Jack Welch Inflicted Great Damage on Corporate America
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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.
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.
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.
PS You know things are really bad when the stock chart starts to go to log price scale because it has gone down so much!
Its bizarre to talk to well-meaning execs (even below C-suite) at public companies and hear them overtly say this. "Well we know X and Y are sound investments for the company's success, but it's a question of finding a way to sell something that long-term without tanking our stock price."
I try not to cry market inefficiency without good evidence, but "shareholders promote good corporate governance" starts feeling pretty bizarre when the people running a company describe shareholders like corporate raiders encouraging them to destroy value for a quick payout.
> I wish boards can come up with a compensation structure for execs which optimizes for long term.
For all the talk about "when founders should get out of the way" and "what makes a good founder doesn't always make a good CEO", it's interesting to see that research still finds companies with founder-CEOs performing substantially better. Higher share prices (which might stem from overconfidence), but also better long-term financials, more R&D spending, more influential patent filings, etc.
And that doesn't necessarily mean founders are super-geniuses, exceptional managers, or even unusually attuned to their market. They get less of their salaries in cash, hold options and stocks longer, and vary their behavior less in response to compensation structure. (Also, they often hold so much stock they can't sell in full without panicking the market.)
So it really does look like we just haven't found a good way to compensate non-founder CEOs: their behavior is extremely responsive to their compensation, but nobody has found a scheme that makes them act long-term to the degree a founder would.
Call it "stack ranking" and you too can be lionized by the business press.
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.
I still think that baking the non financial responsibilities into the founding legal documents would go a long way towards preventing those goals from being eroded after the initial founders move on even more so after what you shared as people clearly make the personal decision to prioritize shareholder value above all else then, which is somewhat more disheartening.
This is more cultural than legal (and, as the article points out, he had a lot to do with this shift)
That being said, it is absolutely legal as well as cultural. As a corporate director you can and will be sued if shareholders can show you intentionally made a choice to lower shareholder value even after knowing it would.
To the OP, it was Welch (and others) who popularized the idea of this meaning maximizing "shareholder value", but fiduciary duty existed before then and it is the cultural context that has shifted. It lay terms, many people incorrectly think this means that you have a duty to take actions that will raise the share price. But it's much more nuanced than that.
You can absolutely be successfully sued if it can be shown that you did not act in what you reasonably believed to be the best interests of the corporation, but that is a very different thing. Basically your fiduciary duty is to act in good faith, in the interests of the company (& thereby shareholders).
It is a pretty high bar to demonstrate failure, and most normal things that shareholders might gripe about will fall well short of this, and under "business judgement". There are other checks and balances here, bear in mind that if the board is unhappy enough about the approach they can replace the CEO, etc.
Not given. I’d ask for a source, but I’ll save you the trouble of a fruitless search by not doing so.
With that said, might some consider it noteworthy that these are primarily customer-owned cooperatives rather than worker-owned ones? That seems like it might not be completely inconsequential, but perhaps I am being excessively picky.
Please accept my apologies for being less than entirely clear. It is my opinion that FOSS projects are unlikely to be considered good examples of worker-owned cooperatives that are also successful businesses. As you say, this offers no comment in any way on the viability or suitability of the model.
A quick search suggests that the worker-owned cooperative model is being tried! https://www.techworker.coop/
So no.
It's not strictly tech, though.
But I believe we need to do it if we want a brighter future.
Companies don't vote.
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...
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.
It requires good-faith actors and a long-term, holistic view. Humans are not very good at these things.
Perhaps designing with the crooked timber of humanity in mind could be worth considering?
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.
My 401K through work has easily 4x the fees, even though it's mostly holding Vanguard funds (or similar ETFs).
401Ks are an expensive sham. Increase IRA limits plz.
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/
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.
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).
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?...
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.
If GE stopped paying dividends altogether, for example, the market price would tank.
It's all academic anyway, I think we're saying the same thing.
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.
https://www.wsj.com/articles/ge-chief-says-assets-sales-will...
Spinning off less-profitable divisions would affect market cap.
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.
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...
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.
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.
What does that even mean?
I admit some confusion at which 'short-term numbers' are being optimized at the expense of long term prosperity. I realize I may have been to literal in my reading -- the complaint is that our government is focussed on the short term at the expense of the long term.
The interstate system could be seen as a boondoggle to make automakers rich at the expense of the US having a modern rail network.
Without question the moon landing and the Hoover Dam were historic engineering feats but they were both products of their eras. The Hoover Dam was a prewar Great Depression jobs effort and the moon landing would never have been possible but for the Cold War.
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.
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...
https://www.forbes.com/sites/stevedenning/2011/11/28/maximiz...
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...
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.
A very thought-provoking read, in fact.
archive.is has a beef with some DNS resolvers:
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.
It seems to me there would always be a Jack Welch, albeit one of a different name.
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.
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?
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."