Other segments from the episode on June 1, 2022
Transcript
DAVE DAVIES, HOST:
This is FRESH AIR. I'm Dave Davies, in for Terry Gross. If you're concerned about the growing disparities of wealth and income in the United States, as well as the decline in unionization and the fact that our economy seems dominated by corporations committed to downsizing, outsourcing, offshoring and financial manipulation, our guest, New York Times correspondent David Gelles, says that to a remarkable degree, these trends can be traced to the career of one man. Jack Welch was the chief executive of the General Electric Corporation for the last two decades of the 20th century.
In a new book, Gelles says Welch's ruthless cost cutting and single-minded focus on quarterly earnings transformed GE and made him a celebrity CEO, a darling of Wall Street whose methods were widely praised and copied by other corporate managers. But Gelles argues that the spread of Welch's management principles was bad for workers, bad for the economy, and ultimately bad for GE and the companies that followed his lead.
David Gelles is a correspondent on the climate desk at The New York Times, covering the intersection of public policy and the private sector. Before that, he was a reporter and columnist for the business section for eight years. Before joining The Times in 2013, he was a reporter for the Financial Times. His new book is "The Man Who Broke Capitalism: How Jack Welch Gutted The Heartland And Crushed The Soul Of Corporate America - And How To Undo His Legacy."
Well, David Gelles, welcome to FRESH AIR. You know, Jack Welch took over General Electric in 1981. And I remember it as a company that sold toasters and appliances and dishwashers and refrigerators. This was a company founded by Thomas Edison almost a hundred years before. Give us a sense of GE's role in the American economy and American life back then.
DAVID GELLES: As I dug into the history of GE, I found it hard to overstate not only the impact that GE still had in 1981 when Jack took over, but really its role in the history of American industry for the better part of this century before that. This was the company that brought us electric light bulbs, power plants, X-ray machines. This was the company that introduced everyday products like the toaster oven. They were behind the mass marketing of radio sets and televisions, dishwashers. The list just went on and on. And that was just on the consumer side. When you looked at their influence on industry and government beyond what we might find in our kitchens, they were no less influential there as well. It was GE that helped put men on the moon on the Apollo missions. You go back and look at those pictures, and there are lines and lines of GE engineers working side by side with NASA engineers. And right up to the present day, the size of that company became, you know, at one point, I think, representing something close to 1% of the American GDP. And there was a phrase, you know, as GE goes, so goes the American economy.
DAVIES: Right. It had a very strong record of research and development and innovation. How did it treat its employees?
GELLES: Like many companies in the postwar era, GE was a relatively benevolent employer. Many people call it the golden age of capitalism, these roughly 30 years after World War II which saw many of our biggest companies grow to unprecedented size, and in the process, make a whole bunch of money, and start sharing it in ways that would seem very unfamiliar today. Big companies back then - and GE is a perfect example of this - were proud of the way that they distributed their profits widely with employees, with their supply chains and even with the government. It was a 1953 annual report by GE that I cite in the book where they brag about how much they're paying in salaries to their workers and how much they're paying in taxes to the government. I don't need to tell you that that's a whole lot different than the way many companies operate today.
DAVIES: Now, Jack Welch would transform the company. Let's talk a bit about him. Tell us about his background. What kind of kid was he? What was his temperament?
GELLES: From an early age - and Jack acknowledged this himself in his autobiography - he was impulsive, somewhat aggressive, restless, ambitious, impatient. He was raised primarily by his mother, who was a devout Catholic. One amazing anecdote I found was that she taught him to gamble at an early age, making him wager his own money to learn sort of in a visceral sense what it meant to win and lose. But he was also, you know, deeply involved in the faith. He was an altar boy. There were flashes of a temper. From an early age, there's an anecdote that I think he repeats in his autobiography where he talks about caddying at a local golf course. And the man he was caddying for asked him to go fetch a ball that had gone in the water. And instead, he throws the man's golf clubs in the water and storms off the course.
So you see flashes of a temper. And that continues right on into his early days at GE, when, as a young associate, his first year at the company, he decides to quit because he learns that his colleagues got the same raise that he did. And he thought he was doing better. So he said he would quit the company. And it was only after his superior promised to give him an even bigger raise that he agreed to stay.
DAVIES: Was not a rich kid growing up, right?
GELLES: He was not. His family was relatively poor. His father was a conductor, a unionized conductor on a local commuter railroad in the Boston area. And he grew up with what he said, quote, "his nose pressed up against the glass." He seemed to feel slighted from an early age, and that clearly drove his behavior to the extreme in the years that followed.
DAVIES: So he joins General Electric. We should note that he got a degree from UMass Amherst and then got a degree in chemical engineering from the University of Illinois at Champagne. He gets a job at GE. He moves up into the in the plastics division, starts moving up the management ladder. What was his record there? What was his style?
GELLES: He was pushing his subordinates hard from the very get-go. Early in his career. he was overseeing the development of a new type of plastic in a Massachusetts plant. And he forced his team to go ever faster, ever harder, encouraged them to experiment with a highly volatile process that hadn't been fully tested. And there was an explosion - a large part of this factory blows up. Miraculously, no one is hurt, no one is injured. And the next day, he is called down to headquarters in Fairfield, Conn. And rather than be reprimanded, however, the superiors at the time sort of let him get away with it.
And he took that as evidence that he could continue to, I think, push the envelope, push the limits and get by with a sense of impunity in a way. Ultimately, though, he had real success. He helped oversee the development and introduction of new plastics that became very profitable. He kept moving up the ladder inside GE and was ultimately identified as a potential successor to the CEO at the time, Reg Jones, and asked to move to Connecticut and join essentially the succession race to replace Reg, which, of course, he ultimately won.
DAVIES: It's one thing to have policies that squeeze your employees and make them work harder, try to make them - get more productivity. Was he personally abrasive also? Was he a tough guy to deal with?
GELLES: People recount their experiences with Jack Welch with a shudder oftentimes. The face goes white at times. People said he was like a herd of elephants coming on, was one quote I found. He was argumentative. He pushed people to defend their ideas, even if he agreed with them. He had a penchant for foul language. He employed metaphors that would, frankly, be unacceptable in today's corporate landscape. He had views that would not be traditionally seen as politically correct today. I won't necessarily go into the details. But he was a alpha male, aggressive, materialistic, argumentative manager. And that set the mold for a type of corporate management that still carries weight today. And he, more than just about anyone else, was the progenitor of this style of CEO.
DAVIES: We need to take a break here. Let me reintroduce you. David Gelles is a correspondent for The New York Times. His new book about the late Jack Welch, who was the CEO of General Electric for 20 years, is called "The Man Who Broke Capitalism." We'll be back after this short break. This is FRESH AIR.
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DAVIES: This is FRESH AIR. And we're speaking with New York Times correspondent David Gelles. He has a new book about the late Jack Welch, who was the CEO of General Electric for 20 years. It's called "The Man Who Broke Capitalism."
So when Jack took command of GE, I mean, you write about the ways in which he changed its focus. One of them had to do with its attitude towards its employees. How did that change?
GELLES: Jack came to the job with the conviction that GE simply employed too many people. Now, again, the economy was changing. There was competition from overseas. Things were going to get more competitive. GE was going to have to operate in a different way. But as with almost everything he did, Welch reacted in the extreme. And in the first few years of taking over GE, he fired more than 100,000 people in a series of mass layoffs and factory closures that began a process of destabilizing the American working class. Up until this point, people who had a job at a company like GE or IBM basically figured that they had a job for life. But he explicitly said that this notion was going to be a thing of the past under his watch. And so all of a sudden, we have this much more transactional relationship between a worker and an employer that, of course, we're still living with today.
And in addition to these mass layoffs and factory closures, he turned to things like outsourcing and offshoring, looking for contractors who could do the work of GE security guards and janitors rather than keeping those people on staff. And when those jobs moved to contractors, well, suddenly those men and women were not at a blue-chip Fortune 100 company like GE with a history of great benefits, but they were at a contractor that was a service provider for those companies and looking to minimize costs. And on the offshoring front, Welch sent many of those factory jobs that he closed around the country overseas. They still needed to make the products, but they wanted to make them much, much more cheaply. And so we see the first great wave of labor, American manufacturing labor, going abroad. And thus begins the real beginning of serious outsourcing that would, of course, decimate America's manufacturing base.
DAVIES: Now, of course, all of these things cut costs and, therefore, can improve profits, which is one way of a corporate leader assessing his responsibilities, and that was a primary focus of his. This did get some attention. There was a "60 Minutes" segment and a 1984 Fortune magazine piece about him being the toughest boss of America. And somebody - I guess Newsweek called him Neutron Jack because the neutron bomb, which was developed around the time, would kill people but not destroy buildings. You know, it takes the people away and leaves everything else standing. This was tough stuff. Did Jack Welch care? Was he troubled by any of this coverage?
GELLES: He hated the Neutron Jack name, even though he could never shake it. Even when he died in 2020, President Trump gave him a tweet. He said, there was no corporate leader like Neutron Jack. So that label stuck with him for the duration of his life. What was so remarkable, though, is that despite the negative press he got in those early years, he was able to continue his work because the GE board and, ultimately, Wall Street and, ultimately, the rest of corporate America saw that what he was doing was, for better or worse, working in the short term. These strategies he was employing were indeed ticking up short-term profits. All of a sudden, other CEOs saw that, hey, yes, if we rapidly wind down the cost of our labor, we could potentially see a meaningful increase in earnings per share for the next quarter. And Wall Street sure liked that. And so there was this incentive system that encouraged other CEOs to start following his lead. And what's so remarkable is that even after these first years of pretty withering press, he's able to survive and, ultimately, become revered as the absolute model CEO, to the point that Fortune magazine, at the end of his career, calls him the manager of the century.
DAVIES: Manager of the century - wow. You know, apart from closing plants that he deemed too expensive or moving operations overseas, he had an idea that even with the workforce that you have, you should regularly rank them and cull the bottom what, 10%, right?
GELLES: He had a euphemistic name for this practice. He called it the vitality curve, but it was known internally and more broadly in the public as stack ranking or, even more sharply, rank and yank. And the idea is this. Managers, he said, needed to rank their employees. Twenty percent get an A grade. Seventy percent get a B grade, and 10% get a C grade. And if you're in that 10%, you're out of the company. He did that for 20 years inside GE, which led to thousands and thousands of layoffs. And it became, because he was so influential, dogma in corporate America.
When Steve Ballmer took over Microsoft, he implemented stack ranking, and it led to great turmoil in the ranks of Microsoft. And even more recently, Adam Neumann, the founder of WeWork, was using stack ranking as WeWork was growing so quickly. Even though that company had billions and billions of dollars in funding, he saw the need to fire 10% of its workers every single year because Jack did it.
DAVIES: So one thing that you say that he did that dramatically transformed the company was downsizing, cost-cutting. Another thing you say is deal-making. Now, that can mean a lot of things, right? I mean, every company makes deals - with suppliers, for real estate when they need to build something. You're talking about a different kind of deal-making. What are you referring to?
GELLES: It's true that just about every company makes deals. But no company made as many deals as quickly as General Electric under Jack Welch. During his time as CEO, the company struck more than 1,000 mergers. And at the same time, they shed some 300 or 400 businesses. No company had ever done so many transactions so quickly, and the effects were manifold.
One of the main ways in which it changed GE was simply to make it a bigger company. And that, again, was one of his stated intents. And he understood very quickly, very early on that he wasn't going to be able to grow his way to GE being the biggest company on earth. He was going to have to buy his way there. As he did this, though, it changed the culture in profound ways.
When you buy a company and try to merge its corporate culture, there are all sorts of unintended consequences. And it's not always easy necessarily. And oftentimes you're actually buying things that you may not fully understand. And that was the case when he bought Kidder Peabody, an investment bank on Wall Street that was, frankly, a den of thieves. It was the locus of the biggest insider trading scandal in Wall Street history at the time. And it was only after GE took ownership of it that all of this came spilling out into the open. And Welch realized he sort of had bought himself a mess. But at the end of the day, it didn't really matter because what Welch was focused on was using deal-making to make GE not only bigger, but, as he said, No. 1 or No. 2 in every industry.
DAVIES: You know, you write that when he bought NBC, it made him a media mogul and gave him a certain level of visibility and access to celebrities. I mean, what was distinctive about his approach to owning a broadcast network? I mean, did he meddle with content?
GELLES: He reveled in the limelight. There's no doubt about that. Under his watch, NBC acquired the rights to the Olympics, and the story goes that he was not entirely persuaded of the business merits of the acquisition, but he understood that it would be a good opportunity to wine and dine other executives and celebrities at the Olympics. And so he went ahead with it. Beyond that, though, Welch understood the power of owning media properties long before, I think, many other media moguls truly did.
Now, whether he meddled with coverage in an ongoing basis, I don't know that we can make that claim. But there are instances when, indeed, some very senior media executives who were working for him at the time have shared anecdotes about him actually doing just that. There were reports that on election night in 2000, Welch is in the decision room at NBC and pressures the team to call the election for George W. Bush. Now, I think they resisted that temptation. There are disputes about whether or not that happened. But the implication was clear. Welch understood the power of the media and at least at times tried to use his influence to shape events to his liking.
DAVIES: The remarkable quote here - I mean, I don't know how reliable this is - is him saying in the newsroom on that election night of that razor-thin Bush versus Gore race, "how much do I have to pay you a-holes to call this thing for Bush?" Pretty stunning.
GELLES: Indeed.
DAVIES: We're going to take another break here. Let me reintroduce you. We're speaking with David Gelles. He is a correspondent for The New York Times. His new book about the late Jack Welch, who was CEO of General Electric for 20 years, is "The Man Who Broke Capitalism." He'll be back to talk more after this short break. I'm Dave Davies, and this is FRESH AIR.
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DAVIES: This is FRESH AIR. I'm Dave Davies, in for Terry Gross. We're speaking with New York Times correspondent David Gelles. He's written a new book about the career and legacy of the late Jack Welch, the widely celebrated CEO of General Electric for the last two decades of the 20th century. Gelles argues that Welch's doctrine of ruthless cost cutting and single-minded focus on corporate earnings harmed workers, ruined GE and warped much of the American economy. Gelles' book is "The Man Who Broke Capitalism."
So when Jack Welch took over the GE corporation in 1981 and ran it for 20 years, you say he forced a lot of downsizing, a lot of layoffs, a lot of outsourcing. And he went on an acquisition spree, buying other companies, which changed the nature of General Electric and gave it control of a lot of companies that it may not have known quite what it was doing with. The third thing you talk about is something called financialization. Explain what you mean by this.
GELLES: Jack understood that in the early 1980s, the business world was changing. And, indeed, Wall Street and the finance industry was poised to grow in truly exponential ways. And that was the result of changes in technology that were enabling different kinds of market making. And it was also the result of a great deal of financial innovation at banks and leverage buyout firms, etc. And so even before he took over, he had identified what was known as GE Capital, this financial center inside the company, as an area that he believed could be, really, the future of the company. And over the course of his 20 years in charge, he did just that. Many of his acquisitions well beyond Kidder, Peabody served to enlarge GE Capital. But in the process, they took GE into all manner of, ultimately, somewhat risky financial products. GE all of a sudden was transacting in large corporate real estate deals. They were managing white-label credit cards for other companies. They became the owners of enormous fleets of leased vehicles and airplanes. They had satellites that they leased.
And so all of a sudden, again, they realize - Jack realizes that finance, this large umbrella term for a whole bucket of businesses that are quite far from the factory floor, hold potentially the keys to making GE, as he desires, the most valuable company on Earth. Ultimately, his successor continues this process. And it leads GE to get into things like subprime mortgages, short-term lending. And all of these businesses become dangerously exposed when the financial crisis finally hits. In addition, Jack used financialization to use GE Capital to essentially smooth out the company's earnings. So every 90 days, when the company reported its financial results to Wall Street - in the weeks before it had to report, it was able to massage its earnings and do a few transactions here, a few transactions there, sell a few assets, buy a few assets if it needed to, make a few write-offs to come in and hit its earnings targets just about where it had promised Wall Street it would be. And that led to this unprecedented run of almost 80 quarters in a row when GE was able to hit its numbers, something no other company has ever come close to.
DAVIES: What's interesting about this is that, you know, the focus on quarterly earnings reports was kind of a feature of corporate leadership in these days, that you had to convince Wall Street that you were doing well. That was the benchmark, you know, once every three months. And if you did that well, your stock price rose. And Jack Welch did that really successfully. It struck me that if they were able to hit their targets year after year after year after year, and you're talking about, you know, tens or hundreds of millions of dollars in quarterly earnings, it must have looked a little suspicious. I mean, could anything be that - I don't know. Could anyone be that successful? I mean, it seems like it must have been fudged just on its face.
GELLES: We have to remember that before 2001, 2002, it was a very different era on Wall Street. This was before the Sarbanes-Oxley Act implemented a great deal of more stringent financial disclosures on public companies. This was before some of the major corporate scandals like Enron and Tyco and WorldCom. And it was, frankly, an era where men like Jack Welch could get away with simply not sharing as much as we might expect big companies to reveal about their quarterly results today. And that's just what he did. It was largely a, quote-unquote, "black box." No one really knew exactly all the transactions that were happening inside GE Capital. And that was the intent.
Now, some people definitely were suspicious. And, indeed, not long after Welch retired, Bill Gross, one of the most influential investors, the co-founder of PIMCO, a big bond manager, he writes this scathing rebuke of GE, where he says the company's honesty remains in doubt and goes on to say, GE has been shrouded in mystery for a number of years. Institutional investors have wondered why a company continue to produce 15% earnings growth year after year, quarter after quarter. And he was finally saying the thing that no one had been daring enough to say when Welch was in power, which was that, just as you said, Dave, something looks off here. And sure enough, it was. Seven years after this, in 2009, GE finally settled sweeping accounting charges with the SEC, acknowledging that it had misstated earnings for years.
DAVIES: So in the 20 years that Jack Welch was the head of the company, if, you know, it had these consistently rising earnings, it was acquiring companies everywhere and therefore increasing its size and influence, what did all this mean in the end for the company's stock price and for Jack Welch's own reputation and celebrity?
GELLES: Welch wanted to make GE the biggest company on Earth, and he succeeded. By the early '90s, General Electric had eclipsed, I believe, Exxon at the time to become the most valuable company on the stock market. And it would remain so, more or less, uninterrupted for the duration of his career. And the '90s were, really, sort of the golden years for Welch. Now, many of the processes that we've just talked about - the downsizing, the offshoring, the outsourcing, the financialization, the deal-making - that was all continuing apace. But it was also true that in the short term at least, it was working.
GE's stock continued to tick up, and Welch was able to shake off that Neutron Jack reputation and really emerge as the first celebrity CEO. He was out there mingling with movie stars. His face was on the cover of magazines all the time. And he emerged as sort of this imperial executive and helped define what I think is still with us today in the form of a certain amount of CEO worship. We sort of adore our bosses in this sort of unbelievable way. But it was hard not to, you know? Here he was. He had turned GE into the most valuable company on Earth. He was making, you know, tens and hundreds of millions of dollars himself. And everything seemed to be going pretty swimmingly. GE's stock did fall a bit in his final year in office, but it was still near its all-time highs at the point. And again, Fortune magazine at his retirement calls him the manager of the century. And he basically goes out on top.
DAVIES: Yeah. I'm sure he was widely admired by many, but I'm sure among working people he was not so popular, right? Or am I wrong about that?
GELLES: During his time at GE, many GE workers benefited. Those men and women at the company who were invested in GE stock, they got to see their fortunes rise along with Welch's and the company's. But again, it depends on the time horizon we're looking at. If we're looking at just the years he was running the company and just what he did and who benefited at that point, you can make a case that, sure, he was good for at least the GE workers who didn't get fired under rank-and-yank or under his downsizing or offshoring or outsourcing. But fast-forward and look at what happens to GE's pensioners. Look what happens to the men and women holding GE stock as it plummets in the years following his departure because when he leaves, all of these flaws are fundamentally exposed, and Wall Street starts seeing through the charade. So his reputation among workers was a complex one. I think for some GE workers, they enjoyed the benefits. But even in the '90s, when Jack was riding high, it was becoming commonly understood among organized labor, among union leaders, that Jack had led a charge in the early '80s that was resonating with them still and has, ultimately, helped erode union membership in this country to record-low levels today.
DAVIES: Let me reintroduce you again. We're going to take a break here. We're speaking with David Gelles. He's a correspondent for The New York Times. His new book about the late Jack Welch is called "The Man Who Broke Capitalism." We'll continue our conversation after a quick break. This is FRESH AIR.
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DAVIES: This is FRESH AIR. And we're speaking with David Gelles. He is a correspondent for The New York Times. His new book is about the career and legacy of the late Jack Welch, the widely celebrated CEO of General Electric for the last two decades of the 20th century.
How far did GE fall from the heights that Jack Welch had taken it to?
GELLES: From being the most valuable company on Earth, GE fell to the point of essential irrelevance in the American economy. In 2018, with all of Welch's bad decisions catching up with the company, GE was removed from the Dow Jones Industrial Average, the bluest of blue-chip indexes and a real bellwether of the American economy. GE had been one of the very first companies included in the index, and it was, ultimately, the last of that original group to be removed. But its departure from the Dow was this real symbolic moment that, ultimately, set the stage for a news that happened just last year, which was the fact that GE is finally getting broken up once and for all.
DAVIES: What does that mean, getting broken up once and for all? The company won't exist?
GELLES: Late last year, in 2021, GE's current chief executive announced that the company would separate itself into three smaller standalone companies - one focused on jet engines, one focused on medical devices and one focused on power equipment. This is all that's left of Jack Welch's legacy, far from being the most valuable company on Earth and a conglomerate that spanned the world and all these different industries. GE is now going to be essentially chopped up into three different discrete pieces, and that's the end of the story.
DAVIES: You know, there's also the matter of Jack Welch's lifestyle. And around the time of his retirement, he had a nasty divorce which led to a court case which revealed some details about his severance arrangement with General Electric. You want to explain this?
GELLES: This is one more way in which what Jack Welch did at GE informed the world we live in today. Jack arranged his compensation package in retirement to be such that he was essentially entitled to live as he had as CEO in perpetuity. In practice, that meant that because as CEO, he flew on private jets and enjoyed unlimited tabs at the finest restaurants, so in retirement would the company pick up those expenses. And in this divorce, it came out that, in fact, GE - and ultimately, GE shareholders - were paying for lavish meals at the finest restaurants, were paying for the flowers in his apartment overlooking Central Park, were paying for his floor seats at Knicks games and his tickets to the Metropolitan Opera. When this came out, there was an outrage. He ultimately promised to return some of that money and not accept as much in retirement. But he was ultimately unbowed.
And he wrote an article defending himself where he essentially said I was worth every penny. But it didn't end there because other CEOs began getting these lavish packages in retirement. And in the same way that Welch became one of the first billionaire managers, he wasn't an inventor or an entrepreneur, he was a people manager who ultimately became a billionaire - other CEOs now continue to be compensated at astronomical rates that simply dwarf what the average American makes in their lifetime.
DAVIES: You know, to just widen the lens here and ask a big, big question, I mean, the name of your book is "The Man Who Broke Capitalism." You know, and critics would say we live in a country now where these fantastic contrasts of wealth and poverty and terrible inequality and the distribution of wealth and income and a tax system which essentially supports that and campaign finance practices which allow the rich to have such enormous influence - I don't know - can capitalism be fixed?
GELLES: That makes me ask the question, can our country be fixed? And I really think these questions are two sides of the same coin. Our economic system is at the root and is all mixed up in so many of the other social and political debates that we're experiencing right now as a nation. My hope is that by really understanding the truth that there is a different way to do business and that, in fact, a lot of the things that made this country so prosperous in the second half of the 20th century were working just fine until Jack Welch came along can give us a roadmap for creating an economic system that rewards not only executives and the richest shareholders, but truly starts distributing the wealth created by our corporations deeply and broadly across every part of this country. Because I think if that happened, if we were able to funnel some of these corporate profits back into communities that have been long forgotten for years and decades now, that would at least be one small step towards repairing some of the fabric of this country. And that would be a beautiful thing in my mind.
DAVIES: Well, David Gelles, thank you so much for speaking with us.
GELLES: Thank you so much for having me.
DAVIES: David Gelles is a correspondent for The New York Times. His new book about the late Jack Welch, who was CEO of General Electric for 20 years, is "The Man Who Broke Capitalism." Coming up, David Bianculli reviews the new Netflix special about the late Norm Macdonald. This is FRESH AIR.
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