The legacy of Jack Welch and why some firms are so poor, all they have is profit!

Thursday March 5 2020


By Daniel K. Kalinaki

The General Electric that Jack Welch took over in 1981 had annual revenues of $25 billion and $1.5 billion in profit. By the time he retired in 2001, GE’s annual revenues had jumped nearly five-fold to $130 billion and its stock market valuation had leapt from $14 billion to $410 billion.

Mr Welch was a superstar. Fortune magazine named him ‘Manager of the Century’ and the Financial Times newspaper heralded GE as the ‘world’s most respected company’ for three years in a row.
There was a bidding war for his memoirs – the winning bid was more than $7 million – and when published in the year of his retirement, the book sold more than 10 million copies worldwide.

The Harvard Business School case study of GE under his reign is one of the most popular in decent business schools worldwide; for years his methods were the gospel for many business executives.

Yet there have been few tears for the man who died on Sunday in New York aged 84. An obituary in The New York Times this week dutifully ran off the remarkable numbers behind his stewardship, but it was remarkable for two things.

First, that after running into the turbulence precipitated by the 2008 financial crisis, GE is a pale shadow of its former self. The share price is down more than 80 per cent from its peak in 2000, revenues are significantly lower year-on-year, and the company lost $5.4 billion last year.

Second, and more telling, the comments in response to the obituary were almost unanimously critical or negative of the man, his methods and legacy. Admittedly, NYT is on the far left of a polarised American political spectrum, and CEOs of big corporate firms in the West, have not been popular since the financial crisis exposed their greed, cunning and indifference.


Yet similar sentiments could also be found in The Wall Street Journal and other right-of-centre publications.

How could a man go from being lionised to demonised in less than two decades? The answers are surprisingly easy to come by. Smart people have long known that you can only tell how successful a business executive is, not while they are still in the building, but after they leave.

Successors could make the wrong bets or run down the place, but they could also inherit a hollowed-out operation or one in which the bottom line was padded by years of under-reinvestment or cutting corners.

There are a few local examples but perhaps Kenya Airways offers the best example from the region; a few years of what looks like impressive growth followed by years of spectacular decline into bankruptcy.

For CEOs and companies, this story shows that there can – and probably should – be a higher calling than just profit. Make no mistake about it, unprofitable companies have no impact on the world and soon shut down, but companies that deliver solid, long-term profitability tend to do so not only as an end it itself, but while also trying to make lives better.

In Obliquity, a truly remarkable book, John Kay shows how the most profitable companies are not the most profit-oriented. In fact, he shows that when profitable companies shift their raison d’être – reason for being – to the narrow prism of “maximising shareholder value” it in many cases ends in tears, as it did with the British manufacturing behemoth ICI, the airplane manufacturer Boeing, and many others.

Mr Welch was obsessed with meeting quarterly and annual earnings projections. He did this by getting rid of companies that weren’t leaders or strong number twos in their markets, routinely sacking the bottom 10 per cent of under-performing employees, and shifting the company away from its manufacturing core into financing. It did not end well.

In a world full of soulless quants, only too eager to advise on tax-avoidance in order to trigger year-end bonuses, it is easy for companies and their leaders to lose their sense of perspective, their humanity and their historic mission.

The resulting profits might burnish executive reputations and corporate bottom-lines but it is often for the short-term, and unsustainable.

Like empires, companies rise and fall but those that crash fastest and hardest are the ones that are so poor, all they have is profit. And that, even for Jack Welch, is the bottom line.

Mr Kalinaki is a journalist and a poor man’s freedom fighter.
Twitter: @Kalinaki.