(Bloomberg Opinion) -- There are well-known people who are vilified during their careers only to seem heroic in retrospect. And then there are others who are lionized in their prime, and only later do we realize how harmful their actions truly were.
So it is with Jack Welch, who died on Sunday at the age of 84. I know we’re not supposed to speak ill of the dead, but his effect on American capitalism was too profound — and too destructive — to go unmentioned.
Before the 45-year-old Welch became General Electric Co.’s youngest chief executive officer ever in 1981, the company’s goal was to “simply grow faster than the economy,” according to Fortune magazine’s Geoffrey Colvin, one of journalism’s leading Welch observers. In the decade before Welch took over, GE’s shares had declined 25% — yet its shareholders, who viewed the company’s dividend as their reward for owning the stock, were sanguine. Despite the stock’s poor performance, Reginald Jones, Welch’s predecessor, was still considered the most influential man in business. Even Wall Street didn’t make a fuss about the share price.
Under Welch, GE’s mission changed. Its new goal was to become “the world’s most valuable company.” Which is to say, he turned the focus of the company to its stock price. Everything became secondary to that. Corporate raiders like T. Boone Pickens and Carl Icahn may have been the first to call for companies to “maximize shareholder value,” but they were outsiders, knocking on corporate America’s door. Welch was the ultimate insider, and when he started to emphasize shareholder value, so did the entire American business culture.
Did he succeed? By the standard he set for himself, the answer is clearly yes. During Welch’s 20-year tenure, GE’s total return was about 5,200%, more than double that of the S&P 500 Index. Its revenue grew from $25 billion to $130 billion. Profits were up fivefold. For a while, GE was the world’s most valuable company. Welch became rich — his severance alone was $417 million — but so did many of GE’s top executives. Why? Because they made the bulk of their money not from their salary but from the stock options Welch heaped on them.
Something that is often obscured about the rise of shareholder value is the degree to which it coincided with a roaring bull market. CEOs were praised for their brilliance when in truth they were simply lucky to be in the right place at the right time. This is especially obvious when you look at Welch’s track record. He took over GE 16 months before the 1980s bull market began in August 1982. During those 16 months, GE’s stock price fell 5%. And he retired six months after it ended in March 2000. Guess what? The stock dropped 24% before he left.
Consider also how Welch kept GE’s stock up during his tenure. Yes, some of it was the result of good management — buying NBC at the right moment, for instance. But he also had an uncanny knack for beating analysts’ earnings estimates by a penny quarter after quarter. You can’t do that at a conglomerate the size of GE unless you are playing accounting games.
Second, Welch turned GE Capital, which had formerly been used to underwrite consumer loans for refrigerators and other GE appliances, into a black box from which Welch could extract whatever profit he needed to make his quarterly numbers. What’s worse, GE Capital began making the same kind of risky loans as the rest of Wall Street — loans that got the company into trouble when the financial crisis arrived. Luckily for Welch, he was long gone by then. His successor, Jeffrey Immelt, took the blame for essentially following Welch’s lead.
Here’s the key point: Because Welch was so idolized, the path he trod became the path every other CEO trod as well. They all began focusing on shareholder value. That became the basis on which they were judged and paid. And it warped the business culture, causing companies to put employees, vendors and even customers behind the primacy of shareholders. If you want to see what happens when you take maximizing shareholder value to its logical extreme, I give you Facebook. Or, for that matter, Enron.
You will hear a lot over the next 24 hours about what a business icon Welch was. “The gold standard of greatness,” Jeffrey Sonnenfeld, a Yale University business professor, described him for Bloomberg News’s obituary. Welch’s supporters will make the case that he was a great manager, that his focus on continual improvement imposed high standards and that he developed leaders who went on to run a half-dozen large corporations. There is some truth to that, for sure.
But remember this, too. When you see pharmaceutical companies raising the price of drugs to unconscionable levels; when companies cut back on research and development to satisfy Wall Street; when CEOs routinely make $40 million to $50 million a year, you now know whom to blame.
To contact the author of this story: Joe Nocera at email@example.com
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This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."
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