Business

Jack Welch’s GE Legacy Ended Last Week: RIP


Jack Welch, the legendary longtime CEO of General Electric, died on March 1, 2020, nearly two decades after he left the company. His corporate legacy died at Recent GE . Investment Day Events: March 9, 2023.

And so lies a story. Actually, two stories.

The first is about how Welch, considered by many to be a management genius, ended up leaving a mess behind when he retired from GE. (GE)currently being dismantled in a complete reversal of Welch’s legacy.

The second is about how buying stock in a company because you think the CEO is a genius—and will appoint a genius to succeed him—can jeopardize your financial situation.

For those of you unfamiliar with Welch, who at age 45 became GE’s youngest CEO in 1981 and retired in 2001, most American companies and the business press consider him a Finance god with divine abilities.

During his tenure, GE stock outperformed the Standard & Poor’s 500 (^GSPC) index, Wall Street’s favorite comparative performance measure, with a staggering 8 to 1 margin. GE was up 5,600% from $2.38 the day before Welch took over to $135.69 the day he left, compared with a 700% gain for the S&P.

(All numbers in the story, from Yahoo Finance, exclude dividends and are adjusted for GE’s 81 to 8 inversion in 2021 and its subsidiary GE Healthcare this year.)

Welch is widely worshiped. Among his other honors, Fortune magazine named him Manager of the Century in 1999, and in 2000, the Financial Times named GE the “World’s Most Respected Company” of the year. third in a row.

People have written books about Welch’s management skills and what a genius he was. During his 20 years in charge, GE made hundreds of acquisitions and became a giant enterprise that for parts of his tenure had the highest stock market value of any company. of the United States.

However, after Welch retired, it became clear that he was playing the accounting and income game, and stocking up on financial assets, which allowed for much more flexible profit and loss reporting than other businesses. GE’s old production line.

Welch’s successors—Jeff Immelt for 16 years and John Flannery for 14 months—couldn’t keep the game going the way Welch did. Welch, who has spoken extensively about the importance of a CEO appointing a brilliant successor, sponsored a public contest between Immelt and two other GE executives, both of whom had left the job. company after Welch appointed Immelt.

But because Immelt has inherited all kinds of problems and made a number of mistakes, his tenure has not been a victory for GE investors — or for Welch as it turned out. Under Immelt, GE stock rose 6.5%, but the S&P more than doubled, gaining 128% during his tenure. Under Flannery, stocks fell 51% while the S&P gained 18%.

Stocks went from impossible to lose under Welch to unwinnable under his successors.

That’s why in 2018, GE’s board appointed CEO Larry Culp to try to clean up the mess. Culp, a GE board member who became the first GE CEO who wasn’t previously an employee, took an outsider’s view of the company and saw the company as bad. how. Culp, formerly the highly successful CEO of Danaher Corp. (DHR), started selling off GE pieces. At a recent Investor Day meeting, Culp said he would cut GE’s $100 billion in debt.

How times change. I watched almost the entire four-hour Investment Day presentation and didn’t hear Jack Welch’s name mentioned even once.

Culp spun off what is now called GE Healthcare (GEHC) in January, will spin off GE’s energy business next year into GE Vernova and will continue as CEO of the other company, called GE Aerospace.

Former General Electric CEO Jack Welch speaks during the World Business Forum in New York, October 5, 2010. REUTERS/Lucas Jackson (USA - Tags: BUSINESS)

“Jack neutron”: Former General Electric CEO Jack Welch speaks during the World Business Forum in New York in 2010. REUTERS/Lucas Jackson

Wall Street likes Culp’s breakup plan. And as many GE executives expressed optimism at Investment Day, GE stock jumped 5% or more. As of Monday, GE stock was up 25% during Culp’s tenure, compared with 32% for the S&P.

Those aren’t the same stats as Welch’s – Welch’s outperformance on the S&P will likely never match – but they’re a lot better than Flannery and Immelt did.

However, even though Welch’s GE legacy is over, his influence over most American companies continues. Welch asked GE to adopt a so-called “rank and recoil,” fire the lowest-ranked 10% of GE managers each year, and give lavish bonuses to the top performers. He cut tens of thousands of employees from GE’s payrolls and became known as Neutron Jack – a name he hated – because he evaporated jobs but left buildings standing.

Today, you see evidence of Welch’s fingerprints all over major American companies. For example, many companies report “adjusted earnings”—meaning earnings the way they define them, not as defined by the Generally Accepted Accounting Principles.

And companies that offer what they call “earnings guidance,” often keep the numbers low so that profits will “beyond expectations,” as they say on Wall Street. When things get a little tougher, many companies will cut capital spending and play legitimate but misleading accounting games to beat the earnings numbers they promised Wall Street. And, of course, employees often become human sacrifices.

That to me is the real story of GE. And the real Welch legacy.

Disclosure: I have a small stake in GE that I purchased after Culp became its CEO because I have a substantial investment in Danaher, which has prospered under his leadership. Culp. I also have small investments in GE and GE Heathcare, and I gave each of my four grandchildren a share of GE as a year-end gift.

Allan Sloan, who has written about business for more than 50 years, has won the Gerald Loeb Award seven times, business journalism’s highest accolade. He’s won Loebs in four different categories over four different decades.

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