Jack Welch, the legendary long-time chief executive of General Electric, died on Mar. 1, 2020, almost two decades after he left the company. His corporate legacy died at GE’s recent Investor Day event: Mar. 9, 2023.
And thereby lies a tale. Actually, two tales.
The first is about how Welch, who many people considered a management genius, ended up leaving a mess behind when he retired from GE (GE), which is now being dismantled in a total reversal of Welch’s heritage.
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 be dangerous to your financial health.
For those of you who aren’t familiar with Welch, who at 45 became GE’s youngest-ever CEO in 1981 and retired in 2001, much of corporate America and the business press came to consider him a financial god with a divine touch.
During his tenure, GE’s stock outperformed the Standard & Poor’s 500 (^GSPC) index, Wall Street’s favorite comparative-performance metric, by an astounding 8-to-1 margin. GE rose 5,600% from $2.38 the day before Welch took over to $135.69 the day he left, compared with a 700% rise in the S&P.
(All the numbers in the story, from Yahoo Finance, don’t include dividends, and are adjusted for GE’s 1-for-8 reverse stock in 2021 and this year’s spinoff of GE HealthCare.)
Welch was widely worshipped. 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” for the third straight year.
People wrote books about Welch’s management skills and what a genius he was. During his 20-year run, GE made hundreds of acquisitions and became a gigantic enterprise that for parts of his tenure had the highest stock market value of any U.S. company.
However, after Welch retired, it became clear that he'd been playing earnings and accounting games, and loading up on financial assets, which allowed far more flexibility in reporting gains and losses than GE’s old-line manufacturing businesses did.
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 talked a lot about how important it was for a CEO to appoint a terrific successor, sponsored a public competition among Immelt and two other GE executives, both of whom left the company after Welch appointed Immelt.
But because Immelt had inherited all sorts of problems and made a number of mistakes, his tenure was no triumph for GE investors—or for Welch as it turned out. Under Immelt, GE stock rose 6.5%, but the S&P more than doubled, up 128% during his tenure. Under Flannery, the stock fell 51% while the S&P rose 18%.
The stock went from being a can’t-lose under Welch to a can’t-win under his successors.
Which is why, in 2018, GE’s board named Larry Culp CEO to try to clean up the mess. Culp, a member of GE’s board who became the first GE CEO who hadn’t previously been an employee, had an outsider’s view of the company and saw how fouled up the company was. Culp, previously the highly-successful CEO of Danaher Corp. (DHR), began selling off pieces of GE. At the recent Investor Day meeting, Culp said that he’d cut GE’s debt by $100 billion.
How times change. I watched virtually the whole four-hour Investor Day presentation and didn’t hear Jack Welch’s name mentioned even once.
Culp spun off what’s now called GE HealthCare (GEHC) in January, will spin off GE’s energy business next year into what will become GE Vernova, and will stay as CEO of the remaining company, which will be called GE Aerospace.
"Neutron Jack": Former CEO of General Electric, Jack Welch, speaks during the World Business Forum in New York in 2010. REUTERS/Lucas Jackson ·Lucas Jackson / Reuters
Wall Street loves Culp’s breakup plan. And when various GE executives exuded optimism at Investor Day, GE stock rose 5% or so. Through Monday, GE stock had risen 25% during Culp’s tenure, compared with 32% for the S&P.
Those aren’t Welch-like statistics—Welch’s outperformance of the S&P will likely never be matched—but they’re a lot better than Flannery and Immelt did.
However, although Welch’s GE legacy has been terminated, his influence on much of corporate America continues. Welch had GE adopt what’s known as “rank and yank,” firing the bottom-ranked 10% of GE’s managers every year and lavishly awarding top performers. He sliced tens of thousands of employees from GE’s payroll and became known as Neutron Jack—a name he hated—because he vaporized jobs but left the buildings standing.
These days you see evidence of Welch’s fingerprints all over big-time corporate America. Many companies, for instance, report “adjusted earnings”—meaning earnings as they define them rather than as Generally Accepted Accounting Principles define them.
And companies issue what’s called “earnings guidance,” often keeping the number on the low side so that profits will “exceed expectations,” as they say on Wall Street. When things get a bit tight, many companies will cut back on capital expenditures and play legal but misleading accounting games to beat the earnings numbers they’d promised Wall Street. And, of course, employees frequently become human sacrifices.
That to me is the real GE story. And Welch’s real legacy.
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Disclosures: I have a small GE holding, which I bought after Culp became its CEO because I have a substantial investment in Danaher, which prospered under Culp’s leadership. I also have small investments in GE and GE Heathcare, and I gave each of my four grandkids a share of GE as a year-end present.
Allan Sloan, who has written about business for more than 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He’s won Loebs in four different categories over four different decades.
