Jack Welch and the Cost of Corporate Legends
by Peter S. Cohan
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 Welchs 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, lets examine three questions:
- What did Jack Welch do to earn his mythic status?
- What Welch weaknesses
undermine the legend?
- What general lessons do Welchs actions as GE
CEO offer other executives?
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:
stock market value increased 5,096%, inclusive of dividends, during Welchs
20 year tenure as CEO which began in 1981. This represents an average annual increase
in GEs 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 Welchs 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 Welchs CEO tenure. GEs 2000 earnings of $12.7
billion were more than eight times the $1.5 billion profit it reported in 1980.
GEs revenue more than quintupled to $129.9 billion.
GE earnings grew consistently. Wall Street loved the 103 quarters of uninterrupted
growth in GEs net income that began in 1975 and continued under Welchs
tenure as CEO. This consistent performance highlights the power of GE as a company,
insofar as Welchs 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 GEs 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 Welchs 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, GEs 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 Welchs vitality curve,
which required all GEs 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 GEs values -- Welch publicly detailed how these fired employees
actions had deviated from GEs values. Welchs public display of disaffection
let GE employees know that Welchs commitment to GEs values was sincere;
Be number one or number two or get out. Welchs concept of how to
manage GEs 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.
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 GEs 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.
all, Welch prided himself on winning. One famous anecdote has Welch widely faxing
a golf scorecard showing Welch beating golf pro Greg Normans score of 70,
two under par, by one stroke. In revealing his 69, Welch said Isnt
that the greatest thing? Is that a turn-on? Thats everything! The rest of
it is all nonsense. This is the real stuff. If you are going to shoot a 69, what
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 GEs name in the mud; he oversaw smooth earnings growth that
raised questions about the quality of GEs 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.
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 GEs 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. Welchs 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 Welchs relationship with Suzy Wetlaufer,
then the editor of the Harvard Business Review, McCleans instant reaction
was, Oops, Jacks back to his old ways.
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
GEs 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
Dodgy financial reporting. Skeptical observers of GEs
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 GEs 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.
plan was also a source of artificial earnings smoothing. A 1999 column by Alan
Abelson in Barron's, pointed out that GEs 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 GEs 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 GEs operations,
but under Welch it helped GE meet its aggressive earnings-growth targets each
Weak successors. Although Welch enjoyed regaling the media with
the quality of GE managers, it is remarkable how few of Welchs most admired
protégés performed well once they were out from under Welchs
The first of these post-GE failures was Gary Wendt. In June 2000,
Wendt, who had run GEs 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 Consecos 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 GEs 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 Fiats 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 Welchs successor, Robert
Nardelli, head of GEs power systems division, left to run Home Depot in
December 2000. Lacking retail experience, he nonetheless developed a strategy
based on Welchs: Replace the existing decentralized management style with
a top-down one. Nardellis approach has not yet worked.
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
weekendsthe 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 Depots bargaining power with suppliers, Nardelli
centralized purchasing for Home Depots 1,500 stores. That angered store
managers accustomed to matching their product lines with local tastes. And Nardellis
introduction of low inventories a standard practice at manufacturers
led to empty merchandise shelves at Home Depot -- a major source of customer dissatisfaction.
Home Depots stock has lost over half its value since Nardelli took over
and Home Depot has lost market share to Lowes.
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 slowdownfinancial
services, power turbines, jet engineshave slowed down.
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, GEs 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 Welchs tenure came to expect.
James McNerney of 3M
has had the most success emulating Welch. In January 2001, McNerney, who had run
GEs 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.
who lost the GE CEO succession race, brought to 3M the techniques he learned at
GE: Six Sigma, cost-cutting, and centralized decision-making. 3Ms stock
has actually gained about 20% during McNerneys tenure significantly
outperforming the Dow Jones Industrials average.
what general conclusions can be drawn from Welchs 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 Welchs 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 Welchs vitality curves
and Six Sigma can never change that reality.
S. Cohan is president of Peter S. Cohan & Associates (www.petercohan.com),
a management consulting and venture capital firm. Hes 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).
Peter S. Cohan & Associates
Marlborough, MA 01752
Learn about my new book: "Value Leadership"