Jack Welch ran General Electric from 1981 to 2001 and helped reshape the US business landscape.
In “The Man Who Broke Capitalism”, NY Times reporter David Gelles evaluates Welch’s legacy.
Gelles says Welch was responsible for aggressive layoffs and populism that helped elect Trump.
Few people born since the 1980s have heard of Jack Welch. But they do know Trump, the Boeing 737 Max disasters and a US economic landscape that has led to populism and rising inequality.
“When people look around and say ‘why is the system like this? why are things unfair?’ there’s actually a guy who made it happen. There was a guy who set a precedent for the economy today, and that guy was Jack Welch,” says David Gelles, a reporter for The New York Times and author of a new book called “The Man Who Broke Capitalism”.
Welch took over as CEO of General Electric in 1981 when he had 400,000 workers and was a reliable, innovative household name making lightbulbs but also more sophisticated equipment such as jet engines and power systems.
Coined “Neutron Jack” after the neutron bomb, which purportedly kills people while leaving buildings intact, Welch was a mascot for an age of deregulation and cheap thrills, which quickly unraveled in the recession of the late 200s.
Under his two-decade tenure GE expanded to be worth hundreds of billions of dollars and was the most valuable company in the world at one point. But, Gelles argues, he did so while rupturing the fabric of America, leaving not just GE but the US worse than when he found it.
A ‘Vitality Curve’ of fired workers
Welch was obsessed with growth and spent about $130 billion on nearly 1,000 acquisitions during his time running GE, although many of them failed. Under Welch the company’s financial services division, GE Capital, became enormous but it later needed a $139 billion bailout from the US government following the 2008 financial crisis, as well as a $3 billion rescue investment by Warren Buffett, Gelles says.
Welch also pioneered the “stack ranking system,” in which the bottom-performing 10% of employees were laid off each year, a practice he called the “Vitality Curve.” Companies such as Goldman Sachs still use that approach to keep staff “motivated”.
Welch slashed GE’s workforce by 112,000 people between 1980 and 1985 as well as outsourcing and offshoring jobs to cheaper markets such as Mexico.
“What Welch did was fire people when things were going well,” Gelles tells Insider. “And that was a rupture – the behavior of firing people to turn a bigger profit.”
It was not economics that drove Welch’s labor practices, says Andrew Mawson, co-founding director of Advanced Workplace Associates: “Firing 10% of under-achievers each year seems to me to be a poor way of overcoming an underperforming performance management system.”
Others say that beyond harmonizing morale and productivity, focusing solely on labor costs is inefficient. Simon Geale of supply chain consultancy Proxima tells Insider: “Some business leaders like it because the salary line is easy to measure and quick to action, but the reality of job cuts is that they address a proportionately low expenditure when compared to supplier costs in most industries.”
‘Jack Welch rigged the game’ for Trumpism
More damaging, though, was the thinking Welch inspired among other business leaders. Gelles says his approach was embraced by Jim McNerney, who as Boeing CEO was accused of embarking on a range of cost-cutting measures that contributed to the Boeing 737 Max disasters that killed 346 people five months apart.
“It was clear in talking with hundreds of Boeing employees over the last few years that it is just poorer because of the influence of Welch,” Gelles says.
Inevitably, actions on such a scale would have political ramifications. Gelles says the layoffs and outsourcing Welch initiated helped form “the rust belt” base that put Donald Trump into the White House.
“What Welch did with his series of mass layoffs and factory closures truly destabilized the American working class,” Gelles says.
“And it was from this disaffected base that Trump found many of his most ardent supporters. But the reason they felt like it wasn’t working for them was because Jack Welch rigged the game.”
After Welch died in March 2020 Trump said they had “made wonderful deals together”.
A turning point
Gelles thinks the US is at an inflection point, with the pendulum swinging back in favor of workers. He points to new models that have emerged, including the decision by former Unilever CEO Paul Polman to scrap quarterly guidance in pursuit of longer-term gains, and a move by PayPal CEO Dan Schulman to focus on benefits for his staff.
However, many companies are still geared towards short-term results, as evidenced by recent upheaval in the tech industry, with sliding share prices triggering job cuts.
“The fact that one or two bad quarters is resulting in mass layoffs is crazy to me. The fundamentals haven’t changed much but CEOs feel like they need to be doing something,” Gelles says, suggesting it would be a “decades-long battle” to offset the changes Welch helped to trigger.
Gelles adds: “These are choices that companies made, about how they were going to treat workers, what they were going to prioritize, and how they were going to show up in their communities, and it matters. It’s going to take a long way to get back.”
Read the original article on Business Insider