Jack Welch Inflicted Great Damage on Corporate America

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zyang2• 6 years ago

Unfortunately that mindset is bleeding into our governing system. Make the short-term numbers look good at the expense of long term prosperity.

JackFr4• 6 years ago

Unfortunately that mindset is bleeding into our governing system. Make the short-term numbers look good at the expense of long term prosperity.

What does that even mean?

dmos62• 6 years ago

Which part do you not understand?

zyang2• 6 years ago

Maybe I'm just looking at the past with rose-colored glasses, but postwar US built the most advanced highway infrastructure, hoover dam, landed on the moon. Now we rely on rate cuts and tax cuts to inflate our paper wealth. California couldn't build a high speed rail with all its wealth. Our astronauts had to hitch a ride with the Russians to get to ISS.

minikites2• 6 years ago

We've gone from "a society grows great when old men plant trees whose shade they know they shall never sit in" to "lets burn down the forest for farmland because climate change will happen after I'm dead, so whatever"

multiplegeorges3• 6 years ago

The singular focus on shareholder value, to the exclusion of all else, has greatly damaged society.

There needs be a conscientious realignment to maximizing stakeholder value.

The corporation is best way to organize labour and capital in productive ways that we've ever come up with and it can be a tool for immense good, but not if it disregards the society, the environment, or the community it operates in.

eternalny1• 6 years ago

Totally agreed.

If I was CEO this wouldn't be rocket science, you fire a bunch of people prior to reporting numbers. Expenses go way down, stock goes up, repeat this. Throw in some M&A's and you are good to go.

Not that I would do this, but that's how you maximize "shareholder value". Of course, it's not good for the actual business in the long term.

adharmad• 6 years ago

Partly, the emphasis on extreme short term gains, in turn accentuated by short term trading (options) and HFTs disincentivizes any management actions that try to optimize for the long term.

The CEO will be under tremendous pressure if he/she tries to optimize for a 1 year timeframe (for example) as opposed to quarter-by-quarter. I wish boards can come up with a compensation structure for execs which optimizes for long term.

minikites2• 6 years ago

fire a bunch of people prior to reporting numbers

Call it "stack ranking" and you too can be lionized by the business press.

robofanatic• 6 years ago

and it's perfect when you are one of the biggest shareholders. Your pockets will always be filled no matter what.

Kluny• 6 years ago

Seems like it would be possible to correct for this by requiring the numbers to include the salaries of anyone who was fired in the past quarter - after all, the value they took with them when they left ought to count as a loss.

PascLeRasc• 6 years ago

Wayfair's trying this right now, but it doesn't look too good for them.

Grimm12• 6 years ago

So given the fiduciary responsibility to maximize shareholder value that is hard right now, but the existence of

Edit: The above is apparently more cultural than legal but I still like the below option.

https://en.wikipedia.org/wiki/Benefit_corporation

Give's me hope as a mode to found a company, the gist is:

"that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals"

My understanding is that in the context of the current startup climate is that it is harder but not impossible to raise money under that type of corp though I haven't seen it myself yet.

kens• 6 years ago

There generally isn't a responsibility to maximize shareholder value. See, for instance https://www.lawschool.cornell.edu/academics/clarke_business_...

ska4• 6 years ago

So given the fiduciary responsibility to maximize shareholder value that is hard right now

This is more cultural than legal (and, as the article points out, he had a lot to do with this shift)

mikestew2• 6 years ago

So given the fiduciary responsibility to maximize shareholder

Not given. I’d ask for a source, but I’ll save you the trouble of a fruitless search by not doing so.

epitrochoidal• 6 years ago

Even if that responsibility exists, and a number of individuals have questioned whether it does, it doesn't necessarily follow that such maximization needs to be solely focused on short-term gain.

tehjoker• 6 years ago

The reason the corporation makes bad decisions is because it is a dictatorship by the people that run it. The only way to reform such a system isn't with peans to morality that run in the face of self interest, it is to totally restructure the stakeholder structure to be dominated by the workers and the people they serve.

andruc• 6 years ago

Are there any great examples of worker-co-ops in the tech space?

wpietri3• 6 years ago

Definitely. Here's a good post from the founder of a software consulting company I respect. His background is in engineering, and there are a bunch of common business assumptions that he questions, and that one is first on the list: https://greatnotbig.com/2020/03/unquestioned-business-assump...

Apocryphon6• 6 years ago

Looks like something worth submitting to the front page.

scarface74• 6 years ago

So did Jack Welch also influence the “grow big and exit all cost without a plan to be profitable” VC startup culture.

markus_zhang3• 6 years ago

This needs a total revamp of pretty much every thought and policy in modern capitalism because so many of them have their roots in the stock price above everything ideology.

But I believe we need to do it if we want a brighter future.

toohotatopic• 6 years ago

You have laws to protect society, the environment and the community. Tax environmental and socially harmful activities and let the drive for shareholder maximization lead to environmental and social improvements.

Companies don't vote.

hjkgfdfgh• 6 years ago

No. They just purchase votes.

xenospn• 6 years ago

What laws? You mean the ones corporations spend millions of dollars lobbying against/for and practically writing?

mushufasa2• 6 years ago

you are probably a stakeholder if you have investments such as a 401k. over 50% of american adults have investments in stocks.

you can vote your proxies to direct companies to do better. i built a website to make this more intuitive and easier, and you can support shareholder initiatives just like signing an online petition. e.g. https://www.yourstake.org/petition/disclose-corporate-politi...

waldohatesyou2• 6 years ago

It's lovely that you've done this! That being said, I'm inclined to believe that it's too difficult to get your average Joe to engage in shareholder initiatives, it's hard enough getting them to vote (in Canada at least). I would suspect that a path that would show more promise is the notion of corporate contracts that Elizabeth Warren proposed but unfortunately, it seems that she won't be the nominee.

Kalium4• 6 years ago

It's worth bearing in mind that there are a lot of parties who are, in some fashion, a stakeholder. Stockholders, debt holders, employees, vendors, contractors, towns where offices are, environments, governments of various levels, etc. Many of the things that produce value for them will be in opposition to the things that produce value for other stakeholders (expanding in one town vs another vs environment, etc.).

In theory, it's clearly the job of leadership to balance the needs of all stakeholders to maximize value for everyone. In practice, there's a lot of room to use stakeholder value as a cover for doing what leadership wants to do anyway. Almost everything leadership would want to do provides value to some stakeholder, after all...

One of the few upsides to shareholder value capitalism is that it provides a clear metric. This can help reduce difficulties from the principal-agent problem in a way that a stakeholder approach may have more trouble with.

Perhaps it's excessively cynical of me, but when CEOs talk about stakeholder value I hear powerful people looking to be less accountable.

multiplegeorges3• 6 years ago

I definitely did not mean to imply it was easy to do.

It requires good-faith actors and a long-term, holistic view. Humans are not very good at these things.

2OEH8eoCRo0• 6 years ago

Why were stocks invented? It seems that stocks were not even invented for trading but for funding things. Being able to profit from trading seems secondary. The whole idea that stocks must rise forever or society collapses seems insane to me.

I've always had a pet theory that 401k is a Republican ploy (or extremely useful). Tie everyone's retirement to the stock market as the only thing that matters.

Glawen• 6 years ago

Yes of course it is a ploy, it has 2 effects: It is maddening employees by binding them to stock market (preventing strikes for example), to make them accept pay cuts more easily. It increases stocks because there is a lot more money on the market

triceratops3• 6 years ago

The 401k works in two ways actually. The way you mentioned. Plus, because employees have no choice of bank or investments in their 401k so they can be screwed over on fees more easily.

mushufasa2• 6 years ago

Stock markets were invented originally by the Dutch East India company to raise funds from the general public. This allowed them to raise the capital to expand faster than any other firm in the world, at a time when the alternatives were to convince royalty to grant you money, turn to high-interest small loans via moneylenders, or raise from your own stakeholders (e.g. guild membership).

At its height, the value of the Dutch East Company dwarfed the value of the top 40 global companies today, combined, FAANG included. Ever since, companies have sought to issue stock to the public (IPO).

Originally, the reason to buy a stock was because the company offered dividends to their shareholders. Over time, people started trading their shares of the stock (hence stream of future expected dividends) to others for cash now.

The 'stock market' became a meetingplace for those transactions. Just like other marketplaces (e.g. AirBnB), the stock market makes it easy for buyers to discover sellers and vice versa. The ability to trade assets for cash is 'liquidity' and stock markets have proven to be highly liquid, which is one of their most important qualities. Over time, these meetingplaces became regulated by governments to prevent schenanigans (e.g. Great Depression).

Originally, companies didn't care that much about their stock price after they initially raised the funds from the public. The price of stock was directly tied how much in dividends you would expect from the future, which is a proxy for the health of the company, but that's about it.

Over time, investing into these stocks became its own profession, and investing professionals developed a lot of metrics to assess that health of the company. Methods include looking through the company's balance sheets, assessing their strategy, comparing them to competitors, etc. Think of jargon like EBITDA, Free Cash Flow to Equity, Debt Leverage - there's over 20,000 pages of it throughout the CFA exam series.

Jack Welch is credited with shifting the focus of companies towards increasing their stock price by gaming the investors' metrics. Improving these metrics will have immediate effects on investor perception, much moreso than gradual adjustments to dividends. Employees and managers, who owned a bit of the company stock, would try to do all they could to amp up the price so they could sell their own shares at a high price.

Incidentally, this is the same angle for most tech stocks / VC. Tech companies generally don't focus on paying steady dividends, but rather on growing and raising the stock price to the point where you can sell it to someone else at a higher price. Hence, many tech companies are fine with being unprofitable for a long amount of time, even during an IPO, as long as the valuation of the company (# shares x price) rises via growth.

Re: Republicans, you are actually 100% correct in your suspicion, at least w/r/t the USA. Reagan changed the tax code in the 80s, around the time Welch was in his heyday, to incentivize citizens to invest in the economy. Now over half of American adults are invested in the stock market, which is among the highest participation rate of any country. In other countries, such as China, the stock market doesn't have nearly as high of a % participation from the public.

Reagan's policy is regressive. Only the people with well-paying jobs with 401ks typically invest, so the poor fall farther behind. Furthermore, to take full advantage of the investment tax incentives requires knowledge, which is typically passed down via family rather than taught in schools. This is a substantial driver of inequality.

Here's a short blog/article I wrote about the history of shareholder rights from then till today https://www.yourstake.org/academic-impact/

StillBored• 6 years ago

401k vs pension plays into the republican talking points on a number of fronts.

Its "personal responsibility" vs "socialism" because it shifts the burden and risk from companies and the state (in the form of pension guarantee/insurance) to the individual. Which repeatedly has been shown to be a disaster on quite a number of fronts, not the least of which poor returns or a economic disaster like 2008 completely screws people who expect to retire at a certain time. This turns around and has national economic consequences because so many people instead of retiring in 2008 simply kept working, which meant that those most in need of new jobs had an even harder time finding them.

Its also problematic because younger people who are paid less are more in need of front-loading their retirement so that they can benefit from a longer growth cycle are the least likely to be able to afford it.

Then there are all the issues with the way 401ks are managed vs even IRA's which create an entire industry where the sole purpose seems to be to reduce returns below market rates. Most people would be better off simply buying vanguard total market indexes from a discount broker vs all the fees and overhead brought on by all the middlemen "adding" value by reducing the returns.

Pretty much the entirely of most pension programs problems are caused by companies/organizations that simply ignore long term average returns and under-fund the pensions. Until the 1980/1990's the mandatory formulas for pensions and what they were allowed to invest in were quite strict, but then all that was gradually loosened until now we have a bunch of cases where the pension made bad investments (CalPERS), made wildly exaggerated statements of expected returns, or massively underestimated liabilities (GM) and find themselves in situations where they can't cover current liabilities.

blululu• 6 years ago

Shareholder value is a perfectly fine way to organize a business, but this leaves the question of short-term vs long-term value. Jack Welch, and The 80's in general saw a very strong push toward short term profits at the expense of long term viability.

tomjen3• 6 years ago

I would say that the singular focus on next financial report is the damaging part. You should expect to hold stock for years before selling it.

If you want to do charity with your money, that is almost certainly best done entirely separately from your investments (e.g maximize profits on lifesaving drugs and spend the extra income on givewell).

erikig• 6 years ago

For all his faults, and he had many - from infidelity, focus on manager/corporate rankings instead of absolute performance, allowing accounting shenanigans that still haunt GE etc, wasn't Jack Welch was a product of the period in which he ran GE?

His ability to manage a behemoth of GE's size during the globalization push that resulted in the death of so many industrial companies during that same period is undeniable.

ska4• 6 years ago

Whether he was a symptom or a root cause, I think the disease is correctly identified.

whatshisface2• 6 years ago

A product of the period? It was the leaders of the time that produced the period.

aazaa2• 6 years ago

Under Welch, GE’s mission changed. Its new goal was to become “the world’s most valuable company.” Which is to say, he turned the focus of the company to its stock price. Everything became secondary to that. ...

The irony is that GE's stock price is now at the same place it was in 1997. In between, sound and fury signifying nothing. Over twenty years of zilch.

https://bigcharts.marketwatch.com/quickchart/quickchart.asp?...

ocschwar• 6 years ago

It's bad PR to obsess about PR. It's bad karma to obsess about karma.

masklinn• 6 years ago

FWIW GE has split its stock twice in that interval: there was a 2:1 split in December 1997 and a 3:1 split in mid 2000. Meaning despite stock price being back to its 1997 level, total valuation has increased 6x (and an investor who had one GE share in early 1997 now has 6 of them).

mikeyouse3• 6 years ago

Not sure if it's the case in the link above and am too busy to look into it right now, but stock charts are almost always reflective of all split activity. So comparing the price at two points is apples:apples.

Edit:

Though companies like GE pay substantial dividends so what price charts are missing are the billions of dollars paid out to shareholders over time.

three_seagrass4• 6 years ago

When a stock splits, the market cap still stays relatively the same.

Market cap for GE is still lower today (93 B) than it was in 1997 (208 B). Unless there were major spin offs, that means the company is worth less.

aazaa2• 6 years ago

Charts account for splits. A split does absolutely nothing for you as an investor.

Instead of one slice of pizza, you own two, but they each cost half as much. By far the most misunderstood concept about investment among the public.

tedunangst2• 6 years ago

But Welch was CEO from 1981 to 2001, not 1997 to today?

RIMR• 6 years ago

It's almost like he lead GE towards the trend we see starting in 1997, and that the effects of his leadership are seen 19 years after stepping down.

I never understand people who think that the economy works in realtime. This article makes it clear that while he was CEO, he received nothing but praise for his successes. It is only today that we can look back and see the damage he actually did.

This is simpleton thinking in the same category as the belief that the current state of the stock market is a reflection of how well our currently elected politicians are doing in office...

JackFr4• 6 years ago

I'm not unsympathetic to his point but pointing out that GE doubled the return on the S&P and then trying to make the case that he was merely in the right place at the right time for a global bull market seems odd.

peteradio• 6 years ago

I think the argument is that he cut out the interior walls and burned em for extra heat.

markus_zhang3• 6 years ago

I don't think he is to be blamed on that. What happened for GE/IBM/Boeing is just the symptom.

After all the deindustrialization process had been going on for decades, and naturally the only way to keep the company afloat is to cut cost or "financializate" everything.

The real questions are:

1 - Why there weren't enough people who were interested in STEM?

2 - Why didn't the government (and the voters) do anything useful about this situation?

defterGoose2• 6 years ago

1. When the culture celebrates rapacious capitalism, rugged individualism, and financialization of the economy as right and just, people are drawn along by the current. No one lives in a vacuum despite what the prevailing voices would have you believe. It is no wonder that many talented scientists went (and still go) to investment banks, when this behavior is congratulated and voices of admonishment are minimized.

2. Vietnam, Nixon, Reagan, Bush...the list continues. When Jimmy Carter warned the country people lost faith in him because his statements didn't make them "feel good". This was also the era in which corporate money began to flow almost unrestrictedly into government in the form of lobbying and campaign contributions. As Upton Sinclair rightly put it: "It is hard to get a man to understand something when his paycheck depends on him not understanding it."

markus_zhang3• 6 years ago

Yeah that's exactly what I have in my mind.

stuff4ben• 6 years ago

I'm not an economist or anything, but isn't this article really just a complaint against pure capitalism? Jack played the game and played it well. I wouldn't vilify someone because of that. Blame the system and then propose something better.

sgt101• 6 years ago

There was something better, mid century regulated corporate business stewardship. But Walsh and his acolytes pillaged it like a barbarian horde falling on a dignified gallery.

boshomi2• 6 years ago

De mortuis nil nisi bene.

arbitrage• 6 years ago

Yeah, no. That's way too easy of an out.

He did bad things. His reputation continues to influence commerce to this day. He doesn't get a free pass on the harm he caused simply because he's checked out.

boshomi2• 6 years ago

It means, the dead person can not defend, so critic should be fair.

defterGoose2• 6 years ago

Or, as he might have said, "Free Country".

Ygg2• 6 years ago

Yeah, but was he an evil person or a product of a flawed system?

It seems to me there would always be a Jack Welch, albeit one of a different name.

dtrailin• 6 years ago

The most harmful idea he introduced is stack ranking, the consequences of which we're still dealing with in the tech industry. In particular ranking people on a team level on the team and firing those on the bottom has taken a severe toll on many teams and companies/

protomyth• 6 years ago

The utter destruction of any sense of team work when people realize that someone has to be the bottom is awful.

He had to be a smart guy. How did he not realize anything that actually needs a team is going to suffer? Is this some lone eagle crap like EDS had?[1] Can you imagine the original Macintosh team running under stack ranking? I guess you shouldn't appoint people CEO who don't understand teams are required to build great products.

1) had a buddy who worked for EDS tell me that they wouldn't hire anyone who came as a group at a job fair because "eagles fly alone". That would actually explain some interactions.

btilly• 6 years ago

It is worth noting that when Jack Welch arrived at GE he was dealing with a bloated company heading towards bankruptcy because it had way too much overhead. Firing the bottom 10% each year was harsh medicine, but it was what GE needed at the time.

The fault is not in the medicine supplied. It is that his imitators supplied the same medicine to other companies in other circumstances.

What is the fallout? Jack Welch was a big part of the breaking of the social contract that used to be part of American business. It took decades, but now American workers have accepted that a job is not "until death do us part" and have also given up on their side of the same contract. And the result is a very different relationship between corporate America and their workers.

watwut• 6 years ago

The imitators did what Jack Welch advocated for. He did not advocated for firing 10% of people once when company is clearly bloated. He advocated to do it again and again and again.

When I give you advice and you follow my advice, it is rightful to blame me for that advice.

But also, these articles primary blame him for massive short-termism, corporate raiding and likely creative accounting to get numbers he wanted at the expense of company health.

jdkee• 6 years ago

What a truly horrible human being to do that to his fellow men.

satya71• 6 years ago

His achievement was leverage and acquisition to make the top line number look really big.

The legacy is stack ranking has destroyed culture at innumerable companies (I continue to witness it in most companies that I know).

Also the CEOs from the GE CEO factory went to on to destroy not only GE value, but also Boeing [1] and many others.

[1] https://www.economist.com/business/2020/01/11/the-last-ge-ma...

jsanford9292• 6 years ago

I am skeptical of this article.

Paragraph 5: GE beat the market by 2x over Welch's career.

Paragraph 6: The market is the reason Welch's track record looks so good.

waldohatesyou2• 6 years ago

I think to be able to understand the article's point one has to take for granted that the opinion of the stock market is not gospel.

dang• 6 years ago

Please post the original source. This is in the guidelines: https://news.ycombinator.com/newsguidelines.html.

It's fine to add links to workaround URLs in the thread.

ChrisMarshallNY• 6 years ago

I worked at GE during his tenure.

We used to call him "Neutron Jack," because after he was done, the buildings were still there, but all the people were gone.

He used to visit corporate sites in a $20-million-dollar helicopter. Quite a sight...

neom• 6 years ago

I'm a pretty big fan of "don't hate the player hate the game" - it's too easy to look from outside and say X person failed society. With business, we love to hate on those who have extracted so much wealth for a few, yet modern capitalism is built on these tenants. If we went to prevent inexperienced, philosophically devoid people from running amuck, we need to focus on re-building the system, not vilifying those that utilize it. Many of these issues started with Dodge vs Ford [1] - yet I rarely hear folks talk about it.

[1] https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.

mattmanser• 6 years ago

The article is about how he changed the game.

blaser-waffle2• 6 years ago

There was plenty of ruthless capitalism before he showed up. He just pushed it to be more ruthless.

fredsanford• 6 years ago

For his sake I hope the afterlife doesn't do stack ranking though the irony appeals to me.

cayblood• 6 years ago

Pretty ironic that he later came to call maximizing shareholder value "the dumbest idea in the world."

https://www.forbes.com/sites/stevedenning/2011/11/28/maximiz...

cannabis_sam• 6 years ago

He’s like a human paperclip maximizer..

Jack Welch Inflicted Great Damage on Corporate America

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