Was Jack Welch Really That Good?

(Bloomberg Businessweek) -- Of all the key moments in Jack Welch’s storied tenure as General Electric Co.’s chief executive officer, there’s one that’s always overlooked. It took place on Friday, Aug. 13, 1982..Although he’d been CEO for only 16 months, the 46-year-old Welch had already put his stamp on the place. He was blowing up the bureaucracy, eliminating the formalized meetings that had long marked GE’s culture, and installing a blunter, more freewheeling style that prioritized “facing realities” over “superficial congeniality,” as Welch later put it in Jack: Straight From the Gut. He was beginning to execute on his famous dictum that if a GE business wasn’t first or second in its market, it should be sold, fixed, or closed. (In his first two years, Welch sold 71 businesses.) And though he wasn’t yet known as Neutron Jack, the large-scale layoffs that would earn him that nickname were well under way..Yet the stock market had barely noticed. GE’s shares were actually down 5% during that period, and investors still viewed the company as a dividend play. Then came Aug. 13. That, we know now, was the first day of a powerful bull market, one that would see the S&P 500 index return more than 2,400% by the time it ended 18 years later. Once the bull began running, GE’s stock went in only one direction: up. By the end of 1983, it had returned more than 90%; within five years, 237%. A sprawling, century-old conglomerate had become, improbably, a growth stock..There’s no question that Welch was a brilliant and forward-thinking chief executive. With one big exception (GE’s acquisition of Kidder, Peabody & Co.), everything he touched seemed to turn to gold. Even as General Motors, U.S. Steel, Eastman Kodak, and other companies lost market share to foreign competitors, Welch’s GE was making inroads internationally. He turned GE Capital from a ho-hum consumer-finance arm—underwriting loans for, say, GE refrigerators—into an immense generator of profits. He was one of the first CEOs to reward his top executives with stock options—lots and lots of stock options, making many of them millionaires. He also believed that the mediocre should go elsewhere if they didn’t improve quickly, and he acted on that belief. When Welch adopted Six Sigma, a set of processes designed to create continuous improvement, half the CEOs in the Fortune 500 raced to adopt it as well. Under Welch, GE became famous for developing outstanding managers, men (always men) such as W. James McNerney Jr., Lawrence Bossidy, and David Cote, all of whom became CEOs of important industrial companies..So, yes, Jack Welch was really good. But he was also lucky. According to Fortune magazine’s Geoffrey Colvin, in a story he wrote near the end of Welch’s tenure, Welch tossed aside GE’s historic ambition—“simply to grow faster than the economy”—and replaced it with a new mission: “to be the world’s most valuable company.” In other words, Welch redirected GE’s focus on share-price appreciation at the exact moment the greatest bull market of our lifetime was starting..Prior to August 1982, the men who ran America’s big companies didn’t spend a whole lot of time worrying about their stock price. For one thing, CEOs weren’t measured by how well the stock did. For another, the business world had largely given up on equities. Nothing typified that more than that infamous 1979 BusinessWeek cover, “The Death of Equities.”.Consider Reg Jones, Welch’s predecessor. In his day, Jones was widely considered the country’s best CEO, even though GE’s stock dropped 21% during his nine years at the helm. When he died in 2004, the New York Times attributed the stock’s poor performance to “investor disenchantment with stocks generally, rather than the company’s operations.”.The bull market changed all that. The creation of 401(k)s and IRAs meant the stock market was suddenly important to Americans saving for retirement. Corporate raiders such as T. Boone Pickens and Carl Icahn began demanding that companies start paying attention to shareholders. And executives themselves realized that a rising stock price could make them wealthy thanks to the stock options that became part of every CEO’s compensation package. Suddenly, nothing mattered more than stock performance..Welch partisans will tell you that GE’s shares didn’t just rise in lockstep with the S&P 500; they absolutely obliterated the index. That’s true: GE’s total return during Welch’s 20 years was about 5,200%, more than double that of the S&P 500. GE’s revenue grew from $25 billion to $130 billion while its profits grew tenfold, to $15 billion..“Jack was one of the finest managers I’ve ever met,” billionaire investor and former GE director Ken Langone told CNBC last year. “Every 90 days he would meet with all his different business segments and drill down. He knew everything about his businesses.”.“Jack changed the rules of the game,” says John A. Byrne, who for years wrote about Welch when he was on the BusinessWeek staff. “He was the first CEO to lay off workers while the company was still profitable. There were people who hated him for it. But if he hadn’t done it, GE wouldn’t have thrived.”.“He motivated. He inspired,” says Paul Argenti, a longtime business professor and Welch observer at Dartmouth College’s Tuck School of Business. “He was great at defining and executing a strategy. And changing it when it needed to change. He was the consummate leader of his time.”.I don’t disagree with any of that. But I also recall another reason Wall Street was so enamored of Welch: Quarter after quarter, this huge, unwieldy conglomerate beat the Street’s earnings estimates by a penny or two. Given the ups and downs of business, it was an almost miraculous feat. The profit GE Capital generated was only one of the reasons Welch valued it so much. The other reason was that it was GE’s black box. It gave him the means to dispense those quarterly miracles..Argenti says he doesn’t think Welch’s methods would work today. “Beating by a penny has gone away,” he told me. Today’s employees tend to respond best to a different kind of leadership—quieter and less self-promotional, as exemplified by Tim Cook at Apple Inc., say, or Reed Hastings at Netflix Inc.. Read more: GE’s Larry Culp Faces Ultimate CEO Test in Trying to Save a Once-Great Company.Still, by the time Welch retired in September 2001, he was widely hailed as the greatest CEO of his time, maybe of all time. Fortune named him manager of the century; BusinessWeek gave him and his wife, Suzy, a column. But it seems to me that GE’s deterioration during Jeff Immelt’s time as chief executive officer should cause us to question whether such accolades were truly deserved..One issue is whether the conglomerate structure Welch turned over to Immelt was sustainable. Take GE Capital again. Immelt critics point out that he depended on it for profits even more than Welch did. But a good part of the reason for this is that the business climate Immelt operated in was far more difficult than anything Welch ever faced. The 2008 financial crisis exposed how woefully undercapitalized GE Capital was. It had far too many substandard loans on its books, as it stretched for profits that were harder to come by. Would Welch have prevented the fall of GE Capital? Maybe. But it was he who created the dependence on that division in the first place..The second issue has to do with the larger business culture. Yes, hundreds of other CEOs adopted Six Sigma after Welch did. But they also bought into his obsession with the stock price. At its worst, that obsession gave us Enron Corp. and WorldCom. But even putting crookedness aside, it led most of corporate America to care primarily about dancing to Wall Street’s tune. Employees, communities, and even customers became less important than “maximizing shareholder value.”.Then there’s the question of Welch’s successor, Immelt. Welch now claims that Immelt fooled him—that he gave the impression of being a better leader than he turned out to be. But c’mon. Immelt joined GE in 1982; Welch had almost two decades to size him up. If one of the most important jobs of a CEO is to pick his successor—and it is—then Welch failed..A year after Welch retired, BusinessWeek asked the great management thinker Jim Collins whether Welch was a “Level 5” leader, Collins’s highest accolade for a CEO. He responded: “His report card does not come in until Immelt exceeds him. If Immelt does not exceed him, then he has failed. Jack Welch did not make GE great. GE was already great. Every GE CEO has been to his era what Welch was to his, without exception. It takes 50 years to create a GE. Generations of leaders built it. Whether Welch was a Level 5 comes down to a question we don’t know the answer to. Was Welch first and foremost ambitious for himself or for GE? Only he knows that.”.Here’s one other thing. As I noted earlier, the great bull market ended on March 24, 2000. Tech companies such as Pets.com imploded. Solid companies such as Cisco Systems Inc. saw their stock price fall by three-quarters, and they still haven’t fully recovered..Jack Welch’s GE wasn’t immune. From March 24, 2000, to Sept. 6, 2001, when Welch retired, GE’s shares fell 24%. Was he managing any differently? No. Had he lost his touch when it came to earnings? No, again. The only thing that had changed is that the market was going down instead of up. Even Welch couldn’t defy a bear market..Was Jack Welch a great manager? Of course he was. But the bull market—and the culture’s new emphasis on share price—made him look better than he really was. And by the way, the greatest manager of the 20th century was Alfred P. Sloan, who ran General Motors Co. from 1923 to 1956. But that’s a story for another day..To contact the editor responsible for this story: Jim Aley at jaley@bloomberg.net, Bret Begun.©2019 Bloomberg L.P.

Was Jack Welch Really That Good?

Although he’d been CEO for only 16 months, the 46-year-old Welch had already put his stamp on the place.

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