Who broke capitalism?
I recently finished reading "The Man Who Broke Capitalism," a new book by New York Times business reporter David Gelles. The book describes how Jack Welch, while he was CEO of GE in the 80s and 90s, fundamentally changed the way corporations operate. I reached out to Gelles because his book provides essential insights into corporate behavior today. This conversation has been edited for length and clarity. I hope you enjoy it. — Judd
LEGUM: You lay out in the book that Jack Welch introduced a new style of management, which involved financialization (getting out of the business of making stuff and into the business of moving money around), making jobs much more precarious (either by firing people, or making people worried that they might be fired), and a relentless focus on quarterly profits. But you describe how, especially after Welch left, this didn't work out for GE over the long term. And it didn't work out for some other companies that followed Welch's model. But today, Welch's management style continues to be influential. Why do you think, despite the objective failures of this over the long term, Welch's approach to corporate management endures?
GELLES: I think the reason his views hold sway, when, as you say, the evidence over the long term is clear, is that business school students aren’t taught to think about the long term, and our economy isn't set up to incentivize long-term performance. And so what he was able to do at GE undoubtedly worked, as long as he was getting away with it. And then when the music stopped, things started to fall apart. During that time, he got enormously rich, and his deputies got enormously rich. People who were smart enough to invest in the stock and get out at the right time got enormously rich. And there are very few consequences in corporate America for long-term failure. The incentive structures in our economy are simply not set up to really enhance true long-term performance, let alone take care of people or communities.
LEGUM: One of your colleagues, Andrew Ross Sorkin, recently interviewed the CEO of Starbucks, Howard Schultz. Sorkin asked Schultz about Starbucks’ own anti-union efforts. And in response, Schultz said that unions were important in the 40s, 50s, and 60s because people were working in coal mines and companies were abusing their workers. But today companies treat their workers well. That is the exact was the exact opposite thesis of your book. You refer to the 40s, 50s, and 60s as the "golden age" of capitalism where companies had a more equitable relationship with workers.
GELLES: Listen, Howard Schultz talking about coal miners is a classic red herring. The reason that Starbucks baristas are unionizing is because even though Starbucks may pay above the minimum wage, the reality is that most frontline workers in the United States don't make enough money to take care of their families. And the reason that is, is because the minimum wage hasn't kept pace with inflation for the past 40-plus years.
It was definitely true that at big corporations, the Dow and the Fortune 100 in the postwar decades, there was a clear effort to let everyday workers share in the wealth that was created by these companies. I cite the 1953 GE annual report where they're so proud to talk about how this was their biggest payroll in history, and how great that was, and how great it was that they were paying their suppliers so much money, and how great it was even that they were paying their taxes. They were proud to do all these things because there was this implicit understanding that what was good for big companies, could be good for the country, and vice versa. That, obviously, painfully, isn't the world we live in today.
The book covers this transition from, call it the golden age of capitalism, which, of course, was not perfect, to this era of shareholder privacy, where workers are really treated as expendable labor. They're treated as expendable. When Howard Schultz scratches his head and wonders why people want to unionize at Starbucks shops, I encourage him to really do the work of understanding what a Starbucks barista's life is like, and that's probably hard for a billionaire to do. But if he were to do so, I suspect he might come away from that exercise having a bit more empathy for what it's actually like to make less than $20 an hour in this country without the promises of real and enduring job security and steady benefits. It's not a pretty picture.
LEGUM: Your book describes GE’s dominance in the 80s and 90s. Today, many of the most powerful companies are tech companies, like Google, Amazon, and Microsoft. One of the things these companies are famous for is creating these sort of lavish campuses to attract talent. And they are paying their top talent quite a bit of money. Do you still see Welch’s influence in modern tech companies?
GELLES: The answer is unequivocally yes. And you can look at things like stack ranking, which is the process of sorting your employees into A, B, and C players and firing the bottom 10% or so. That was a hallmark of Steve Ballmer’s tenure at Microsoft. Elon Musk, just two weeks ago, said he was having bad vibes about the economy, and so he was gonna fire 10% of his workers because he wanted to reduce labor costs. I see the fingerprints of Jack Welch, right there.
Beyond that, you mentioned the fact that Google pays its senior engineers really well, absolutely. But guess who they don't pay at all? They don't directly employ their security guards, or their janitors, or their bus drivers, or their food service workers. And that's the legacy of Welch as well, he was the one who really embraced domestic outsourcing for all of these jobs that used to be kept in-house. And that, of course, had the effect of taking millions of people off the payrolls of these major American corporations that were great, reliable employers and putting them onto the payrolls of contractors, making them essentially service workers who enjoy substantially lower hourly salaries and substantially worse benefits.
LEGUM: I was really interested when you started talking about the Business Roundtable, and the Chamber of Commerce because it's something that we talk a lot about in Popular Information. And you reference the Business Roundtable’s 2019 statement where they formally reject the idea of shareholder-driven capitalism. The statement says shareholders are just one of many stakeholders that the corporation should serve. But since then the Business Roundtable has vehemently opposed any increase in corporate taxes, even if those increases would fund efforts to address climate change or provide benefits to their employees. Do see any Fortune 500 corporations that are fundamentally changing course?
GELLES: It's hard for me not to conclude that a lot of the stakeholder capitalism rhetoric is totally performative. I think it's true that when you talk to CEOs, they're singing a different tune today than they were five or seven or 10 years ago. There's definitely increased dialogue about some of these issues, notably, employee pay and benefits, and the overall carbon footprint of the corporation. But, as you said, on so many of these real fundamental issues, we're still light years away from meaningful progress. It’s going to be a generational project to move things back in the other direction.
When I see the Business Roundtable statement and I see the stakeholder capitalism rhetoric, it strikes me as the beginnings of a conversation that could potentially make room for some real reforms. But the talk itself is obviously empty rhetoric unless big companies actually change the way, not only they operate, but the way they incentivize decision-making.
The CEOs are not motivated to change the system. They have assumed such enormous power over our economy. After talking with CEOs for the last decade or more [as a reporter at the New York Times], there's a change in tone in recent years, but we're still light years away from a real change in substance.
LEGUM: Amazon has started the Climate Pledge. There's the Climate Pledge Arena, and they're recruiting other companies to pledge to reach net-zero carbon emissions. So, on the surface, this seems to be a break from what you describe as Welchism because getting to net-zero isn't going to necessarily increase their quarterly earnings — it might decrease their quarterly earnings in the short term. Do you feel that these corporate efforts on climate are a genuine departure from shareholder-driven corporate management, or not?
GELLES: I think a lot of these efforts by major companies to reduce their own carbon emissions and to get to net-zero as a corporation are sincere and by all accounts, companies are putting real resources into achieving that. Those efforts, however, do very little to address the structural and systemic forces that are fueling runaway consumption. They do very little to truly shift energy production away from fossil fuels and towards renewable energy. For a lot of the companies that are doing it, it is relatively easy, because they're not energy producers. So I think they are real efforts, and I also try to be really careful not to overstate their importance, in terms of actually moving the needle in overall global greenhouse gas emissions.
I think what they represent is the fact that governments are not getting the job done. So, that leaves an opening for businesses to play this much broader role in shaping the world we all live in, and that's good and bad. I think this is one of the examples where [there is] an absence of meaningful climate action from governments. If CEOs want to step up, and at least do their own little part at their companies, I'm all for it. But I think it's really important that we don't mistake that with a true enduring solution that's going to tackle the enormity of the challenge at hand because it's not.
LEGUM: Is there anything else Popular Information readers should know about your book?
GELLES: So much of the work you do uncovers and exposes the fundamental hypocrisy between the narratives that companies tell about their work, and their role, and their values, and the actual actions they take, and where they actually put their resources at the end of the day. To me, there's a direct line between that and the way Welch presented GE as a model corporate citizen, even while decimating the American working class, eroding the social contract between corporations and the government and the rest of society, and gutting towns by moving operations overseas. That to me is like the foundation of the hypocrisy that is at the heart of the way corporate America operates today. It's what you document day after day: companies saying one thing and doing something entirely different with their money.
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Thank you for this conversation. I grew up in a GE town where Jack lived. Three shifts, noon lunch whistle, acres and acres of GE buildings and parking lots and employees. My dad installed Jacks pool and plenty of his house projects; his daughter was my chemistry lab partner in high school. Then the decline came, and the PCB pollution, and the job loss. Our vibrant Main Street became a ghost town, four theaters closed, shops for every specialty gone, uncles and grandfathers left with a shrinking retirement anchored to GE stock and gutted benefits. While Jack moved on and up. My father will not buy a GE product, not even a light bulb.
I got an MBA in 2012 and at no point during the two-year program did I recall hearing any professors talk about raising wages for employees. It was all about revenue growth - negative externalities (e.g., climate change) be damned - and keeping costs (e.g., reducing wages, outsourcing) as low as possible. GE was imploding at the time, following the 2008 financial crisis, and yet we talked about Jack Welch's management philosophy as the gold standard for how to run a corporation. The concept of shareholder primacy is indoctrinated early in these programs, which tend to produce future executives. Schools are changing their tunes rapidly, but it definitely feels performative.