Since I haven’t had many deep thoughts lately, I want to share with you some essays about history that have caught my attention. In this case, the history is pretty recent—it’s about the late Jack Welch, CEO of General Electric from 1981 to 2001.
When I was an economics editor at Business Week in the 1980s, Jack Welch was becoming a legend. My editor-in-chief admired him, talked with him a lot, and featured him as a speaker at magazine functions. In 1999, Fortune called him the “manager of the century.” He was bold, smart, and unafraid.
But did he bring General Electric down?
General Electric was founded by Thomas Edison and J. P. Morgan in 1892. It developed a ubiquitous brand name and seemed to “own” the field of electric appliances.
By 1981, however, when Welch became CEO, it lacked vigor. It was a $12 billion company, but stodgy and bureaucratic. Welch attacked that bureaucracy, laid off workers, and started acquiring companies. When Welch left in 2001 the company was worth $600 billion and in terms of revenues was the fifth-largest company in the U.S.
But gradually the company fell apart. Today the company is worth $113 billion—still big, but not in the same league as before. It is being divided into three separate companies, has had lots of spin-offs, and has spawned many unhappy investors (and former investors).
Was It Jack Welch’s Fault?
Even though Welch retired 22 years ago, can he be responsible for the decline? Yes, partly. So suggest Thomas Gryta and Ted Mann, authors of Lights Out: Pride, Delusion, and the Fall of General Electric.
Richard S. Tedlow enthusiastically reviews their book in Business History Review. In this short space I offer just tidbits of an answer to whether Welch was, in part, responsible.
To begin with, Tedlow and the authors give Welch credit for the company’s spectacular rise, but they say he shares blame for the fall with Jeff Immelt, his hand-picked successor.
Conglomerates, as GE became, do run into trouble if they aren’t deftly handled (perhaps even if they are) , and the recession of 2008 brought down a lot of companies. But what’s disturbing about GE is the claim that a key factor in GE’s success was not quite legitimate.
Welch made GE Capital, a division created in 1932 to support appliance sales, into a broad-based borrower and lender—like a bank. GE Capital, says Tedlow, was “essentially an unregulated bank Welch could use to smooth earnings and consistently meet Wall Street’s expectations.” He calls GE Capital a “black box.” Similarly, Dexter Van Dango, writing for MonitorDaily in 2015 when GE Capital was being sold off, said:
“GE Capital had a reputation for providing consistent, predictable, reliable earnings; nipping and tucking as needed and managing—read this as manipulating—the parent company’s quarterly results.”
Tedlow says that Welch was more interested in wooing Wall Street than in catering to customers, and the GE-Wall Street love affair seems to have continued under Immelt. Then the financial crash hit in 2008 and the federal government decided to start regulating “nonbank banks” like GE.
Where Were the Analysts?
It amazes me that Wall Street analysts, investors, and journalists (not to mention federal regulators, but they tend to be behind the curve anyway) could be so wrong about the trajectory of GE. If such people had seen more clearly the way GE was moving, they might have kept it from flying so high and falling so far.
But such misjudgments may not be all that rare.
Consider Good to Great : Why Some Companies Make the Leap . . . and Others Don’t, a book published by a highly successful financial guru, Jim Collins, in 2001. The book has chapters on 11 companies that by his reckoning (based on supposedly diligent research) had clicked up from being good companies to highly profitable stars.
But Collins’s analysis fell apart in the case of two out of the 11 companies. First, the mortgage lender Fannie Mae (Federal National Mortgage Association) was a company created by the federal government, subsidized by the federal government, and fatefully told what to do by the federal government.
The government pressured it to extend highly questionable loans to borrowers unlikely to pay them back, a process that led to the 2008 crash. FNMA sank under the weight of its bad loans, bringing down with it hedge funds and even banks.
The other problem company in Collins’ s book was retailer Circuit City. This company, which started 1949 under a different name, expanded rapidly in the 1980s, competing against Best Buy and other electronics discount stores. It had a good year in 2001 but it began faltering soon after Good to Great was published. It went bankrupt in 2008, undoubtedly hurt by the crash and recession, but also by bad planning choices.
And we periodically have other spectacular failures such as the bankruptcy of Enron in 2001, which brought down the prominent accounting firm Arthur Andersen with it. Before that, Enron had been a “Wall Street darling,” wrote Investopedia in 2015. And most recently we have seen some spectacular bank failures.
Lessons Learned?
I understand that economic growth depends on what Joseph Schumpeter called “creative destruction”: better companies are constantly driving out not-so-good ones. But usually that happens in either of two ways: Individual companies fail slowly, and their difficulties are well-covered by the media (e.g., the Wall Street Journal’s coverage of the Bed, Bath and Beyond and WeWork). Alternatively, the process is industry-wide, highly visible, and fascinating, such as Amazon’s reshaping of the retail market.
Precipitous shocks like the fall of GE or Enron are rare. Do they tell us more about the particular company—or more about the blindness of the observers? A persuasive, even wily, CEO might fool analysts and reporters (and perhaps the CEO himself). On the other hand, how alert are the watchers? It’s all too easy to “go along” with current estimations—and it may take nerve (and risk to one’s career) to call out the emperor’s clothes if everyone else claims to see them.
To me, the downfalls are a mystery.
The image above is of Jack Welch at the 7th World Economic Forum, provided by Challenge Future and licensed under Creative Commons.
This reminds me of something venture capitalist and economist Bill Janeway told me during an interview a few years ago. I asked how he evaluated investments and entrepreneurs. I don’t have the quote handy, but it was something like this: “You have to realize that all entrepreneurs lie. The most dangerous ones are those who know they are lying.” Entrepreneurs, whether in big growing companies or start ups often lie to themselves about risks and rewards. It may be necessary in most cases to have the confidence to take risks. But the ones who know they are lying are usually doing it to line their own pockets at the expense of investors.