The Saga of Neutron Jack - Profit At Any Cost
C R Sridhar
Even in an age as cynical as ours reverence is not dead. But in what is aptly called the age of corporate capitalism, the feeling of reverence finds strange expression: through hagiography, which extols not the virtues of saints but the avarice of business magnates. The media whose task is to keep the hoi polloi in a perpetual state of wonder achieves this by heaping praise on the business gods of corporate America. The pride of place in that pantheon belongs to Jack Welch, who was the CEO of General Electric. On channels such as NBC or CNBC, which GE owned, one can see Welch spinning his views on how to make millions. He looks out at us from the covers of books, grinning wolfishly, and seeming to pity us for being so ordinary. His testament is titled 'Jack: Straight from the Gut.'
Welch presided over the destiny of GE from 1981- 2001. He ruled like a despot and impressed upon GE his style of management, which was blunt, abrasive and brash. He transformed the company into a corporate leviathan. GE has manufacturing plants in thirty-four countries around the world. Besides electrical products and lighting products, GE makes plastics, aircraft engines, locomotives, appliances, giant turbines, and medical diagnostic equipment. The company also offers financial services through GE Capital.
In 1980 GE recorded revenues of roughly $26.8 billion; in 2000 they were nearly $130 billion. When Welch took over, the stock market judged the company to be worth about $14 billion. In 2001 it was roughly $490 billion, making it the most valuable one in the world. Welch pushed the price of GE stock up more than 1000 percent from 1982 to 1997.1 These results left Wall Street gasping with admiration. The New York Times, Time and Fortune have lionized Jack Welch, referring to him as Business Hero of All Time, Businessman of the Era, Businessman of the Millennium. In Ivy League business schools his methods are discussed in hushed tones. The canonization of Jack Welch seems complete.
Was there a dark side to Saint Jack? This is the question that Thomas F. O'Boyle answers unequivocally in At Any Cost. Carefully researched and masterfully written, the book is a savage indictment of predatory Capitalism and of the values that Welch represented. His ruthless drive to keep pushing up 'the bottom line' of GE's stock value made him very attractive to Wall Street. His bare-knuckle approach to management, coupled with his obsessive cutting of costs, created stupendous shareholder value. But in the long run Welch was a disaster to the society: his "way of doing business carries with it a heavy penalty," points out O'Boyle, "not necessarily for him or stockholders, but for the people who do his bidding and for the government and society, which must often clean up his mess." 2
GE changed the quality of life for Americans: it brought good things to life, as the jingle says. The company was socially responsible: the advertised claim that their 'efforts are creating more goods for more people at less cost, but also more and better jobs at higher wages' was not misleading. GE products were built to last, and the company had always adhered to high standards of quality control. When Welch took over he soon changed the priorities: GE neglected research, engineering, and manufacturing, and began to concentrate more on financial services, as the returns were more dramatic there. This was dictated by the need to pander to Wall Street, which is obsessed with quarterly earnings, and treats stock value as the sole measure of corporate success.
The personality of Welch mirrored the era of financial manipulation. Exceedingly vain, ambitious and autocratic, he pursued a career of profit making to the exclusion of everything else. Loyalty, trust and tradition were only for the weak. His intellectual mentors were Karl Von Clausewitz and Helmuth Von Molkte, the Prussian military theorists who advanced the concept of total war.3 Business operations were conducted like war, with the sole purpose of higher profits. The corporation was besieged with enemies; and the duty of every employee was to make GE the victor over all.
He cut costs by ruthlessly downsizing the workforce. In his zeal to maximize profits Welch would sack employees. He earned the epithet 'Neutron' because he destroyed people while leaving the business intact. The year before Welch became the CEO the company had employed 402,000 people, out of which 2,85,000 were in United States; it had a net profit of $1.5 billion. By 2000 its net profit had swelled to $12.7 billion: but the workforce had been cut to 2,22,000.
The chilling impact was felt most in manufacturing, where GE sold or closed one-third of its plants. The retrenchment policies practiced by Welch to shore up 'the bottom line' were widely admired by other CEO's, and became the way to have a 'lean and mean' company.4 The social impact was cataclysmic. The abrupt and unfair dismissal of GE's employees produced alcoholism, domestic violence, and broken homes. Some after years of dedicated service committed suicide. The pain of such blighted lives does not figure as costs to corporations: but these costs are borne by society.
Questionable Business Methods
Welch's addiction to earnings and the destructive urge to cut costs pushed GE to adopt questionable business methods. One of the biggest scandals to rock the company was the case of Kidder Peabody, the securities firm that lost GE $1 billion before it was sold to Paine Webber in 1994. People who had been held up as model employees were charged with fraud (but finally sanctioned only for negligence and for violating trading norms).5 GE was also involved in paying kickbacks and bribes to General Rami Dotan of the Israeli air force, in order to secure orders for the jet engines. In this case GE pleaded guilty to four charges of felony.6
Between 1985-1992 GE was involved in more instances of fraud, in their dealings with the Pentagon, than any other military contractor: there were fifteen criminal convictions and civil judgments against it.7 GE's synthetic diamond business and the De Beers cartel were indicted for price fixing.8 The fiasco of the ill-fated rotary compressor nearly cost GE its refrigerator business. Hundreds of refrigerators worked badly, leading to widespread customer complaints. GE had to replace the defective compressors at a cost of $450 million dollars. The reason for this debacle was that the testing of the compressor had been hurried through to meet the deadline set by Welch. The dumping of polychlorinated biphenyls into the Hudson River, eventually causing a public health catastrophe, stained GE's reputation: because Welch kept stonewalling the environmental authority's attempts to make the company pay for dredging the poisonous chemical from the river.9
Obsession With Profits
Thomas O'Boyle views Welch's obsession with profit at any cost as part of a larger problem confronting Corporate America: which is debasement of values such as loyalty, compassion, and trust in human relationship. The reduction of the worker to a mere factor of production, to a cog in a machine devoted to profit maximizing, makes downsizing acceptable. The glorification of military values in management theory makes cruelty justifiable as business tactic. This is best exemplified by the publication of books with titles like Attila the Hun and Management, The Art of War for Executives and Machiavelli and Management. The lessons to be gleaned from these books are that moral values are impediments to profit, and that it is a sound tactic to harm the other person before he can harm you.
For Welch the overriding purpose of business enterprise was strife and eternal competition where only the 'lean and mean' would survive. Boyle argues that such attitudes distorted the fine balance between business, stockholders, workers and society: 'a higher purpose, a sense of service toward communities, people, or humankind- none of this was never sincerely articulated or instilled.' This has given rise to the cynical feeling among Americans at large that in big business 'people are valued only for their material worth or usefulness, and are tossed aside when they become a hindrance to those who have power over them.' 10 Work for most people becomes, in the words of Studs Terkel, ' a sort of dying through Monday to Friday'. 11 The price of pursuing profit at any cost is paid by society in the form of alienation and violence.
Boyle sums up thus: "history will eventually set the Welch record straight. Above all, he will be held responsible for GE's multiple misadventures: transgressions in which entire businesses were destroyed and thousands of people lost their jobs. Business historians will come to understand the anxiety and insecurity Welch instilled and how that contributed to a make-money-at-all-costs mentality that was a perfect hothouse for growing calamity. Those historians will wonder why Welch was never held accountable, why tough questions were never asked, why shareholders and directors looked the other way." 12
The phenomenon of Neutron Jack is as inexplicable as the bull market of the nineties, which defied both logic and imagination. Stocks that in 1990 were worth $3 trillion, representing the accretion of two hundred years of trading, saw their value spiral to an unbelievable $15 trillion in a decade. Perhaps Welch should be judged by that financial bubble: maybe Neutron Jack was as overvalued as his stocks.
Note: All references to page numbers in the endnotes are from the book At Any Cost by Thomas F. O'Boyle.
1. Page 11.
2. Page 12.
3. Page 68.
4. From 1987 to 1991 big American corporations lowered their net payroll by 2.4 million workers. The downsizing happened when corporations made huge earnings. The profits went to shareholders and CEO's who gave themselves generous compensation packages.
5. Page 13.
6. Pages 255-276.
7. Page 13.
8. Page 14.
9. Page 378.
10. Page 366.
11. Page 366.
12. Page 12.
The Saga of Neutron Jack - Profit At Any Cost
- » Published on March 18, 2007
- » Type: Opinion
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