Jack Welch, the legendary longtime chief executive of General Electric, passed away on March 1, 2020, nearly two decades after leaving the company. their corporate legacy died GE’s Recent Investor Day Event: March 9, 2023.
And there is such a story. Actually, two stories.
The first is about how Welch, whom many considered a management genius, left behind a mess when he retired from GE, which is now being dismantled in a total reversal of Welch’s legacy.
The second is how buying stock in a company because you think the CEO is a genius — and would appoint a genius to succeed him — can be dangerous to your financial health.
For those of you who aren’t familiar with Welch, who became GE’s youngest-ever CEO in 1981 at age 45 and retired in 2001, most of corporate America and the business press describe him as a man with a divine touch. Considered a financial god.
During his tenure, GE’s stock outperformed the Standard & Poor’s 500 (^GSPC) index, Wall Street’s favorite comparative-performance metric, by an astonishing 8-to-1 margin. GE rose 2.38% from $5,600 the day Welch took over to $135.69 the day Welch left, compared to a 700% increase in the S&P.
(All numbers in the story from Yahoo Finance don’t include dividends, and are adjusted for GE’s 1-for-8 reverse stock in 2021 and the spinoff of GE Healthcare this year.)
Welch was widely worshipped. Among his other honors, Fortune magazine named him Manager of the Century in 1999, and in 2000, the Financial Times named GE the “World’s Most Admired Company” for the third straight year.
People wrote books about Welch’s management skills and how talented he was. During his 20-year tenure, GE made hundreds of acquisitions and became a behemoth that had the highest stock market value of any American company during parts of his tenure.
However, after Welch retired, it became clear that he was playing the earnings and accounting game, and loading up on financial assets, leading to profit and loss reporting far below that of GE’s old-line manufacturing businesses. Allowed more flexibility.
Welch’s successors—Jeff Immelt for 16 years and John Flannery for 14 months—couldn’t expand the game to the extent of Welch. Welch, who talked a lot about how important it was for a CEO to appoint a brilliant successor, sponsored a public contest between Immelt and two other GE executives, both of whom left the company after Welch appointed Immelt.
But because Immelt inherited all kinds of problems and made many mistakes, his tenure was not a victory for GE investors or, as it turned out, for Welch. Under Immelt, GE stock rose 6.5%, but the S&P more than doubled, rising 128% during his tenure. Under Flannery, the stock fell 51% while the S&P rose 18%.
Stock could not win a no-lose under Welch under his successors.
Which is why, in 2018, GE’s board named Larry Culp CEO to try to clean up the mess. Culp, a member of GE’s board who became the first GE CEO who was not previously an employee, had an outsider’s view of the company and saw how bad the company was. Culp, formerly of Danaher Corp. (DHR), began selling off pieces of GE. At a recent investor day meeting, Culp said he would cut GE’s debt by $100 billion.
Time changes so much. I literally watched the entire four hour Investor Day presentation and didn’t hear Jack Welch’s name mentioned once.
Culp announced in January that what is now called GE Healthcare (GEHC) will spin off GE’s energy business into GE Vernova next year, and will remain as CEO of the remaining company, which will be called GE Aerospace.
Wall Street loves Kalp’s breakup plan. And when various GE executives demonstrated optimism at Investor Day, GE stock soared 5% or more. As of Monday, GE stock was up 25% during Culp’s tenure, compared to 32% for the S&P.
Those aren’t Welch-like figures—the S&P’s outperformance will likely never match Welch’s—but they’re a lot better than Flannery and Immelt.
However, although Welch’s GE legacy has died down, his influence on much of corporate America continues. Welch adopted what GE became known as “rank and blow”, firing 10% of GE’s lower-ranking managers each year and richly rewarding top performers. He cut thousands of workers from GE’s payroll and became known as Neutron Jack—a name he hated—because he vaporized jobs but left buildings standing.
These days you see evidence of Welch’s fingerprints all over big-time corporate America. For example, many companies report “adjusted earnings”—meaning earnings as they define them rather than as generally accepted accounting principles define them.
And companies that issue what’s called “earnings guidance” often put numbers on the low side so that profits “exceed expectations,” as they say on Wall Street. When things get a little tight, many companies cut back on capital spending and play legal but deceptive accounting games to beat the earnings numbers they promised Wall Street. And, of course, employees often become human sacrifices.
To me, this is the real story of GE. and Welch’s true legacy.
Disclosure: I have a small GE holding, which I bought after Culp became CEO because I have a substantial investment in Danaher, which prospered under Culp’s leadership. I also have small investments in GE and GE Heathcare, and I gave each of my four grandchildren a share of GE at the end of the year.
Alan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He has won Loebs in four different categories in four different decades.
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