With Cisco announcing that they no longer need 12% of their staff this calendar year (5% in February, and another 7% in September), I am left wondering what is so terribly wrong with American Capitalism. Interestingly at about the same time someone recommended I read this book, so here we are — seeking to understand the behavior of our corporate masters once more.
This book starts with this quote:
To understand a civilization, consider its heroes.
Which is telling because its so true. I think it also works for organizations — if you want to see the values of an organization, don’t look at what they say, look at who they promote and idolize. That’s really the author’s point though, so I shouldn’t take too much credit.
It’s clear from the start that the author doesn’t like Jack Welch or his leadership of General Electric and that he thinks Welch’s legacy is toxic. Honestly though, he makes a pretty convincing argument that leaves me not being a huge fan either and certainly GE didn’t survive the experience of Welch and those he chose to replace him upon retirement. It is asserted that Welch had three main maneuvers in business: downsizing; deal making; and financialization. Overall, the goal was a laser like focus on quarterly results, even if that meant jeopardizing the long term future of the company or committing things which look a lot like criminal accountancy. This quote rings very true for many companies these days:
In another departure from convention, Welch dispensed with the notion that mass layoffs were a measure of last resort, used only in times of existential crisis. Instead, he used them proactively. To Welch, downsizing was a means to improve profitability, a tool that could help him meet quarterly earnings targets.
This book is interesting, because it describes a transition in how people were employed and thought about the role of a company that I never saw first had — by the time I entered the workforce Welch was considering retiring. That is, in my lived experience stack ranking, outsourcing what you can, and offshoring as much as possible have just been the normal way of doing things. I never did manage to work somewhere with a tea trolley and that makes me sad.
One of the key ideas in this book is that you can’t produce innovation with cost cutting, stock buybacks, and creative accounting. To innovate, you must invest in research and development — a thing which many firms have outsourced in the form of acquiring startups. The Innovator’s Dilemma argues that its logical to outsource innovation as bigger companies are rational to focus on their existing high margin businesses, but that’s not what is being described in the case of GE. GE wasn’t investing in their existing businesses either, they were just cutting everywhere they could and returning almost all of their profits to shareholders either as dividends or stock buybacks.
The book details GE’s fate after Welch (it wasn’t good), but also covers the performance of Welch’s mentees at other companies, which was also generally abysmal. The most time however is spent on Boeing where it is argued the Welchism let to the cost cutting which ultimately killed over 500 people in the 737MAX crashes.
The book then closes out by arguing there is another way — using examples from Unilever reinventing itself, and PayPal discovering lifting it’s call center employees out of poverty was good for business. Certainly, a focus on quarterly results instead of long term sustainable growth has been shown over and over again to not be in the long term interests of a company, its investors, and certainly not its employees and the communities they live in.
So where does that leave us with understanding Cisco’s current behavior? Well, first off we should note that Cisco has been doing this stuff for a long time — well before the current CEO when the company was led by John Chambers. Cisco loves a layoff, outsources heavily, and off shores as much as they can. Quarterly results are hugely important to Cisco senior leadership, who also partake in stock buybacks instead of investing in R&D for their future products. So what did the previous Cisco CEO John Chambers have to say of Jack Welsh? Well firstly they were friends:
Jack Welch once told me that being a great leader takes a near-death experience (John Chambers via LinkedIn).
But its more explicit than that:
Jack Welch was not only the best business leader of the previous generation but also a role model for many of us (John Chambers via Twitter).
I think that explains a lot to be honest. Jack Welch was followed by Jeff Immelt, who presided over the collapse of the GE house of cards. I am left wondering if Chuck Robbin’s role is to pick up the pieces left by John Chambers, much like Immelt?
Business & Economics
Simon & Schuster
May 23, 2023
270
New York Times Bestseller New York Times reporter and “Corner Office” columnist David Gelles reveals legendary GE CEO Jack Welch to be the root of all that’s wrong with capitalism today and offers advice on how we might right those wrongs. In 1981, Jack Welch took over General Electric and quickly rose to fame as the first celebrity CEO. He golfed with presidents, mingled with movie stars, and was idolized for growing GE into the most valuable company in the world. But Welch’s achievements didn’t stem from some greater intelligence or business prowess. Rather, they were the result of a sustained effort to push GE’s stock price ever higher, often at the expense of workers, consumers, and innovation. In this captivating, revelatory book, David Gelles argues that Welch single-handedly ushered in a new, cutthroat era of American capitalism that continues to this day. Gelles chronicles Welch’s campaign to vaporize hundreds of thousands of jobs in a bid to boost profits, eviscerating the country’s manufacturing base, and destabilizing the middle class. Welch’s obsession with downsizing—he eliminated 10% of employees every year—fundamentally altered GE and inspired generations of imitators who have employed his strategies at other companies around the globe. In his day, Welch was corporate America’s leading proponent of mergers and acquisitions, using deals to gobble up competitors and giving rise to an economy that is more concentrated and less dynamic. And Welch pioneered the dark arts of “financialization,” transforming GE from an admired industrial manufacturer into what was effectively an unregulated bank. The finance business was hugely profitable in the short term and helped Welch keep GE’s stock price ticking up. But ultimately, financialization undermined GE and dozens of other Fortune 500 companies. Gelles shows how Welch’s celebrated emphasis on increasing shareholder value by any means necessary (layoffs, outsourcing, offshoring, acquisitions, and buybacks, to name but a few tactics) became the norm in American business generally. He demonstrates how that approach has led to the greatest socioeconomic inequality since the Great Depression and harmed many of the very companies that have embraced it. And he shows how a generation of Welch acolytes radically transformed companies like Boeing, Home Depot, Kraft Heinz, and more. Finally, Gelles chronicles the change that is now afoot in corporate America, highlighting companies and leaders who have abandoned Welchism and are proving that it is still possible to excel in the business world without destroying livelihoods, gutting communities, and spurning regulation.