The Facts and Folklore of Jack Welch

At the top of the lists of 21st century CEO superstars lies Massachusetts’ very own Jack Welch; CEO of General Electric from 1981 to 2001. Welch’s most notable accomplishment is the 4000% increase in value during his tenure. While Jack Welch was not the richest CEO or the youngest, this CEO’s superlative was his collection of the largest severance payment in history; $417 million.

Between 1980 and 1998, the U.S. economy grew at 6% a year and the stock market increased an average 20% every year. Additionally, between the years of 1981 and 2002 was the largest blue-chip bull market in history. The last piece of context worth clarifying would be that the market capitalization of General Electric increased 4000% — shares outstanding multiplied by price per share (not revenues, income, or earnings).

To the manipulated recipient of these statistics, a 4000% increase in value sounds stellar. Given the context of Jack Welch’s fortunate regime, I would think a large increase in market capitalization, earnings, and revenue would be expected in one of the world’s largest companies. However, that would still be giving Welch too much credit.

Under the Welch administration, revenues [not net income] increased only 385% and earnings increased marginally. The question still remains, how did Welch boost value 4000%? Easy, Jack Welch was a serial acquirer – his goal was to streamline General Electric. Apparently the answer was to open up several new divisions of General Electric and buy any relevant company that had an income. So, Welch physically expanded General Electric by adding existing companies. Interestingly, most of these divisions were not even successful; however, Welch’s prized financial division was flourishing. GE Capital held roughly 55% of GE’s assets in 2000.

General Electric’s other industrial divisions continuously struggled to meet earnings expectations for these twenty years. Welch’s opaque leveraged hedge fund, GE Capital, was a bank used when the other divisions needed to hit their earnings marks. General Electric Capital would sell assets and move the income to another division of the company. This in itself sounds a bit like a special purpose entity to me. Adding to Welch’s embellished legacy was the timing of his departure. Following 2001, General Electric continued to employ Welch’s earnings tactics. Just a few years later, Jeffrey Immelt’s largest corporation in the world found themselves in a financial quandary. GE Capital’s financial strategies simply no longer worked amidst a credit freeze and the worst financial crisis since the Great Depression. Obviously, if GE Capital fails to supply their usual income, the rest of the company would be at risk of imploding.

Not only did Jack Welch come to General Electric, blow it into a huge balloon, and leave right before it was about to burst, he made sure to take home $417 million. Additionally, Jeffrey Immelt, who has received an abundance of criticism in previous years, never received enough credit for successfully deflating Welch’s balloon, and providing some variability in earnings for the first time in decades.

My initial question when reading about Jack Welch’s “achievements”, and the question that still remains is: I wonder how Thomas Edison would feel about the accolades of General Electric’s [second] most praised executive being attributed to finance and management rather than innovation?

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