“Pride proceedeth the fall.” — Proverbs 16:18
In the beginning of the new millennium, the 21st century, he was the toast of the town. He took a sleepy corporation and made it the most valuable company in the world, with a stock valuation exceeding $600 billion.
The stock increased at an annual rate of 21% during the two decades of his tenure.
He was named the “CEO of the Century,” and his picture appeared on the cover of books and all the major magazines, including The Economist, Newsweek, Fortune, Business Week and Success.
Harvard Business School deified him. And Donald Trump called him “probably the greatest corporate leader in history of a major company.”
He was in many ways the first CEO celebrity, as he played golf with presidents, mingled with movie stars and appeared on The Tonight Show.
This legendary CEO retired with the highest retirement package ever, and at one point, was on the Forbes 400 Richest People in America list.
What is his name? It was Jack Welch, the chairman and chief executive of General Electric (GE).
The Rest of the Story
It’s all been downhill since he retired in 2001. The publication date of his memoir, “Straight from the Gut,” should have been a portend: September 11, 2001. (He had to cancel his book tour.) His morals were questioned after he had an affair with a reporter, resulting in a nasty divorce.
It turned out that the new GE that Jack Built was a house of cards. Through aggressive mergers and acquisitions, he took an industrial manufacturer and converted it into an unwieldy, overleveraged conglomerate. Who would have thought that a company known for manufacturing electric turbines would end up owning insurance companies, commercial banks and communications companies like NBC?
GE was out of control and its management was accused of accounting shenanigans and bad investments. The stock price never returned to its high when Jack Welch left the company (2000), as it is currently down 87% from that. The last original member of the Dow Jones Industrial Average was dropped from the blue-chip index in June 2018.
A new book detailing the rise and fall of Jack Welch and GE has just been published.
“The Man Who Broke Capitalism: How Jack Welch Guttered the Heartland and Crushed the Soul of Corporate America — and How to Undo His Legacy” was written by New York Times business reporter David Gilles and published by Simon & Schuster.
It’s a scathing critique of Jack Welch’s 20-year career at GE and explains that he emphasized short-termism, created a conglomerate with the goal of achieving #1 or #2 in each sector, fudged the numbers, offered stock options and huge rewards to CEOs and devalued workers by laying off the bottom 10% of the company’s employees every year. Welch believed in a dog-eat-dog world of Darwinian capitalism.
Who is to Blame?
Unfortunately, Gilles missed the mark when he blames free-market economists Friedrich Hayek and Milton Friedman for providing the philosophy behind Welch’s ruthless business model.
Gilles claims, “In their view, companies ought to maximize profits for shareholders at any cost, markets should be free, governments should stay out of the way and the rest of the society ought to take care of itself.” (pp. 4-5).
He goes on to say, “Competition was the paramount way to organize human activity, they stressed, and it was imperative that people stopped relying on the government — or worse, their employers — to ensure their well-being. Welfare, social safety nets, and excessive protection for workers would inevitably lead to mediocrity and apathy, they believed.” (p. 35)
Apparently, the New York Times reporter is unaware that both Hayek and Friedman supported basic welfare programs to help the poor. Hayek advocated a welfare state in his book “The Constitution of Liberty.” Friedman favored the negative income tax in “Capitalism and Freedom.”
Nor did Hayek and Friedman believe in unfettered capitalism. They were firm advocates of the rule of law and a justice system that ferreted out fraud and deceptive business practices. They would be no fans of Jack Welch.
Ruthless Capitalism vs. Compassionate Capitalism
Jack Welch’s business model was a short-term success but a long-term disaster. I see very little virtue in Jack Welch’s methods. He gave capitalism a bad name.
John Mackey, CEO of Whole Foods Market, is very critical of Welch’s policy of firing the bottom 10% every year. As he said in “Conscious Capitalism,” “We think such a policy is very damaging to workplace morale, because it creates a climate of fear and pits people against each other. Why create an arbitrary 10 percent turnover? If everyone is doing well, everyone should stay.”
Libertarian CEO Charles Koch uses an objective grading system A to C to determine if an employee should be fired or promoted. Only C employees were asked to find employment elsewhere. Koch’s employment policy is a lot better than Welch’s dog-eat-dog Darwinian approach to workers.
What’s amazing to me about Gilles is that he never once writes about the alternative business model offered by John Mackey or Peter Drucker, just to name a few CEOs that do not engage in Welch’s ruthless business philosophy.
At the end of his book, Gilles outlines his wish list: put workers on corporate boards, raise the minimum wage three times the current rate (!), raise taxes on the rich, strengthen antitrust policies and cap executive compensation. It emphasizes mandates/prohibitions and ignores the positive new business models that are being developed in the real world.
Good vs. Bad Capitalism Revealed at FreedomFest
I highly recommend John Mackey’s book “Conscious Capitalism: Liberating the Heroic Spirit of Business.” In 2013, he won the Leonard E. Read Book Award at FreedomFest.
Mark Skousen presents John Mackey the Leonard E. Read Book Award in 2013 for “Conscious Capitalism.”
You can order the paperback version here.
I teach a popular class at Chapman University called “Libertarian CEOs,” using Koch Industries, Whole Foods Market, FedEx, Truist Bank and other case studies of successful companies.
At this year’s FreedomFest, I’m going to do a session on “Is Your Boss Ruthless or Compassionate? How the New Model of Capitalism Can Defeat Socialism and Marxism.” You won’t want to miss it.
John Mackey and Steve Forbes are co-ambassadors at FreedomFest and both of them will be attending and speaking this year. We have over 250 speakers, 180 exhibitors and several thousand attendees — authors, professors, investors, concerned citizens and experts on politics, economics, healthy living, and finance. There’s something for everyone.
As Steve Forbes says, “FreedomFest is where the best ideas are developed. I changed my schedule to attend all three days.”
Three New Speakers at FreedomFest
I am excited to announce three new speakers at this year’s big show at the Mirage Hotel in Vegas, July 13-16: Glenn Beck, Senator Mike Lee and Betsy Devos, the former secretary of education.
Plus, there will be dozens of debates and the Anthem film festival. It is truly “the greatest libertarian show on earth.”
Hurry, our room block at the Mirage Hotel & Casino is almost full, and the Treasure Island hotel next door is filling up fast.
You Nailed It!
The New York Times Rejects Mandatory Mask-Wearing to Fight the Virus
“It is simultaneously true that masks work and mask mandates do not work.” — Dr. Shira Doron, epidemiologist, Tufts Medical Center
Last week, The New York Times finally admitted that mask mandates are not the answer in response to the COVID-19 pandemic. You can read the story here.
The wearing of masks has been controversial. It may indeed reduce the chances of getting the virus, but it also has had unintended consequences. As the Times states, “Masks hinder communication, fog glasses and can be uncomfortable. There is a reason that children and airline passengers have broken out in applause when told they can take off their masks.”
Moreover, the Times states, “The evidence suggests that broad mask mandates have not done much to reduce COVID caseloads over the past two years.”
The solution is to let people decide themselves whether to wear masks or not. The Times calls it “one way masking.” The article goes on to say, “Fortunately, the scientific evidence points to a reasonable compromise. Because masks work and mandates often don’t, people can make their own decisions. Anybody who wants to wear a snug, high-quality mask can do so and will be less likely to contract COVID.”
I have always preferred persuasion over force and choice over mandates when it comes to changing behavior. As I say, “The triumph of persuasion over force is the sign of a civilized society.” See “Persuasion vs. Force” here.