The Man Who Broke Capitalism

How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America—and How to Undo His Legacy

David Gelles

• Publisher: Simon & Schuster
• Year: 2022
• Print ISBN: 9781982176426
• eBook ISBN: 9781982176433
• Topic: Business
• Subtopic: Business General
• Index: Business

New York Times Bestseller

New York Times reporter and “Corner Office” columnist David Gelles reveals legendary GE CEO Jack Welch to be the root of all that’s wrong with capitalism today and offers advice on how we might right those wrongs.

In 1981, Jack Welch took over General Electric and quickly rose to fame as the first celebrity CEO. He golfed with presidents, mingled with movie stars, and was idolized for growing GE into the most valuable company in the world. But Welch’s achievements didn’t stem from some greater intelligence or business prowess. Rather, they were the result of a sustained effort to push GE’s stock price ever higher, often at the expense of workers, consumers, and innovation. In this captivating, revelatory book, David Gelles argues that Welch single-handedly ushered in a new, cutthroat era of American capitalism that continues to this day.

Gelles chronicles Welch’s campaign to vaporize hundreds of thousands of jobs in a bid to boost profits, eviscerating the country’s manufacturing base, and destabilizing the middle class. Welch’s obsession with downsizing—he eliminated 10% of employees every year—fundamentally altered GE and inspired generations of imitators who have employed his strategies at other companies around the globe. In his day, Welch was corporate America’s leading proponent of mergers and acquisitions, using deals to gobble up competitors and giving rise to an economy that is more concentrated and less dynamic. And Welch pioneered the dark arts of “financialization,” transforming GE from an admired industrial manufacturer into what was effectively an unregulated bank. The finance business was hugely profitable in the short term and helped Welch keep GE’s stock price ticking up. But ultimately, financialization undermined GE and dozens of other Fortune 500 companies.

Gelles shows how Welch’s celebrated emphasis on increasing shareholder value by any means necessary (layoffs, outsourcing, offshoring, acquisitions, and buybacks, to name but a few tactics) became the norm in American business generally. He demonstrates how that approach has led to the greatest socioeconomic inequality since the Great Depression and harmed many of the very companies that have embraced it. And he shows how a generation of Welch acolytes radically transformed companies like Boeing, Home Depot, Kraft Heinz, and more. Finally, Gelles chronicles the change that is now afoot in corporate America, highlighting companies and leaders who have abandoned Welchism and are proving that it is still possible to excel in the business world without destroying livelihoods, gutting communities, and spurning regulation.

ONE The Most Valuable Company in the World

“I plan to blow up the Queen Mary”

It was 1980 and the country was languishing. Culturally, politically, and economically, the previous decade had offered up a series of indignities that seemed to question the premise of American exceptionalism. The Vietnam War raged and Richard Nixon resigned. The stock market was flat and inflation was on the rise. Across the country, there was a sense of pervasive dissatisfaction, and an accompanying conviction that something had to change dramatically. In November, Ronald Reagan—who worked as a pitch man for GE before entering politics—beat Jimmy Carter in a landslide, becoming the fortieth president of the United States with the slogan “Let’s Make America Great Again.” The new president’s economic policy, known as Reaganomics, prioritized lower taxes, decreased regulation, and a favorable posture toward Wall Street, a combination that would benefit corporations while marginalizing workers.

In the boardrooms of corporate America, a revolution was also stirring. A month after Reagan was elected, GE announced that John Francis Welch Jr. would become its next chairman and chief executive. The young, tempestuous, ambitious son of a train conductor and a homemaker, Welch would be just the eighth man to lead GE since the company was founded by Thomas Edison nearly a hundred years earlier, at the dawn of the Electric Age.

As CEO of GE, Welch assumed responsibilities that went far beyond those of a typical manager. To preside over the General Electric Company required, back then, something closer to statesmanship. The company’s enormity and financial might made it an economic, political, and cultural force. Its output accounted for a full percentage point of gross domestic product. Its CEO commanded a loyal workforce of 400,000 men and women—greater than the entire population of Cincinnati. Its televisions, refrigerators, and toasters were in countless American homes. Its jet engines hung on the wings of planes flying coast to coast. Its nuclear reactors lit up cities around the globe.

The great diversity of GE’s holdings provided its CEO with what seemed like an almost omniscient view of the economy. And thanks to GE’s century of success, the company was considered a pioneer in management philosophy, setting the standard by which legions of executives were trained, organized, and evaluated. More than anything else though, GE was a role model. Other executives—inside GE, and at companies large and small around the country—looked to its leader for guidance on how to comport themselves, and what kind of balance their companies should strike with employees, the government, and investors. GE’s previous CEOs had counseled presidents, reshaped business school curriculums, and redefined how Americans worked. It was the most important job in the corporate world, and wherever Welch took the company, other corporations would inevitably follow.

Given the job’s expansive responsibilities, the process by which GE selected its next CEO was extensive and intense. The vetting took years and had all the theatrics of cardinals choosing a new pope. The outgoing CEO pitted candidates against one another, demanded memos articulating their vision, and asked each the same question: If they died in a plane crash, who besides them should run the company? Outside observers expected GE to pick a seasoned in-house executive with a conservative approach, a man steeped in “the GE Way” who would continue with the current strategy. But inside GE, the sense that something needed to change dramatically was acute. When the figurative white smoke finally rose from the company’s Fairfield, Connecticut, headquarters, Welch was the winner.

Welch succeeded a genteel Englishman named Reginald Jones who had run the company for the previous decade. Jones, with an Ivy League education and a deliberating, cerebral aura, was highly regarded for his poise, judgment, and discretion. President Carter twice asked Jones to join his cabinet. Tall and lean, Jones wore tailored suits, and his office at GE headquarters was a hushed enclave, where he and his lieutenants pondered strategy far from the factory floor. Jones had spent his career at GE, distinguishing himself as a financial whiz and rising to become chief financial officer before taking over, and he ran a hierarchical, bureaucratic company. Yet for all his élan, Jones was modest. He lived in a simple colonial brick home in Greenwich, not far from GE headquarters. He once asked his wife if she wanted anything more, and her reply reflected the family’s abiding humility. “Why would we want anything more?” she said. Though Jones was regarded as the most accomplished CEO in America, he drew a salary that would today be considered a pittance for an executive of his stature, earning $200,000, just twelve or thirteen times what new management recruits to the company took home. GE did not grow at breakneck speed while Jones was CEO. Nonetheless, during the decade he was in charge, GE managed to preserve its standing as a model corporate citizen, a company held in high regard by its workers and by society at large.

Welch was Jones’s opposite in every way. He grew up poor and went to state school. He was impatient, impulsive, and crass. Short, quick-witted, and coiled with energy, Welch wore jeans and rolled-up shirtsleeves whenever he could get away with it. He spoke with a thick Boston accent, and when he grew angry, a boyhood stutter flared up. Welch had a PhD in chemical engineering, but preferred chatting up machinists to sitting in a boardroom and deliberating with directors. He loathed hierarchy and bureaucracy and didn’t give a damn what people thought of him, so long as he was making money for the company. Over twenty years, he had risen through the ranks at GE by growing sales and slashing costs, and what time Welch did spend in the office was often marked by shouting matches. He was a cursing, kinetic tornado of a man, arguing his way from one decision to the next. GE had “replaced a legend with a live wire,” the Wall Street Journal quipped upon the news that Welch was taking over from Jones.

But while Welch could not have been more different from Jones, GE had a way of choosing CEOs who were prepared to meet the moment, and American industry was on the cusp of profound change. Four decades of postwar prosperity had made America the greatest economic force in history, and much of the country’s population enjoyed substantial improvements in their quality of life. Incomes rose, productivity skyrocketed, unemployment remained relatively low, and a great middle class flourished. Corporations like GE, Exxon, General Motors, Ford, Westinghouse, U.S. Steel, IBM, and Xerox fueled much of this growth, mass-producing products that the world desperately wanted, and paying their workers well. Yet by the start of the 1980s, the status quo was no longer working. Productivity had stagnated and inflation was growing, a distressing new combination known as “stagflation.” Complacency had also taken root in corporate America. Decades of success and a dearth of credible rivals had made many big companies less eager to invest, innovate, and pursue growth. And new competition was finally emerging around the globe. Germany and Japan had rebuilt and modernized their economies after World War II, and were suddenly churning out sophisticated, high-quality, competitively priced goods.

Welch was keenly aware of the threat posed by globalization. In the mid-1970s, he had toured a GE joint venture with Yokogawa Medical Systems in Japan, where ultrasound machines were being produced, and was stunned by what he saw. “The process was like nothing I had seen in the United States,” he recalled. When a machine was finished being assembled, a worker unbuttoned his shirt, dabbed some gel on his chest and applied the ultrasound probes on his body for a quick test. Then the same man wrapped the product up, put it in a box, affixed the shipping label, and placed it on the loading dock. “It would have taken a lot more people to get this done in Milwaukee,” Welch noted.

The rest of the country was also catching on to the widening skills gap between the United States and some emerging economies. On June 24, 1980, NBC aired a prime-time documentary that captured the nation’s gnawing self-doubt. Titled If Japan Can, Why Can’t We?, the hour-long special explored the extraordinary manufacturing advances taking place abroad, and turned the mirror on a nation grappling with its diminished standing in the world. That same year, Jones and Welch acknowledged the need for urgent change, coauthoring a letter to shareholders. “U.S. business today finds itself challenged by aggressive overseas competitors,” they wrote. “National productivity has been declining and, in industry after industry, product leadership is moving to other nations. Companies that refuse to renew themselves, that fail to cast off the old and embrace new technologies, could well find themselves in serious decline in the 1980s. We are determined that this shall not happen to General Electric.”

It wasn’t going to be easy for GE to thrive in this new age. And in some ways, the company, while iconic, was particularly vulnerable. When Welch took over, half of GE’s earnings came from businesses dating back to the Edison era: motors, wiring, and appliances. Yet Welch, an extremist in all he did, drastically overcorrected. Instead of trying to fix American manufacturing, he effectively abandoned it, and would soon start shuttering factories around the country and shipping jobs overseas. “One of the narratives in the early ’80s was ‘How do we save American capitalism from the Japanese?’ ” said Louis Hyman, a professor of business history at Cornell University who has studied Welch and GE. “And the answer for Jack Welch was, ‘Let’s be more brutal.’ ”

In certain corners of academia and government, a related upheaval was under way. With the New Deal economics that defined postwar policy failing to deliver sustained gains after decades of success, a backlash was brewing. Conservative economists called for less government meddling, less regulation, free markets, fewer labor unions, and a world where big businesses were free to act in their own best interests. Some went further, arguing that corporations should focus on maximizing shareholder value, rather than concerning themselves with the public good. On Wall Street, animal spirits were stirring. Thanks to technology, money was beginning to move in strange new ways. A new economy was taking shape, and Welch, as chairman of GE, would have a strong hand in its design.

GE was hardly in trouble when Welch took over. Jones had overseen a steady rise in earnings, and the company had just reported an annual profit of nearly $1.5 billion. But GE’s stock price hadn’t budged in years, and that, to Welch, was a problem. In a memo to Jones outlining his approach should he be selected as CEO, Welch made explicit his contention that Wall Street should come first. “What we have to sell as an enterprise to the equity investor is consistent, above-average earnings growth through the economic cycle,” he wrote. “The discipline to balance both short and long term is the absolute of such a strategy.” Welch was effectively declaring that even if times were tough, he would find a way to make GE ever-more profitable. It was a bold mandate. Earnings don’t go up endlessly, especially during economic downturns. Periods of expansion and contraction affect all companies, even GE. Welch, however, had a vision. He believed GE was going to be the most valuable company on earth, and he was determined to make that audacious goal a reality.

That raw ambition captivated even Reg Jones, who decided that Welch had what it took to be chairman. Yet as Welch himself would later acknowledge, Jones had no idea just how all-encompassing the transformation would be. “I’m not sure he knew how much I wanted GE to change,” Welch said.

Jones would soon find out. Once Welch was chosen as the next CEO, Jones summoned his successor to his office at GE headquarters. There, the outgoing CEO tried to bestow some final bits of wisdom upon the young man—just forty-five years old at the time—who had been tapped to take over, describing in grand terms a company that held unmatched sway over the U.S. economy.

“Jack, I give you the Queen Mary,” Jones said. “This is designed not to sink.”

Welch didn’t miss a beat.

“I don’t want the Queen Mary,” he snapped back. “I plan to blow up the Queen Mary. I want speedboats.”

“Generous Electric”

The company Welch wanted to blow up was part of the bedrock of the American economy, the culmination of nearly a century’s worth of innovative engineering breakthroughs and careful financial stewardship. GE’s scientists helped win the world wars, and won Nobel Prizes, too. The devices they invented and commercialized ushered in modern life as we know it, full of electrical conveniences and technological marvels. General Electric introduced the world to power plants and incandescent light bulbs, inventions as significant as the wheel and the printing press. On September 4, 1882, at 3 p.m., Thomas Edison himself flipped the switch at the first American power station, on Pearl Street in downtown Manhattan, illuminating four square blocks of the city, including the offices of J. P. Morgan and the New York Times. Edison went on to wire London’s Holborn Viaduct with an array of 3,000 bulbs. And not long after that, GE installed a power plant in Japan. GE introduced or popularized electric meters, electric motors, the electric locomotive, and the X-ray machine. And that was just in the nineteenth century.

As the twentieth century dawned, GE brought to market the steam turbine, and then the electric fan. In 1909, it started selling toasters, establishing a foothold in the American kitchen. Around the same time it helped engineer the first voice radio broadcast, a transmission that included a verse from the Bible, a recording of the Largo from Handel’s opera Xerxes, and a violin solo of “O Holy Night.” In 1924 it introduced the diesel electric locomotive, revolutionizing rail transport. The next year, GE made the refrigerator mainstream. Some years after that, it started putting televisions in living rooms across the country, which, along with its ubiquitous radios, helped create the modern media landscape. In 1935, GE introduced the garbage disposal, and three years after that, the fluorescent light.

GE played an integral role in the American effort to win World War II, sending its executives to help the military, and making the vacuum tubes for radar systems and the engines for planes. In the years after the war, GE developed America’s first jet engine. In the 1930s it created moldable plastics, and by the 1950s it was making transparent plastic. The plastics were used in almost every conceivable product, and in space. When Neil Armstrong and Buzz Aldrin landed on the moon, their boots were made of silicon rubber developed by GE, and the visors of their helmets were made with GE’s Lexan plastic. GE built one of the world’s first nuclear power plants in 1957, introduced the world’s first lasers in 1962, and developed revolutionary new medical scanners in the 1970s.

It was an unprecedented run of corporate innovation and economic growth, and for the most part, workers shared in the bounty. GE was among the first American companies to offer its employees retirement plans, a share of profits, health insurance, and life insurance. GE created the first research and development lab, the first industrial park, and in 1913 the company built one of the first true corporate campuses, on a ninety-two-acre site outside Cleveland. In addition to a light bulb factory and a research center, there was a swimming pool, a bowling alley, a gym, tennis courts, a rifle range, and baseball and football fields. Dentists and doctors were on hand, as was a bank. In the evenings, employees stuck around to enjoy tap dancing and live music. A hundred years before Silicon Valley companies like Google and Facebook began showering their employees with perks, GE understood the value of taking excellent care of its workers.

It was a directive that came from the top. Gerard Swope, who became GE’s chief executive in 1922, practiced what he proudly called “welfare capitalism,” using the corporation’s vast resources to take exceptional care of its employees—providing a profit-sharing plan, health benefits, higher wages, and more—all in an effort to boost morale and inspire workers. With the thievery and excess of the Gilded Age still fresh in the collective consciousness, GE was trying to distinguish itself as an upstanding corporate citizen, and in 1927, GE’s chairman, Owen D. Young, used a speech at the Harvard Business School to excoriate businessmen who “devise ways and means to squeeze out of labor its last ounce of effort and last penny of compensation.” Instead, Young called for CEOs to “think in terms of human beings—one group of human beings who put their capital in, and another group who put their lives and labor in a common enterprise for mutual advantage.” In 1929, Forbes observed of GE that “few corporations are more progressive or better managed.” GE was so magnanimous in these years that it earned the moniker “Generous Electric.”

An annual report from 1953 described how GE worked “in the balanced best interests of all.” The report trumpeted how much the company had paid in taxes, the virtues of paying its suppliers well, and how critical it was to take care of its employees. That year, GE proudly stated that it spent some 37 percent of its sales on pay and benefits for its workers, resulting in the “the biggest pay roll in the Company’s history—with more people at work than ever before.” Next to the statistic was an illustration of a grinning factory worker walking away from the assembly line, holding bags of money. Only after enumerating all the ways in which it was helping the government, suppliers, and employees did the company mention how much it allocated for investors. The sum: a modest 3.9 percent of sales. The message from the report was clear. GE saw itself as a part of an interconnected whole, one where employees and society didn’t take a backseat to shareholders. “Maximizing employment security is a prime company goal,” GE’s head of employee benefits, Earl Willis, wrote in 1962. “The employee who can plan his economic future with reasonable certainty is an employer’s most productive asset.” What was good for the corporation was good for the country, and vice versa.

In 1960, the year Welch joined GE, the company’s slogan was “Progress Is Our Most Important Product.” It was a line repeated on every Sunday night installment of General Electric Theater, the mainstay television review hosted by Ronald Reagan, then merely an actor. In subsequent years, GE’s slogan became “Accent on Value.” And then in the 1970s, Jones introduced the phrase, “We Bring Good Things to Life.” It wasn’t just talk. Under Jones, the company invested 10 percent of its profits into research and development, spending heavily in a bid to invent more good things.

GE’s postwar posture was in keeping with the times. The Gilded Age and Great Depression had revealed the highs and lows of modern capitalism. Great wealth could be created practically overnight, and many millions could benefit. But it also became clear that without sufficient regulation, executives could extract vast sums of wealth from corporations for themselves while undermining the broader economy. The sudden rise of the oil industry, the sugar trust, the financial system, and the railways spawned monopolies and robber ba...

Table of contents

• Cover
• Title Page
• Dedication
• Introduction
• Chapter One: The Most Valuable Company in the World
• Chapter Two: Neutron Jack
• Chapter Three: That’s Why They Got Hired
• Chapter Four: The GE Glow
• Chapter Five: Rotten Apples
• Chapter Six: Bad Trades
• Chapter Seven: Negative Externalities
• Chapter Eight: Beyond Welchism
• Acknowledgments
• About the Author
• Notes
• Index
• Copyright