Welch rues short-term profit obsession
By Francesco Guerrera in New York
Jack Welch, who is regarded as father of the shareholder value movement, has said the obsession with short-term profits and share price gains that has dominated the corporate world for over 20 years was a dumb idea.
In an interview for the Financial Times series on the future of capitalism, the former General Electric chief said the emphasis by executives and investors on shareholder value since he spelt it out in a speech in 1981 was misplaced.
Mr Welch, whose stellar record in his two decades at GE helped make shareholder value popular, said that it was wrong for managers and investors to set consistent earnings growth and steady share price increases as their overarching goal.
On the face of it, shareholder value is the dumbest idea in the world, he said. Shareholder value is a result, not a strategy...your main constituencies are your employees, your customers and your products.
Mr Welch spoke at the weekend, before Thursdays news that GE, which he left in 2001, had been downgraded by Standard & Poors, losing the pristine triple A rating it had held since 1956.
Mr Welchs comments on shareholder value come as the credit crisis and the global economic slowdown have caused a radical rethinking of many of the corporate and financial beliefs that held sway over the past few decades.
In a similar shift, Alan Greenspan, the former chairman of the Federal Reserve and a high priest of laissez-faire capitalism, told the FT last month the US might have to nationalise some banks on a temporary basis to fix the financial system.
The birth of the shareholder value movement is commonly traced to a speech Mr Welch gave at New Yorks Pierre hotel in 1981, shortly after taking the helm at GE.
In the speech, entitled Growing Fast in a Slow-Growth Economy, Mr Welch outlined his beliefs in selling underperforming businesses and aggressively cutting costs in order to deliver consistent profit rises that would outstrip global economic growth.
GE, he told analysts then, will be the locomotive pulling the GNP, not the caboose following it, according to reports of the speech.
Mr Welch said last week he never meant to suggest that setting, and meeting, profit expectations quarter after quarter in an effort to boost a companys share price should be the main goal of corporate executives.
It is a dumb idea, he said. The idea that shareholder value is a strategy is insane. It is the product of your combined efforts - from the management to the employees.
However, GEs success under Mr Welch - during his tenure, the conglomerates market capitalisation rose from $13bn to $400bn while profits grew tenfold to almost $14 billion - prompted many executives to place greater emphasis on shareholder value. Many fund managers also backed concept because they are judged on a quarterly basis.
Asked to comment about recent remarks by Jeff Immelt, his successor at GE, that anybody could run a business in the 1990s. A dog could have run a business, Mr Welch said he agreed with the concept because economic conditions were better.
It was an easier time to be a CEO in the 1990s, he said.The wind was on our backs. Up until 2007, this was easy. Now, it is really difficult. Mr Welch declined to comment further on GE.
