Photo: Wikimedia Commons

Jack Welch, the legendary chief executive of General Electric between 1981 and 2001, recently passed away. As he had been hailed as the “manager of the century” by Fortune magazine in 1999, I was wondering about his  legacy in corporate management practice that might continue to be relevant. I was particularly interested because I met him for  a business discussion.

His reputation was built on his transformation of GE, an old-line, low-growth manufacturing company, into a big-growth company that grew its public value from US$14 billion to $440 billion and reached  annual revenues of about $130 billion. It became one of the world’s most valuable companies.

The remarkable fact was that earnings and profits grew steadily each quarter over the years. Since investors love predictable-growth companies, GE stock became the gold standard of the market. 

In 1999 Fortune called Welch the “manager of the century.” Would that still be an appropriate description – with benefit of hindsight? 

He was not shy about his style that many people found too aggressive but he delivered results that were widely admired. His objective was consistent growth of revenues and profits. Welch attributed his success to a management process that included setting a very high standard for product quality, focusing the business units on being No 1 or 2 in their markets and a very demanding management process that rewarded highly the top performers but fired the bottom 10% of the managers each year.

As a friend who had worked at GE noted that the pressure on management to meet quarterly revenue and profit goals was immense, and that is how he achieved his performance targets. Heroes could be short-term – a bad year would be terminal. Business-unit managers who failed to meet strict objectives knew their fate. Welch was not slow in informing them and with an amazing focus on numbers, nothing escaped his attention.

Welch used two basic levers in growing the company. The first lever centered on upgrading the GE industrIal businesses, where he sold off those that did not meet the market leadership test and replaced them with better acquired businesses. This was largely successful.

The second lever that worked while he was at GE, but failed later, was building financial-service businesses such as equipment leasing. Such businesses require big low-cost capital sources, and to that end GE borrowed a great deal of short-term money to fund long-term customer commitments. In 2000, the company had finance-business revenues of about $60 billion and short-term debt of $200 billion. 

This strategy proved disastrous after Welch retired because big short-term debt made the company vulnerable to financial-crisis situations when lessors defaulted, such those of 2008. His successor as CEO was forced eventually to exit GE Capital at great loss and put the company in a distress mode. Today, GE is back being an industrial-product company after having undergone a nearly catastrophic change caused by Welch’s financial-industry strategy.

I met Welch in the company’s Schenectady, New York, headquarters. The first thing that impressed me was the eerie silence in empty offices. The facility was built many years earlier to hold a large corporate staff. Welch had fired a large number of employees along his dictum that bureaucracy was detrimental to company operations. 

I was impressed with his depth of knowledge and curiosity. He opened the meeting by asking about the RCA research management style. He was well aware of some of the accomplishments of the lab, including the invention of color television and pioneering work in CMOS (complementary metal oxide semiconductors) for chips and lasers for communications. 

He asked about the budgeting process. When I mentioned that the budget had come from corporate funds (not divisional funding), he voiced his strong opinion that scientists and engineers working on independent research are likely to waste money and work on the wrong things. He believed that research and development projects must be directed by divisional management.

At GE such funding was half from corporate funds and half from divisional  funds. In effect, the GE Laboratories only worked on projects with fairly short-term payback. When I mentioned my experience of breakthroughs coming from researchers given freedom to follow their ideas, Welch just shook his head. He just did not trust such people to be productive. 

In concluding the meeting I asked him what he thought was the single most important thing that he did that contributed to his success at GE. “Building sophisticated digital financial systems,” he said, because they allowed him to control operations closely and evaluate management performance.

And indeed, using contractors, GE implemented information technology that gave Welch close control of operating parameters. He had a remarkable mastery of operating details and ability to monitor operating conditions at a time when many businesses were still heavily reliant on manual systems. 

There was a happy ending for the Sarnoff Corporation. Welch kept his promise, and at the end of five years the company became self-sufficient with revenues of about $100 million. I served as chairman of its board of directors for some time.

Back to our question – did Welch leave a lasting legacy?

His focus on sophisticated digital fInancial controls was relatively early and is now standard practice. His tough management style proved to work for him but not for his successors at GE, and I have yet to meet CEOs who take pride in firing 10% of their managers annually. There are better ways of motivating creative management.

There was another big defect in his management style. As became clear in my discussion with him, he did not appreciate the need for major innovations at GE. The once famous GE Laboratories became development facilities, without the freedom to experiment in high-risk but high-reward projects. Welch was a consolidator, not an innovative leader.

Finally, the highlight of his work at GE was transforming the company into a financial business using short-term debt. This eventually led to a disastrous condition that required US government intervention to save GE. 

So – no. Welch was not the “manager of the century.” 

Dr Henry Kressel is a technologist, inventor and long-term Warburg Pincus private equity investor. Among his technological achievements is the pioneering of the modern semiconductor laser device that enables modern communications systems. He is co-author with Norman Winarsky of If You Want to Change the World: A Guide to Creating, Building and Sustaining Breakthrough Ventures (Harvard Business Review Press, 2015).