The Man Who Broke Capitalism: How Jack Welsh Gutted the Heartland and Crushed the Soul of Corporate America – and How to Undo his Legacy
Reviewed by Chris Wendel
Many of us who grew up in or around Michigan can relate to the nurtured automotive employee who had careers at Ford or General Motors (known in the day as “Generous Motors”). The post-World War II environment was right for large, growing companies that valued employees and provided substantial benefits and, in many cases, life long employment.
In his recent book “The Man Who Broke Capitalism,” New York Times reporter David Gelles uses the behemoth company General Electric (GE) as an example of this now rare company model. For decades GE exemplified the large corporation that valued its workers with broad benefits and stability. With its roots beginning with Thomas Edison, GE built numerous holdings in lighting, appliances, communications and other industries. From the 1920s – 1970s, the company generated profits with steady, even-keeled growth.
By 1980, circumstances had changed. Legacy costs of aging employees became burdensome for many companies and President Ronald Reagan was elected on a Libertarian, pro-business campaign. At the same time American economist Milton Friedman was lauded for his declaration that “an entity’s greatest responsibility lies in the satisfaction of the shareholders.”
One person who adopted Friedman’s belief that corporate earnings were the true measure of success was GE’s Jack Welsh. A long-term GE employee that rose through its ranks, Welch was considered a surprise when he was appointed as GE’s CEO in 1981.
With an enormous ego and dogged determination, Welch quickly changed the way things were done at GE. He declared that he wanted GE to be number one or two in the industries it had interests in. To accomplish his objectives, Welch dismantled the existing management system by cutting employees, moving lower performing factories overseas, and cutting 10% of his managers annually.
The abrupt changes killed morale for employees and shifted the company’s focus to producing quarterly profits. To accomplish this consistently, Welch gravitated towards creative accounting methods including stock buy backs and lending money. GE Capital, a small part of GE when Welch took over as CEO, became a conduit for acquiring business sometimes far outside GE’s original footprint. Over time GE purchased Boeing Aerospace, the securities firm Kidder, Peabody & Co., and RCA (which included NBC Television). Many other companies were purchased and their employees fired before GE would profit by selling off their parts and pieces.
Although GE increased its market share from $12 billion in 1981 to $410 billion when Welch retired, the lack of long-term strategy came back to haunt the company. (GE also purchased interests in sub-prime mortgages which led to severe financial fallout after Welch’s tenure.)
“The Man Who Broke Capitalism” emphasizes the dehumanizing wake Welch leaves behind. His consistent history of prioritizing high earnings for the sake of stockholder benefit becomes an accepted practice. Gelles argues that the Welch effect goes far beyond his time at GE, blaming Welch’s strategies for the demise of the America manufacturing base and corporations caring about their employees, communities and the environment.
Gelles notes that Welch’s cost cutting tactics lived on after 16 of his GE managers he mentored became CEOs at other large corporations. As a counter to his dismal assessment, Gelles offers hope with modern-day examples of companies that are able to do well and do good, including Patagonia, PayPal, Unilever, and Seventh Generation.
Despite his 200+ pages of evidence, it seems unrealistic for Gelles to place the blame for the demise of America’s manufacturing industry entirely at the feet of Jack Welch. Political and economic forces were in play in the early 1980s, setting the stage for a heavy emphasis on corporate profits and unfortunately the downfall of the American worker. Welch certainly emerges as an egotistical leader that bullies his way to earnings, but it’s more accurate to say that he’s principally a catalyst than the cause of everything Gelles presumes.
Chris Wendel works for Northern Initiatives, a mission-based lender located in Marquette, Mich. Northern Initiatives provides funding to businesses in Michigan and “know-how” to organizations throughout the United States. Wendel lives and works in Traverse City.