Jack Welch was one of the most celebrated chief executives in American corporate history. He played golf with presidents, hung around with celebrites and helped the share price of GE, the company he ran for 20 years, to soar.
Along the way, the man who was nicknamed Neutron Jack fired over 100,000 staff under a series of mass layoffs and factory closures. He used an annual employee ranking scheme where workers performance was scored and the bottom 10pc were let go every year.
It became known as “rank and yank”. Welch chillingly called it the “vitality curve”.
He made aggressive acquisitions and oversaw the purchase, on average, of one $130m company every week for 20 years. Many of the jobs Welch cut went overseas.
After he retired, GE’s share price did not perform as well and last year the current CEO said he would split up the manufacturing giant into three totally separate businesses.
A new book by The New York Times journalist David Gelles goes much further than simply tracking the Jack Welch story. It blames Welch and his management and business model for the creation of a more destructive kind of capitalism.
The Man Who Broke Capitalism doesn’t pull any punches. Its marketing blurb says: “How Jack Welch gutted the heartland and crushed the soul of corporate America.”
It is quite the charge. The book tracks very well how Welch’s approach to downsizing, deal-making and financialisation became the cornerstones of America’s 21st century model for big business.
At its core though, Gelles describes Welch’s approach as driven by short-term gain and a fixation with short-term shareholder value at the expense of long-term benefit for all stakeholders, including staff.
Having become CEO in 1981, by 1987 shares in GE had risen 250pc and the corporation became the “most valuable company in the world”.
Just as Gelles depicts Welch’s approach to management quite accurately, he goes too far by heaping responsibility for the failings of corporate America in the 21st century almost solely on one man’s shoulders.
“Capitalism in America was working well right up until 1981, when Jack Welch broke it,” he says.
The American capitalist model after the New Deal of the 1930s which ran for decades ensured that businesses took a longer-term view and took care of their employees over a working lifetime.
Back in those days, a job really was for life. The American government wanted to ensure there were rising living standards for ordinary Americans, as much out of a fear of communism, as doing the right thing.
Nevertheless, things did change in the 1980s and went down a road of outsourcing, downsizing, financial engineering and leverage, which changed the model for good.
Part of that process was globalisation. The Soviet Union collapsed at the end of 1991. China began to open up. Companies began to ask whether the people doing office security, cleaning or the canteen actually had to be employees. They began to ask whether goods could be manufactured more cheaply in another country.
At its core, capitalism is about competition. If somebody else finds a way of offering a product better than yours or equal to it, at a cheaper price, you have to adapt.
Welch may have been a high-profile champion for so much of this change, but Gelles doesn’t really address what would have happened if he hadn’t done all of this.
Many of America’s older blue chip companies had become so enormous and cost heavy, they were sitting ducks for competitors and they could have gone into decline anyway.
Assessing GE’s performance after Welch, isn’t the only way of deciding his legacy. It may simply be that some of the declines that occurred later would have happened sooner, if he hadn’t adopted at least some of the changes that he did.
Share price gains benefited employees of the company too. Many held shares and gained from that. But this wasn’t much good to employees who were either fired or saw that wealth diminish as the share price fell after Welch retired. Welch himself retired with a $400m exit package.
Even if Gelles goes too far and does everything except place Welch on the grassy knoll, he still raises some very important issues. Welch was fanatical. He took everything to its extreme. Being cost conscious became firing 10pc of the staff.
Gelles probably reads too much into the history of the company and its place in the US corporate landscape. It traced its roots back to Thomas Edison. It was the company that brought America electric light bulbs, power plants and X-ray machines.
But the providers of stage coaches didn’t give us the train or the motor car. Train companies didn’t invent the airplane. It always takes someone else to come along and find the next iteration of what has been done before.
Perhaps GE was doomed to slowly unwind. Welch may have accelerated that process or equally he may even have delayed it. Gelles says Welch’s brutal efficiency drive led to long-term decline.
Gelles’s book is a fascinating read because Welch’s story is extraordinary. Welch embodied a school of thought that was gathering currency at that time and he represented its extremes.
Gelles makes the mistake of blaming the demise of American manufacturing on Welch and his philosophy. In truth, globalisation changed American manufacturing and it has brought benefits as well as deeper turmoil.
Perhaps if the benefits had been more evenly distributed or the proceeds better invested in society, the problems would be less stark.