THE MOST INFLUENTIAL CEO of the twentieth century was born in the middle of the Great Depression, the son of a railroad conductor and a homemaker, neither of whom had finished high school. During the long hours when his father was away, working the trains on the Boston & Maine Railroad, the slightly built boy, John Francis Welch Jr., formed a deep bond with his sharp-tongued, ambitious mother.
It was from Grace Welch that the boy Jack picked up what would become a favorite phrase: “Don’t kid yourself,” she would bark. “That’s the way it is.”
Grace Welch taught her child self-confidence with the same style he would use as he embarked on a career in business. There were cutthroat card games at home and withering public dressing-downs, like the time she berated him in front of his school teammates for his poor sportsmanship. The result was a child brimming with self-assurance, trained for boldness, and spoiling for a chance to prove his abilities to those who might have doubted him. The small but highly competitive child ultimately became the captain of his high school ice hockey team in Salem, Massachusetts. With Grace’s ever-vigilant eye on his studies, he graduated from high school and headed off to the University of Massachusetts at Amherst to study chemical engineering. The boy kept pushing and driving, earning a master’s degree and a PhD in the same field at the University of Illinois.
He was not interested, however, in an academic career. Grace Welch’s terrier of a son would go into business. He was determined to make a name for himself and to make some money. In 1960, Jack Welch was hired by the Plastics division of General Electric Company.
Welch spoke in animated bursts, his voice high-pitched, raspy, and accented by his New England blue-collar roots. Although he had fought a persistent stammer since childhood, he brought the locker room bravado that had served him in Salem into the corporate world. For Jack, the world was divided into winners and everyone else. Confrontation was his steady state. Outside of work, he kept the macho sense of competition boiling with nonstop sports banter, golf, hard drinking, and the unending ribbing of both colleagues and rivals.
Jack Welch had a fiery soul that filled the room; former executives remembered how his blue eyes could pierce through a crowd when he had something important to say. One GE executive described him as “radiating noise and energy like a thundercloud.” Doctorate notwithstanding, he was always known simply as Jack.
From the outset, Welch carried himself with a swagger that could tilt over into bombast. Even well into his two-decade scramble up GE’s corporate ladder, Welch’s genius for leadership wasn’t always recognized by everyone. When then-CEO Reg Jones asked for a list of possible successors in the late 1970s, he was given a list that didn’t even include Welch.
Jones was the quintessential CEO in the traditional GE image: a lean, highly admired Englishman who was twice asked to join President Jimmy Carter’s cabinet. Jones was modest to the point of self-effacing. According to company lore, he had once introduced himself so circumspectly to the mayor of the city of Bridgeport, which adjoined suburban Fairfield, where Jones had moved the headquarters from New York City, that the mayor had at first thought that Jones was the manager in charge of a local Connecticut office. When Jones gently clarified, the mayor exclaimed, “You run the whole fucking company?!”
Welch, a young man in a hurry even by GE standards, had left no one with an impression that he was less important than he was. Style aside, Jones was impressed with Welch’s strategic planning, even if he lacked the polish and reserve of a typical “GE guy.” The CEO added Welch to the succession short list himself.
The company’s shares performed miserably under Jones, but he was still considered one of America’s leading business executives, both of GE and of his era. GE’s stock woes were largely explained away as stemming from macroeconomic forces outside the company’s control. What was well within the company’s power, however, was solid. GE’s revenue and profits more than doubled during Jones’s nine years as chief executive, and amid the broader economic turmoil of the late 1970s, the company maintained its steady dividend and huge base of individual stockholders.
Meanwhile, the perpetually driving Welch continued to progress upward through the executive ranks. Jones had first encountered Welch after the young man left Plastics to join GE’s strategic planning operations, a team at headquarters that laid out multiyear plans for business development, acquisitions, and streamlining of the company’s portfolio. (The unit was the pride of Jones’s operation, but Welch found it stifling.) From the planning office, Welch was promoted again, to run GE’s consumer products business, churning out radios and toasters for the American mass market.
The consumer products job turned out to be only a stepping-stone. In just twenty years, Jack Welch was named the ninth chief executive officer in the history of GE.
When he got the top job, Welch was intent on eliminating bureaucracy in order to reduce excess costs. Welch was implementing and expounding the corporate philosophies that would define the 1980s and ’90s and make him a corporate celebrity. Welch’s core mission was to attack complexity, ripping out layers of bureaucracy that had built up inside the company and making the massive company more nimble. Welch would do his best to kill anything that slowed GE down.
Strategy meetings and reviews in the pre-Welch years were structured, daylong affairs, dominated by huge binders and projections for the next two decades, one GE executive recalled. Welch saw these as hopelessly lumbering exercises in a fast-changing economy that required constant updating, refining, and shifting the portfolio of businesses, products, and people. Executives like Jones had seen five-year plans for industrial businesses as conservative and essential planning tools, given the amount of investment required to develop new products and bring them to market. Welch called them “bullshit.”
Welch shunned the extensive planning and shrank the team. He pushed decision-making down to the individual businesses but kept a sharp eye on the specifics of each operation. He pushed middle managers to stop writing long memos and to lose their thick planning books. “I don’t want planning. I want plans,” he would say. Welch’s defenders said that he had an uncanny ability to marshal detailed information from deep within GE’s business lines, even as he kept an eye on the larger forces that were changing the face of global business, like outsourcing, trade policy, and the rise of Japan.
Executive teams were tasked with finding and removing layers of management. During one visit to the GE Aviation facility in Lynn, Massachusetts, Welch chatted with workers in the plant’s boiler room, where he learned that the operation of the boiler room was supervised by four layers of management, a shocking discovery. That was just the sort of complexity that Welch was determined to carve out of the company.
He proselytized the new GE religion: every business should be either first or second among its competitors. Welch sold major businesses that had been central to GE’s history, putting an end to the era of GE selling TVs and toasters. And he moved aggressively into new fields in search of profits, including a $6.5 billion acquisition of RCA Corporation, owner of NBC, in 1986.
The RCA deal was a huge dive into the media world that would be almost unthinkable today. The benefit of owning companies in disparate businesses would have been questioned in any era, because of the divergent skills required to churn out heavy-duty machinery in one unit and top television sitcoms in another. That diversity is even less favored today, thanks to the rise of activist investors and Wall Street’s general consensus that focused businesses have higher value.
The shares of conglomerates inherently trade at a discount off the sum of their individual units, but the company’s diverse set of businesses and better access to capital theoretically offer protection from volatility. In the age of cheap online trades, managed funds, and index funds, however, the so-called conglomerate discount is no longer worth it.
Under Welch, GE was changing rapidly. He famously gave a speech in his first year as CEO titled “Growing Fast in a Slow-Growth Economy.” With the power of the GE brand providing credibility to his strategy, the new CEO oversaw almost one thousand acquisitions, or about four deals a month over his two decades, with a value topping $130 billion.
By 1985, with only five years on the job, Welch had spent more than $8 billion to overhaul factories for robotics and automation. He had also seized on an important new source of profit: the financial services unit then known as GE Credit Corporation. Welch spent $10 billion at GECC, buying up property and business equipment that GECC then leased out to other companies.
It was the beginning of the assembly of one of the greatest profit engines in the history of the company, a vast portfolio of business units and properties all designed to use GE’s immense, solid balance sheet not just to finance goods so its customers could buy them but to pursue financial profits for their own sake. Welch’s greatest innovation, as great as his much-advertised embrace of management training and efficiency, was this embrace of finance. It would change the makeup of the company and alter its fate. By 1985, financial services made up one-sixth of GE’s annual profits—a marked jump from when Welch first took the reins and financial services accounted for about 7 percent of GE’s profits, the same level it had stayed at for much of the 1970s. As early as the mid-1980s, GE’s lending operation had become as large as some of the largest US financial services firms.
At its height, GE Capital produced more than half of GE’s total profits. The most famous industrial company in America had essentially become one of its largest and most inscrutable banks.
To Welch and his acolytes, the proof of his methods’ glorious success was in the numbers. But the glory came at great human cost. Welch famously slashed jobs wherever possible, which created tension in a company where many workers had assumed for years that they would be GE employees for life. He slashed more than 100,000 jobs in the 1980s, one-fourth of the entire workforce of General Electric, and he moved tens of thousands of other jobs overseas, where there were no unions and labor was cheap. Critics questioned whether Welch had any other management strategy than slashing costs and worried about the fallout from the dismal employee morale.
Unions and other opponents started calling him “Neutron Jack” because he removed the people while the buildings were left standing. Welch hated the nickname, but over the years, despite his fame as a CEO, that nickname has stuck to him.
Another famous and controversial tactic—often called “rank-and-yank”—forced managers to come up with an annual ranking of the performance of their workers. The bottom 10 percent would be put on notice, and if they didn’t improve, they were fired. The constant pressure from this kind of tactic only added to employee tension.
Rank-and-yank worked well for GE’s acquisitions, providing a formula for trimming fat and squeezing profits out of the operations. But some managers didn’t see it as helpful, especially after it had been used for a few years and some competent employees were ending up in the bottom 10 percent. You can trim fat only for so long. Also, some thought that the policy made workers fight each other for survival and inhibited managers’ ability to bring their workers together to operate as a team for the good of the company. One manager tried to subvert the system by putting an employee who’d recently died in the bottom 10 percent of the ranking list in order to save another employee’s job.
The company depended on its workforce as a competitive advantage, Welch argued, and keeping performance in line was an unending struggle. The GE management machine had effectively institutionalized a way for managers to overcome the natural reluctance of employees to improve on poor performance.
All of this made Wall Street happy. GE’s stock soared under Welch right from the beginning and would split five times in his time as CEO. Unlike Jones before him and Immelt after, Welch was leading GE into one of the biggest business booms in history.
Some of Welch’s critics see the country’s economic prosperity as the major reason for his strategy’s success. His supporters scoff at this, giving Welch full credit for GE’s booming decade, and some even argue that GE’s success actually fueled the concurrent expansion.
Workers came around to liking Welch for good reason: the stock kept rising. From 1980 to 2000, GE’s earnings rose to $12.7 billion from $1.5 billion, while revenue more than quintupled, rising to $129.9 billion. The stock price rose more than forty times its value in the period.
Around him, the conglomerates of Welch’s youth were collapsing, falling out of favor not just with investors but with the broader movements in American culture. The old behemoths of the 1960s and ’70s were seen as unwieldy, even arrogant, in their composition, which was too broad, too slow, and too big.
GE managed to thrive in a world where its peers couldn’t survive. Giant conglomerates, like GE’s historical rival Westinghouse Corporation, were fading away, and others, like AT&T, were under siege by increased competition or government regulation. GE’s success only reinforced its dogma: it was the exception to the rule because of its people, culture, and tradition. The idea of breaking up GE in the Welch years was mostly seen as absurd. As long as GE could continue its long trend of hitting earnings targets and beating expectations, the company and Welch would operate with an unofficial exemption from the law of the marketplace: the right to be the last of the great old conglomerates.
Welch’s returns also helped investors look past the Welch-era entanglements that didn’t fit with GE’s self-congratulatory narratives. The negative revelations began in the 1980s. Those black eyes included GE’s 1985 guilty plea to the charge of submitting time cards for too much overtime on government contracts and a 1994 bond-trading scandal at Kidder Peabody & Company, the investment banking firm GE had acquired to boost its financial business.
Under Welch, the company was also beginning to confront ugly legacies of the past, especially the pollution it had left behind over the decades at its factories. Years of environmental activism had finally yielded laws and regulations that would require major polluters like GE to begin figuring out how to carry out massive environmental restoration projects—and preparing to pay for them.
Welch fought this work bitterly, saving a special measure of scorn for the US Environmental Protection Agency (EPA), which was pressing GE to help remove more than a million pounds of polychlorinated biphenyls, or PCBs, that GE had dumped into New York’s Hudson River over the years. The dumping had once been legal, but the chemicals were banned in 1977 and were considered likely to cause cancer by the time Welch took over as CEO. Still, under Welch, the company fought hard to avoid having to pay to dredge the chemicals from the river bottom, whipping up public opposition in the small factory towns along the Hudson where the dredging would occur. Welch was livid, and he challenged the notion that the chemicals were even harmful. Either way, he insisted, the rushing current of the Hudson was strong enough that the river would clean itself.
Welch became a brand of his own as Wall Street, and to some extent even Main Street, swooned before his success and the style that brought it. He became famous for his straight talk and confrontational approach while encouraging others to bring the same to him. As his career progressed and GE’s stellar performance continued, it became harder to challenge his burning will.
Jack Welch was a bona-fide celebrity. He was treated like a star at shareholder meetings, where he would be asked to autograph the company’s annual reports for adoring investors.
These years birthed the Jack Welch myth. The company’s financial results were presented as proof of Welch’s brilliance and his extraordinary will. They also served as evidence that GE had somehow transformed the day-to-day tasks of managing a business into something resembling a hard science.
By the mid-1990s, GE and Welch were constantly venerated by the media and the financial community, and substantial pushback was rare on almost any front. Critics on Wall Street were aggressively pursued as research and published reports produced scathing formal responses from GE’s investor relations department. Executives from other companies made pilgrimages to GE’s management training center at Crotonville to see firsthand a little of the internal corporate training for which Welch’s company had become famous. Workouts and team-building exercises, merciless dissections of business pitches, beer-soaked, chauvinistic hijinks in the after-hours—all these features of the training helped create a whole generation of leaders forged in Welch’s own image (the favored ones anyway).
The oversight role of the board was minimal. After all, Welch’s meteoric success provided very little for the board to complain about. Being appointed to GE’s board was already seen as a prestigious accomplishment and considered an honor for leaders, business titans, and other powerful people.
The board had largely followed the chairman’s lead. One newcomer to the board under Welch was surprised by the CEO’s command of the boardroom and the sparse debate among the group. Confused by how the meeting transpired, the new director asked a more senior colleague afterward, “What is the role of a GE board member?”
“Applause,” the older director answered.
With a titanic image came ego and overreach. Welch had served nearly twenty years as CEO and was deep into the process of choosing a fitting successor when he rashly decided to delay his retirement and stick around to try to buy Honeywell, a rival industrial company. But this deal was a step too far—Welch’s motivation for the deal was preventing Honeywell’s planned merger with United Technologies, which was a major GE competitor in the jet engine market.
What seemed to Welch a perfect capstone for his tenure struck European regulators as a brash and dangerous consolidation. The Europeans also proved far less susceptible to Welch’s rough charm than the pundits and politicians in the United States. Welch seethed when he learned that this was an impasse he wouldn’t be able to break. Despite GE’s strenuous arguments, EU regulators blocked the deal.
The winds were shifting on Welch. GE’s share price had soared for years, making it, for a time, the world’s most valuable company. But now, in the CEO’s final eighteen months, the share price fell 33 percent. Even as Welch drove a succession process that winnowed the ranks of his possible replacements, a reckoning was coming for the company.
Was the company—was Welch—really worth what they said?
Like his predecessor, Welch started the process to find the next CEO years before he intended to retire. He often said that his legacy would be determined by his successor, so the decision on his replacement was the most important of his career.
He wanted to take a different approach to the hunt. When he was striving get the top job, Welch had been forced to compete in a brutal battle with two other executives while they all worked in GE’s Connecticut headquarters. The candidates were each named a vice chairman of the company, with the understanding that one of them would get the job and the others would remain at the company in their prestigious posts. (One of them, Edward Hood, stayed on as vice chairman with Welch until 1993.)
Jack knew that his top managers were prized throughout the corporate world. In his mind, his top talent was so good that they were better off running other large companies. In some ways, the public battle royal would simply market his best leaders for their next jobs, elevating their stature along with GE’s and Welch’s.
The company put together a list of twenty-four candidates in 1994 and whittled it down over the years. Some of those passed over would have successful careers at other companies, including Dave Cote at Honeywell and Dave Calhoun at Nielsen, Blackstone, and Boeing.
The process involved the board, although Welch was naturally in the driver’s seat. The board, a group who had been handpicked by Welch over the years and seldom offered resistance in the later years of his rule, went to great lengths to conceal the candidates from the public. The directors spent time with all the contenders, both with and without Welch. He worked hard to get the directors exposed to the candidates, setting up golf pairings and arranging events where he meticulously chose the seating himself.
The list was cut to eight by 1997 and then pared down to only three by 2000, when the company signaled who was on its short list by placing chief operating officers, a position that didn’t exist in other GE businesses, under each of the candidates.
The three were Bob Nardelli, who ran the Power business; Jim McNerney, head of jet engines; and the youngest, an ebullient sales whiz who ran GE Healthcare and was widely seen as the front-runner, Jeff Immelt.