Who really belongs in fifth place on the list of Friedrich Hayek, Milton Friedman, Ronald Reagan and Margaret Thatcher? This foursome is often presented as the pioneers of the neoliberal phase of capitalism. Hayek as a philosopher of small government. Economist Milton Friedman as champion of free markets where companies aim only to maximize profit. And Reagan and Thatcher as the government leaders who ushered in the era in which market forces were given full play in Western societies through deregulation and privatization.
Read Jack Welch’s obituary here: ‘Neutron Jack’ Welch was the father of shareholder value
An exponent from the business world is missing from that list. The movie character Gordon Gekko, legendary for his Greed is goodtalk in the movie Wall Street, has been proclaimed for this symbol. But there is also one CEO who actually implemented Hayek and Friedman’s ideas and paved the way for shareholder capitalism: Jack Welch, CEO of American industrial icon General Electric from 1981 to 2001. Nickname: Neutron Jack.
For years, his image graced the cover of business magazines, he inspired top managers and was even named the manager of the century (the twentieth). Welch turned GE, founded by inventor Thomas Edison, into the world’s most valuable company. Well into the 21st century, the industrial giant was able to continue that battle with tech giant Microsoft. GE was worth $14 billion when Welch started, it was $600 billion when he retired.
David Gelles, economics reporter for that New York Timesbreaks down to The man who broke capitalism mercilessly Welch’s method. Often described as a visionary in times of globalization, he ushered in an era in which profit maximization was elevated to the highest goal, not business continuity. Gelles mainly describes Welch as the man who ruthlessly put an end to the golden age of capitalism in USA
During that period, the American model did not deviate significantly from European ‘stakeholder capitalism’, where the interests of all involved parties in a company – including customers, suppliers and employees – were weighed against each other. Until the 1980s, loyalty between employers and employees was also high in the United States. When you first worked at GE, you often retired there as well. Companies took responsibility for the environment where their factories were located, Gelles said.
Until Welch came along. He earned his nickname Neutron Jack through mass layoffs: Where Welch went, people disappeared and factories stood empty. GE managers were instructed to eliminate the lowest rated 10 percent of their employees each year. His approach that a company is valued not for the quality of its employees, but for the size of its profits, led investors to immediately reward reorganizations with a share price increase. Until today.
Welch made one acquisition after another (almost a thousand in total) and turned the industrial group into a giant with companies in the media and the financial sector. He split the takeover spoils. All the companies he kept had to become number one or two in their market or he would divest them under the widely followed motto ‘fix it, close it, or sell it’.
Welch became a champion of shareholder capitalism. He would rather buy his GE stock to boost the stock price than have Welch invest in innovation. He allowed himself to be rewarded as CEO in a way that was unprecedented, the difference with the pay of the GE workers grew exponentially. It was completely new, claims Gelles. His method was followed by many American and later European top managers. His disciples at GE, which had its own management school, were drawn to other companies and generally followed the same strategy there.
However, many imitators did not know the real secret behind Welch’s success: the financial subsidiary GE Capital, which ultimately accounted for 40 percent of sales and 60 percent of profits. This financing department started by helping customers finance the purchase of their refrigerator or television. GE Capital grew through several acquisitions into an unregulated shadow bank that made lots of loans and mortgages.
In addition, GE Capital made it possible to boost profits just before the end of a quarter by making financial transactions. Due to the lack of transparency in the reporting of the numbers, investors saw high predictable gains. How GE actually performed was also poorly understood by Wall Street analysts because of these accounting gimmicks. That GE meanwhile invested little in innovation and was no longer at the forefront remained hidden for a long time.
Until GE Capital crumbled after the financial crisis of 2008. It quickly became clear that GE’s industrial businesses were not doing nearly as well as had been assumed. Welch had saddled his successor Jeff Immelt with a company that could never sustain its success. Welch died in 2020. Not long after, GE’s current CEO, outsider Larry Culp, decided to split the company permanently. GE is still only a manufacturer of aircraft engines.
This book is certainly not an objective biography of Welch, rather it is an accounting. Welch is even blamed by Gelles for the accidents with the Boeing 737 Max. Since 1997, Boeing has been led by former GE executives who, Welch-style, have cut back significantly on technology development and security spending for shareholder profits. With fatal accidents as a result.
In his final years, Welch was a key supporter of President Donald Trump, who in turn had looked to Welch as an example for years. Gelles outlines the irony inherent in this. Trump has just had his electoral success in the American heartland, which Jack Welch and his followers have so mercilessly destroyed by the departure of their factories.