In 1953, Charles Wilson, then CEO of General Motors, is said to have told Congress, “As goes GM, so goes the nation”. GM filed for bankruptcy in June of 2009, after the great recession and financial collapse left it with $173 billion in debt for “just” $82 billion in assets. The rise, fall, and rebirth of GM can be seen as punctuating the post-war industrial boom, the once dominance of the U.S. industrial machine at a time when jobs seemed secure and life-long (along with a powerful role for labor unions), and its ultimate defeat at the hands of global competition, increased costs, staggering pension liabilities, and financial risks taken by management.
This has led me to reflect on the recent tumbles of General Electric, where I cut my corporate teeth in the 1980’s and early 1990’s. My two children were born in Schenectady, NY and my travels included Evendale, where we built jet engines, Rockville, MD, the home of our now defunct information services business, Valley Forge, PA, where our national intelligence business boomed, merged with RCA, and then was sold at a huge profit to what became Lockheed….and many other businesses, from Louisville (appliances) to New York (Kidder Peabody, which hardly anyone remembers).
During my entire time at GE, the company was led by Jack Welch, probably the most respected, admired and imitated business leader of that part of the 20th century. I studied my own company, and I read pro-Jack and anti-Jack (e.g. “Profit at any Cost”) writings throughout. At one of my first company meetings, I remember hearing about how all of our businesses had to be #1 or #2 or they would be shut down or sold, and how “the ideal employee should be ready to go but eager to stay”. Welch was known as “Neutron Jack” because he eliminated the people while leaving the buildings standing. In Schenectady, however, many of the buildings went, too, as the company reduced its tax bill and contributions to the community as it cut payroll and shifted turbine manufacturing elsewhere. All of this, we were told, was in the name of creating value for GE’s shareholders.
From this very first lesson, I was determined to be a shareholder. Over nine years, I maxed out my 401(k) plan every year and put every nickel into GE stock. The company also rewarded me regularly with stock options, and when I left, in the early years of the Internet boom, I cashed out; it’s not a fortune but it’s a big part of the reason I don’t have to worry (at least not for myself) about what happens to Social Security in my retirement years.
Jack retired in 2001, collecting a severance package worth $417 million. During his 20 year tenure, GE’s market capitalization (its value to its shareholders) increased from $13 billion to over $600 billion (the Standard & Poor’s 500 stock index delivered a whopping 1880% return during that period, but GE’s performance was twice as good). Jack took less than a billion for his personal reward, while delivering, as promised, hundreds of billions to shareholders.
Unfortunately, the stock market tanked in 2001, as we suffered a recession and a hit from the September 11 terrorist attacks, coming not long after the Internet bubble burst (in March of 2000). Then in 2008-2009 we had the collapse of the housing bubble, the near-death of our banking system, and the great recession. GE has never really recovered from these two hits. Since Jack left in 2001 to the present its stock has declined from over 50 to under 14, while the S&P 500 has nearly doubled. In the last 10 years (roughly since the start of the great recession) it lost half of its value while the S&P 500 more than recovered, reaching a string of new highs.
Jack doesn’t talk much publicly about what happened after he left GE. He’s moved on. But he’s still visible, as a commentator and business icon. There’s a (for profit, of course) Jack Welch – branded online MBA program at Strayer University. And he attracted attention in 2012 for appearing to claim that the Bureau of Labor Statistics had distorted their unemployment statistics.
The telling of the GE story is just as polarized as American politics. Either you’re with Jack, or you’re against Jack. Jack, a tough guy by all accounts, was succeeded by Jeffrey Immelt, who promised to follow in Jack’s footsteps but was more of a snowflake. So, if you’re with Jack, Jack built up this incredible legacy and fortune, which Immelt destroyed. In you’re against Jack, Jack built a house of cards characterized by image-building and financial risk, which was loved by investors until the financial risks ultimately failed to pay off, by which time he was long gone. Of course, the real story is somewhat more nuanced, but there can be hardly any doubt that the current state of GE owes largely to the troubles of its financial services businesses (real estate, lending, insurance and so forth) which Jack built up to become one of the largest banks in the world while keeping it somewhat protected from regulation. With that in mind, it is hard to pin all of the blame on his successor, as GE suffered what other big, complex financial institutions, like Citigroup, suffered–big losses from having to unload troubled assets and failing business units. GE additionally had to weather the loss of Wall Street’s confidence: As long as Jack was in charge, it seemed that no one wanted to look behind the curtain; when the business started to struggle, GE went from being able to do no wrong to being able to do no right, as reflected in the stock performance: Even as some of the businesses, like aircraft engines, have done well, it is not enough to make up for tainted assets.
Why is GE an allegory for the U.S. entry into the 21st century, just as GM was an allegory for the earlier period? It is not only the ruthless devotion to profit and the associated leverage hype of the 1980’s, which GE symbolized. It is also a story of taking advantage of global sourcing, financial and tax tricks, and downscaling or shutting down industrial businesses — Jack Welch was the poster child for all of it. And one view of what went wrong reflects heavily on what’s going on in American politics and the management of our country. It has to do with rewarding short-term thinking and something called agency risk or agency theory: In a nutshell, we destroy great American corporate institutions by rewarding their leaders based on their creation of shareholder value. But shareholder value, at least in the near term, comes from short-term increases in profits, along with accompanying fleeting perceptions. This magnifies the effects of certain actions, such as acquisitions and outsourcing, and punishes other actions, particularly hiring. The “agency” part is that the executives who are incentivised to create this value generally cash out long before a lot of the other shareholders — so they get the rewards without taking the long term risk. This is exactly what happened with GE’s house of cards.
I was reading a host of articles from the Cato Institute (a libertarian think tank) and the American Enterprise Institute (a conservative think tank) about the effects of free trade on jobs. Cato, backed by the Koch family, is unabashedly in favor of free trade. I have been surprised to find how many right-leaning articles blame corporations, rather than trade, for the decline in jobs in certain manufacturing sectors, which contributed to voter angst in the 2016 elections and the resulting backlash against free trade (which they support). So one conservative theory is that it’s not free trade that costs jobs, but short-sighted company management that costs jobs. This idea intrigues me because of my experience at GE and my understanding of agency risk (as it was explained to me by Jim Rutt, who was then the chairman of the Santa Fe Institute) and its contribution to the housing market collapse and the great recession. Basically, any time you give leaders (of a company or of a government) an incentive that is in conflict with the interests of their stakeholders, you are in great danger. In the case of GE, it rewarded Jack and the short-term shareholders for the shareholder value that was temporarily created by short-term profits.
Are we doing the same thing with our government, and is this one of the reasons why our government can’t be too closely aligned with business interests? Do we reward our government for short-term returns such as tax cuts, economic stimulus that lasts until the next election, attacking our enemies, the perception that they are negotiating deals on our behalf, etc., at the same time that we fail to hold our leaders accountable for the long-term risks and value that they are creating (as measured, for example, by budget deficits, the imbalances in entitlement programs, leaving troops in lingering battles throughout the world, environmental impacts)? Just as the shareholders of a company have to reward management for long-term performance, we have to reward our elected officials for their long-term returns to our national security and prosperity. And we’re talking very long term, because most of us can’t just hope to sell out when we hit a peak. How are we going to achieve the right incentives and accountability for our leaders?