improving how children learn and teachers teach takes more than money.
• Today, the Jack Welch Management Institute lives on, with students still paying $50,000 a year to receive an online degree with his name on it. It is but one reminder of Welch’s enduring influence in the global marketplace of bad ideas. His books are still in print. And from San Diego, to Sydney, to Kansas City, to Prague, groups of aspiring executives get together to discuss Welch’s legacy and study his books.
• Dignan found that GE executives were myopically focused on their own business lines, doing whatever was needed to meet their numbers quarter after quarter, and thinking little about the company’s overall strategy.
• “This is going to hurt before it gets better,” he would tell them. “We actually have to dismantle the garden from the roots up and rebuild a business for the twenty-first century. And then it can be a $1 trillion company. But you’re not going to get your quarterly returns for the next five years. Do you want to do that?” The alternative, he explained, was a slow march to irrelevancy. “The answer was always like, ‘No. We want our dividend,’ ” Dignan said.
• That summer, he commissioned the consulting firm McKinsey & Company to produce a study assessing GE Capital’s vulnerability in the event of a sharp economic downturn. McKinsey’s verdict: Everything was fine! The consultants believed that even if capital markets in the United States seized up, there would be enough liquidity in the global financial system to sustain GE Capital’s frantic dealmaking and lending operations.
• Just months before the economy’s darkest days he proclaimed, “Our financial businesses should do well in a year like 2008.”
• “This airplane is designed by clowns, who are in turn supervised by monkeys,” read one message. “This is a joke,” read another. “This airplane is ridiculous.” Another wrote, “I honestly don’t trust many people at Boeing.”
• The backlash was swift. “You’ve lost your mind,” retorted Austan Goolsbee, an economist who had served as chairman of the Council of Economic Advisers. The mainstream business press systematically dismantled Welch’s claim. Venerable economists picked apart the Welch myth, correctly noting the enormity and implausibility of the conspiracy necessary to pull off a wholesale fabrication of the federal jobs report. Writers at Fortune magazine, where Welch was publishing his column at the time, were among those to debunk the claim. Welch spent the next day doing damage control, appearing on CNN with Anderson Cooper and other shows to explain that, no, he didn’t have any evidence, and offering up halfhearted apologies. But once Welch’s lie was out there, it was impossible to contain. Right-wing pundits picked up on the conspiracy theory and amplified it. “In regards to today’s jobs report, I agree with former GE CEO Jack Welch,” tweeted Allen West, the Republican congressman. “Chicago style politics is at work here.” Laura Ingraham, the Fox News host, called the numbers “total pro-Obama propaganda.” Former House speaker Newt Gingrich said the Welch lie “rings true.” Even Donald Trump, then merely a reality television star, joined the chorus of conspiracy theorists, calling Welch’s bogus accusation “100 percent correct” and accusing the Obama administration of “monkeying around” with the numbers. “I don’t believe the number and neither do any of the other people that have intelligence,” Trump said on Fox News. “Because that number came out of nowhere.” The lie went viral, with “jobs report truthers,” as they became known, insisting that the Bureau of Labor Statistics figure was a fabrication designed to bolster President Obama’s reelection hopes.
• But it didn’t matter that Welch was wrong. In fact, the more zany stuff he tweeted, the more followers he gained. He called climate change “mass neurosis” and “the attack on capitalism that socialism couldn’t bring.” He suggested that Hillary Clinton was compromised as secretary of state because of the Clinton Foundation. Once again he was ahead of his time, recognizing that on Twitter, salaciousness translated to followers, and followers amounted to power.
• Together, Welch and Trump had come to understand just how powerful lies could be in the age of social media. At the time, their antics were written off as buffoonery and bluster, the mad musings of washed-up tycoons. But their falsehoods found a willing audience, helping propel Trump to the Oval Office, and laying the groundwork for Pizzagate, QAnon, and the endless cascade of falsehoods that would soon come from President Trump himself.
• Chuck Todd foresaw the insanity to come. “The idea that Donald Trump and Jack Welch—rich people with crazy conspiracies—can get traction on this,” Todd said, “is a bad trend.”
• Immelt himself conceded that the country had lost its way, becoming over-reliant on risky bets like the ones made by GE Capital. “While some of America’s competitors were throttling up on manufacturing and R&D, we deemphasized technology,” he told a crowd at West Point in late 2009. “Our economy tilted instead toward the quicker profits of financial services.” “Rewards became perverted,” he continued. “The richest people made the most mistakes with the least accountability.”
• Sanders kept going, leveling an indictment against Welchism itself. “If you are a corporation and the only damn thing you are concerned about is your profits—let’s just give an example of a corporation that’s making money in America, today, but desiring to move to China or to Mexico to make even more money—that is destroying the moral fabric of this country.”
• Given Flannery’s pedigree, he approached his responsibilities not with a holistic view of how he might revive a once great industrial giant, but with the grim industriousness of a bean counter.
• 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. Over the years many great companies joined the Dow and were subsequently dropped when their fortunes faded. 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. It was a stubborn reminder of America’s proud industrial past and the great wealth that was created and shared during the Golden Age of Capitalism.
• The company that would replace GE was Walgreens Boots Alliance, the drugstore chain. It was a selection rich with symbolism. After all, America was no longer a country that made appliances and jet engines, so much as it was one that consumed prescription drugs and processed foods.
• Arthur Cecil Pigou, contemplating the trajectory of modern capitalism a century ago, foresaw what was to come. Pigou, an English economist who worked as a professor at the University of Cambridge, was concerned not just with how goods and services changed hands, but also with what effect all that economic activity had on society at large. In 1920, he published his seminal work, The Economics of Welfare, putting his finger on a core truth about capitalism that was as resonant then as it is today: individuals running corporations are incentivized to maximize their own self-interest, not take care of the rest of the world. The Economics of Welfare also expanded on the concept of “externalities” in business, a term for the side effects of commercial activity. Where previous economists had mostly considered the positive externalities of a growing economy—the cost of goods going down as supply increased, for example—Pigou turned his attention to negative externalities: all the harm that companies might cause in their pursuit of profits. If industrialists couldn’t be trusted to look out for the common good, Pigou understood, it was only a matter of time before the consequences of their actions began to spill over into the wider world.
• And today, even after Welch and most of his protégés have retired or died, 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.
• Executives’ faith in the easy math of mass layoffs—that fewer employees will mean higher profits, that labor is a cost, not an asset—persists in spite of a growing body of research debunking that dogma. “The research evidence has not found any support for the overall idea that layoffs help firm performance,” said Peter Cappelli, a professor at the University of Pennsylvania’s Wharton School of Business. “There is no evidence that cutting to improve profitability helps beyond the immediate, short-term accounting bump.”
• Even at some of the country’s largest employers, there is a concerted effort to keep workers as close to temps as they can possibly be, with the aspiration of making people as interchangeable as the parts of a machine.
• 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.
• The practice flourished at Microsoft for years under Steve Ballmer, Immelt’s former cubicle-mate. Unsurprisingly, it led to mass disaffection and an erosion of cooperation, as colleagues were pitted against each other. “This caused people to resist helping one another,” said one Microsoft employee. “It wasn’t just that helping a colleague took time away from someone’s own work. The forced curve meant that ‘Helping your fellow worker become more productive can actually hurt your chances of getting a higher
• Like Welch before him, Amazon founder Jeff Bezos seemed to arrive on the job with a zealot’s conviction that workers were fundamentally expendable. According to an executive who helped design Amazon’s warehouse systems, Bezos articulated early on that he wanted to avoid having an entrenched, loyal workforce. If employees grew too comfortable, Bezos believed, it would be an inevitable “march to mediocrity.” Without the threat of dismissal, his employees wouldn’t work their hardest, Bezos reasoned, explaining that “our nature as humans is to expend as little energy as possible to get what we want or need,” the executive said.
• Bezos uses technology, and has turned Amazon’s warehouses into laboratories where workers are subjected to ever more dystopian forms of management, where people are treated like machines, workplace injuries are common, and any vestige of sentimentality is snuffed out. “We’re not treated as human beings, we’re not even treated as robots,” said one worker. “We’re treated as part of the data stream.”
• Treating humans like cogs in a machine—expendable parts that can be replaced at will—has had predictable effects on Amazon’s attrition. The company loses about 3 percent of its hourly workforce every week, translating into a turnover rate of some 150 percent a year. Yet that astronomically high churn is a feature, not a bug. The company seems to be designed to chew workers up and spit them out.
• Bezos could even be considered the Jack Welch of his day, wielding unmatched financial, political, and cultural power. Where Welch controlled NBC, Bezos personally owns the Washington Post and has control of Amazon Prime’s TV and film offerings. When Bezos left his longtime wife, MacKenzie Scott, for Lauren Sanchez, a helicopter pilot with supermodel looks, the tabloids ate it up. Not since Welch left Jane for Suzy had there been such a sensational CEO divorce.
• Ever since Welch acquired RCA, mergers and acquisitions have been booming. In 1985, there were just 2,300 deals in the United States, worth $300 billion. By the time Welch retired, those figures had both roughly tripled—nearly 10,000 deals in 2001, worth $1 trillion. And the numbers just kept growing. In 2019 there were more than 18,000 such deals worth nearly $2 trillion, a wholesale reordering of the economy driven by private equity firms and public companies alike.
• But the evaporation of some 4,000 public companies over the past thirty years is largely the result of the decades-long mergers boom that has made a few companies bigger, and many industries more concentrated.
• Today, three quarters of American industries are significantly more concentrated than they were twenty-five years ago.
• Amazon, 3G, AT&T, and Under Armour are hardly the exceptions. Welch’s fingerprints can be found all over today’s economy. At company after company, the Jack Welch way of doing business—and sometimes Welch’s own tutelage—has left a trail of destruction. The negative externalities are endless, and can be seen in the companies themselves, in the employees who suffer, and in data that confirms that the riches of this land are not evenly distributed, not even remotely so.
• Whereas in the 1980s less than half of corporate profits were going back to investors, over the past decade, that figure has soared to 93 percent.
• A 2019 study found that some 44 percent of working Americans are employed in low-wage jobs that provide median annual incomes of just $18,000 a year. The poorest 50 percent of Americans essentially own nothing.
• Americans—mostly the working class—are dying earlier from suicide, drug overdoses, alcoholism, and poor health, what economists Anne Case and Angus Deaton refer to as “deaths of despair.”
• For about three decades after World War II, the pay ratio between CEOs and employees remained consistent. As executives made more money, so did everyday workers. Then, right around the time Welch took over GE, those trend lines began to diverge. Worker pay flatlined, and in some years even fell when adjusted for inflation. Executive compensation, on the other hand, skyrocketed. Whereas a CEO during the Golden Age of Capitalism might have made ten or fifteen times as much as an average worker at his company, today that figure stretches into the hundreds or even thousands.
• In 1913, the top 0.00001 percent was represented by four of the wealthiest men ever to walk the planet; John D. Rockefeller, Henry Clay Frick, Andrew Carnegie, and George Fisher Baker accounted for some 0.85 percent of the total wealth in the United States. In 2020, the 0.00001 percent was represented by just three men: Jeff Bezos, Bill Gates, and Mark Zuckerberg, who together accounted for some 1.35 percent of total U.S. wealth. Three men who founded technology companies possessed as much wealth as the entire bottom half of the United States combined. The wealthiest 0.01 percent of American households, around 18,000 families, also possess proportionally more capital than they did in the Gilded Age, today owning about 10 percent of the country’s wealth, compared to 2 percent in 1913. Perhaps most startling is how fast they have achieved this sudden concentration of wealth. In the late 1970s, just before Welch took over, the top 0.01 percent of families held just 2 percent of the country’s wealth.
• Welchism has made America poorer, less equal, and more insecure. It has hollowed out factory towns while filling Wall Street’s coffers. It has left corporations unaccountable for their failings, while leaving more of the population vulnerable to the whims of highly paid executives. And it has created an economy where once proud industrial companies lose their way, with sometimes fatal consequences.
• Rather than investigate the crash’s cause and ensure that Boeing’s engineering was sound, the company’s executives turned their attention back to Wall Street. Less than two months after the crash, on December 17, citing “Boeing’s strong operational performance, financial health and positive future outlook,” Dennis Muilenburg, the Boeing CEO, announced that the company was increasing its dividend by 20 percent and would spend $20 billion on stock buybacks. It was the apex of two decades of unwavering devotion to investors that began in 1997, when Stonecipher joined the company, and it further clarified Muilenburg’s priorities. In the few years since he had taken over, Boeing had spent more than 90 percent of its operating cashflow on buybacks and dividends.
• Shortly after Calhoun took over, Stumo penned an op-ed for USA Today expressing his skepticism that the new CEO was fit for the job. The reason for his concern? “Calhoun comes from a background working under Jack Welch at General Electric,” Stumo wrote, “when the company transitioned from making great products toward a finance-oriented approach.”
• Welch loved The Apprentice. “I knew it was going to be a good show when Suzy and I were watching it in bed with her two kids and they started shouting, ‘You’re fired! You’re fired!’ ” Welch said. “It’s a homerun.” The show was a surreal simulacrum of his own life, allowing Welch to watch layoffs from the comfort of his own couch. For Trump, this was CEO cosplay, offering him a taste of the very real power Neutron Jack once wielded. And when Welch needed to peddle the Jack Welch Management Institute, he turned to Trump for a cameo on The Apprentice, followed by an appearance on the Today show.
• Trump deftly homed in on the disillusionment festering in cities that had been abandoned by companies like GE. “Our workers’ loyalty was repaid with betrayal,” Trump said in one of the major economic speeches of his campaign. “Our politicians have aggressively pursued a policy of globalization—moving our jobs, our wealth and our factories to Mexico and overseas.… Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache.… Our politicians took away from the people their means of making a living and supporting their families. Skilled craftsmen and tradespeople and factory workers have seen the jobs they loved shipped thousands of miles away.… This wave of globalization has wiped out our middle class.” Trump’s whole campaign, it seemed, was a rebuttal of Welchism.
• The dismantling of American manufacturing, the hollowing out of the middle class, the replacement of factory jobs with service jobs—they all sowed deep discontent in a large segment of the electorate. Trump may not have had any intention of addressing their needs. But he picked up on their anger and used it as fuel for his campaign.
• “I’ve been coming down here since 1980, and this was the first presidential meeting I’ve ever had where it was like talking to a peer.” It was a telling aside. Of all the U.S presidents Welch had met, Trump was the one in whom he saw his own likeness.
• 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.” Polman needed to send a signal to the market that he was serious about change, and soon after the retreat, he announced that he would stop issuing quarterly guidance. He was putting Wall Street on notice, making it clear that he didn’t intend to be measured by short-term results.
• Polman noted that the former GE chief was only able to post such stellar returns thanks to his accounting games. “If he was that wonderful, he should have been in Las Vegas,” he said. In the eyes of Polman, Welch was little more than a gambler.
• And a couple years after Unilever rebuffed Kraft Heinz, reflecting on the deal, Polman couldn’t help but gloat. “Since then, their share price is down 70 percent, and they now face legal issues around reporting,” he said. “Our share price is up about 50 percent. Some people think greed is good. But over and over it’s proven that ultimately generosity is better.”
• He wanted a way to measure “the financial health of our employees” that went beyond basic metrics like the minimum wage, the purchasing power of which varies by zip code. Over the course of a few months, PayPal worked with academics and nonprofit groups to create a new metric: “net disposable income,” or NDI. That, Schulman explained, amounted to “how much money do you have after you pay all of your taxes and your essential living expenses, like housing and food and that kind of thing.”
• The financial wellness program at PayPal cost tens of millions of dollars, money that didn’t go out the door in buybacks or dividends. “It was a significant material investment in our employees,” Schulman said. But he likened it to investments in other parts of the business, be it advertising or infrastructure. “I believe very strongly that the only sustainable competitive advantage that a company has is the skill set and the passion of their employees,” he said.
• Schulman said. “This whole idea that profit and purpose are at odds with each other is ridiculous. I mean, if you ever have any chance of moving from being a good company to a great company, you have to have the very best employees, that love what they’re doing, that are passionate about what they’re doing. Everything else will emanate from there.”
• For most of the past four decades, Schwab’s stakeholder theory took a backseat to the ideas promulgated by Welch and his cronies. But in recent years, as the negative externalities kept piling up, Schwab’s thinking has resurfaced as an alternative framework for how CEOs might approach their duties.
• But starting in 2014, Larry Fink, BlackRock’s CEO, began embracing the rhetoric of stakeholder capitalism. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Fink wrote in an open letter to corporate America that year. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” No longer would it be enough for companies to make profits, contended Fink, who continued developing his argument in subsequent annual letters. Instead, if corporations wanted the support of BlackRock, they would need to make a positive contribution to the world around them. “Society is demanding that companies, both public and private, serve a social purpose,” Fink wrote in 2018. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
• We need to move beyond a world where employees of profitable multinational corporations qualify for food stamps, and that can only happen when employers commit to offering their workers a living wage. Numerous studies have demonstrated that raising wages for workers does not lead to unemployment or inflation. To the contrary, research has shown that raising the minimum wage has the effect of increasing productivity, improving morale, and generally helping the companies that take better care of their employees.
• The relentless pressure created by quarterly earnings reports is impossible for most public companies to ignore. It warps executive behavior in the worst way, incentivizing short-term decision-making and disincentivizing investments that will create value years down the road. But time and again, we have seen that the corporations that create the most wealth in the long run are those that develop the capacity to think beyond the next ninety days.
• These polices aren’t just ethical and just, they’re also good for business. Study after study shows that when wages are higher, the economy is stronger for all; that when the government is well funded, democracy thrives; that when companies exist in a dynamic, competitive landscape, jobs are more abundant and consumers benefit; and that when wealth is shared with workers instead of hoarded by executives, everyone wins.
• Berkshire Hathaway, the diversified conglomerate run by Warren Buffett, raked in $42.5 billion in profits in 2020. During this same time, Berkshire Hathaway laid off 13,000 employees, many of them factory workers. It didn’t matter that Buffett’s conglomerate was awash in cash, or that workers who lost their incomes and health insurance in the middle of a pandemic faced existential risks to their health and livelihoods. Berkshire Hathaway evidently determined that the downsizing was the most rational move in an economy where the pursuit of shareholder value takes precedence over everything else.
• One study showed that companies that signed the Business Roundtable statement were actually more likely to announce layoffs in the first months of the pandemic than companies that didn’t sign the statement, and that the companies that pledged to serve all stakeholders actually distributed more of their profits to shareholders than those who didn’t publicly pledge to look out for the common good. That is, there was inverse correlation between virtue signaling and actual virtuousness.
• Some four decades after Welch set his sights far beyond GE’s traditional manufacturing business, the company had come full circle. All of Welch’s empire building had amounted to little in the end.
• In the waning days of 2021, GE finally announced that it would break itself up, once and for all. The days of the conglomerate were over. Culp would spin off the power division and the health care division as new public companies, leaving General Electric—a company that practically invented the modern American economy as we know it—as nothing more than a supplier of airplane engines. It was a definitive repudiation of Welch’s vision. The GE that he had built into the most valuable company on earth decades before—with its vast array of industrial divisions, its black box financial unit, and its imperialistic ambitions—no longer had a place among the great American companies. Instead, fittingly, it was being taken apart piece by piece, as executives and investment bankers tried to figure out how to make the most of what was left of the house that Jack built.
• “If you’re a company today and you’re studying management stuff that worked in the ’90s, you’re in the wrong neighborhood,” he said. “Something bad is about to happen.”
• For the half century after the Great Depression, capitalism in America was a well-oiled machine that produced economic growth for many corporations, many families, Wall Street firms, and the nation as a whole. Technological breakthroughs—including many engineered by GE—took us to the moon, modernized our lives, and turbocharged the economy. Thousands of companies became major employers, and the profits they generated were distributed widely—to investors, yes, but also to workers and the IRS, and back into the company in the form of capital expenditures and R&D. It was working well right up until 1981, when Jack Welch broke it.
• Welch redefined what it meant to be a successful CEO. Achievement was measured not by jobs created, but by jobs cut. Value creation was measured not over the course of years, but in discrete, predictable ninety-day cycles. The quantity of a company’s profits became more important than the quality of its products. Welch set the bar against which other CEOs were measured soon after he took over, and even now, with stakeholder capitalism on the rise, many executives continue to model his behavior. Years after his death, Welch still looms over the corporate world as the Manager of the Century, living rent-free in the minds of CEOs around the world.
• To create a new economy we will need a new framework for success. This will require celebrating leaders who prioritize long-term growth over short-term gains, and putting an end, once and for all, to the bankrupt practice of making men like Welch our heroes. We will need to raise pay, improve benefits, and share wealth with our workers. And perhaps most difficult of all, we will need to uproot the legacy of a tough kid from the Boston suburbs who rose to become the most powerful CEO in the world. These efforts will not be easy. But if successful, they have the potential to create something with truly enduring value: a world beyond Welchism.