David Gelles has been reporting on American CEOs for years at The New York Times. But there’s one CEO who stands heads and shoulders above his peers. He’s been retired for more than two decades, but his impact is still felt. Revered by some and reviled by others, his name is Jack Welch and he served as the CEO for General Electric (GE) from 1981 to 2001.
In Gelles’ new book, The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America?and How to Undo His Legacy, he chronicles how Welch’s laser focus on maximizing shareholder value by any means necessary - including layoffs, outsourcing, offshoring, acquisitions, and buybacks - became the new playbook in American business.
The book demonstrates how this shareholder maximizing version of capitalism has led to the greatest socioeconomic inequality since the Great Depression and harmed many of the very companies like Boeing that have embraced it.
To get at the root of why this society seems to put our bosses up on pedestals, look back well over 100 years to the way we celebrated some of the early industrialists who rose to such great heights. We have the same veneration for modern-day technologists and entrepreneurs who are able to create amazing new breakthroughs and products.
In a big, diverse country that never had a monarchy or a unified religion, and is increasingly polarized and fractured, we look to our business leaders as some of the most important and perhaps some of the last sort of cultural touchstones who can be relevant to society at large. This helps explain some of the reasons we have some of the problems we do today.
I argue in the book that Jack Welch was a celebrity CEO. He was trying to marry this American reverence of CEOs with the modern media ecosystem, and he used it to disastrous effect. It was only through our collective veneration of Welch that he was able to be so influential over such a long period.
In the book, you draw a line from Jack Welch to the 737 Max issues at Boeing. Can you walk me through that?
Starting in 2019, I was one of the reporters at the New York Times who started digging into Boeing after the second crash of the 737 Max. The plane’s technical problem was very clear early on. There was a bad piece of software that relied on one flimsy sensor on the fuselage of the plane. So, we understood, in theory, what caused the planes to crash.
What we started understanding as we dug deeper, though, was that there was a cultural story. Over 25 years, something fundamental had shifted inside Boeing—the company’s priorities and what made it tick. When we started trying to understand that cultural change, it was a story of Jack Welch.
Starting in 1997, three successive CEOs who studied at Jack's knee at GE, took over Boeing. They deliberately, explicitly tried to make Boeing more like GE. And in doing so, they transformed one of the great American manufacturers, a company that for nearly 100 years had been focused on aeronautical engineering, into one that was motivated by financial engineering.
Records from congressional inquiries revealed messages between mid-level Boeing employees. These records showed that engineers and test pilots were thinking about the stock price when making decisions about safety. The awareness of the company's stock price percolated all the way down to the level of people who should be focused on the quality and safety of the plane, not Wall Street.
In 2011, Boeing faced this critical juncture; it was faced with the loss of a major order from American Airlines. The company had been a Boeing customer for decades, so they gave the Boeing CEO, Jim McNerney, a courtesy call to let him know that they were about to place a big order from Airbus instead of Boeing. McNerney asked for a week or two to make a counter-offer. In those few days, Boeing decided to redesign the 737 one more time. Rather than design a whole new plane that was suitable for the 21st century, they tried to re-engineer and tinker with the 737, which had been introduced in the 1960s. And it was that decision that set in motion this cascade of decisions and design changes that required this flawed piece of software to be put in the plane in the first place. In 2009, Welch said that maximizing shareholder value is “the dumbest idea in the world.” Do you believe that he meant that? If not, why did he say it, when it’s against his entire cannon?
Jack Welch was a master of reading the room. And I think he understood in that moment, right in the year after the financial crisis, when GE Capital's aggressive home mortgage business helped drag the company down, it became clear what his kind of management led to.
But there was no great conversion moment.
I've spoken with enough CEOs over the years to recognize that many of them are experts at telling themselves a story where they are not the bad guys. So was there a certain amount of rationalizing going on? Or was he saying that in all his decisions that he made to maximize shareholder value at GE, he was actually motivated by something else? I don't know. I can't get inside his head.
But you just need to look at his public statements during his time as CEO, and in the aftermath of his retirement, to understand that he was on record as saying the purpose of the business is to increase its profits.
When Welch was asked by the Wall Street Journal what he believes his greatest legacy was, he said it was "making GE the most valuable company on Earth", and he did for a while before GE collapsed.
How did Welch contribute to income inequality?
I'm not an academic who has studied inequality in a deep way. But those who have, including most famously Thomas Piketty, draw a direct line between executive compensation and its absolutely relentless upward trajectory over the last decades, and the widening gap between the haves and have-nots.
Welch's own enormous executive compensation was immense. He was on the Forbes list of the 400 richest Americans simply for being a people manager. He didn't invent anything. He didn't own the company. He was hired help. And yet, he became something close to a billionaire. By doing so, he set a precedent for hundreds of other managers over the past several years to do the exact same thing. Now we don't even blink when a CEO is rewarded with a $20- or $50 million-a-year pay package.
As all that is happening, what's happening to his workers? They're getting laid off en masse. He's outsourcing them to contractors who don't pay nearly as good of wages as GE once did. He's sending jobs overseas in search of low wages and taxes. At the same time, look at what's happened to the American minimum wage: It's stuck at $7.25 an hour. If it had just kept pace with inflation over the last 20 years, it would be closer to $25. But we live in this world that was shaped by Jack Welch's priorities. And we're still trying to dig out of that hole.
Why this book? Why now?
I wrote the Corner Office column for the last five years for the New York Times, and I got to interview hundreds of CEOs. It was a real privilege. And I got an insight into what makes CEOs tick. After a couple of years, I realized that one name kept coming up: Jack Welch. Some people would bring him up as a cautionary tale, and others look to him as guidance for how they ought to comport themselves. Either way, Jack Welch was clearly living rent-free in the minds of CEOs today. And that just bugged me. It was just a question mark more than anything else. He hasn’t been a CEO for almost 20 years.
Why is he still so influential?
When the Boeing story landed, and I realized that it was really a Jack Welch story, it clicked for me. He’s the guy that explains why we are in such a messed-up world today.
What’s the antithesis to Welch’s shareholder maximizing capitalism? What are the results?
There's a temptation to imagine that something as simple and squishy as stakeholder capitalism represents that antithesis to shareholder capitalism, but I believe that it's really just the very first steps. It's the opening awkward remarks in a conversation about what an equitable economy is actually going to look like.
The book covers 80 years—from the moments right after World War II and the way companies were behaving back then. This was the “golden age of capitalism” all the way to the highly unequal society we live in today. So, I recognize that shareholder capitalism has been a generational project. Jack Welch instituted the priorities of Milton Friedman and Friedrich Hayek—a relentless prioritization of shareholder value above everything else.
And in the same way, it's going to be a generational project to rebalance things. We’re seeing the start of that as stakeholder capitalism and ESG [environmental, social and governance] are becoming a part of the mainstream conversation. Maybe we’re at that moment in a pendulum's arc where it pauses and starts to begin its trajectory back in the other direction. I hope we're there because we need to reset.
I include some practical suggestions at the end of the book. We need to take better care of our workers. We need to give them better wages and better benefits. We need to offer them equity. The distribution of corporate profits over the last 50 years has gotten wildly out of whack. There's no law that says that shareholders and executives are entitled to this enormous slice of the pie. These are choices that people—mostly older white men—make about how wealth in this society is allocated. And we have the opportunity to change that.
So let's start talking about what is fair, what is equitable and what actually is healthy for the economy in the long term. We're starting to see that Welch’s philosophy has led us to a moment where cities in the middle of the country are hollowed out, communities across the country are starved for resources, and the tax base is unable to fund things like education and infrastructure.
These are choices we've made. We can make different choices that create a different kind of economy. For founders launching companies, what lesson do you believe they should take away from Jack Welch?
The first thing that comes to mind is to avoid stack ranking. Stack ranking, also known as rank-and-yank, is a popular talent management system that was popularized by Welch himself at GE in the ‘80s. Managers are forced to sort their people into A, B and C players. The top 20% performers are A players. The middle 70% performers are B players. The bottom 10% performers are C players. Every year, Welch required all C players to be fired. And what was so astonishing is that not only did it take root at other big companies like Microsoft, but it continues to this day to show up in companies like Uber. The employees who experienced stack ranking at both of those companies talk about the absolutely corrosive effect it had on culture. It gets to the point where your job essentially becomes finding a colleague who you could make look bad to your boss in order to gain more job security. It is just the Lord of the Flies. It's terrible.
Additionally, Jack was just a brutally uncompassionate manager. He was crass. He was rude. He was argumentative. He had a serious strain of alpha male machismo, and often made sexist, derogatory remarks. When he wanted to fire someone, he referred to it as “shooting people.” And that’s hard to even talk about during a week like this—after the school shootings. It's that kind of violent rhetoric that caused loyalty inside GE and the culture under Jack Welch to crumble.
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