The Financial Times recently ran an article on the front page (if you still read news printed on actual paper) implying that Jack Welch has had an epiphany which has reversed his thinking over the last 30 years. This received a lot of attention in the mainstream financial media.
The author, Francesco Guerrera states, “Jack Welch, who is regarded as the father of the ’shareholder value’ movement that has dominated the corporate world for more than 20 years, has said it was ‘a dumb idea’ for executives to focus so heavily on quarterly profits and share price gains. “ Guerrera continues, “His comments, made in an interview for the FT’s series on the future of capitalism, come as the economic crisis has caused a radical rethinking by many leading executives and policymakers.”
Full disclosure – I am a fan of Jack Welch. I realize that this may be tragically un-hip, but to me his approach to business is plain common sense coupled with a relentless focus on execution. So, I was certainly intrigued to hear about Jack’s epiphany.
In the article, Guerrera adds, ” The birth of the shareholder value movement is commonly traced to a speech that Mr. Welch gave at New York’s Pierre hotel in 1981, shortly after taking the helm at GE. ”
So, I decided to go back to this speech to see how the association was made. I was unable to locate a copy of the speech online, but it can be found in the appendix of “Straight from the Gut,” by Jack Welch.
In the speech, Welch begins by saying that it would be pointless to try to describe the initiatives of GE’s various businesses under “an all-inclusive, all-GE, central strategy – one grand scheme.”
This makes sense to me – the strategy for a low-cost provider can’t possibly be described under the same umbrella as the strategy for a high-value business. So, he chose instead to talk about a “central idea” that could be applied across the company. That idea was simple – the insistence on being number one or number two in a market.
This central idea came with a set of three values. States Welch, “Around this tangible central idea we will wrap these intangible central values – unifying dominant themes … One we’ve termed reality, a second we call quality/excellence, and third, the human element.”
What he meant by reality was the idea that people need to see the world as it is, not as they wish. Quality/excellence refers to the idea that everyone in the company should be striving to be proud of every product and service they provide. And the human resource element refers to “an atmosphere where people dare to try new things – where people feel assured in knowing that only the limits of their creativity and drive … will be the ceiling on far and fast they move.”
He concludes by stating that GE will grow faster than the economy. Welch says, “For those of you who like in some way to associate GE and the GNP, if anything we will be a locomotive pulling the GNP, not a caboose following it.”
Nowhere in the speech does Welch state that the CEO’s only focus should be on shareholder value, quarterly profits, or share price gains.
His focus is on market leadership, differentiation, quality, building great teams and growing faster than the economy.
On his blog, Welch says, “The article also noted that I never mentioned the term ’shareholder value’ in that particular speech. In fact, that speech was all about a long-term strategy for General Electric and how the company was going to operate over the next twenty years. Somehow, that speech got spun in the FT article to equate short-term earnings and shareholder value. That I just don’t get.”
I don’t get it either.
In the FT article, Welch did say that it was ‘a dumb idea’ for executives to focus so heavily on quarterly profits and share price gains. So what did he mean? I had the good fortune to be able to attend a class presented by Jack Welch recently. During one session, he said that any schmuck (I’m pretty sure he used that exact term) can manage for the short term or the long term. A good manager does both.
So, focusing purely on short term profits and share price is a dumb idea. Shareholder value is not a strategy.
And from what I can tell, Jack Welch has never said anything different.