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[The Anti-Economist]

Why Jack Welch Knows About Changing Numbers


As CEO of General Electric, Welch was a master of earnings enhancement.

The dust-up that former General Electric CEO Jack Welch caused last week caught me by surprise. “Unbelievable jobs numbers..these Chicago guys will do anything..can’t debate so change numbers,” he tweeted. As America now knows, the unemployment rate fell last week to 7.8 percent, the first time it has dropped below 8 percent during Obama’s term as president. (Nice news to offset the drubbing Obama took in the debate.)

Who would bother to take seriously Welch’s accusation that Obama’s team was manipulating the jobs data? Only those who don’t know much about him, I’d have thought. What surprised me is that that seemed to be just about everybody. Even Paul Krugman used his column to defend the estimable Bureau of Labor Statistics; pieces otherwise critical of Welch nevertheless referred to him as a great executive.

But the accusations fit Welch’s profile. He thinks as he does because he himself was often cited as one of the leading book-cookers of his era. Why would he think anyone would approach numbers any differently?

As one of his executives told me while I was researching my book Age of Greed, “Jack always advised me to keep a nickel in your pocket.” In case your earnings per share fall a bit short, in other words, always have something hidden somewhere to boost them. For years, Wall Street bought his charade of increasing profits every calendar quarter to show what a strong and predicable company GE now was, and how it continued to grow under any and all conditions.

GE was a strong profit-generator—but not that strong. Yet Welch’s legend grew, and GE’s stock price soared.

Welch was considered the best corporate executive of his time. He was talented and charismatic. He was also ruthless, and proud of it. He was the man who insisted that every department cut the bottom 10 percent of its staff every year. In the two years after he became CEO in 1980, he gutted or sold businesses that employed 70,000 workers, 20 percent of GE’s workforce. Five years later, some 130,000 of GE’s 400,000 workers were gone. They started to call him Neutron Jack, after the bomb that killed people but didn’t destroy buildings.

Welch was selling stale manufacturing businesses, in his mind, like the venerable appliances division, which made toasters and irons. In their stead he bought RCA, owner of NBC, and eventually Kidder Peabody, a soon-to-be-troubled investment bank. He handled neither investment well.

He was managing in the new fashion, like a takeover artist or leveraged-buyout partner, buying companies that could turn handsome profits with fewer workers and selling older ones rather than trying to remake them. He had not always been like this. When he started out, he was an engineer with a Ph.D., bent on innovation. He oversaw the development of new plastic products early in his career, and made a big successful bet on CT scanners, overseeing major innovations in the technology.

But then innovation was pushed aside at America’s manufacturing giants in favor of buy-and-sell. No one saw it that way for quite a while. Welch preached new managerial methods. He encouraged people to talk back. But a strategic shift was taking place in corporate America, often in emulation of him. As the media, Wall Street analysts, and not a few mainstream economists were lauding the new lean-and-mean corporate America, the nation’s manufacturers were mostly taking the easy way out—stripping down companies, foregoing real innovation, and riding the financialization wave, exploiting securities bubbles along the way.

Nobody did that better than Welch. He turned the greatest manufacturing company in the world into a bank, essentially, his GE Capital Division providing half or more of the company’s profits at a time when banks were printing money—that is, until 2008. Welch retired in 2001. GE’s profits rose ten times, to $13 billion, over his tenure. In 1980, GE was the ninth most-profitable company in America. During the 1990s it was always first, second, or third. At $500 billion, its shareholder value was greater than that of any other company in the nation.

Before Welch got the CEO job in 1980, he’d had to write a long essay to GE’s then chairman, Reginald Jones, about how he would run the company. Under Jones, the company’s goals had been long-term, but Welch argued that times had changed. Stock prices had been down across the board for a decade and had made all kinds of companies vulnerable to takeover. Welch had his eye on the market. “What we have to sell as an enterprise to the equity investor is consistent, above-average earnings growth throughout the economic cycle,” he wrote. “The discipline to balance both short and long term is the absolute of such a strategy.”

One way—perhaps the key way—Welch pushed up earnings “consistently” as CEO was to make last-minute financial trades in GE Capital just before the close of the calendar quarter. As CNN Money pointed out, (euphemistically calling Welch’s actions “earnings management”), “Though earnings management is a no-no among good governance types, the company never denied doing it, and GE Capital is the perfect mechanism.” Welch never made the kinds of aggressive manipulations that brought down Enron or Worldcom, but he was part of an era in which honest accountants were laughed out of town.

After Welch left GE, by the way, the company went downhill. Its banking business was clobbered in the financial crisis—it was heavily invested in subprime mortgages—and Welch’s successor, Jeffrey Immelt, is still struggling to reshape the company, partly by returning to manufacturing. Among his most conspicuous sales was NBC. GE’s stock price is still not nearly as high as it once was. Its stock-market value isn’t even close to today’s leader, Apple, which makes real products.

Welch’s legacy will no doubt continue to fade. He has no moral right to make accusations against one of the U.S. government’s most forthright agencies. He sees in the government what he himself was.

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