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[News Clips]:
Perhaps the most influential and imitated, not to mention the most controversial corporate CEO of the last half century—
—Jack Welch
—Jack Welch
[Clip of 30 Rock]: Do you know why Jack Welch is the greatest leader since the pharaohs?
Host: Earlier this year, Google CEO Sundar Pichai laid off 12,000 employees after calling for a “Simplicity Sprint” to increase productivity. When Bob Iger returned to Disney, he immediately announced he would eliminate 7,000 jobs. When Elon Musk took over Twitter, one of the first things he did, besides pull a few embarrassing and cringe-y stunts—
[CNN News Clip]: In a tweet, Elon Musk wrote “entering Twitter HQ, let that sink in.”
Host: —was ask managers to rank their employees in each department and fire the bottom 10%. To which managers responded: rank by what metric, dude?
The modern CEO learned to cut the fat and destroy the lives of workers without remorse, from basically ONE guy, one CEO –– Jack Welch.
[Jack Welch Archival Clip]: Social Responsibility means Win.
You may not have heard of him, but Jack Welch, the CEO of General Electric is the reason companies off-shore jobs, do massive cost-cutting and layoffs, and pour all their profits into stock buybacks.
[Archival news clip]: During the 80s, GE earnings have increased every quarter, growing at a rate 3 times the national average and accelerating.
Host: And the thing that’s surprising is, it didn’t used to be that way.
This is the Class Room, from More Perfect Union. And today we’re talking about Jack Welch, the Man Who Invented the American CEO.
Jack Welch took over General Electric in 1981—I was less than one year old, but I was alive in the 80s, take that as you will. At the time, General Electric was the all-American company. It was founded by Thomas Edison in 1892 and there were few industries it didn’t touch. It was famous for the lightbulb but also the electrical grid, aviation, hydroelectric power, and x-ray machines. It also was synonymous with middle class suburban prosperity: starting in the 1920s, its household appliances—dishwashers, toasters, refrigerators—were in homes across America—and employees, hundreds of thousands of them, had life-long careers–a living wage, benefits, and stability. Wow, that sounds amazing, I wonder what happens next.
Welch had been a company man. He started at GE at the age of 25 as a junior chemical engineer making the equivalent of $107,000. He said that he didn’t quite fit in at GE—he was raised Irish-Catholic in a working class home in Salem, Massachusetts, he didn’t like wearing ties, he was brash and aggressive. When Jack Welch took over, GE employed more than 400,000 people and was worth $14 billion. In just a few years, both those numbers would change dramatically.
[Jack Welch Archival Clip]: The case for change in General Electric is absolutely clear.
Host: One of the first speeches he made as CEO was in Manhattan’s glitzy Pierre hotel. He promised a new era at GE. He’d sell off underperforming units and cut costs. Anything he couldn’t fix, he’d close or sell.
[Jack Welch Archival Clip]: And only the winners will in fact win this game.
Host: In elite business circles and management schools, this speech at the Pierre is considered the beginning of the philosophy of shareholder capitalism: the idea that a company had ONE priority. And that was to make profits for investors.
[Jack Welch Archival Clip]: I am not a destroyer of companies. I am a liberator of them.
Host: It’s hard to grasp how unusual this line of thinking was at the time. From 1948-1979, a company grew along with its workforce. As companies invested in products and factories, productivity went up and with that, workers’ wages. The investors were often the last priority. Gerald Swope, GE’s chief executive from 1922 to 1945 practiced what he called “welfare capitalism”—he gave workers health benefits and a profit-sharing plan. In an annual report from 1953, GE boasted about how it had paid all its taxes and that it had spent a whopping 37% of its revenue on workers’ pay and benefits.
This wasn’t Jack Welch’s philosophy, though. Welch thought GE was bloated—too much bureaucracy, too many redundancies. He thought keeping employees on for life and giving everyone—from the janitor to the executive suite benefits was sentimental and wasteful.
[Jack Welch Archival Clip]: And layers, and bureaucrats, and parking spaces—oof, horrible.
Host: In his autobiography, Welch wrote that GE was known as a supertanker—strong and steady in the water. What Welch wanted instead was a speedboat.
One of the first things Welch did was lay people off. In the first two years, he laid off 72,000 people, and shut down a dozen factories. He instituted what he called the “Vitality Curve.” Every manager of every unit would rank their department and fire the bottom 10% every year. This is the practice that CEOs would carry into the 21st century. Microsoft was famous for it, Jeff Bezos does it today, and Adam Neumann did it before he left WeWork disgraced.
[Adam Neumann interview]: We believe that everyone is a creator. Ashton’s a creator, and you’re a creator, and our friends behind the camera are creators. We all have superpowers.
Host: It wasn’t as though GE was struggling, it was still one of the top ten companies in the country, but that didn’t matter to Welch.
He knew that the growth he wanted couldn’t come from GE alone, so he focused on buying companies and selling off any unit within GE that wasn’t ranked first or second in the world. Within a year, he sold off 20% of General Electric.
He off-shored jobs and replaced life-time workers with contractors, who could be paid less. He moved unionized factories to states with less union power, or overseas. “Ideally,” he once said, “you’d have every plant you own on a barge.”—USA, USA, USA
But he was chipping away at the manufacturing work that had given GE its reputation as a household name, Welch was expanding something else: GE Capital. This is where he knew he could make the company rich. He bought up insurance companies, got into credit card loans—I have a homeboy that worked for GE, and he used to talk about this all the time. It didn’t make sense to me that GE owned insurance companies and I think about the excitement in his face he would speak with when he would talk about how rich this company is, he’s in government now, where was I?
The political climate was changing, and Welch knew how to take advantage. In 1972, a group of top executives formed the Business Roundtable, a kind of supervillain lobbying group that was determined to have a direct influence on Washington. This group of CEOs, including Welch, lobbied against antitrust laws and blocked labor law reform. When Ronald Reagan became president in 1981, they suddenly had an administration ready to do their bidding.The Business Roundtable convinced the Securities and Exchange Commission to allow more mergers and acquisitions and change the tax code to loosen restrictions on stock buybacks, which had been heavily regulated since the Great Depression. This was where Welch really started to put his focus at GE: stock buybacks.
Stock buybacks are a get-rich-quick scheme for the 1%. If profits are falling, companies can buy their own stock from investors, limiting supply and artificially boosting the value of the company.
In 1990, GE purchased $10 billion of its own stock, at the time the largest buyback in history. In an article in the New York Times, critics worried that too many businesses were following Welch’s lead. They weren’t actually creating products, they weren’t trying to compete with manufacturers overseas, they were just artificially boosting their stocks.
This is how Jack Welch made GE the most valuable company in the world.
[Archival News Clip]: Share owner equity reached 19.4%
Host: Quarter after quarter, Jack was able to top GE’s earnings. These early fat years at GE made Welch a celebrity. He was named “Manager of the Century” by Fortune magazine in 1999 and called “the most widely admired, studied, and imitated CEO of his time.”
There was one problem: Welch was lying. Before each quarter, Welch was able to boost GE’s stock by doing a complex mixture of acquisitions and closings, international financing, tax write-offs and buybacks to hit the exact target Welch wanted Wall Street to see. Eventually this caught up to Welch. In 1995, GE was fined $7.5 million and in 1999 $50 million for inflating its earnings and hiding the fact that, actually, business wasn’t going so well.
As Welch’s stardom grew, he became fascinated with media. He understood the power of the press and he wanted his own network. In 1985, he bought RCA in order to sell off struggling sectors but keep the real get: NBC.
[Archival news clip]: They’re calling it a merger. It was one of those gun-to-the-head mergers, by the friendly folks at GE.
Host: He created CNBC, a cable news business channel, and bought its main competitor, Financial News Network, for $150 million. It was the early years of the 24-hour news cycle and Welch wanted business reporting to have the same urgency, and fanbase, that a sports network could have. CNBC’s ratings increased along with the stock market as more Americans became interested in stocks and finance as an American pastime.
In 1997, the Business Roundtable published a paper called the “Statement on Corporate Governance”: “The principal objective of a business enterprise” it said, “is to generate economic returns to its owners.” Welchian philosophy and shareholder capitalism had prevailed.
Welch retired from GE in 2001 with a farewell gift of $417 million –one of the largest severance payouts in history and $900 million in stock. He wrote his first memoir: Jack: Straight from the Gut—<laugh> ah, you can’t be serious, it sounds like a 90s hip-hop album—with a $10 million advance: even more than was offered to the Pope! A few years later, during a divorce settlement with his first wife, the press discovered that Welch hadn’t just gotten a large severance package, he’d also enjoyed basically all aspects of his life covered by GE. Asked to comment, a spokesman at GE (presumably being paid to do damage control for Jack Welch) reminded reporters that Welch made GE’s fortunes rise by “hundreds of billions of dollars” implying that: Welch was worth it.
For the shareholders, maybe he was. Under Welch, G.E.’s revenue increased fivefold to $130 billion and its stock shares from $14 billion to $410 billion. He’d also laid off half of GE’s workforce and closed dozens of factories across the United States.
The new CEO of General Electric, Jeffrey Immelt, continued Welch’s practice of mergers and acquisitions and expanded GE Capital to include subprime mortgages and short-term lending—great stuff.
In 2008, GE’s stock fell by 42% and GE Capital by 80%. The financial wing of GE was so large and the company had taken on so much debt that it needed a last-minute $3 billion bail-out from Warren Buffett. The company never really recovered and in 2021, GE split into three companies and sold off its major assets: NBC Universal and GE Capital. Ten years after shuttering its last lightbulb factory in the United States, GE was no longer the most valuable company in the world.
[Archival News Clip]: This is a disgrace what happened here—it was a great American company.
[CNBC news clip]: Former General Electric CEO and Chairman Jack Welch, has died at the age of 84. His wife Susie said in a statement: “more than anything else, Jack was a lifeforce made of love.”
Host: Welch’s influence is hard to overstate. Managers he trained and mentored went on to run dozens of S&P 500 companies–Equifax, Albertson, Boeing, and Chrysler.
The practices he pioneered are now commonplace–using contractors, off-shoring labor, putting stock-buybacks ahead of investment or innovation. These practices are all for the benefit, first and foremost, to the shareholder, and for the short-term goal of boosting quarterly earnings.
In 2019, the Business Roundtable issued a new statement signed by 300 CEOs from Jeff Bezos to Tim Cook of Apple to the CEOs of WalMart and Blackrock: “We know that many Americans are struggling. Too often hard work is not rewarded.” They claimed that the era of shareholder capitalism was over. The new “Purpose of the Corporation” was to create “long-term value” that benefits employees, communities, suppliers and customers.” Sounds amazing. But of course these same CEOs union bust and don’t raise wages to a living wage. They dump toxic chemicals, lobby to remove regulations, and close down factories that communities depend on. Welch’s legacy still informs much of corporate America and it would take dramatic changes in our labor laws and the financial system to restore the balance of power back to working people in America.
Thanks for watching The Class Room, from More Perfect Union. We based this episode on a few books: David Gelles’ great biography on Welch The Man Who Broke Capitalism, Berry Lynn’s End of the Line and of course the book from the man himself: Jack Welch’s Straight from the Gut. Are there other heroes and anti-heroes of American capitalism that you want to see episodes about? Comment below and as always like and subscribe to support more videos like this one!
