Jack Welch, the legendary longtime CEO of General Electric, died on March 1, 2020, nearly two decades after leaving the company. His corporate legacy died on GE’s recent Investor Day: March 9, 2023.
And so there is a tale. In fact, two tales.
The first concerns 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 broken up in a total reversal of Welch’s legacy.
The second concerns 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 unfamiliar with Welch, who at 45 became GE’s youngest CEO in 1981 and retired in 2001, much of the American business and business press has come to terms with him. consider as a financial god with a divine touch.
During his tenure, GE shares outperformed the Standard & Poor’s 500 Index (^GSPC), Wall Street’s preferred benchmark of performance, by an astounding margin of 8 to 1. GE rose 5,600% , rising from $2.38 the day before Welch took office to $135.69 the day he left, against a 700% rise in the S&P.
(All numbers in history, from Yahoo Finance, do not include dividends and are adjusted for GE’s 2021 1-for-8 reverse stock and this year’s GE HealthCare spin-off.)
Welch was widely revered. Among his other accolades, 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 consecutive year.
People wrote books about Welch’s management skills and what a genius he was. Over its 20-year career, GE made hundreds of acquisitions and grew into a gigantic corporation that, during parts of its tenure, had the highest stock market value of any American company.
However, after Welch’s retirement, it became clear that he was playing income and accounting games, and accumulating financial assets, which provided much more flexibility in reporting gains and losses than GE’s former manufacturing operations.
Welch’s successors—Jeff Immelt for 16 years and John Flannery for 14 months—could not keep the game going the way Welch did. Welch, who has spoken extensively about the importance for a CEO to appoint a formidable successor, sponsored a public contest between 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 not a triumph for GE investors — or ultimately for Welch. 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 title went from a not-to-lose title under Welch to a not-to-win title under his successors.
That’s why, in 2018, GE’s board named Larry Culp CEO to try to clean up the mess. Culp, a GE board member who became GE’s first CEO who had not been employed before, had an outside view of the company and saw how dirty the company was. Culp, a very successful former CEO of Danaher Corp. (DHR), began selling GE parts. At the recent Investor Day meeting, Culp said he would reduce GE’s debt by $100 billion.
How times change. I watched virtually the entire four-hour Investor Day presentation and didn’t hear Jack Welch’s name mentioned once.
Culp spun off what is now called GE HealthCare (GEHC) in January, will transform GE’s energy business next year into what will become GE Vernova, and will remain as CEO of the remaining company, which will be called GE Aerospace.
Wall Street loves Culp’s breakup plan. And when various GE executives expressed optimism during Investor Day, GE shares rose about 5%. Through Monday, GE stock had risen 25% during Culp’s tenure, compared to 32% for the S&P.
These aren’t Welch-type stats — Welch’s outperformance against the S&P will probably never be matched — but they’re much better than Flannery’s and Immelt’s.
However, although Welch’s GE legacy has come to an end, his influence over much of corporate America continues. Welch asked GE to adopt what’s called “rank and yank,” firing the bottom 10% of GE managers each year and generously rewarding the best. He sliced tens of thousands of employees from GE’s payroll and became known as Neutron Jack – a name he hated – because he sprayed jobs but left buildings standing.
These days, you see evidence of Welch’s fingerprints all over major American corporations. Many companies, for example, report “adjusted earnings,” meaning earnings as they define it rather than as defined by generally accepted accounting principles.
And companies issue so-called “earnings forecasts,” often keeping the number low so that earnings “exceed expectations,” as they say on Wall Street. When things get a little tight, many companies will cut capital spending and play legal but deceptive accounting games to beat the profit numbers they promised on Wall Street. And, of course, employees often become human sacrifices.
This is for me the true story of GE. And the true legacy of Welch.
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Disclosures: I have a small stake in GE, which I bought after Culp became CEO, because I have a substantial investment in Danaher, which thrived under Culp’s leadership. I also have small investments in GE and GE Heathcare, and gave each of my four grandchildren a share of GE as a year-end gift.
Allan Sloan, who has written about business for over 50 years, is a seven-time winner of the Gerald Loeb Award, business journalism’s highest honor. He won Loebs in four different categories over four different decades.
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