Who actually belongs fifth in 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 the philosopher of small government. Economist Milton Friedman as champion of free markets in which companies only aim to maximize profit. And Reagan and Thatcher as the government leaders who ushered in the era in which market forces were given full scope 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. Movie character Gordon Gekko, legendary for being Greed is goodspeech in the movie Wall Street, has been proclaimed that symbol. But there’s also a top executive 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 covers of business magazines, he inspired top managers and was even named 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 keep up that battle with tech giant Microsoft. GE was worth $14 billion when Welch started, it was $600 billion when he retired.
Neutron Jack
David Gelles, economics reporter for the New York Timesdecomposes into The Man Who Broke Capitalism mercilessly the method of Welch. Often described as a visionary in times of globalization, he ushered in the era when profit maximization was elevated to the highest goal, not the continuity of the company. Gelles mainly describes Welch as the man who ruthlessly put an end to the Golden Age of capitalism in the U.S.
During that period, the American model did not deviate significantly from European ‘stakeholder capitalism’, in which the interests of all parties involved 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 US. Once you 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. He earned his nickname Neutron Jack through mass layoffs: where Welch went, people disappeared and the factories were left empty. GE executives were instructed to eliminate the worst-rated 10 percent of their employees each year. His approach that a company is valued not for the quality of its people but for the size of its profits led investors to immediately reward reorganizations with a share price increase. Up to the present day.
Welch made one takeover after another (almost a thousand in all) and turned the industrial group into a giant with companies in the media and in the financial sector. He split up takeover prey. All the companies he retained had to become number one or two in their market or he would divest them under the much-followed motto ‘fix it, close it, or sell it’.
Welch became a champion of shareholder capitalism. He would rather buy his GE shares to boost the stock price than that Welch invested in innovation. He allowed himself to be rewarded as CEO in a way that was unprecedented, the difference with the salary of the GE workers grew exponentially. That was all new, Gelles argues. His method was followed by many American and later European top executives. His disciples at GE, which had its own management school, were drawn to other companies and generally followed the same strategy there.
shadow bench
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 branch started out to help customers finance the purchase of their refrigerator or television. GE Capital grew through numerous acquisitions into an unregulated shadow bank, which provided plenty of loans and mortgages.
In addition, GE Capital made it possible to boost profits just before the close of a quarter by making financial transactions. Due to the lack of transparency in reporting the numbers, investors saw high predictable gains. How GE actually performed was also poorly understood by analysts on Wall Street because of those accounting tricks. The fact that GE in the meantime 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 soon became clear that GE’s industrial companies were not performing nearly as well as had been assumed. Welch had saddled his successor Jeff Immelt with a company that could never sustain its success. Welch passed away in 2020. Not long after GE’s current CEO, outsider Larry Culp, had decided to split the company permanently. GE remains only a producer of aircraft engines.
This book is certainly not an objective biography of Welch, it is rather a reckoning. 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, in the Welch style, have cut back significantly on technology development and safety expenditures for shareholder profit. Resulting in fatal accidents.
In his last years, Welch was a key supporter of President Donald Trump, who, conversely, had seen Welch as an example for years. Gelles outlines the irony that lies in this. Trump just had his electoral success in the American Heartland, which Jack Welch and his followers have so mercilessly demolished by the departure of their factories.