Jack Welch Inflicted Great Damage on Corporate America(bloomberg.com)
bloomberg.com
Jack Welch Inflicted Great Damage on Corporate America
https://www.bloomberg.com/opinion/articles/2020-03-02/ge-s-jack-welch-inflicted-great-damage-on-corporate-america
125 comments
The singular focus on shareholder value, to the exclusion of all else, has greatly damaged society.
There needs be a conscientious realignment to maximizing stakeholder value.
The corporation is best way to organize labour and capital in productive ways that we've ever come up with and it can be a tool for immense good, but not if it disregards the society, the environment, or the community it operates in.
There needs be a conscientious realignment to maximizing stakeholder value.
The corporation is best way to organize labour and capital in productive ways that we've ever come up with and it can be a tool for immense good, but not if it disregards the society, the environment, or the community it operates in.
Why were stocks invented? It seems that stocks were not even invented for trading but for funding things. Being able to profit from trading seems secondary. The whole idea that stocks must rise forever or society collapses seems insane to me.
I've always had a pet theory that 401k is a Republican ploy (or extremely useful). Tie everyone's retirement to the stock market as the only thing that matters.
I've always had a pet theory that 401k is a Republican ploy (or extremely useful). Tie everyone's retirement to the stock market as the only thing that matters.
The 401k works in two ways actually. The way you mentioned. Plus, because employees have no choice of bank or investments in their 401k so they can be screwed over on fees more easily.
My IRA through Vanguard has crazy low fees.
My 401K through work has easily 4x the fees, even though it's mostly holding Vanguard funds (or similar ETFs).
401Ks are an expensive sham. Increase IRA limits plz.
My 401K through work has easily 4x the fees, even though it's mostly holding Vanguard funds (or similar ETFs).
401Ks are an expensive sham. Increase IRA limits plz.
Very true. But there is a ton on regulation in the retirement account space. It's much harder to disrupt. But it's worth disrupting if you have a clear idea on how
You need better and simpler laws, not "disruption".
You usually can’t choose who holds your 401k money, but most often get several to dozens of choices for investments (like most things in life, of varying quality).
Lol "dozens" is an overstatement. In any case, it's more limited than the open market, and for absolutely no reason. 401ks shouldn't exist - just increase the limits on IRAs and let everyone use those.
Stock markets were invented originally by the Dutch East India company to raise funds from the general public. This allowed them to raise the capital to expand faster than any other firm in the world, at a time when the alternatives were to convince royalty to grant you money, turn to high-interest small loans via moneylenders, or raise from your own stakeholders (e.g. guild membership).
At its height, the value of the Dutch East Company dwarfed the value of the top 40 global companies today, combined, FAANG included. Ever since, companies have sought to issue stock to the public (IPO).
Originally, the reason to buy a stock was because the company offered dividends to their shareholders. Over time, people started trading their shares of the stock (hence stream of future expected dividends) to others for cash now.
The 'stock market' became a meetingplace for those transactions. Just like other marketplaces (e.g. AirBnB), the stock market makes it easy for buyers to discover sellers and vice versa. The ability to trade assets for cash is 'liquidity' and stock markets have proven to be highly liquid, which is one of their most important qualities. Over time, these meetingplaces became regulated by governments to prevent schenanigans (e.g. Great Depression).
Originally, companies didn't care that much about their stock price after they initially raised the funds from the public. The price of stock was directly tied how much in dividends you would expect from the future, which is a proxy for the health of the company, but that's about it.
Over time, investing into these stocks became its own profession, and investing professionals developed a lot of metrics to assess that health of the company. Methods include looking through the company's balance sheets, assessing their strategy, comparing them to competitors, etc. Think of jargon like EBITDA, Free Cash Flow to Equity, Debt Leverage - there's over 20,000 pages of it throughout the CFA exam series.
Jack Welch is credited with shifting the focus of companies towards increasing their stock price by gaming the investors' metrics. Improving these metrics will have immediate effects on investor perception, much moreso than gradual adjustments to dividends. Employees and managers, who owned a bit of the company stock, would try to do all they could to amp up the price so they could sell their own shares at a high price.
Incidentally, this is the same angle for most tech stocks / VC. Tech companies generally don't focus on paying steady dividends, but rather on growing and raising the stock price to the point where you can sell it to someone else at a higher price. Hence, many tech companies are fine with being unprofitable for a long amount of time, even during an IPO, as long as the valuation of the company (# shares x price) rises via growth.
Re: Republicans, you are actually 100% correct in your suspicion, at least w/r/t the USA. Reagan changed the tax code in the 80s, around the time Welch was in his heyday, to incentivize citizens to invest in the economy. Now over half of American adults are invested in the stock market, which is among the highest participation rate of any country. In other countries, such as China, the stock market doesn't have nearly as high of a % participation from the public.
Reagan's policy is regressive. Only the people with well-paying jobs with 401ks typically invest, so the poor fall farther behind. Furthermore, to take full advantage of the investment tax incentives requires knowledge, which is typically passed down via family rather than taught in schools. This is a substantial driver of inequality.
Here's a short blog/article I wrote about the history of shareholder rights from then till today https://www.yourstake.org/academic-impact/
At its height, the value of the Dutch East Company dwarfed the value of the top 40 global companies today, combined, FAANG included. Ever since, companies have sought to issue stock to the public (IPO).
Originally, the reason to buy a stock was because the company offered dividends to their shareholders. Over time, people started trading their shares of the stock (hence stream of future expected dividends) to others for cash now.
The 'stock market' became a meetingplace for those transactions. Just like other marketplaces (e.g. AirBnB), the stock market makes it easy for buyers to discover sellers and vice versa. The ability to trade assets for cash is 'liquidity' and stock markets have proven to be highly liquid, which is one of their most important qualities. Over time, these meetingplaces became regulated by governments to prevent schenanigans (e.g. Great Depression).
Originally, companies didn't care that much about their stock price after they initially raised the funds from the public. The price of stock was directly tied how much in dividends you would expect from the future, which is a proxy for the health of the company, but that's about it.
Over time, investing into these stocks became its own profession, and investing professionals developed a lot of metrics to assess that health of the company. Methods include looking through the company's balance sheets, assessing their strategy, comparing them to competitors, etc. Think of jargon like EBITDA, Free Cash Flow to Equity, Debt Leverage - there's over 20,000 pages of it throughout the CFA exam series.
Jack Welch is credited with shifting the focus of companies towards increasing their stock price by gaming the investors' metrics. Improving these metrics will have immediate effects on investor perception, much moreso than gradual adjustments to dividends. Employees and managers, who owned a bit of the company stock, would try to do all they could to amp up the price so they could sell their own shares at a high price.
Incidentally, this is the same angle for most tech stocks / VC. Tech companies generally don't focus on paying steady dividends, but rather on growing and raising the stock price to the point where you can sell it to someone else at a higher price. Hence, many tech companies are fine with being unprofitable for a long amount of time, even during an IPO, as long as the valuation of the company (# shares x price) rises via growth.
Re: Republicans, you are actually 100% correct in your suspicion, at least w/r/t the USA. Reagan changed the tax code in the 80s, around the time Welch was in his heyday, to incentivize citizens to invest in the economy. Now over half of American adults are invested in the stock market, which is among the highest participation rate of any country. In other countries, such as China, the stock market doesn't have nearly as high of a % participation from the public.
Reagan's policy is regressive. Only the people with well-paying jobs with 401ks typically invest, so the poor fall farther behind. Furthermore, to take full advantage of the investment tax incentives requires knowledge, which is typically passed down via family rather than taught in schools. This is a substantial driver of inequality.
Here's a short blog/article I wrote about the history of shareholder rights from then till today https://www.yourstake.org/academic-impact/
Yes of course it is a ploy, it has 2 effects:
It is maddening employees by binding them to stock market (preventing strikes for example), to make them accept pay cuts more easily.
It increases stocks because there is a lot more money on the market
401k vs pension plays into the republican talking points on a number of fronts.
Its "personal responsibility" vs "socialism" because it shifts the burden and risk from companies and the state (in the form of pension guarantee/insurance) to the individual. Which repeatedly has been shown to be a disaster on quite a number of fronts, not the least of which poor returns or a economic disaster like 2008 completely screws people who expect to retire at a certain time. This turns around and has national economic consequences because so many people instead of retiring in 2008 simply kept working, which meant that those most in need of new jobs had an even harder time finding them.
Its also problematic because younger people who are paid less are more in need of front-loading their retirement so that they can benefit from a longer growth cycle are the least likely to be able to afford it.
Then there are all the issues with the way 401ks are managed vs even IRA's which create an entire industry where the sole purpose seems to be to reduce returns below market rates. Most people would be better off simply buying vanguard total market indexes from a discount broker vs all the fees and overhead brought on by all the middlemen "adding" value by reducing the returns.
Pretty much the entirely of most pension programs problems are caused by companies/organizations that simply ignore long term average returns and under-fund the pensions. Until the 1980/1990's the mandatory formulas for pensions and what they were allowed to invest in were quite strict, but then all that was gradually loosened until now we have a bunch of cases where the pension made bad investments (CalPERS), made wildly exaggerated statements of expected returns, or massively underestimated liabilities (GM) and find themselves in situations where they can't cover current liabilities.
Its "personal responsibility" vs "socialism" because it shifts the burden and risk from companies and the state (in the form of pension guarantee/insurance) to the individual. Which repeatedly has been shown to be a disaster on quite a number of fronts, not the least of which poor returns or a economic disaster like 2008 completely screws people who expect to retire at a certain time. This turns around and has national economic consequences because so many people instead of retiring in 2008 simply kept working, which meant that those most in need of new jobs had an even harder time finding them.
Its also problematic because younger people who are paid less are more in need of front-loading their retirement so that they can benefit from a longer growth cycle are the least likely to be able to afford it.
Then there are all the issues with the way 401ks are managed vs even IRA's which create an entire industry where the sole purpose seems to be to reduce returns below market rates. Most people would be better off simply buying vanguard total market indexes from a discount broker vs all the fees and overhead brought on by all the middlemen "adding" value by reducing the returns.
Pretty much the entirely of most pension programs problems are caused by companies/organizations that simply ignore long term average returns and under-fund the pensions. Until the 1980/1990's the mandatory formulas for pensions and what they were allowed to invest in were quite strict, but then all that was gradually loosened until now we have a bunch of cases where the pension made bad investments (CalPERS), made wildly exaggerated statements of expected returns, or massively underestimated liabilities (GM) and find themselves in situations where they can't cover current liabilities.
Definitely. Here's a good post from the founder of a software consulting company I respect. His background is in engineering, and there are a bunch of common business assumptions that he questions, and that one is first on the list: https://greatnotbig.com/2020/03/unquestioned-business-assump...
Looks like something worth submitting to the front page.
Done! Thanks for suggesting it. https://news.ycombinator.com/item?id=22477075
So given the fiduciary responsibility to maximize shareholder value that is hard right now, but the existence of
Edit: The above is apparently more cultural than legal but I still like the below option.
https://en.wikipedia.org/wiki/Benefit_corporation
Give's me hope as a mode to found a company, the gist is:
"that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals"
My understanding is that in the context of the current startup climate is that it is harder but not impossible to raise money under that type of corp though I haven't seen it myself yet.
Edit: The above is apparently more cultural than legal but I still like the below option.
https://en.wikipedia.org/wiki/Benefit_corporation
Give's me hope as a mode to found a company, the gist is:
"that includes positive impact on society, workers, the community and the environment in addition to profit as its legally defined goals"
My understanding is that in the context of the current startup climate is that it is harder but not impossible to raise money under that type of corp though I haven't seen it myself yet.
There generally isn't a responsibility to maximize shareholder value. See, for instance https://www.lawschool.cornell.edu/academics/clarke_business_...
Oh interesting, I've heard that repeated so many times by so many different people in different places in business including the worry that they might be going against their fiduciary responsibility to the company I kind of just took it as fact. Thanks!
I still think that baking the non financial responsibilities into the founding legal documents would go a long way towards preventing those goals from being eroded after the initial founders move on even more so after what you shared as people clearly make the personal decision to prioritize shareholder value above all else then, which is somewhat more disheartening.
I still think that baking the non financial responsibilities into the founding legal documents would go a long way towards preventing those goals from being eroded after the initial founders move on even more so after what you shared as people clearly make the personal decision to prioritize shareholder value above all else then, which is somewhat more disheartening.
> So given the fiduciary responsibility to maximize shareholder value that is hard right now
This is more cultural than legal (and, as the article points out, he had a lot to do with this shift)
This is more cultural than legal (and, as the article points out, he had a lot to do with this shift)
Of course we had a lot to do with it, it's a construct of Man. These are not innate laws of the universe passed down to us.
That being said, it is absolutely legal as well as cultural. As a corporate director you can and will be sued if shareholders can show you intentionally made a choice to lower shareholder value even after knowing it would.
That being said, it is absolutely legal as well as cultural. As a corporate director you can and will be sued if shareholders can show you intentionally made a choice to lower shareholder value even after knowing it would.
Of course there is a legal, i.e. fiduciary duty. It just isn't what most people thing it is.
To the OP, it was Welch (and others) who popularized the idea of this meaning maximizing "shareholder value", but fiduciary duty existed before then and it is the cultural context that has shifted. It lay terms, many people incorrectly think this means that you have a duty to take actions that will raise the share price. But it's much more nuanced than that.
You can absolutely be successfully sued if it can be shown that you did not act in what you reasonably believed to be the best interests of the corporation, but that is a very different thing. Basically your fiduciary duty is to act in good faith, in the interests of the company (& thereby shareholders).
It is a pretty high bar to demonstrate failure, and most normal things that shareholders might gripe about will fall well short of this, and under "business judgement". There are other checks and balances here, bear in mind that if the board is unhappy enough about the approach they can replace the CEO, etc.
To the OP, it was Welch (and others) who popularized the idea of this meaning maximizing "shareholder value", but fiduciary duty existed before then and it is the cultural context that has shifted. It lay terms, many people incorrectly think this means that you have a duty to take actions that will raise the share price. But it's much more nuanced than that.
You can absolutely be successfully sued if it can be shown that you did not act in what you reasonably believed to be the best interests of the corporation, but that is a very different thing. Basically your fiduciary duty is to act in good faith, in the interests of the company (& thereby shareholders).
It is a pretty high bar to demonstrate failure, and most normal things that shareholders might gripe about will fall well short of this, and under "business judgement". There are other checks and balances here, bear in mind that if the board is unhappy enough about the approach they can replace the CEO, etc.
If you were planning to sabotage things in some sort of short-seller scheme, probably. That’s likely different from a hypothetical CEO accidentally lowering stock value in the process of fulfilling some sort of ethical or social good, since corporations tend to include an avowed code of values.
So given the fiduciary responsibility to maximize shareholder
Not given. I’d ask for a source, but I’ll save you the trouble of a fruitless search by not doing so.
Not given. I’d ask for a source, but I’ll save you the trouble of a fruitless search by not doing so.
Even if that responsibility exists, and a number of individuals have questioned whether it does, it doesn't necessarily follow that such maximization needs to be solely focused on short-term gain.
Totally agreed.
If I was CEO this wouldn't be rocket science, you fire a bunch of people prior to reporting numbers. Expenses go way down, stock goes up, repeat this. Throw in some M&A's and you are good to go.
Not that I would do this, but that's how you maximize "shareholder value". Of course, it's not good for the actual business in the long term.
If I was CEO this wouldn't be rocket science, you fire a bunch of people prior to reporting numbers. Expenses go way down, stock goes up, repeat this. Throw in some M&A's and you are good to go.
Not that I would do this, but that's how you maximize "shareholder value". Of course, it's not good for the actual business in the long term.
Partly, the emphasis on extreme short term gains, in turn accentuated by short term trading (options) and HFTs disincentivizes any management actions that try to optimize for the long term.
The CEO will be under tremendous pressure if he/she tries to optimize for a 1 year timeframe (for example) as opposed to quarter-by-quarter. I wish boards can come up with a compensation structure for execs which optimizes for long term.
The CEO will be under tremendous pressure if he/she tries to optimize for a 1 year timeframe (for example) as opposed to quarter-by-quarter. I wish boards can come up with a compensation structure for execs which optimizes for long term.
Absolutely. In recent decades CEO tenure has fallen by ~half, while CEO compensation is circa 10x bigger. I think that's behind a lot of current business and economic problems. Giving someone only a short time to extract a lot of money is an absolutely terrible setup for creating sustained value delivery.
Spot on. Any doubters can go check out GE stock. After several rounds of mining, there is nothing left in the poor rock.
PS You know things are really bad when the stock chart starts to go to log price scale because it has gone down so much!
PS You know things are really bad when the stock chart starts to go to log price scale because it has gone down so much!
HFTs aren't related to business short-termism. Welch's short term lives on the month to month scale, HFTs live on the nanosecond scale and are mainly concerned with pricing every option in the universe down to the picopenny.
> The CEO will be under tremendous pressure if he/she tries to optimize for a 1 year timeframe (for example) as opposed to quarter-by-quarter.
Its bizarre to talk to well-meaning execs (even below C-suite) at public companies and hear them overtly say this. "Well we know X and Y are sound investments for the company's success, but it's a question of finding a way to sell something that long-term without tanking our stock price."
I try not to cry market inefficiency without good evidence, but "shareholders promote good corporate governance" starts feeling pretty bizarre when the people running a company describe shareholders like corporate raiders encouraging them to destroy value for a quick payout.
> I wish boards can come up with a compensation structure for execs which optimizes for long term.
For all the talk about "when founders should get out of the way" and "what makes a good founder doesn't always make a good CEO", it's interesting to see that research still finds companies with founder-CEOs performing substantially better. Higher share prices (which might stem from overconfidence), but also better long-term financials, more R&D spending, more influential patent filings, etc.
And that doesn't necessarily mean founders are super-geniuses, exceptional managers, or even unusually attuned to their market. They get less of their salaries in cash, hold options and stocks longer, and vary their behavior less in response to compensation structure. (Also, they often hold so much stock they can't sell in full without panicking the market.)
So it really does look like we just haven't found a good way to compensate non-founder CEOs: their behavior is extremely responsive to their compensation, but nobody has found a scheme that makes them act long-term to the degree a founder would.
Its bizarre to talk to well-meaning execs (even below C-suite) at public companies and hear them overtly say this. "Well we know X and Y are sound investments for the company's success, but it's a question of finding a way to sell something that long-term without tanking our stock price."
I try not to cry market inefficiency without good evidence, but "shareholders promote good corporate governance" starts feeling pretty bizarre when the people running a company describe shareholders like corporate raiders encouraging them to destroy value for a quick payout.
> I wish boards can come up with a compensation structure for execs which optimizes for long term.
For all the talk about "when founders should get out of the way" and "what makes a good founder doesn't always make a good CEO", it's interesting to see that research still finds companies with founder-CEOs performing substantially better. Higher share prices (which might stem from overconfidence), but also better long-term financials, more R&D spending, more influential patent filings, etc.
And that doesn't necessarily mean founders are super-geniuses, exceptional managers, or even unusually attuned to their market. They get less of their salaries in cash, hold options and stocks longer, and vary their behavior less in response to compensation structure. (Also, they often hold so much stock they can't sell in full without panicking the market.)
So it really does look like we just haven't found a good way to compensate non-founder CEOs: their behavior is extremely responsive to their compensation, but nobody has found a scheme that makes them act long-term to the degree a founder would.
Look at elon musks tesla compensation - extremely long term and ambitious.
As an aside, it’s sort of insane that there are some ideologies that consider democracies suspect because of office holders are focused on winning short-term elections, when modern corporations make decisions on even shorter timeframes!
Seems like it would be possible to correct for this by requiring the numbers to include the salaries of anyone who was fired in the past quarter - after all, the value they took with them when they left ought to count as a loss.
>fire a bunch of people prior to reporting numbers
Call it "stack ranking" and you too can be lionized by the business press.
Call it "stack ranking" and you too can be lionized by the business press.
and it's perfect when you are one of the biggest shareholders. Your pockets will always be filled no matter what.
Wayfair's trying this right now, but it doesn't look too good for them.
you are probably a stakeholder if you have investments such as a 401k. over 50% of american adults have investments in stocks.
you can vote your proxies to direct companies to do better. i built a website to make this more intuitive and easier, and you can support shareholder initiatives just like signing an online petition. e.g. https://www.yourstake.org/petition/disclose-corporate-politi...
you can vote your proxies to direct companies to do better. i built a website to make this more intuitive and easier, and you can support shareholder initiatives just like signing an online petition. e.g. https://www.yourstake.org/petition/disclose-corporate-politi...
It's lovely that you've done this! That being said, I'm inclined to believe that it's too difficult to get your average Joe to engage in shareholder initiatives, it's hard enough getting them to vote (in Canada at least). I would suspect that a path that would show more promise is the notion of corporate contracts that Elizabeth Warren proposed but unfortunately, it seems that she won't be the nominee.
You have laws to protect society, the environment and the community. Tax environmental and socially harmful activities and let the drive for shareholder maximization lead to environmental and social improvements.
Companies don't vote.
Companies don't vote.
What laws? You mean the ones corporations spend millions of dollars lobbying against/for and practically writing?
I would say that the singular focus on next financial report is the damaging part. You should expect to hold stock for years before selling it.
If you want to do charity with your money, that is almost certainly best done entirely separately from your investments (e.g maximize profits on lifesaving drugs and spend the extra income on givewell).
If you want to do charity with your money, that is almost certainly best done entirely separately from your investments (e.g maximize profits on lifesaving drugs and spend the extra income on givewell).
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Shareholder value is a perfectly fine way to organize a business, but this leaves the question of short-term vs long-term value. Jack Welch, and The 80's in general saw a very strong push toward short term profits at the expense of long term viability.
So did Jack Welch also influence the “grow big and exit all cost without a plan to be profitable” VC startup culture.
The reason the corporation makes bad decisions is because it is a dictatorship by the people that run it. The only way to reform such a system isn't with peans to morality that run in the face of self interest, it is to totally restructure the stakeholder structure to be dominated by the workers and the people they serve.
Are there any great examples of worker-co-ops in the tech space?
While it has flaws, the Mondragon Corporation is the largest successful co-op that I know of.
It's not strictly tech, though.
It's not strictly tech, though.
Do FOSS projects count as something like that?
If your goal is to show strictly that technical things can be produced by cooperatives, yes. If your goal is to show successful businesses that pay the bills of everyone involved through their technical labor, perhaps not.
There are examples of successful co-ops outside of tech: Mondragon, REI, and credit unions like Alliant come to mind. The absence of co-ops in tech could just be because the model hasn’t been tried yet. It doesn’t provide any signal about the viability of the model, or lack thereof.
You're absolutely right - the world is full of cooperatives! REI, every credit union, Vanguard, and State Farm all spring to mind.
With that said, might some consider it noteworthy that these are primarily customer-owned cooperatives rather than worker-owned ones? That seems like it might not be completely inconsequential, but perhaps I am being excessively picky.
Please accept my apologies for being less than entirely clear. It is my opinion that FOSS projects are unlikely to be considered good examples of worker-owned cooperatives that are also successful businesses. As you say, this offers no comment in any way on the viability or suitability of the model.
A quick search suggests that the worker-owned cooperative model is being tried! https://www.techworker.coop/
With that said, might some consider it noteworthy that these are primarily customer-owned cooperatives rather than worker-owned ones? That seems like it might not be completely inconsequential, but perhaps I am being excessively picky.
Please accept my apologies for being less than entirely clear. It is my opinion that FOSS projects are unlikely to be considered good examples of worker-owned cooperatives that are also successful businesses. As you say, this offers no comment in any way on the viability or suitability of the model.
A quick search suggests that the worker-owned cooperative model is being tried! https://www.techworker.coop/
At a corporate level I cannot think of a single co-op that is owned by its employees at this scale.
Mondragon is worker-owned.
Not unless they make money and that money is distributed to the contributors.
So no.
So no.
It's worth bearing in mind that there are a lot of parties who are, in some fashion, a stakeholder. Stockholders, debt holders, employees, vendors, contractors, towns where offices are, environments, governments of various levels, etc. Many of the things that produce value for them will be in opposition to the things that produce value for other stakeholders (expanding in one town vs another vs environment, etc.).
In theory, it's clearly the job of leadership to balance the needs of all stakeholders to maximize value for everyone. In practice, there's a lot of room to use stakeholder value as a cover for doing what leadership wants to do anyway. Almost everything leadership would want to do provides value to some stakeholder, after all...
One of the few upsides to shareholder value capitalism is that it provides a clear metric. This can help reduce difficulties from the principal-agent problem in a way that a stakeholder approach may have more trouble with.
Perhaps it's excessively cynical of me, but when CEOs talk about stakeholder value I hear powerful people looking to be less accountable.
In theory, it's clearly the job of leadership to balance the needs of all stakeholders to maximize value for everyone. In practice, there's a lot of room to use stakeholder value as a cover for doing what leadership wants to do anyway. Almost everything leadership would want to do provides value to some stakeholder, after all...
One of the few upsides to shareholder value capitalism is that it provides a clear metric. This can help reduce difficulties from the principal-agent problem in a way that a stakeholder approach may have more trouble with.
Perhaps it's excessively cynical of me, but when CEOs talk about stakeholder value I hear powerful people looking to be less accountable.
I definitely did not mean to imply it was easy to do.
It requires good-faith actors and a long-term, holistic view. Humans are not very good at these things.
It requires good-faith actors and a long-term, holistic view. Humans are not very good at these things.
Cynically, designing systems that only work when humans behave in ways humans are reliably not very good at seems like it might be a recipe for failure. Or abuse.
Perhaps designing with the crooked timber of humanity in mind could be worth considering?
Perhaps designing with the crooked timber of humanity in mind could be worth considering?
This needs a total revamp of pretty much every thought and policy in modern capitalism because so many of them have their roots in the stock price above everything ideology.
But I believe we need to do it if we want a brighter future.
But I believe we need to do it if we want a brighter future.
> Under Welch, GE’s mission changed. Its new goal was to become “the world’s most valuable company.” Which is to say, he turned the focus of the company to its stock price. Everything became secondary to that. ...
The irony is that GE's stock price is now at the same place it was in 1997. In between, sound and fury signifying nothing. Over twenty years of zilch.
https://bigcharts.marketwatch.com/quickchart/quickchart.asp?...
The irony is that GE's stock price is now at the same place it was in 1997. In between, sound and fury signifying nothing. Over twenty years of zilch.
https://bigcharts.marketwatch.com/quickchart/quickchart.asp?...
FWIW GE has split its stock twice in that interval: there was a 2:1 split in December 1997 and a 3:1 split in mid 2000. Meaning despite stock price being back to its 1997 level, total valuation has increased 6x (and an investor who had one GE share in early 1997 now has 6 of them).
Not sure if it's the case in the link above and am too busy to look into it right now, but stock charts are almost always reflective of all split activity. So comparing the price at two points is apples:apples.
Edit:
Though companies like GE pay substantial dividends so what price charts are missing are the billions of dollars paid out to shareholders over time.
Edit:
Though companies like GE pay substantial dividends so what price charts are missing are the billions of dollars paid out to shareholders over time.
While it's true that dividends immediately impact market price by making it lower, the market also prices in the expectation of future dividends by inflating the price.
If GE stopped paying dividends altogether, for example, the market price would tank.
If GE stopped paying dividends altogether, for example, the market price would tank.
While this is fairly standard corporate finance framing, I don't think it's necessarily as true as it once was. If GE were to stop paying dividends and announce they were going to do buybacks funded by cheap debt, I doubt the market would more than shrug.
Cancelling dividends and doing buybacks is different than cancelling dividends though. GE is a blue chip stock so the market will definitely notice.
It is different, but otherwise GE would just what, pile up the money? Cancelling dividends is only a drag on a stock if it's a sign that they can't afford to pay them regularly. In a hypothetical scenario where GE decided 20 years ago to stop paying dividends (to enable a better apples:apples comparison of stock price over time), they would have been just as profitable for that time period but today their balance sheet would have a ton more cash. I'm just calling into doubt whether that would have negatively impacted their share price or outlook at all.
It's all academic anyway, I think we're saying the same thing.
It's all academic anyway, I think we're saying the same thing.
When a stock splits, the market cap still stays relatively the same.
Market cap for GE is still lower today (93 B) than it was in 1997 (208 B). Unless there were major spin offs, that means the company is worth less.
Market cap for GE is still lower today (93 B) than it was in 1997 (208 B). Unless there were major spin offs, that means the company is worth less.
GE has been selling off assets as part of a turnaround strategy in the past ~2yrs or so
https://www.wsj.com/articles/ge-chief-says-assets-sales-will...
https://www.wsj.com/articles/ge-chief-says-assets-sales-will...
That shouldn't affect market cap since they're capturing the cash equivalent in value through the sale. It's trading physical assets (probably with poor returns) for cash assets.
Spinning off less-profitable divisions would affect market cap.
Spinning off less-profitable divisions would affect market cap.
[deleted]
Charts account for splits. A split does absolutely nothing for you as an investor.
Instead of one slice of pizza, you own two, but they each cost half as much. By far the most misunderstood concept about investment among the public.
Instead of one slice of pizza, you own two, but they each cost half as much. By far the most misunderstood concept about investment among the public.
But Welch was CEO from 1981 to 2001, not 1997 to today?
It's almost like he lead GE towards the trend we see starting in 1997, and that the effects of his leadership are seen 19 years after stepping down.
I never understand people who think that the economy works in realtime. This article makes it clear that while he was CEO, he received nothing but praise for his successes. It is only today that we can look back and see the damage he actually did.
This is simpleton thinking in the same category as the belief that the current state of the stock market is a reflection of how well our currently elected politicians are doing in office...
I never understand people who think that the economy works in realtime. This article makes it clear that while he was CEO, he received nothing but praise for his successes. It is only today that we can look back and see the damage he actually did.
This is simpleton thinking in the same category as the belief that the current state of the stock market is a reflection of how well our currently elected politicians are doing in office...
After 19 years, I think that first envelope is getting a little yellowed.
It's bad PR to obsess about PR.
It's bad karma to obsess about karma.
It is worth noting that when Jack Welch arrived at GE he was dealing with a bloated company heading towards bankruptcy because it had way too much overhead. Firing the bottom 10% each year was harsh medicine, but it was what GE needed at the time.
The fault is not in the medicine supplied. It is that his imitators supplied the same medicine to other companies in other circumstances.
What is the fallout? Jack Welch was a big part of the breaking of the social contract that used to be part of American business. It took decades, but now American workers have accepted that a job is not "until death do us part" and have also given up on their side of the same contract. And the result is a very different relationship between corporate America and their workers.
The fault is not in the medicine supplied. It is that his imitators supplied the same medicine to other companies in other circumstances.
What is the fallout? Jack Welch was a big part of the breaking of the social contract that used to be part of American business. It took decades, but now American workers have accepted that a job is not "until death do us part" and have also given up on their side of the same contract. And the result is a very different relationship between corporate America and their workers.
The imitators did what Jack Welch advocated for. He did not advocated for firing 10% of people once when company is clearly bloated. He advocated to do it again and again and again.
When I give you advice and you follow my advice, it is rightful to blame me for that advice.
But also, these articles primary blame him for massive short-termism, corporate raiding and likely creative accounting to get numbers he wanted at the expense of company health.
When I give you advice and you follow my advice, it is rightful to blame me for that advice.
But also, these articles primary blame him for massive short-termism, corporate raiding and likely creative accounting to get numbers he wanted at the expense of company health.
Unfortunately that mindset is bleeding into our governing system. Make the short-term numbers look good at the expense of long term prosperity.
We've gone from "a society grows great when old men plant trees whose shade they know they shall never sit in" to "lets burn down the forest for farmland because climate change will happen after I'm dead, so whatever"
> Unfortunately that mindset is bleeding into our governing system. Make the short-term numbers look good at the expense of long term prosperity.
What does that even mean?
What does that even mean?
Maybe I'm just looking at the past with rose-colored glasses, but postwar US built the most advanced highway infrastructure, hoover dam, landed on the moon. Now we rely on rate cuts and tax cuts to inflate our paper wealth. California couldn't build a high speed rail with all its wealth. Our astronauts had to hitch a ride with the Russians to get to ISS.
> but postwar US built the most advanced highway infrastructure, hoover dam, landed on the moon.
The interstate system could be seen as a boondoggle to make automakers rich at the expense of the US having a modern rail network.
Without question the moon landing and the Hoover Dam were historic engineering feats but they were both products of their eras. The Hoover Dam was a prewar Great Depression jobs effort and the moon landing would never have been possible but for the Cold War.
The interstate system could be seen as a boondoggle to make automakers rich at the expense of the US having a modern rail network.
Without question the moon landing and the Hoover Dam were historic engineering feats but they were both products of their eras. The Hoover Dam was a prewar Great Depression jobs effort and the moon landing would never have been possible but for the Cold War.
Which part do you not understand?
> Unfortunately that mindset is bleeding into our governing system. Make the short-term numbers look good at the expense of long term prosperity.
I admit some confusion at which 'short-term numbers' are being optimized at the expense of long term prosperity. I realize I may have been to literal in my reading -- the complaint is that our government is focussed on the short term at the expense of the long term.
I admit some confusion at which 'short-term numbers' are being optimized at the expense of long term prosperity. I realize I may have been to literal in my reading -- the complaint is that our government is focussed on the short term at the expense of the long term.
The state of infrastructure maintenance in many (most?) regions suggests there is at least possibly something to this.
The most harmful idea he introduced is stack ranking, the consequences of which we're still dealing with in the tech industry. In particular ranking people on a team level on the team and firing those on the bottom has taken a severe toll on many teams and companies/
The utter destruction of any sense of team work when people realize that someone has to be the bottom is awful.
He had to be a smart guy. How did he not realize anything that actually needs a team is going to suffer? Is this some lone eagle crap like EDS had?[1] Can you imagine the original Macintosh team running under stack ranking? I guess you shouldn't appoint people CEO who don't understand teams are required to build great products.
1) had a buddy who worked for EDS tell me that they wouldn't hire anyone who came as a group at a job fair because "eagles fly alone". That would actually explain some interactions.
He had to be a smart guy. How did he not realize anything that actually needs a team is going to suffer? Is this some lone eagle crap like EDS had?[1] Can you imagine the original Macintosh team running under stack ranking? I guess you shouldn't appoint people CEO who don't understand teams are required to build great products.
1) had a buddy who worked for EDS tell me that they wouldn't hire anyone who came as a group at a job fair because "eagles fly alone". That would actually explain some interactions.
His achievement was leverage and acquisition to make the top line number look really big.
The legacy is stack ranking has destroyed culture at innumerable companies (I continue to witness it in most companies that I know).
Also the CEOs from the GE CEO factory went to on to destroy not only GE value, but also Boeing [1] and many others.
[1] https://www.economist.com/business/2020/01/11/the-last-ge-ma...
The legacy is stack ranking has destroyed culture at innumerable companies (I continue to witness it in most companies that I know).
Also the CEOs from the GE CEO factory went to on to destroy not only GE value, but also Boeing [1] and many others.
[1] https://www.economist.com/business/2020/01/11/the-last-ge-ma...
I'm not unsympathetic to his point but pointing out that GE doubled the return on the S&P and then trying to make the case that he was merely in the right place at the right time for a global bull market seems odd.
I think the argument is that he cut out the interior walls and burned em for extra heat.
For his sake I hope the afterlife doesn't do stack ranking though the irony appeals to me.
Pretty ironic that he later came to call maximizing shareholder value "the dumbest idea in the world."
https://www.forbes.com/sites/stevedenning/2011/11/28/maximiz...
https://www.forbes.com/sites/stevedenning/2011/11/28/maximiz...
I worked at GE during his tenure.
We used to call him "Neutron Jack," because after he was done, the buildings were still there, but all the people were gone.
He used to visit corporate sites in a $20-million-dollar helicopter. Quite a sight...
We used to call him "Neutron Jack," because after he was done, the buildings were still there, but all the people were gone.
He used to visit corporate sites in a $20-million-dollar helicopter. Quite a sight...
What a truly horrible human being to do that to his fellow men.
I am skeptical of this article.
Paragraph 5: GE beat the market by 2x over Welch's career.
Paragraph 6: The market is the reason Welch's track record looks so good.
Paragraph 5: GE beat the market by 2x over Welch's career.
Paragraph 6: The market is the reason Welch's track record looks so good.
I think to be able to understand the article's point one has to take for granted that the opinion of the stock market is not gospel.
Cloudflare DNS resolution error...
The actual link is https://www.bloomberg.com/opinion/articles/2020-03-02/ge-s-j... .
> DNS resolution error.
archive.is has a beef with some DNS resolvers:
https://jarv.is/notes/cloudflare-dns-archive-is-blocked/
archive.is has a beef with some DNS resolvers:
https://jarv.is/notes/cloudflare-dns-archive-is-blocked/
Works for me.
A very thought-provoking read, in fact.
A very thought-provoking read, in fact.
He’s like a human paperclip maximizer..
Blocked by Cisco Umbrella.
Same here, what's the deal with that
archive.{is,today,fo,li,vn,md,ph} allows arbitrary content, which means that most corporate firewalls will block it as a matter of principle, assuming you're using the MITM part of Umbrella.
I'm a pretty big fan of "don't hate the player hate the game" - it's too easy to look from outside and say X person failed society. With business, we love to hate on those who have extracted so much wealth for a few, yet modern capitalism is built on these tenants. If we went to prevent inexperienced, philosophically devoid people from running amuck, we need to focus on re-building the system, not vilifying those that utilize it. Many of these issues started with Dodge vs Ford [1] - yet I rarely hear folks talk about it.
[1] https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
[1] https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.
The article is about how he changed the game.
There was plenty of ruthless capitalism before he showed up. He just pushed it to be more ruthless.
De mortuis nil nisi bene.
Yeah, no. That's way too easy of an out.
He did bad things. His reputation continues to influence commerce to this day. He doesn't get a free pass on the harm he caused simply because he's checked out.
He did bad things. His reputation continues to influence commerce to this day. He doesn't get a free pass on the harm he caused simply because he's checked out.
Yeah, but was he an evil person or a product of a flawed system?
It seems to me there would always be a Jack Welch, albeit one of a different name.
It seems to me there would always be a Jack Welch, albeit one of a different name.
It means, the dead person can not defend, so critic should be fair.
Or, as he might have said, "Free Country".
I'm not an economist or anything, but isn't this article really just a complaint against pure capitalism? Jack played the game and played it well. I wouldn't vilify someone because of that. Blame the system and then propose something better.
There was something better, mid century regulated corporate business stewardship. But Walsh and his acolytes pillaged it like a barbarian horde falling on a dignified gallery.
For all his faults, and he had many - from infidelity, focus on manager/corporate rankings instead of absolute performance, allowing accounting shenanigans that still haunt GE etc, wasn't Jack Welch was a product of the period in which he ran GE?
His ability to manage a behemoth of GE's size during the globalization push that resulted in the death of so many industrial companies during that same period is undeniable.
His ability to manage a behemoth of GE's size during the globalization push that resulted in the death of so many industrial companies during that same period is undeniable.
A product of the period? It was the leaders of the time that produced the period.
Whether he was a symptom or a root cause, I think the disease is correctly identified.
I don't think he is to be blamed on that. What happened for GE/IBM/Boeing is just the symptom.
After all the deindustrialization process had been going on for decades, and naturally the only way to keep the company afloat is to cut cost or "financializate" everything.
The real questions are:
1 - Why there weren't enough people who were interested in STEM?
2 - Why didn't the government (and the voters) do anything useful about this situation?
After all the deindustrialization process had been going on for decades, and naturally the only way to keep the company afloat is to cut cost or "financializate" everything.
The real questions are:
1 - Why there weren't enough people who were interested in STEM?
2 - Why didn't the government (and the voters) do anything useful about this situation?
1. When the culture celebrates rapacious capitalism, rugged individualism, and financialization of the economy as right and just, people are drawn along by the current. No one lives in a vacuum despite what the prevailing voices would have you believe. It is no wonder that many talented scientists went (and still go) to investment banks, when this behavior is congratulated and voices of admonishment are minimized.
2. Vietnam, Nixon, Reagan, Bush...the list continues. When Jimmy Carter warned the country people lost faith in him because his statements didn't make them "feel good". This was also the era in which corporate money began to flow almost unrestrictedly into government in the form of lobbying and campaign contributions. As Upton Sinclair rightly put it: "It is hard to get a man to understand something when his paycheck depends on him not understanding it."
2. Vietnam, Nixon, Reagan, Bush...the list continues. When Jimmy Carter warned the country people lost faith in him because his statements didn't make them "feel good". This was also the era in which corporate money began to flow almost unrestrictedly into government in the form of lobbying and campaign contributions. As Upton Sinclair rightly put it: "It is hard to get a man to understand something when his paycheck depends on him not understanding it."
Yeah that's exactly what I have in my mind.
It's fine to add links to workaround URLs in the thread.