‘Superstar’ Welch may have sowed seeds for GE decline
For Fortune magazine in 1999, Jack Welch, then General Electric’s chief executive, wasn’t just the country’s best executive, or the manager of the year, but nothing less than the best manager of the 20th century, “far and away the most influential manager of his generation.”
Welch himself was more circumspect. “My success will be determined by how well my successor grows it in the next 20 years,” he said thatyear.
Eighteen years later, with last week’s announcement that Welch’s handpicked successor, Jeffrey Immelt, would step down as GE’s CEO, the verdict would appeartobein.
“Given how horrendous the stock performance has been for so many years, the most amazing thing is why the board didn’t act sooner” to replace Immelt, said Charles Elson, a professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
Scott Davis, a Barclays managing director, said on CNBC that Immelt’s tenure was“an unmitigated disaster for shareholders .”
Welch brought muchneeded energy and charisma to the chief executive’s job and streamlined GE’s bloated bureaucracy. Had he stayed on through the financial crisis, perhaps he would have recaptured the growth that eluded I mme lt.
But hardly anyone considers Welch, now 81, a management role model anymore, and the conglomerate model he championed at GE — that with strict discipline, you could successfully manage any business as long as your market share was first or second — has been thoroughly discredited,at least in the U.S.
No wonder, given the performance of the company’ s stock over the past 10 years. GE shares dropped 25 percent during that period, in contrast with a 59 percent rise for the S&P 500. The rival industrial conglomerate Honeywell’s stock has more than doubled, and Danaher’s has tripled. United Technologies gained 67 per-
cent. But Immelt remained one of the country’s highestpaid executives: $21.3 million in 2016, $33 million in 2015, and $37 million in 2014. Even without a formal severance package, Immelt, 61, will get an additional $211 million when here tires, Fortune estimates.
“I’m a long-term GE shareholder,” Elson said. “The bottom line is, I did poorly and he did very well .”
Speaking of his tenure at GE, Immelt pointed to the increased strength of the company’s industrial businesses, their competitiveness and large market shares.
“I’ ll say that will stand the test of time,” he said Monday in an interview. “Let other people make their own judgments.”
Immelt’s defenders have pointed out that he had to contend with the collapse of the tech bubble, the Sept. 11 attacks and the financial crisis, all circumstances beyond his control. But so did the chief executives of every other major company.
“About the best that can be said is that he enabled GE to survive through a difficult time,” said Bruce Greenwald, professor of finance at Columbia .“But he never really understood how tocreate value through growth .”
And he inherited “a highly inflated stock price,” Greenwald said, thanks to Welch’s aura and lofty expectations that probably no one could have met.
As Aswath Damodaran, a finance professor at the New York University Stern School of Business, put it, “It’s always tough to follow a legend.”
Suffice to say that Immelt won’t be writing a book like Welch’s national best seller, “Jack: Straight From the Gut,” to celebrate his tenure at GE. But ultimately, it may be the much-lauded Welch whose reputation emerges more tarnished.
“Jeff Immelt brought his best every day for 16 years,” Welch said in a statement. His office said he was not available to comment about his own legacy.
I mme lt tacitly repudiated the Welch model himself, moving to dismantle parts of the GE empire by getting rid of NBC Universal and the once-too-big-to-fail GE Capital. The problem, many critics said, is that he didn’t do son early fast enough.
“I don’t think Jack Welch was ever as good as he was made out to be,” said Damodaran, who has spent years trying to value GE. During Welch’s tenure, “he benefited from the growth of financial services in the American economy and the growth of GE Capital,” Damodaran added. “That’s what made it untouchable for so long.”
That strategy backfired in 2008, years after Welch had left, with the arrival of the financial crisis.
“It turned out GE had no competitive advantage in financial services,” Damodaran said. “If anything, their risk controls were even worse” than those at other large financial institutions. Warren Buffett had to come to the rescue with a $3 billion infusion.
In a statement, a General Electric spokeswoman said, “Today, GE is a more focused industrial company with strong growth opportunities in the long term.”
GE shares rallied last week on news of Immelt’s departure, largely on hopes that his successor — John Flannery, a company veteran — will embrace that logic. He promised a“comprehensivereview” of all GE businesses to be carried out “with speed, urgency and no constraints.”