Reassessing Jack Welch’s Legacy After GE's Decline: Joe

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Jack Welch.

Photographer: Lucas Jackson/Reuters

Of all the key moments in Jack Welch’s storied tenure as General Electric Co.’s chief
executive officer, there’s one that’s always overlooked. It took place on Friday, Aug. 13,
1982.

Although he’d been CEO for only 16 months, the 46-year-old Welch had already put his
stamp on the place. He was blowing up the bureaucracy, eliminating the formalized
meetings that had long marked GE’s culture, and installing a blunter, more freewheeling
style that prioritized “facing realities” over “superficial congeniality,” as Welch later put it
in Jack: Straight From the Gut. He was beginning to execute on his famous dictum that if a
GE business wasn’t first or second in its market, it should be sold, fixed, or closed. (In his
first two years, Welch sold 71 businesses.) And though he wasn’t yet known as Neutron
Jack, the large-scale layoffs that would earn him that nickname were well under way.

Yet the stock market had barely noticed. GE’s shares were actually down 5% during that
period, and investors still viewed the company as a dividend play. Then came Aug. 13.
That, we know now, was the first day of a powerful bull market, one that would see the
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S&P 500 index return more than 2,400% by the time it ended 18 years later. Once the
bull began running, GE’s stock went in only one direction: up. By the end of 1983, it had
returned more than 90%; within five years, 237%. A sprawling, century-old conglomerate
had become, improbably, a growth stock.

“Jack was one of the finest managers I’ve ever met.”

There’s no question that Welch was a brilliant and forward-thinking chief executive. With
one big exception (GE’s acquisition of Kidder, Peabody & Co.), everything he touched
seemed to turn to gold. Even as General Motors, U.S. Steel, Eastman Kodak, and other
companies lost market share to foreign competitors, Welch’s GE was making inroads
internationally. He turned GE Capital from a ho-hum ​consumer-finance arm—
underwriting loans for, say, GE refrigerators—into an immense generator of profits. He
was one of the first CEOs to reward his top executives with stock options—lots and lots
of stock options, making many of them millionaires. He also believed that the mediocre
should go elsewhere if they didn’t improve quickly, and he acted on that belief. When
Welch adopted Six Sigma, a set of processes designed to create continuous
improvement, half the CEOs in the Fortune 500 raced to adopt it as well. Under Welch,
GE became famous for developing outstanding managers, men (always men) such as W.
James McNerney Jr., Lawrence Bossidy, and David Cote, all of whom became CEOs of
important industrial companies.

So, yes, Jack Welch was really good. But he was also lucky. According to Fortune
magazine’s Geoffrey Colvin, in a story he wrote near the end of Welch’s tenure, Welch
tossed aside GE’s historic ambition—“simply to grow faster than the ​economy”—and
replaced it with a new mission: “to be the world’s most valuable company.” In other
words, Welch redirected GE’s focus on share-price appreciation at the exact moment the
greatest bull market of our lifetime was starting.

Prior to August 1982, the men who ran America’s big companies didn’t spend a whole lot
of time worrying about their stock price. For one thing, CEOs weren’t measured by how
well the stock did. For another, the business world had largely given up on equities.
Nothing typified that more than that infamous 1979 BusinessWeek cover, “The Death of
Equities.”

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 Welch’s predecessor, Reg Jones.

Photographer: Bettmann/Getty
Images

Consider Reg Jones, Welch’s

predecessor. In his day, Jones was
widely considered the country’s
best CEO, even though GE’s stock
dropped 21% during his nine
years at the helm. When he died
in 2004, the New York Times
attributed the stock’s poor
performance to “investor disenchantment with stocks generally, rather than the
company’s operations.”

The bull market changed all that. The creation of 401(k)s and IRAs meant the stock
market was suddenly important to Americans saving for retirement. Corporate raiders
such as T. Boone Pickens and Carl Icahn began demanding that companies start paying
attention to shareholders. And executives themselves realized that a rising stock price
could make them wealthy thanks to the stock options that became part of every CEO’s
compensation package. Suddenly, nothing mattered more than stock performance.

Welch partisans will tell you that GE’s shares didn’t just rise in lockstep with the S&P 500;
they absolutely obliterated the index. That’s true: GE’s total return during Welch’s 20
years was about 5,200%, more than double that of the S&P 500. GE’s revenue grew from
$25 billion to $130 billion while its profits grew tenfold, to $15 billion.

“He was the first CEO to lay off workers while the company was still profitable. There
were people who hated him for it. But if he hadn’t done it, GE wouldn’t have thrived.”

“Jack was one of the finest managers I’ve ever met,” billionaire investor and former GE
director Ken Langone told CNBC last year. “Every 90 days he would meet with all his
different business segments and drill down. He knew everything about his businesses.”

“Jack changed the rules of the game,” says John A. Byrne, who for years wrote about
Welch when he was on the BusinessWeek staff. “He was the first CEO to lay off workers
while the company was still profitable. There were people who hated him for it. But if he
hadn’t done it, GE wouldn’t have thrived.”

“He motivated. He inspired,” says Paul Argenti, a longtime business professor and Welch
observer at Dartmouth College’s Tuck School of Business. “He was great at defining and
executing a strategy. And changing it when it needed to change. He was the consummate
leader of his time.”

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I don’t disagree with any of that. But I also recall another reason Wall Street was so
enamored of Welch: Quarter after quarter, this huge, unwieldy conglomerate beat the
Street’s earnings estimates by a penny or two. Given the ups and downs of business, it
was an almost miraculous feat. The profit GE Capital generated was only one of the
reasons Welch valued it so much. The other reason was that it was GE’s black box. It gave
him the means to dispense those quarterly miracles.

Argenti says he doesn’t think Welch’s methods would work today. “Beating by a penny
has gone away,” he told me. Today’s employees tend to respond best to a different kind
of leadership—quieter and less self-promotional, as exemplified by Tim Cook at Apple
Inc., say, or Reed Hastings at Netflix Inc.

Read more: GE’s Larry Culp Faces Ultimate CEO Test in Trying to Save a Once-Great
Company

Welch (left) and Jeff Immelt at the press conference announcing Immelt was replacing
Welch as GE’s president and chairman-elect.

Photographer: Mark Peterson/Redux

Still, by the time Welch retired in September 2001, he was widely hailed as the greatest
CEO of his time, maybe of all time. Fortune named him manager of the century;
BusinessWeek gave him and his wife, Suzy, a column. But it seems to me that GE’s
deterioration during Jeff Immelt’s time as chief executive officer should cause us to
question whether such accolades were truly deserved.

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One issue is whether the conglomerate structure Welch turned over to Immelt was
sustainable. Take GE Capital again. Immelt critics point out that he depended on it for
profits even more than Welch did. But a good part of the reason for this is that the
business climate Immelt operated in was far more difficult than anything Welch ever
faced. The 2008 financial crisis exposed how woefully undercapitalized GE Capital was. It
had far too many substandard loans on its books, as it stretched for profits that were
harder to come by. Would Welch have prevented the fall of GE Capital? Maybe. But it was
he who created the dependence on that division in the first place.

The second issue has to do with the larger business culture. Yes, hundreds of other CEOs
adopted Six Sigma after Welch did. But they also bought into his obsession with the stock
price. At its worst, that obsession gave us Enron Corp. and WorldCom. But even putting
crookedness aside, it led most of corporate America to care primarily about dancing to
Wall Street’s tune. Employees, communities, and even customers became less important
than “maximizing shareholder value.”

Then there’s the question of Welch’s successor, Immelt. Welch now claims that Immelt
fooled him—that he gave the impression of being a better leader than he turned out to
be. But c’mon. Immelt joined GE in 1982; Welch had almost two decades to size him up. If
one of the most important jobs of a CEO is to pick his successor—and it is—then Welch
failed.

A year after Welch retired, BusinessWeek asked the great management thinker Jim Collins
whether Welch was a “Level 5” leader, Collins’s highest accolade for a CEO. He
responded: “His report card does not come in until Immelt exceeds him. If Immelt does
not exceed him, then he has failed. Jack Welch did not make GE great. GE was already
great. Every GE CEO has been to his era what Welch was to his, without exception. It
takes 50 years to create a GE. Generations of leaders built it. Whether Welch was a Level
5 comes down to a question we don’t know the answer to. Was Welch first and foremost
ambitious for himself or for GE? Only he knows that.”

Here’s one other thing. As I noted earlier, the great bull market ended on March 24,
2000. Tech companies such as Pets.com imploded. Solid companies such as Cisco
Systems Inc. saw their stock price fall by three-quarters, and they still ​haven’t fully
recovered.

Jack Welch’s GE wasn’t immune. From March 24, 2000, to Sept. 6, 2001, when Welch
retired, GE’s shares fell 24%. Was he managing any differently? No. Had he lost his touch
when it came to earnings? No, again. The only thing that had changed is that the market
was going down instead of up. Even Welch couldn’t defy a bear market.

Was Jack Welch a great manager? Of course he was. But the bull market—and the
culture’s new emphasis on share price—made him look better than he really was. And
by the way, the greatest manager of the 20th century was Alfred P. Sloan, who ran
General Motors Co. from 1923 to 1956. But that’s a story for another day.

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