by Peter S. Cohan

Jack Welch is a business legend whose mythic status has been tainted not only by his personal peccadilloes but also by the weak performance of his acolytes. Perhaps the most important lesson executives can draw from his career at GE is that the techniques Welch cites to explain his success at GE are not easily transferable outside the time frame and the company in which they worked. Ultimately, the biggest beneficiaries of Welch’s tenure were GE shareholders and Welch himself who relished the worshipful attention that his GE-owned NBC helped to focus on him.

To bring these conclusions to life, let’s examine three questions:

- What did Jack Welch do to earn his mythic status?
- What Welch weaknesses undermine the legend?
- What general lessons do Welch’s actions as GE CEO offer other executives?

The Good

The case for Jack Welch as business legend rests on six pillars. While some of these pillars are based on quantifiable performance, others pertain to specific personal qualities which Welch has helped to spin into legend through interviews and his own book. The six pillars include the following:

GE’s stock market value increased 5,096%, inclusive of dividends, during Welch’s 20 year tenure as CEO which began in 1981. This represents an average annual increase in GE’s shareholder value of 21.3% a year. The S&P 500 increased 1,433% over the same period, or about 14.3% a year, also inclusive of dividends. An investor who purchased $10,000 of GE stock at the beginning of Welch’s tenure as CEO and held it until its end would have earned $677,000, three-and-a-half times more than the $194,000 resulting from an identical investment in the S&P 500.

Consistent profit and revenue growth. GE profit increased eight-fold, revenues rose five-fold during Welch’s CEO tenure. GE’s 2000 earnings of $12.7 billion were more than eight times the $1.5 billion profit it reported in 1980. GE’s revenue more than quintupled to $129.9 billion.

Furthermore, GE earnings grew consistently. Wall Street loved the 103 quarters of uninterrupted growth in GE’s net income that began in 1975 and continued under Welch’s tenure as CEO. This consistent performance highlights the power of GE as a company, insofar as Welch’s predecessor Reginald Jones oversaw seven years worth of these earnings increases. As we will soon see, this consistency also has raised questions about the use of accounting policies that may have overstated the consistent earnings power of GE’s operations.

Six Sigma added over $350 million to GE profits. Welch launched Six Sigma -- a productivity improvement process -- in late 1995 with 200 projects and intensive training programs, moved to 3,000 projects and more training in 1996, and undertook 6,000 projects and still more training in 1997. In 1997 Six Sigma delivered $320 million in productivity gains and profits, more than double Welch’s original goal of $150 million. In 1998, Welch expected GE to get $750 million in net benefits from Six Sigma.

Forced ranking of employees cut costs and increased GE management quality. Between 1980 and 1985, 81,000 GE employees lost their jobs, earning Welch the nickname “Neutron Jack,” after the neutron bomb, which kills people but leaves buildings standing. In all, GE’s employment dropped from 402,000 at the end of 1980 to as low as 220,000 in the mid-1990s. GE employment increased to 314,000 in 2001, mostly because of acquisitions.

Many of the GE employees who lost their jobs were victims of Welch’s “vitality curve”, which required all GE’s 4,000 managers to evaluate their teams every year, rewarding the top 20% and firing the bottom 10%. Some of those fired were able to achieve their performance targets, but did so in ways that were inconsistent with GE’s values -- Welch publicly detailed how these fired employees’ actions had deviated from GE’s values. Welch’s public display of disaffection let GE employees know that Welch’s commitment to GE’s values was sincere;

Be number one or number two or get out. Welch’s concept of how to manage GE’s portfolio of businesses was well known and led to a high volume of deals. Welch sold GE businesses with low-growth prospects, expanded GE Capital and entered broadcasting with the $6.4 billion purchase in 1986 of RCA, owner of the NBC TV network. In total Welch oversaw 993 acquisitions worth $130 billion, while selling 408 businesses for a total of about $10.6 billion. While these deals probably made Wall Street happy – insofar as they generated big banking fees – it is difficult to discern whether GE shareholders received more in value than the $130 billion it paid for the acquisitions.

Horatio Alger myth. Welch cultivated an image as a short, stuttering, blue-collar kid who pulled himself up by his own bootstraps to become the most successful CEO in history – and piling up a $900 million net worth in the process. In 1971, Roy Johnson, then head of GE’s human resources department, recommended that Welch be promoted to VP of the chemical and metallurgical division, citing his “driving motivation, natural entrepreneurial instincts, creativeness, aggressiveness, and his abilities as a natural leader and organizer.” However, in that same evaluation, which Welch discovered years later, Johnson expressed reservations about Welch's style, saying he could be “somewhat arrogant (and) reacts (or overreacts) emotionally -- particularly to criticism.”

Despite the critics, in 1980 then CEO Reg Jones selected Welch as his successor in a process that involved eight final candidates and months of deliberations. Many thought the two were poorly matched. Jones was a courtly English executive and church deacon. Welch was perceived as a pugnacious engineer from working-class New England. Nevertheless, Welch saw their similarities -- both were hardworking men from modest backgrounds, both were only children, and both enjoyed numbers and analysis.

Above all, Welch prided himself on winning. One famous anecdote has Welch widely faxing a golf scorecard showing Welch beating golf pro Greg Norman’s score of 70, two under par, by one stroke. In revealing his 69, Welch said “Isn’t that the greatest thing? Is that a turn-on? That’s everything! The rest of it is all nonsense. This is the real stuff. If you are going to shoot a 69, what better moment?”

The Bad

Welch’s humanity cut both ways – causing him to do things that undermined the purity of his legend. For example, he stayed on the GE throne too long; he fought a losing battle against the government in a pollution case; he bought an investment bank that dragged GE’s name in the mud; he oversaw smooth earnings growth that raised questions about the quality of GE’s financial reporting; he brought unwanted attention to his personal life and his post-retirement perks; and the performance of many of his highly touted proteges was underwhelming.

Overstaying his welcome. For Welch, much of his final year running GE, a time when he should have been celebrating his success, was marked by controversy and disappointment.

He had intended to retire in April 2000, five months after his 65th birthday, but he surprised GE by announcing that he would not leave until September 2001 so that he could help GE complete its acquisition of Honeywell International. The Honeywell deal was to have been the highlight of his GE career, and US antitrust regulators agreed to let it go forward. But the deal collapsed in the summer of 2001 after European antitrust officials made demands that Welch said made the deal not worth doing.

Losing a pollution case. In 2001, the Environmental Protection Agency (EPA) upheld a Clinton administration order that could require GE to pay as much as $500 million to dredge up chemicals, called PCBs, from portions of the Hudson River downstream from GE plants. The EPA ruling came after GE had already spent millions on a PCB cleanup.

Welch argued that the proposed dredging would do more harm than good and contended that GE was being unfairly targeted by the government.

Business scandals. Welch also oversaw scandals, including GE’s 1985 guilty plea to submitting time cards for too much overtime on government contracts and the 1994 bond-trading scandal at its former Kidder Peabody investment-banking unit. Welch agreed that the Kidder Peabody acquisition was a mistake resulting from his own hubris and that he took steps to improve ethical standards at GE.

Personal life and perks. Welch’s autobiography devoted two paragraphs to his 1987 divorce after 28 years from his first wife, Carolyn, mother of his four children. Dick McClean, a former colleague of Welch, said “His private life was always what was absolutely incredible.” Without elaborating, when McClean heard about Welch’s relationship with Suzy Wetlaufer, then the editor of the Harvard Business Review, McClean’s “instant reaction was, ‘Oops, Jack’s back to his old ways.’”

Welch’s personal life became a public embarrassment for Welch and GE not long after his second wife became aware of the Wetlaufer relationship. In papers filed in divorce court, Jane Welch, his second wife, listed the details of the perks that GE shareholders were paying him.

The details proved embarrassing to Welch and to GE. His post-retirement perks included a $15 million apartment in Manhattan; the use of GE’s corporate jet, a limousine, a Mercedes; and the purchase of sports tickets, satellite dishes, laundry services and toiletries.

Welch, whose fortune is estimated at $900 million, and who was paid $16 million in his last year as CEO, Jane revealed was receiving $2.5 million a year in perks for the remainder of his life.

The public pressure on Welch from the problems in his personal life led him to renounce many of these perks on the editorial page of the Wall Street Journal.

Dodgy financial reporting. Skeptical observers of GE’s long string of earnings growth noted above have wondered to what extent the continuous growth resulted from GE's use of gains and restructuring charges to offset each other. In 2001, for example, charges associated with shutting down the Montgomery Ward chain, which was owned by GE Capital, were offset by a onetime gain from the sale of the last of GE’s stake in PaineWebber. Had these events occurred further apart, they would have ultimately balanced out the same way, but they could have created either a decline in earnings growth or an increase that would have been difficult to exceed in the following year.

GE’s pension plan was also a source of artificial earnings smoothing. A 1999 column by Alan Abelson in Barron's, pointed out that GE’s pension plan had been fully funded for years; it was invested in stocks and fixed-income securities, and when gains in the fund exceeded the amount GE was required to pay, the difference was added to reported income.

This amount grew faster than GE’s overall earnings during the late 1990s, and in 2000 it totaled $1.74 billion, or about 13.7% of net income. The point is that this number is unrelated to GE’s operations, but under Welch it helped GE meet its aggressive earnings-growth targets each quarter.

Weak successors. Although Welch enjoyed regaling the media with the quality of GE managers, it is remarkable how few of Welch’s most admired protégés performed well once they were out from under Welch’s wing.

The first of these post-GE failures was Gary Wendt. In June 2000, Wendt, who had run GE’s profitable GE Capital unit landed at Conseco, an Indiana insurance company suffering from overly aggressive acquisitions, high debt and excessive executive compensation. In his 28 months as CEO, Wendt failed to fix Conseco’s problems. At the outset, he accepted a $45 million cash bonus. Throughout his tenure, Wendt issued a series of turnaround memos, even as Conseco continued some of its poor lending practices. Ultimately, Wendt was unable to deliver on his promises. He stepped down as CEO in October 2002 and Conseco filed for Chapter 11 in December 2002.

In February 2003, former Welch deputy Paolo Fresco lost his job as CEO of Fiat. Fresco, who spent 30 years with GE and finished his career there as vice chairman of General Electric International, was a member of GE’s three-person management team. In 1998, he was chosen as CEO of Fiat, the Italian automotive company.

Fresco tried to turn Fiat into a diversified conglomerate, like GE, that would no longer rely solely on autos for its revenue. In 1999 alone, Fiat spent $10 billion on farm and construction equipment acquisitions. But Fiat borrowed too much to finance its diversification. And as Fiat’s core auto business lost revenues, its cash flow suffered. Fresco was also inhibited by the influence of the controlling Agnelli family and by social obstacles that prevented Welch-style mass layoffs.

Two other Welch disciples are struggling. After losing out to Jeff Immelt as Welch’s successor, Robert Nardelli, head of GE’s power systems division, left to run Home Depot in December 2000. Lacking retail experience, he nonetheless developed a strategy based on Welch’s: Replace the existing decentralized management style with a top-down one. Nardelli’s approach has not yet worked.

His approach saved money in the short-term while harming customer service and alienating store managers. To save money, Nardelli increased the use of part-time workers for busy weekends—the proportion of part-timers rose from 30% in December 2001 to 50% in the spring of 2002. But that shift hurt service and alienated customers. In an effort to increase Home Depot’s bargaining power with suppliers, Nardelli centralized purchasing for Home Depot’s 1,500 stores. That angered store managers accustomed to matching their product lines with local tastes. And Nardelli’s introduction of low inventories – a standard practice at manufacturers – led to empty merchandise shelves at Home Depot -- a major source of customer dissatisfaction. Home Depot’s stock has lost over half its value since Nardelli took over and Home Depot has lost market share to Lowe’s.

Upon succeeding Welch at GE, Jeffrey Immelt announced that GE would always outperform any market in which it competed. In fact, under Immelt, GE has underperformed the major stock market indices – losing half its market value since its peak. Immelt had the misfortune to start his new job on September 10, 2001. And in the past two years, the divisions that bolstered GE during the 2000-2001 slowdown—financial services, power turbines, jet engines—have slowed down.

With Welch having cut many of the easier to identify costs with his Six Sigma program, Immelt has been focused on technology, expanding services, and increasing sales in China and Europe. GE also introduced a new advertising campaign: “Imagination at Work.” Nevertheless, GE’s string of rapid profit growth has ended and it remains to be seen whether GE will ever resume the kind of performance which investors under Welch’s tenure came to expect.

James McNerney of 3M has had the most success emulating Welch. In January 2001, McNerney, who had run GE’s aircraft engine division joined as CEO of 3M, a 100-year-old multi-division industrial company with a research and development tradition and a decentralized management structure, much like GE when Welch took it over in 1981.

McNerney, who lost the GE CEO succession race, brought to 3M the techniques he learned at GE: Six Sigma, cost-cutting, and centralized decision-making. 3M’s stock has actually gained about 20% during McNerney’s tenure – significantly outperforming the Dow Jones Industrials average.

The Ugly

So what general conclusions can be drawn from Welch’s career? The ugly truth is that what worked for Welch at GE between 1981 and 2001 is not working for Immelt. Nor has it worked for many of his protégés who went to other companies. Certainly those lucky enough to have purchased GE stock when Welch took over as CEO and sold it when he retired are far better off than they would have been in a stock index fund.

The rapid deterioration of Welch’s mythic status calls into question the whole notion of business legends. It seems to me that these legends are created more for the benefit of the media – which comforts the afflicted and afflicts the comfortable – and the business legends themselves who love the media attention on their way up and resent it on their way down.

For executives the simple truth remains – the job of CEO pays well because it is hard. Silver bullets such as Welch’s “vitality curves” and Six Sigma can never change that reality.

Peter S. Cohan is president of Peter S. Cohan & Associates (www.petercohan.com), a management consulting and venture capital firm. He’s the author of seven books, including the forthcoming Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy (Jossey-Bass, A Wiley Imprint, forthcoming 2003).

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