Shifting from a “Shareholder”-Driven Financial System to a Productive Economy : It Won’t Happen Without a Brawl
A Book Review
The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America – and How to Undo His Legacy
By David Gelles
Simon & Schuster, 2022, 264 pp
By John Ascher
David Gelles’ recent book about the infamous late CEO of General Electric, Jack Welch, is a valuable study of the corporate shift towards “profits over people” financialization, and greed — all qualities of today’s private equity-dominated USA financial cauldron. After reading this study, no argument that can be made against the extraordinary impact of this one businessman, and his role as a mentor for a generation of CEOs who aided in the gutting of the productive economy of the USA.
Unfortunately, in his focus on Welch, Gelles creates a simplified narrative about the “golden era of capitalism” allegedly overturned by Welch. In the final section of the book, the reader is thus led to an illusory proposed solution: reverse the Welch-type corporate leadership, and we will enter a new “golden era,” characterized by socially conscious CEOs promoting “stakeholder” as opposed to “shareholder” values.
As we have witnessed in the past several years during the COVID-era economic crisis and recent extreme weather, the U.S. economy desperately needs a radical shift in order to return to a productive economy. Our infrastructure and our supply chains have miserably failed. First and foremost, we require new political leadership and initiatives, once again using ‘profit” as a benefit for all of society and the entire economy, not as money for the wealthy few enriched by the “success” of the Jack Welches.
Gelles’ pathway to documenting Welch’s role is directly tied to the story that made him an award-winning reporter for the New York Times.
Following the two deadly crashes of Boeing’s 737 Max in 2018 and 2019, Gelles was granted an exclusive interview in 2020 with the recently elevated chairman of Boeing, Dave Calhoun. While the software issue behind the crashes was already by then known, Gelles was trying uncover why decisions to redesign the outdated 737 model had been made. (Boeing was desperate to keep a contract with American Airlines which it was about to lose to Airbus, and was making decisions more based upon accounting than sound engineering.)
The interview was staged at the Boeing Leadership Center in St. Louis, on March 2, 2020.
Gelles asked the Boeing chief why the interview was being held at the Leadership Center, and Calhoun, without prompting, answered “Jack Welch.” Welch had died the day before, and Calhoun was formerly with GE and saw Welch as his mentor.
This was the “aha” moment for Gelles, who went on to uncover the influence of Welch in gutting productive companies and turning them into profit- driven financial entities throughout the U.S. economy.
It should be noted that as a reporter for The New York Times, Gelles has interviewed hundreds of business executives. He sits on The Times’ Climate Desk and reports on the relationship between public and private policy.
On GE itself, much of the book is a detailed account of Welch’s shifting the company from its origin as a technology leader at its inception, to a financial colossus engaged in mortgage-backed securities, and other pursuits of short-term, often predatory financial gain.
Founded by Thomas Edison, GE in its productive period symbolized the dramatic advances of American living standards in the late 19th and 20th centuries. Light bulbs, engines, locomotives, power plants, and later, jet engines were all pioneered by their engineers. American households were dominated by GE toasters, refrigerators, and more.
John Francis Welch, Jr. was appointed the Chairman and CEO of GE in 1981, serving in that role until his retirement in 2001. During the 20 previous years prior to his becoming CEO, Welch had clawed his way up the ranks of GE and was already known for his cost-cutting measures.
Despite his training as a chemical engineer, Welsh adopted as his singular goal making GE the largest profit-making corporation on earth. Gelles names Welch’s three tenets as “downsizing, dealmaking, and financialization.”
Here are some of his “accomplishments:”
- Institutionalized annual job cuts: Welch created a “Vitality Curve” of job performance in terms of profit-making. Each year he would cut the bottom 10% of his workforce. (Some called this practice “rank and yank”.) He wanted to eliminate job security and employee loyalty, replacing that with the attitude of “winning.”
- Outsourcing: Tens of thousands of GE’s jobs were sent out of the U.S. in the effort to slash costs and maximize profits. Welch hated unions.
- Diversification: Welch shifted GE away from its productive industrial roots, to chase corporate opportunities in the financial sector in search of increased profits. Welch acquired nearly 1,000 companies and sold over 400 businesses.
GE’s share price increased during Welch’s tenure by 21 per cent per annum, and Welch increased the worth of GE from $14 billion to $600 billion by the time he retired. GE became the most valuable corporation on the planet.
By the time Welch was through, the main profit-making arm of GE was no longer engines or light bulbs, but GE Capital. Mechanical engineering was literally replaced with financial engineering. GE purchased Kidder Peabody, invested in mortgage-backed securities, and acted as an unchartered bank issuing credit cards for other corporations.
Welch perfected the aggressive alpha-male approach of running his empire, bludgeoning his underlings into submission. Often, referring to someone he wanted to fire, he would say they should be “shot.” Fortune Magazine in 1984 named him the “Toughest Boss in America,” describing his style as follows: “Welch conducts meetings so aggressively that people tremble… He attacks almost physically with his intellect – criticizing, demeaning, ridiculing, humiliating.” Employees described that working, for him, was like being at war, with only some surviving until the next battle.
Welch’s success and style were lionized by the corporate media. Dozens of executives were Welch protégées. These included future heads of Boeing, 3M, Honeywell, Chrysler, Home Depot, and many more.
And, of course, Welch became a media mogul. Under Welch, GE bought out RCA, taking over NBC Television.
Donald Trump’s reality-tv show, “The Apprentice,” was taken over by NBC only a few years after Welch retired. Welch was a big fan of the show, and even made a guest appearance. Welch lived in the GE Capital-financed Trump International Hotel in New York and served on a Trump Administration advisory board.
Where Did “Welchism” Come From?
In a podcast interview about the book, the author described the history of corporate America as a pendulum. Ideas create the ground for future shifts in corporate culture and are then incorporated into practice. Often these ideas take an entire generation to take hold. Then, the pendulum shifts back. The two extremes of the arc are corporate greed, and harmony and beneficence.
Gelles does not seem to realize that the “pendulum swing” he is describing is really the battle from the inception of the nation, between the ideas of the American System of Alexander Hamilton, and those of Adam Smith, then known as the British System.
According to the book, before Welch came the “Golden Age of Capitalism.”
In Gelles’ narrative, this was a 50-year period which began in 1932. The ideas of this time were represented by two economists of FDR’s Brains Trust — Adolf Berle, Jr, and Gardiner Means — in their study, The Modern Corporation and Private Property. (An excellent insight, by the way. -ed) The swing back was when Welch took charge of GE.
Gelles describes the first as the era when corporations cared, and workers shared in the fruits of their endeavors. “The New Deal helped revitalize the economy with massive investments in infrastructure, creating millions of jobs. Wall Street was reined in with new regulations, and as workers benefited, inequality waned. It was a recipe for growth, and in the postwar years, companies poured profits back into their workforces, ensuring a stable, skilled employee base,” he writes.
Then, in the 1970s the New Deal era economics simply ran out of steam. (In fact, these policies were systematically dismantled -ed.)
New Deal concepts were replaced by the free-market orthodoxy of the Chicago school of Milton Friedman, a product of the earlier Austrian School of Friedrich von Hayek.
Friedman declared that “the social responsibility of business is to increase its profits.” The social safety net, government regulation, and protective labor laws were all to be scrapped for the benefit of unfettered free markets.
Gelles cites the work of two academics, Michael Jensen and William Meckling, who used Friedman’s ideas to develop a new theory of corporate “culture.” Concern for local communities, charities, and respect for employees all stood in the way of the drive for more profit. Executives would be better motivated by large pay packages which incentivize delivering larger returns for investors. Share price was the ultimate metric of success.
These ideas spread first through business circles, and then into the government, especially in the Reagan administration which trumpeted deregulation unleashing “free market” forces. (Dereg, of course, had already started under Carter. -ed)
This then, according to Gelles, was the background of Jack Welch’s creed, and the environment in which he then took over General Electric. Welch was thus the definitive turning point from the old golden era to the new profit-driven era.
Today, Gelles says, corporate America has taken this approach and made it even more virulent.
Stable jobs have been replaced by gig jobs, and employment security is an idea of the past. Employees are expected to be always on call, and basic benefits like healthcare have been gutted. Companies like Boeing eliminated defined pensions, and replaced them with 401Ks, which are at the mercy of the stock market. Minimum wages have not kept up with inflation. and now we have a national fight for a $15 an hour minimum wage, which would still not allow workers to rent an apartment in the US.
And, of course, the income inequality and stock buybacks are major hallmarks of the Welch-induced corporate nightmare.
The author’s description of today’s vulture financial system strikes the mark and shows an appropriate degree of anger about current conditions.
Suggestions for Improvement
The elements Gelles develops in this book are sufficient for him to reach a set of very strong conclusions about how to reverse the conditions which he quite competently exposes. That does not happen.
Instead, Gelles suggests the need for another generation to seed the environment, all of which takes time. He cites the emergence of a new corporate leadership committed to “stakeholder” values, which needs to grow. Additionally, he suggests: Put workers on boards; offer more stock options to employees; reduce aggressive mergers and acquisitions; cap executive compensation. And more.
Gelles’ gloss-over of FDR’s ruthless role in ending the Great Depression by launching the New Deal weakens the book. That “golden era” was the result of a determined fight for American System policies by the President and his allies. Certainly, organized labor was promoted by FDR, but corporate recognition of the rights of labor came because of a protracted bloody struggle, not a shift in the Zeitgeist. And regulations like Glass-Steagall, which prohibited banks from engaging in financial speculation, took a quality of guts not apparent today.
The positive changes of the 1930s were not the result of an “invisible hand” moving the pendulum.
Compare FDR’s aggressive measures to the recently passed Anti-Inflation Act of the Biden administration. One of the included new taxes in that bill typifies the cozy approach towards Wall Street: Stock buybacks are now subject of a small federal tax, as opposed to being regulated or eliminated.
Wall Street yawned when they heard that one.
And the Republicans are much, much worse.
Today, in the face of another major recession, there is an opportunity and the urgency for fundamental change. This will take leadership, and an interventionist economic policy, which places the rebuilding of the physical economy of the US back as the priority. And it will require a social movement, as has been the case with all great change.
The policies, thoroughly exposed in this book, that led to the free-market orthodoxy of the Welch and Friedman era will have to be reversed. We need re-regulation of certain industries (like freight rail), regulations against the cancerous private equity scourge, and more.
While there has been some movement towards reviving a productive economy by reshoring of our outsourced industries, this will not work without a complete overhaul of our infrastructure, including providing adequate power and water. Our transportation system, including freight, is broken.
And like in the 1930s, there will have to be a reliable source of government credit to rebuild. During the recent years, we relearned what FDR knew in the Great Depression: pouring money into banks and corporations leads to more stock buybacks, not productive investment. FDR spurred growth with an agency which David Gelles doesn’t mention in his book — the Reconstruction Finance Corporation.
The proposed National Infrastructure Bank Act, now before Congress in HR3339, can bring back that approach today.