Jack Welch Broke Capitalism & Ushered In an Era of Distrust

BIANNA GOLODRYGA: And up next: The ruthless world of corporate America is being traced back to one businessman. Former General Electric CEO Jack Welch is the man who broke capitalism and David Gelles’s new book. And Walter Isaacson joins David to discuss the legacy of America’s first celebrity CEO.

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WALTER ISAACSON, CORRESPONDENT: David Gelles, welcome to the show.

DAVID GELLES, AUTHOR, “THE MAN WHO BROKE CAPITALISM”: Thanks so much for having me.

ISAACSON: Your book is about Jack Welch, the legendary CEO of General Electric for two decades. But it’s also about something larger. And I want to talk about that, which is, it’s about the destruction of American capitalism. Explain that to me.

GELLES: Well, for the decades really after World War II, companies went about their business with a real sense of civic engagement, a real sense that when a company like Johnson & Johnson, for example, was making its products and delivering it services, it was doing so, yes, in the interest of its stockholders, but also for so many other stakeholders, which men like those who ran Johnson & Johnson and General Electric at the time identified and called out in their annual report, saying that they were in it for their employees, for their consumers, for the men and women working in their supply chain, and even for the government. They were proud to pay their taxes at the time. Something changed right around 1981. And this change was embodied by men like Jack Welch. And it has led to a world in which very few of those stakeholders are getting the attention that they need. And the wealth from the companies that for so long float to that large group of stakeholders is largely concentrated now in the shareholders and the executives. So, I identify Welch as the man who helped transform this arrangement and gave us the world we have today.

ISAACSON: You say, in the 1950s, corporations cared more about other stakeholders. I was struck in your book that — I think it’s 1953. You quote the GE, annual report. And what is it saying the mission of GE is?

GELLES: Well, GE was among many companies during this era that, again, proudly identified the fact that they were running their corporation, yes, for investors, and they were proud to deliver a modest return, but, really, they saw their success as the country’s success, their success as the success of the men and women working in their factories. And they were even proud. They announced that year that it was their biggest payday ever. They were spending more on the cost of labor than ever before. And that was a good thing to them. And I don’t need to tell you that’s not the world we live in today. These days, executives at so many companies are focused on reducing labor costs, on reducing the amount of money they pay in taxes, and really amplifying profits for institutional investors and largely for executives, who, of course, are compensated in stock these days.

ISAACSON: So, Jack Welch pretty much focused only on shareholder value. Was that the main transformation?

GELLES: Well, it’s not just the focus but it was how he did it. When he arrived at GE in 1981 as CEO, he unleashed a wave of factory closures and mass layoffs that fundamentally destabilized the American middle class. Up until that point, you couldn’t point to major American employers using layoffs as a tool to improve profit margins. But all of a sudden, he made it the norm at GE. And what was so important to recognize is that GE was really the standard-bearer for corporate America. So, what he did at GE became common practice everywhere else. So, he did it with downsizing. He did it with financialization as well. He turned GE from an industrial company that, of course, made light bulbs and aircraft engines, to a financial company that was making most of its money, towards the end of his career, from financial products. Things like high-interest credit cards, commercial real estate deals. And that mirrored and helped fuel this transformation of the American economy. And during his tenure, we saw Wall Street become a bigger and bigger part of the American economy.

ISAACSON: It gets to the heart of a debate we still have, which is, is a corporation supposed to focus really just on shareholder value? Making a profit? Return on investment? It comes out of the Milton Friedman school, as you discussed in your book, or is a corporation supposed to do that but also look after other stakeholders such as its community, its country, its workers, and its customers? How did Jack Welch help change the way we look at that divide?

GELLES: We are absolutely right to call out Milton Friedman who, of course, in 1970 wrote in the “New York Times” magazine that the social responsibility of business is to increase its profits. But that was really a theory. Not only in 1970 but right up until 1981. No one until Welch had the command of a large enough company. The gumption. And frankly just the will to make that a reality. And there’s such a difference, as you know, Walter, between theory and practice. And Jack was the one that put it into practice. But more broadly, I do think you are right to note that there has been this long-running debate. And it’s — I think of it as a pendulum swinging back and forth. And in the years after World War II, that golden age of capitalism, which is what some people call it, there was really a stakeholder focus. Even if we didn’t call it stakeholder capitalism, which is a term that’s invoked today. But it has swung so far in this other direction of shareholder primacy. And I think we’re at the beginning of a reassessment, a real re- engagement with that debate of what is the purpose of a corporation.

ISAACSON: Well — wait, explain to me why Jack Welch and, for that matter, Milton Friedman are wrong. I mean, isn’t it mainly the responsibility of a company to say, you invest in us and we’re going to give you the biggest profit possible?

GELLES: Well, it’s important to know that there is no law that specifically outlines what the purpose of a company is. There’s no law in the constitution. The FCC doesn’t say that companies have to maximize profit —

ISAACSON: But can shareholders sue if you’re violating a fiduciary duty to give them as much profit as possible?

GELLES: No, there’s actually a huge misconception that there is some law to maximize short-term profits. There’s a fiduciary duty, of course, but they don’t specify exactly what form that takes and importantly, on what time horizons we’re talking about. And Jack Welch, no doubt, was a master of maximizing short-term returns. And he did so, so effectively that GE became the largest, most valuable company in the world during his tenure. And we can’t take that away from him. But he did it to an extreme. And in doing so, in being so myopically focused on quarterly results, on short-term results, he essentially hollowed up the company. Research and development withered. They started getting into short-term financial instruments that ultimately came back to haunt them when the financial crisis hit. And this is what so much of our company — our economy, excuse me, looks like. Decision after decision to maximize short-term quarterly profits at the expense of the long-term well-being, not only of the corporation but of communities, of individual employees, and of — I would argue, our society. I think this focus on short-term profits has had a cascading long-term effect not only on the companies themselves but really on the fabric of our nation which, of course, is in pretty sorry shape these days.

ISAACSON: So, you think that this focus on short-term profits. Sort of undermine job security, the notion of a prosperous middle class in this country, and in some ways, I think you write it leads to Donald Trump and other things.

GELLES: When you look at some of the disaffected pockets across the middle of the United States of America, these are towns where factories and GE factories, in particular, once thrived. One of the things Welch did was not just go about downsizing with layoffs, but he embraced offshoring and outsourcing to the extreme. He was really one of the first CEOs to famously say, if he could, he would have every factory on a barge. So, it would just be a floating, stateless entity that could chase cheap labor and favorable exchange rates all over the world wherever it — he could go. That speaks to his real lack of interest in the communities in which GE operated its factories. And when you look across the country and see the erosion of good, high-quality jobs in town after town, the erosion of the tax base that those, kind of, factories supported, it’s not hard to understand just how damaging this has been over the long term. I even asked Jeff Immelt, Jack Welch’s successor about this when I interviewed him for the book. And he understood it. He said, listen. I get it. When someone is making $35 something an hour at a GE factory and they lose their job for whatever reason and they wind up making $13 an hour at a contractor, that not only has a damaging effect on that individual and that individual’s family and community, but it erodes a sense of trust in business. And so, when people ask, why doesn’t, you know, business have more credibility with everyday Americans these days? It’s decisions like this compounded over decades that, I think, we can fairly point to and say, this is a part of the problem.

ISAACSON: After Jack Welch left, GE collapsed, pretty much. Was it because Jack Welch left or was it because of what he did before he left?

GELLES: A lot of things happened right when Jack Welch left. So, that was a combination of, I would argue, underinvestment in some of the core research and development that made GE great for so much of the 20th century. But also, it’s important to know, he — his last day on the job was September 8th, 2001. Three days later, the world changed in all sorts of ways that we know and had a cascading effect on GE that Jeff Immelt, his successor, had to deal with. But it’s important to note that Jeff Immelt himself, several years after taking over, candidly reflected and took a hard look at the company he had inherited. And I can’t use the words he used on this program, but he said, he did not like what he saw at all and understood that the company was not as strong as it appeared from those quarter-after-quarter results. In fact, it was a lot of short-term focus that was making the stock look really good. But in the long run, as Jeff Immelt found out, the company had real fatal problems that he had to deal with. And that a succession of CEOs have tried and failed to fix since. And just last year, it was announced that General Electric, founded in the 1800s, was finally going to be broken up once and for all.

ISAACSON: There are half as many manufacturing jobs in America as there were when Jack Welch took over GE. To what extent does he bear some responsibility for that and for the type of CEO that is doing things like that?

GELLES: Well, globalization was coming for the United States, no doubt about it, right? Whether Jack went on his terror of downsizing and offshoring and outsourcing that gave him the name Neutron Jack, this was a moment in the early ’80s when the industrialized economies of Japan and Germany were coming back, you know, roaring back after World War II in their rebuilding processes. So, there was going to be more competition on the global stage, no doubt about it. Welch, however, reacted in the extreme. It’s a counterfactual to imagine what it would have looked like had he found ways to double down on American manufacturing. To resist the temptation to just chase cheap labor. We won’t know. We can’t know the answers to that. But what’s clear is that there are plenty of other prosperous countries that have strong manufacturing bases. So, it’s impossible to know exactly, to what extent, he could have done things differently. But there is no doubt in my mind and no doubt from the data that he was a driving force in letting American jobs move overseas, especially in the 1980s. To your second question. To what extent is he responsible for other CEOs behavior? I think it’s impossible to underestimate his influence on other CEOs. As I mentioned, GE was one of the most influential companies for decades. It was the place other companies, other boards went to, not just to get a sense of how they ought to behave, but it was a place they went to to recruit other CEOs. And more than two dozen of Jack Welch’s direct protegees went on to run other major American companies. Companies like 3M, Boeing, Home Depot, Chrysler. And time and again, when his protegees went to those companies, they followed the same playbook of using downsizing, finance, and a deal- making to prop up the stock in the short term often leaving the country and the companies poorer for it in the long run.

ISAACSON: When he worked at Time Incorporated, we — our mandate came from the will of Henry Luce, that was the founder, who said that the company should be operated both in the public interest and in the interest of shareholders. And he said that good executives would have to balance the tension there. Then when it merged with Time Warner, suddenly, they were imitating Jack Welch and asking managers, like me, to fire 10 percent of the workforce each year by trying to identify the lowest-performing 10 percent. It was also a company that got financialized, as you say. So, do you think this was a trend coming after Jack Welch?

GELLES: It’s just so powerful to hear you have had your own personal experience. In the week or so since the book has been published, I keep hearing stories about this over and over. And I hadn’t heard it turning up in Time Warner, but there it is. And that is absolutely the legacy of Jack Welch. What you just mentioned, that bottom 10 percent notion, that was an innovation, I would argue a rather dark one, that he pioneered in the 1980s. He called it the vicavity (ph) curve, which is, the sort of, euphemistic term for firing the bottom 10 percent of your workers every single year. Other people called stacked ranking or, I think, most accurately, rank and yank. Managers had to put their employees into three categories, 20 percent in the top, 70 percent in the middle, 10 percent in the bottom, and that bottom 10 percent got shown the door ruthlessly and relentlessly year after year. But it wasn’t just Jack and it wasn’t just GE. He started it, but it didn’t end there. It continued at so many other countries — companies, excuse me, including Microsoft under Steve Belmar. And even more recently, it was showing up at places like Uber and WeWork in just the past few years.

ISAACSON: The era of Jack Welch in the 1980s and 1990s coincided with the end of manufacturing in the United States as a major force, a deindustrialization of the United States. Do you think that manufacturing and industrial production can come back to the United States now?

GELLES: It’s going to be different, of course, but we’re starting to see it come back. We’re seeing even companies like Apple invest in real manufacturing operations in the United States. And what’s exciting to me about this is that these are not low-quality manufacturing jobs. These are incredibly high-quality, high techs, sophisticated manufacturing jobs. And it tells me that there is an opportunity right here for CEOs who want to invest in their people, who want to invest in the United States, and who want to help share the massive wealth created by these corporations with some of the people of this country. There is a golden opportunity to do it right now. And I think given the state of the world, it’s becoming all the more clear that between supply chains and rapidly shifting strategic relationships, there’s also just a national security imperative to try to make sure that America can be a strong manufacturing economy in addition to all the other amazing things that we’re able to do.

ISAACSON: David Gelles, thank you so much for joining us.

GELLES: Thank you so much for having me.