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jack welch sez “nevermind about that shareholder value movement!”

By shag carpet bomb • Mar 12th, 2009 • Category: Economics, Politics

this is rich. Jack Welch, the man who promoted the idea that shareholder profits should come first and foremost, and hence the constant emphasis on profit and increasing share values, has decided that he didn’t really mean it. of course, what he says is that he never meant it that way to begin with. nonetheless…

Financial Times - March 12, 2009

Welch rues short-term profit ‘obsession’ By Francesco Guerrera in New York

Jack Welch, who is regarded as father of the “shareholder value” movement, has said the obsession with short-term profits and share price gains that has dominated the corporate world for over 20 years was “a dumb idea”.

In an interview for the Financial Times’ series on the future of capitalism, the former General Electric chief said the emphasis by executives and investors on shareholder value since he spelt it out in a speech in 1981 was misplaced.

Mr Welch, whose stellar record in his two decades at GE helped make shareholder value popular, said that it was wrong for managers and investors to set consistent earnings growth and steady share price increases as their overarching goal.

“On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy...your main constituencies are your employees, your customers and your products.”

Mr Welch spoke at the weekend, before Thursday’s news that GE, which he left in 2001, had been downgraded by Standard & Poor’s, losing the pristine triple A rating it had held since 1956.

Mr Welch’s comments on shareholder value come as the credit crisis and the global economic slowdown have caused a radical rethinking of many of the corporate and financial beliefs that held sway over the past few decades.

In a similar shift, Alan Greenspan, the former chairman of the Federal Reserve and a high priest of laissez-faire capitalism, told the FT last month the US might have to nationalise some banks on a temporary basis to fix the financial system.

The birth of the shareholder value movement is commonly traced to a speech Mr Welch gave at New York’s Pierre hotel in 1981, shortly after taking the helm at GE.

In the speech, entitled “Growing Fast in a Slow-Growth Economy,” Mr Welch outlined his beliefs in selling underperforming businesses and aggressively cutting costs in order to deliver consistent profit rises that would outstrip global economic growth.

GE, he told analysts then, ”will be the locomotive pulling the GNP, not the caboose following it,” according to reports of the speech.

Mr Welch said last week he never meant to suggest that setting, and meeting, profit expectations quarter after quarter in an effort to boost a company’s share price should be the main goal of corporate executives.

“It is a dumb idea,” he said. “The idea that shareholder value is a strategy is insane. It is the product of your combined efforts - from the management to the employees”.

However, GE’s success under Mr Welch - during his tenure, the conglomerate’s market capitalisation rose from $13bn to $400bn while profits grew tenfold to almost $14 billion - prompted many executives to place greater emphasis on shareholder value. Many fund managers also backed concept because they are judged on a quarterly basis.

Asked to comment about recent remarks by Jeff Immelt, his successor at GE, that “anybody could run a business in the 1990s. A dog could have run a business,” Mr Welch said he agreed with the concept because economic conditions were better.

“It was an easier time to be a CEO in the 1990s,” he said.”The wind was on our backs. Up until 2007, this was easy. Now, it is really difficult”. Mr Welch declined to comment further on GE.

2 Responses »

  1. gary on March 12th, 2009 at 7:22 PM:

    Welch said: “It is the product of your combined efforts - from the management to the employees”.

    I love it when CEO quote Marx.

    And what does this mean:
    “It was an easier time to be a CEO in the 1990s,” he said.”The wind was on our backs. Up until 2007, this was easy. Now, it is really difficult”.

    What is “the wind” here? He is almost certainly referring to market, but something else that is also very quantifiable produced that wind. Smug asshole.

  2. shag carpet bomb on March 19th, 2009 at 6:11 AM:

    hey gary — loved the discussion of hotels in Korea btw.

    i was thinking about this bit, Jack Welch basically paraphrasing Marx. To me, it’s more complicated. I mean, isn’t what Welch said just the labor theory of value, which was expressed before Marx — and which Marx set out to criticize? I’m thinking of Critique of the Gotha Programme in which he says, in his first criticism, “Labor is not the source of all wealth!” Critique of the Gotha Programme, 1

    Anyway, I’m hoping to wrangle with this when I get time to do a closer reading of Time, Labor, and Social Domination.

    And Chuckie, if you’re reading: I have to say, Postone is a boring ass read. I can’t put my finger on why right now. It’s not that the ideas are boring. I don’t know.

    And, as for the weather bit, yeah. But that’s kind of the dominant way to think of it, isn’t it: The economy is like the weather. It just is. Winds blow, rains fall, gales of creative destruction hurl us around and destroy buildings. Nothing more can be done about it than humans can do about the weather.”

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