Jack Welch Rejects His Existence

This is from March 13, 2009

• The Financial Times – Welch condemns share price focus
Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said it was “a dumb idea” for executives to focus so heavily on quarterly profits and share price gains.   The former General Electric chief told the Financial Times the emphasis that executives and investors had put on shareholder value, which began gaining popularity after a speech he made in 1981, was misplaced.

• Up & Down Wall Street Daily (Barron’s Online) – Randall W. Forsyth:  Bernie, Jack and the Rest of Us
Now, the one-time champion for the creation of shareholder value by growing earnings by share, quarter in and quarter out, has rejected that doctrine.  “On the face of it, shareholder value is the dumbest idea in the world,” Welch told the FT. “Shareholder value is a result, not a strategy…Your main constituencies are your employees, your customers and your products.” Yet, the main way GE, much of Corporate America and the U.S. economy created value was by the use of debt. Credit inflated incomes and wealth to the point they were no longer sustainable; we are now witnessing the unraveling of that process.

Comment: Let us quote from Jack, Straight From the Gut (2001 edition) by Jack Welch:

Page 224
I was getting ready to leave the office for a long weekend on Thursday night, April 14, 1994, when Mike [Carpenter, Head of GE Capital] called with one of those phone calls you never want to get. “We’ve got a problem, Jack,” he said, We have a $350 million hole in a trader’s account the we can’t identify, and he’s disappeared.

Jack continues:

I didn’t yet know who Joseph Jett was, but over the next few days I would learn more then I cared to about him. Carpenter told me that Jett, who ran the firm’s government bond desk, had made a series of fictitious trades to inflate his own bonus. The phony trades artificially boosted Kidder’s reported income. To clean up the mess we would have to take what looked like a $350 million charge against our first quarter earnings.

The quarter had ended and Jack was given the bad news that GE was going to miss its numbers. What was Jack’s response?

The news from Mike made me sick: $350 million, I couldn’t believe it. It was overwhelming.  I rushed to the bathroom, and my stomach emptied in awful spasms.

Let there be no surprise, the “GE culture” is all about beating the street’s quarterly estimates by a few cents. What makes the head of GE throw up? Products that kill? Laying off employees? Bad strategic decisions? Apparently not. What makes him throw up is missing street estimates by a few cents. His division heads understood this and would go to any length to prevent it from happening.

More from Jack:

Page 225
That Sunday evening, I called 14 of GE’s business leaders to deliver the bad news and apologize to each of them for what had happened. I felt terrible, because this surprise would hit the stock and hurt every GE employee. I blame myself for the disaster.

The previous year, 1993, when Jett’s phantom trades accounted for nearly a quarter of the profits made by Kidder’s fixed income group, Jett had been named Kidder’s “Man of the Year.” We had approved Mike’s request to give Jett a $9 million cash bonus, a huge award even for Kidder. Normally, I would have been all over this. I would have dug into how one person could have been so successful, and I would have insisted on meeting him.

The response of our business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said the could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise.

Please re-read the last highlighted passage. It sure sounds like Jack just described SEC and FASB violations as an integral part of the GE culture.

Didn’t we create Sarbanes Oxley in 2002 to stop such cheating?