Episode #81: Jack’s Legacy

The good, the bad, and the ugly

On 1st March 2020, we heard the news that Jack Welch had sadly passed away at the age of 84. For over 20 years, he was the CEO and Chairman of General Electric, at the time one of America’s premier firms. Welch guided GE through the heady 1980s and 90s, at a time before the 2001 recession and the 2008 GFC curbed everyone’s enthusiasm.

Welch is widely credited with transforming American capitalism. He was named the Manager of the Century by Fortune magazine in 1999, beating out some pretty stellar competition from earlier in the 20th Century.

Since then a lot of what Welch did has been discredited, or at best questioned. In this episode, I look at the legacy that is Jack Welch, and explore the good, the bad, and the ugly. 

JACK’S LEGACY: THE GOOD, THE BAD, AND THE UGLY

Episode #81 Transcript

Hey there, and welcome to Episode #81 of the No Bullsh!t Leadership podcast. This week's episode, Jack's Legacy: The good, the bad, and the ugly. Today I'm changing normal programming a little due to a recent event that I really thought worth pausing to comment on - and no, it's not the COVID-19 virus sweeping the planet.

On the 1st of March, we heard the news that Jack Welch had passed away at the age of 84 from renal failure. Jack was the Chief Executive and Chairman of General Electric for over 20 years, through the heady 1980s and 90s, before a recession in 2001 and the GFC in 2008 curved everyone's enthusiasm. Welch is widely credited with transforming American capitalism, and that comments made by both supporters and detractors. He was named the manager of the century by Fortune Magazine in 1999 beating out some pretty stellar competition from earlier in the 20th century.

Since then, a lot of what Welch did has been discredited, or at least frowned upon. So I want to look at the legacy that is Jack Welch from my vantage point as a person who never met him, and never worked for GE, but have nonetheless read quite a deal about him over the years, including his autobiography, which he released in 2001. So we'll start with a little bit of background. Who was Jack Welch, and what did he do at GE? I'll briefly explore why he may have fallen from grace. I'll then drill down on one of his core strategies for creating a high performing organisation and ask, does 20:70:10 really work? And I'll finish with my verdict on Jack. So, let's get into it.

Jack Welch joined GE in 1960 as a 24 year old. He was fresh from a PhD programme as a chemical engineer and interestingly, he worked for that one company all his life, which in itself is remarkable these days. It will be virtually unthinkable for the young adults being produced by our universities, colleges and apprenticeship programmes today to think that they could work for the one company for their whole careers. GE itself was started in 1892 in Boston by five founders, including luminary names such as Thomas Edison, if you'll pardon the pun, and JP Morgan. The company turns 128 next month. Welch became Chief Executive and Chairman of GE in 1980, until his retirement in 2001. He had a massive focus on growth and profitability. He's commonly thought of to have changed corporate America - some say for the worst, not for the better, though. He paid brutal attention to the bottom line.

He took out over a hundred thousand people from the GE workforce between 1980 and 1985. That's just over one quarter of the global workforce, and it wasn't really a distressed business - he'd just seen the inefficiencies and sclerosis that was stopping the organisation from being its best. Welch had a massive focus on shareholder returns, and, the enrichment of those performers at the top end of the company who produced the returns. The capitalist concept of aligning the interests of owners and managers was really fleshed out strongly in GE. These days, it is the incentives put in place to reward management for creating shareholder value that results in some of the obscene CEO payments that we read about in the press. Under Welch, GE's strategy was to put the "C" into conglomerate. He took a stodgy, industrial firm and diversified it into media, finance and high tech - just to name a few.

GE was and probably still is ubiquitous. Every single one of you listening to this podcast has used GE products, whether you know it or not. So have a look at the branding on the jet engine of the next plane you sit in. And, it's worth remembering the GE manufacturers everything from turbines in power stations that generate the electricity you use, through to the high performing plastics used in many high quality products. But GE under Welch became America's largest company at one point, and its performance was stunning. It's as American as Boeing. Under Welch, it went from revenue of 25 billion to 130 billion. The profit went from 1.5 billion to 15 billion. Now that's a compound annual growth rate of 12% over 20 years. Every year growing by 12% - that's better than the Chinese economy. And, it had a market cap of 400 billion at its peak.

Now, Welch was famous for a few headline strategies. The first of these was being number one or number two in your market or be shutdown. And the other strategy was to rip apart the concrete layer of bureaucracy that sat in the middle of the organisation. He did this with his 20:70:10 methodology. Now this is not to be confused with 70:20:10, the learning methodology that says 70% of your learning comes from on the job experience, 20% comes from coaching and mentoring from your leaders and 10% comes from formalised education courses. 20:70:10 was how you divided up the workforce to understand who was to be nurtured and who wasn't. So 20% represented the top 20% of the workforce. Those are the people that you love, you promote, you give the opportunities to you develop, you pay. Those are the ones who are the top of the organisation.

The 70% is the middle part of the organisation. That is the essential rump that gets the work done. They're important, but the bottom 10% has to be turned over every single year. So if you find yourself in the bottom 10% then of course you are going to be ruthlessly exited from the organisation. It really creates an "every person for themselves" culture. And, mass-layoffs tend to change the psychological contract that our company has with its workforce. So from loyal employees with a job for life, to a mood of carve your own destiny. Now, Welch said in his autobiography that the only thing that provides job security is satisfied customers. Companies can't give you that, which I guess to an extent is true, but it's a pretty brutal way of looking at it. Another one of Welch's key innovations was to introduce Six Sigma later in his tenure as a means of improving the many manufacturing processes throughout GE.

And to those of you who don't know about Six Sigma, it's basically just a process to reduce the number of defects in any manufacturing or service operation. Now, some of the clues on Welch's philosophy come from the man himself. And I have to say that many of these are not only reasonable, but they're ultimately quite desirable. So from day one in GE as a graduate engineer, Welch went above and beyond in delivering work. And this is what fueled his meteoric rise. He clearly held the tenent of excellence over perfection, and he strived to create a safe environment in which excellence was rewarded. So he used to say, and I quote from his autobiography, "Everyone knew that having a big swing and missing was okay". So he encouraged innovation. He held really strong views on the ability of people's potential to be nurtured in the GE environment.

So he believed that a person's only limitation to progression should be their own creativity, drive and standard of personal excellence. He strongly held the principle that rigorous differentiation delivers real stars. And you know what? I think he's right about that. This in turn enables us to form winning teams. Welch was driven by a desire to continually raise the performance bar to seek improvement and create greater value. But, when good people make mistakes, they don't need to be crucified, they need to learn. On the downside. I wouldn't be looking to Welch as a role model for life balance. He had two heart attacks and was a self-professed workaholic.

Why the fall from grace, then? Well, I've got it boiled down to about half a dozen things. The first thing is the corporate excess. Welch paid lavish bonuses, and made sure that the executives at the top of the organisation really shared the wealth was created for the shareholders. Now this is how most CEOs make the really big bucks. They don't make it in their fixed salary, they make it in their non-fixed remuneration that is tied to longterm performance. So what they normally do is they take the performance of the organisation and compare it to other organisations in the same industries and they compare their total shareholder returns and things like their price to earnings ratios. Over long period of time if the company performs well, then management is rewarded royally. Even post retirement, it was rumoured that Welch had some opulent benefits that GE picked up the tab for. Now that's not a good look for someone who was Chairman and CEO, who basically controlled the board.

The second criticism revolves around what lot of people call inhumane methods. Now, obviously Welch made massive cuts in the workforce on a scale not before seen in corporate America, but he did this while profitability was still growing massively and business units were cut as if it was life or death. Now this might be okay if it was positioning GE for the longterm, but was it? A little bit more on this in a minute? Leaving aside the perception that comes from ruthless efficiency for those who remained, he was reputedly a very good leader. Now those who are close to Jack said he was a genius at identifying and nurturing talent. He encouraged people to take risks and speak their minds, and the push to meritocracy was extreme.

The third reason he had a fall from grace is the critics contended that market innovation was stifled with the drive for six Sigma. This is pretty interesting. A key tenant of Clayton Christensen's "Innovator's Dilemma" is that rational investment behaviour by managers leads to underinvestment in the next wave of products and services, thereby stifling innovation. So by his own admission, Welch was slow to see the potential of the internet, for example, and largely missed that boat.

The fourth thing is he used some old tricks to prop up the balance sheet. Things like mass outsourcing of certain functions. Now this may have improved the performance in the short term, but possibly the expense of longterm control and the intellectual property of the organisation. Another widely held criticism is that the massive growth in some areas of the conglomerate distracted from the declining performance in the traditional businesses. So in other words, these fast growth businesses like GE Finance masked the decline in their other manufacturing businesses.

Now finally and most compelling, the performance after Welch retired fell off a cliff. GE is not the powerhouse it used to be. So the share price peaked on Welch's departure at around $60 USD per share, but of close of trading last week, it was $9.40. In fact, in June 2018, GE was delisted from the Dow Jones Industrial Index. And this was the last of the companies founded in or before 1907 to do so. This was because its value or market capitalization was less than 10% of the indexes most valuable stock. Now, ironically, the most valuable stock at the time when GE was delisted was Boeing. But that's a whole other story. Boeing shares at that time were priced around $400, but today they've lost about a third of their value to be trading at around $260 per share. It's absolutely true, today's rooster is tomorrow's feather duster. So the longterm picture for GE is less than rosie. And let's just say that Welch's successor, Jeff Immelt won't have his name on the chalkboard when Fortune Magazine contemplates the candidates for Manager of the Century in 2099. But look, let's put this in context. You've probably all heard of, if not read, the classic book "Good to Great" by Jim Collins.

Now if you have a copy, just slip into the early part of the book on page seven and have a look at the companies upon which that research was based and see where they are now. No one is saying the conclusions in that book aren't valid, not even Phil Rosenzweig who provided another perspective in his outstanding book, "The Halo Effect". However, many of the companies lauded in that piece of research are now or have been financially distressed, which in my mind goes to the point that things change and businesses and industries go in cycles. That's why most companies that manage to create a competitive advantage come back to the pack within two to seven years.

It's worth us asking the question, does the 20:70:10 methodology work? Cause this was really central to Jack's view of how he was going to improve the capability and performance of the workforce. I talk a lot about high performing teams and the techniques for improving team performance. Now some of the things I say might sound a little ruthless to those who are a little more on the soft and fluffy side of leadership, for example. So if you've become really good at rationalising why you need to keep people happy and to make sure they like you, you'll find a lot of my content quite jarring. And if you subscribe philosophically to the principle that everyone is welcome, everyone is looked after and everyone has a place regardless of their personal choices around behaviour and performance, then you'll likely be at odds even with many of my views.

But those of you who know me have probably worked out that I'm not really in this camp. Having said that, I still see a few major issues with the way Welch implemented his 20:70:10 methodology. I really strongly believe that meritocracy is the only way to run a team or an organisation regardless of your industry, sector or purpose. We are where we are with diversity and inclusion largely because of the lack of meritocracy over past generations. But the blanket application of meritocracy is trickier in practise than it might seem. In my experience, forced rankings don't really work. It's counterproductive to producing the best outcome. Now, let me give you an example. Having every team, division and business unit independently having to identify a bottom 10% who will then be unceremoniously purged from the workforce doesn't factor in the differences between teams. So Team A might be truly awesome and Team B might be a little sh!t, but the bottom 10% of Team A might will fit into the middle 70% or even in many cases, the top 20% of Team B. But applying the blanket rule to each team at the most granular level doesn't account for this.

I also had a conversation many years ago with one of my early influences in my executive career, a very wise and seasoned executive named Thras Moraitis. Thras was a founder of one of the large global consulting firms, particularly predominant in Europe, and he told me that at one point in time they had decided to implement that 20:70:10 methodology of GE. What he said was it worked really well for the first couple of years and they really managed to get an uplift in workforce average capability and performance, but he said by year three weird things were happening. He'd have a look at the list of the people who were to be exited from the organisation because they turned up in the bottom 10% and thought to himself, hang on a minute, I know this person. That's actually a pretty good person. So what happens pretty quickly is that you start to lose some very, very good people and that is not good for morale.

Let's wrap this up. What's my verdict on Jack Welch? Well, I've always said there's a lot of luck and timing in this CEO caper, and Welch did manage his timing impeccably. He stepped away from GE just before the 2001 recession - but over 20 years worth of timing? I don't know, I doubt that. There's no question in my mind that he uplifted performance massively and timing aside, he can't be blamed for the way the 2008 GFC hit General Electric. Welch clearly had the wind at his back through unprecedented stock market growth in the 1980s and 90s but GE still massively outperformed this growth. GE rose 70 fold in 20 years, which was more than three times as fast as the S&P 500 Index.

He clearly got results all the way through his career starting as a chemical engineer. He had a PhD and he did the work. That's why before the age of 40, he was running a collection of GE's businesses, with over $2 billion in sales. Jack actually did focus on people. Stories from him and the people close to him bare out that he was a great leader to be close to. In other words, if you're a high performer, you did really, really well under Jack Welch. If you weren't a high performer, maybe not so much, but Welch says in his autobiography that he never changed who he was. Sure he was brash, outspoken, and he was driven to perform, but he clearly had his leadership fingerprint sorted out. He knew who he was and he went with that. There are some questions too around the Chairman and CEO model. Is that too little governance over someone who's driving an organisation that large, and does this model make a difference as to how GE performed over its time?

Would additional governance have forced any changes at all to what was done? We don't know. I suspect that history will treat Jack Welch rather more harshly than maybe warranted. Over the years for my part, I managed to adapt a number of his philosophies and tempered them to seek a better balance of outright performance with constructive culture, but there's no denying the impact Jack Welch and his legacy touches all of us in some way.

Alright. So that brings us to the end of Episode 81. Thanks so much for joining us, and remember at Your CEO Mentor, our purpose is to improve the quality of leaders globally. So please take a few moments and rate and review the podcast because this is how we reach even more leaders. I look forward to next week's episode, "Being Right Isn't Everything", and next week I actually will do that episode. Until then, I know you'll take every opportunity you can to be a No Bullsh!t Leader.

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