Short-term profits and long-term consequences — did Jack Welch break capitalism?
Long before the reign of Elon Musk, Mark Zuckerberg and Jeff Bezos, there was Jack Welch.
Welch, who headed up the General Electric Company from 1981 and 2001, is often thought of as the first celebrity CEO, a businessman who wowed investors and mingled with celebrities.
"[Welch's] face was on the cover of magazines all the time," New York Times correspondent David Gelles says. "He emerged as sort of this imperial executive and helped define what I think is still with us today in the form of a certain amount of CEO worship."
In his book, The Man Who Broke Capitalism, Gelles makes the case that Welch's ruthless cost-cutting and single-minded focus on quarterly earnings ultimately hurt both GE and American capitalism.
"Neutron Jack," as he became known, had a practice of ranking employees and automatically firing the bottom 10 percent every year; in Welch's first few years of leadership he fired more than 100,000 people in a series of mass layoffs and factory closures.
"Up until this point, people who had a job at a company like GE or IBM basically figured that they had a job for life. But he explicitly said that this notion was going to be a thing of the past under his watch," Gelles says.
Many of the jobs that Welch cut were sent overseas: "We see the first great wave of labor, American manufacturing labor, going abroad, and thus begins the real beginning of serious outsourcing that would, of course, decimate America's manufacturing base," Gelles says.
Welch made aggressive deals, including the acquisition of NBC in 1986, with an eye toward expanding GE's influence. The moves initially buoyed the company's stock price; in Sept. 1993, GE became the most valuable company on the stock market.
But ultimately, Welch's leadership did not lead to long-term profits. He championed risky financial ventures and acquisitions, which his successor then continued. GE's focus on subprime mortgages and short-term lending would prove costly when the 2008 financial crisis hit. In 2021, GE's current chief executive announced that the company would separate itself into three smaller standalone companies: One focused on jet engines, one focused on medical devices, and one focused on power equipment.
"This is all that's left of Jack Welch's legacy," Gelles says. "Far from being the most valuable company on Earth and a conglomerate that spanned the world and all these different industries, GE is now going to be essentially chopped up into three different discrete pieces – and that's the end of the story."
On GE's role in the American economy before Welch took over
As I dug into the history of GE, I found it hard to overstate not only the impact that GE still had in 1981 when Jack took over, but really its role in the history of American industry for the better part of the century before that. This was the company that brought us electric light bulbs, power plants, X-ray machines. This was the company that introduced everyday products like the toaster oven. They were behind the mass marketing of radio sets and televisions, dishwashers. The list just went on and on. ...
When you looked at their influence on industry and government beyond what we might find in our kitchens, they were no less influential there as well. It was GE that helped put men on the moon on the Apollo missions. You go back and look at those pictures and there are lines and lines of GE engineers working side-by-side with NASA engineers. And right up to the present day, the size of that company became, at one point, I think, representing something close to 1% of the American GDP. And there was a phrase, "As GE goes, so goes the American economy." ...
Big companies back then — and GE is a perfect example of this — were proud of the way that they distributed their profits widely with employees, with their supply chains, and even with the government. It was a 1953 annual report by GE that I cite in the book, where they brag about how much they're paying in salaries to their workers and how much they're paying in taxes to the government. I don't need to tell you that that's a whole lot different than the way many companies operate today.
On Welch's background
He was impulsive, somewhat aggressive, restless, ambitious, impatient. He was raised primarily by his mother, who was a devout Catholic. One amazing anecdote I found was that she taught him to gamble at an early age, making him wager his own money to learn, in a visceral sense, what it meant to win and lose. But he was also deeply involved in the faith. He was an altar boy.
There were flashes of a temper from an early age. There's an anecdote ... where he talks about caddying at a local golf course. And the man he was caddying for asked him to go fetch a ball that had gone in the water. And instead, he throws the man's golf clubs in the water and storms off the course. So you see flashes of a temper. And that continues right on into his early days at GE, when, as a young associate, his first year at the company, he decides to quit because he learns that his colleagues got the same raise that he did and he thought he was doing better. So he said he would quit the company, and it was only after his superior promised to give him an even bigger raise that he agreed to stay.
On Welch's practice of ranking employees and firing the bottom 10%
He had a euphemistic name for this practice. He called it the "vitality curve," but it was known internally and more broadly in the public as stack ranking or even more sharply "rank and yank." And the idea is this: Managers, he said, needed to rank their employees. 20% get A grade, 70% get a B grade, and 10% get a C grade. And if you're in that 10%, you're out of the company.
He did that for 20 years inside GE, which led to thousands and thousands of layoffs. And it became, because he was so influential, dogma in corporate America. When Steve Ballmer took over Microsoft, he implemented stack ranking and it led to great turmoil in the ranks of Microsoft. And even more recently, Adam Neumann, the founder of WeWork, was using stack ranking as WeWork was growing so quickly, even though that company had billions and billions of dollars in funding, he saw the need to fire 10% of its workers every single year because Jack did it.
On Welch's unflattering nickname "Neutron Jack"
He hated the "Neutron Jack" name, even though he could never shake it. Even when he died in 2020, President Trump gave him a tweet. He said "There was no corporate leader like Neutron Jack," so that label stuck with him for the duration of his life. What was so remarkable, though, is that despite the negative press he got in those early years, he was able to continue his work because the GE board, and ultimately Wall Street and ultimately the rest of corporate America, saw that what he was doing was, for better or worse, working in the short-term. These strategies he was employing were indeed ticking up short-term profits. All of a sudden, other CEOs saw that, Hey, yes, if we rapidly wind down the cost of our labor, we could potentially see a meaningful increase in earnings per share for the next quarter and Wall Street sure liked that. And so there was this incentive system that encouraged other CEOs to start following his lead. And what's so remarkable is that even after these first years of pretty withering press, he's able to survive and ultimately become revered as the absolute model CEO, to the point that Fortune magazine at the end of his career, calls him "the manager of the century."
On Welch's impact on GE employees
During his time at GE, many GE workers benefited those men and women at the company who were invested in GE stock, they got to see their fortunes rise along with Welch's and the company's. But again, it depends on the time horizon we're looking at. If we're looking at just the years he was running the company and just what he did and who benefited at that point, you can make a case that, sure, he was good for at least the GE workers who didn't get fired under rank and yank or under his downsizing or offshoring or outsourcing.
But fast forward and look at what happens to these pensioners. Look what happens to the men and women holding GE stock as it plummets in the years following his departure. Because when he leaves, all of these flaws are fundamentally exposed and Wall Street starts seeing through the charade. So his reputation among workers was a complex one. I think for some GE workers, they enjoyed the benefits. But even in the '90s, when Jack was riding high, it was becoming commonly understood among organized labor, among union leaders, that Jack had led a charge in the early '80s that was resonating with them still and has ultimately helped erode union membership in this country to record low levels today.
On General Electric today
From being the most valuable company on Earth, GE fell to the point of essential irrelevance in the American economy. In 2018, with all of Welch's bad decisions catching up with the company, GE was removed from the Dow Jones Industrial Average, the bluest of blue chip indexes and a real bellwether of the American economy. GE had been one of the very first companies included in the index, and it was ultimately the last of that original group to be removed, but its departure from the Dow was this real symbolic moment that ultimately set the stage for news that happened just last year, which was the fact that GE is finally getting broken up once and for all.
Sam Briger and Joel Wolfram produced and edited this interview for broadcast. Bridget Bentz, Molly Seavy-Nesper and Natalie Escobar adapted it for the web.
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