The 'Dumbest Idea in the World' Jack Welch, the figurehead of shareholder value, disowns his doctrine - By Karl-Heinz Büschemann
It's almost as if the pope had quit the church: Jack Welch, former head of U.S. engineering giant General Electric (GE), was the foremost prophet of a doctrine that companies around the world have obeyed for the past two decades: shareholder value.
Like Welch, most bosses in America and Europe did all they could to enhance their companies' market value. "Raise the share price" was their rallying cry. But in an interview with The Financial Times in March, Welch struck a different tune. "Strictly speaking, shareholder value is the dumbest idea in the world," he admitted. Could it be that the man once considered the most relentless manager of them all has found wisdom at 73? Is he joining the choir of those who blame the mania for maximizing returns, the blind faith in the rules of Wall Street, as the source of the financial crisis?
Since the crisis hit last year, dissent has been rising against the principle that shareholder value should be a company's top priority. The chase after the highest stock price possible - and executive compensation linked to that price - led many companies right over a cliff.
It is difficult to determine exactly who coined the term "shareholder value." Apparently Welch was already using it in 1981, when he took the top post at GE at age 45 and gave a speech on management in the Pierre Hotel in New York City. Others attribute the term to American economist Alfred Rappaport, whose 1986 book "Creating Shareholder Value" shaped the thoughts and deeds of entire generations of managers, not least in Germany. They quickly found out that nothing drives stock prices up as quickly as mass layoffs.
After more than two decades of managers obsessed with stock price trends, the party on the bourse is over. Exchanges in America have fallen to levels last seen 12 years ago. The world is in the depths of a recession and prosperity is under threat worldwide - good reasons to question the most important commandments for executives.
Anja Tuschke, professor of strategic business management at Munich University, still believes that the concept of shareholder value is sound - the problem is the way it has been implemented. Emphasis on stock prices led managers to think in the short term: They were planning in three-month phases. "That was not good, nor was it welcomed by the proponents of the shareholder value concept," she explained. "Companies that invest attain correspondingly high stock prices in the course of time."
Welch was too impatient to wait that long. The GE boss, who had become a standard-bearer for legions of managers and feared for his ego and his iron fist, subordinated everything to the stock price at GE. His "20-70-10" principle dictated that a company should nurture the top 20 percent of its employees, value the middle 70 percent and weed out the bottom 10 percent, regardless of how well the company was doing. He was called "Neutron Jack," alluding to the dreaded bomb that killed people but left buildings standing. Though allegedly miffed by the unflattering title, his success was vindication enough.
When Welch took the helm at GE in 1981, the company was worth $13 billion. When he stepped down in 2001, its market capitalization was $400 billion. But things went downhill from there: Today, GE shares total $100 billion.
The culture wars over shareholder value raged long and hard in Germany. The term did not become a code of practice for managers until a good 10 years after Rappaport's book appeared on the shelves. It introduced an element of uncertainty to the land of Rhenish capitalism, which relies on harmonious relations between employers and labor. Until the mid-1990s, German stockholders had little clout. "Ultimately, stockholders received only the standard dividend and share prices grew at an unsatisfactory rate compared to other countries," said management consultant Roland Berger in 1996.
Soon, though, CEOs were enthusiastically putting the concept into practice. Jürgen Schrempp, the former head of Daimler-Benz, adopted the doctrine at the established Stuttgart automaker. "Profit, profit, profit" was his foremost management rule. Schrempp's belief in the beneficial powers of the stock market led him to buy out U.S. car manufacturer Chrysler in 1998. The adventure would wipe out more wealth than almost any other managerial decision in German economic history.
Deutsche Telekom CEO Ron Sommer likewise followed Welch's great example, taking the state-owned enterprise public in 1996. Stock fever swept through Germany. But investors soon lost their confidence in the stock market. The "T-Share," for a time worth more than ?100 ($135), tanked. Countless small shareholders lost a bundle.
Josef Ackermann, head of Deutsche Bank and perhaps the leading champion of shareholder value in Germany, demanded a 25 percent return on investment. No DAX-listed company CEO had ever dared to do that in Germany. Ackermann achieved his target for a short time but today the country's biggest bank is happy if it can weather the financial crisis without asking for a government bailout.
As more and more private equity investors took over companies and then squeezed them dry, the shareholder value principle lost its shine in Germany. "Some private equity investors don't lose any sleep over the people whose jobs they destroy," said Franz Müntefering of the SPD in April 2005 when he was German labor minister. "Anonymous and faceless, they descend on companies like a swarm of locusts, strip them and then move on."
Müntefering took plenty of flak for his words but recently, people have been more understanding. As a CEO and later as a columnist, Welch helped craft his own nimbus as a management guru but he is now humble when discussing corporate governance in the financial crisis admitting, "We are sailing in uncharted waters."
- This article originally appeared in the Süddeutsche Zeitung on March 14.