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The End of Jack Welch Capitalism

by BILL WADDELL

A guy by the name of Richard Lambert who works for the Confederation of British Industries - kind of like the Brit version of NAM - gave a very good speech a few weeks ago slamming business' short term perspective and the notion of setting maximization of shareholder value as the over-arching objective - well ahead of the interests of any of the other stakeholders.  He said,

"The late Peter Drucker, that great business philosopher, used to argue that managers did themselves a great disservice by banging on about the profit motive and shareholder value. He put it this way:

“Managers constantly complain about the (public) hostility to profit. They rarely realize that their own rhetoric is one of the main reasons of this hostility. For indeed in the terms management uses when it talks to the public, there is no possible justification for profit, no explanation for its existence, no function it performs. There is only the desire of some anonymous capitalists – and why that desire should be indulged by society any more than bigamy, for example, is never explained.”

You can make precisely the same argument about undue emphasis on shareholder value. When that metric is used as a justification at the same time both for a socking great salary for the chief executive and for closing down a factory, it’s hardly surprising if the public views it with suspicion.

The US Business Roundtable has argued persuasively that to build public trust, businesses need to create value for multiple stakeholders, and show authentically that they share values and interests with them. This means, among other things, that businesses must pay attention to wider social issues, and make an effort to see themselves as others see them.

What follows from this is that community engagement is not a matter of philanthropy. On the contrary, it should be seen as a matter of corporate self-interest. Companies have a real interest in the well being of their customers and the communities in which they operate, as well as in being seen as a positive force in society, rather than the opposite."

... and, "the era of what you might call Jack Welch capitalism might be drawing to a close. If you concentrate on maximizing value to shareholders over the short term, you put at risk the relationships that will determine your longer-term success."

He points out that even Jack Welch is trying to rewrite history, claiming that he has been all about stakeholders from the get-go. The chickens came home to roost in recent years and the guy who trashed the lives of 100,000 GE employees and their families, writing in his book Jack - Straight From the Gut, "We moved the GE 'back rooms' in the United States to the 'front rooms' in India" and "We can hire a level of talent in India ... impossible to attract in the United States" now claims that "increasing the value of your company in both the short and long term is an outcome of the implementation of successful strategies. I've always felt that way, and I've always said I felt that way," because, "Employees will benefit from job security and better rewards. Customers will benefit from better products or services. Communities will benefit because successful companies and their employees give back."

Actually, Jack, the only people who gained from you leadership were GE's short term investors - which is what you intended all along.  The employees hardly benefited as you tossed over 100,000 of them en masse into the unemployment lines.  The community got the short end of the deal when the American taxpayers had to pony up billions in bailout money to keep GE afloat.  Is that what you meant about employees giving back?  Long term investors got stiffed - GE stock today is under $20 a share compared to the $40 you had jacked it up to when you left.  As Jeff Immelt cleans up the wreckage you left behind, those who invested in GE in 1997 can finally get their money back out.

On the other hand, manufacturing excellence has pretty clearly reached the mainstream.  The global economic debacle has provided a very shiny silver lining.  The short term outsourcers in the Jack Welch mode have suffered the most, but there are lean companies moving ahead left and right.  It used to be hard to find lean success stories, but now it is quite easy.  A few years ago a company like Byrne Tool & Die in Michigan and Matouk in Connecticut would have been a big deal.  Now they pop up, it seems, every day.

The Lean Accounting Summit began in 2005 with a bunch of consultants and academics, and we struggled to find a company or two to present at the Summit that was actually doing anything with it.  Now there are so many companies making great progress the challenge is to select from among so many outstanding companies the ones with the most meaningful story to tell.  In my own consulting practice the tenor of has changed from companies wanting to learn what lean was all about to almost entirely companies that are already lean, but want to get to the next level.

Lambert is right, the era of 'Jack Welch Capitalism' is gasping its last breaths.  Oh, there will be some - many, perhaps - who didn't get the memo.  I talked to one lean leader yesterday whose senior management opted for McKinsey over lean.  That road is well traveled and quite predictable -  "Every time we have an outsourcing forum, it's like a GE and McKinsey alumni association meeting," says Sunil Mehta, vice-president of NASSCOM, India's software industry association. So that plan won't last long and they will be back to lean soon enough if they survive McKinsey.

In researching the post the other day on Simmons and the investment bankers I came across data indicating that, while thousands fo American manufacturers have found their way to bankruptcy court over the last couple of years, most of them are the ones owned by investment bankers.  Some of that is because bankruptcy is a tool the investment bankers use with great skill to stiff the other stakeholders, but I am certain most of it is real.  The game players are falling by the wayside and the lean companies focused on value are moving to the forefront.

The coming years will be a good one in which to be lean leaders.  After toiling in the shadows of the Jack Welch Capitalists for so many years, I can see that your day has finally arrived.  The end of an era?  Thank God, and the beginning of a new and very good one.

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5 Responses to "The End of Jack Welch Capitalism"

  • Marc
    9 April 2010 - 9:55 am

    “If you concentrate on maximizing value to shareholders over the short term, you put at risk the relationships that will determine your longer-term success.”

    Just like in 2007 with the executives at Circuit City decided to fire the top earning salespeople to “cut costs”. I guess they didn’t get the memo either. At least the free market has built-in natural selection when the firm isn’t “too big to fail”.

    I’ve never understood how managers call themselves professionals. Physicians, attorneys, and engineers are professionals, must be licensed to practice, and can be sued personally when their actions cause damage to lives and property.

    You even need a license to cut hair and trim toenails. Perhaps management should also be a licensed profession, given the power they have to affect the lives of many. The entrance exam could be simple. Give the applicant a goose and tell them it lays golden eggs, then count how many minutes before they kill the goose to get all the eggs out.

  • Tim McMahon
    9 April 2010 - 11:38 am

    Nice post Bill. I can’t wait till the time when long term is more than a few years. Stop 3-5 yr business plans. Short isn’t a year it is 3 years. Since I have kids I always think what kind of business can I leave for them.

    It will be a welcome change to see those short term money hungry execs go and take them those diasterous business plans that follow.

  • Kevin Carson
    11 April 2010 - 9:23 am

    “Shareholder value” is more a legitimizing myth than anything else, anyway. Shareholders have virtually zero real control: most finance is from retained earnings, proxy fights usually fail, and since “poison pills” and other countermeasures thwarted hostile takeovers almost all takeovers are in collusion with the management of the acquired firm. Corporations management is a self-perpetuating oligarchy in control of a mass of unowned capital, running things in its own interest–while using rhetoric about “the shareholders” to protect its power from challenges from other internal stakeholders.

  • Tom McGraw
    3 July 2012 - 12:10 pm

    Jack s father had a secure job on the railroad.

    He & Bob Nardelli somehow somehow avoided military service, yet they were healthy enough to work 60 to
    70 hr weeks. I am an Irish Catholic 28 year military vet who served in Afghanistan ; Jack would not make a patch on a real leader s butt.