Jack Welch died last week. He was CEO of General Electric from 1981 to 2000, and had a monumental impact on global business. Welch, named "Manager of the Century" in 1999 by Fortune magazine, grew GE's market capitalization from $15 billion in 1981 to nearly $500 billion in May 2001.
Welch won through a combination of aggressiveness and innovation, taking an already successful company to new heights. He insisted all GE divisions excel or be sold; that underperforming or unnecessary workers be identified and fired; and pursued management initiatives such as Six Sigma quality improvement to grow GE's performance and profitability. Wall Street venerated Welch for his consistent growth of GE's profits, and its stock price rose accordingly.
Welch's successes were substantive and real. But the remarkable consistency of GE's earnings under Welch was a phenomenon unnatural for a large company, and would be nearly impossible to achieve today. Welch accomplished this feat leveraging financial tools, which though entirely legal at the time, would be derided as gimmicks today.
First, he leveraged GE Capital, the firm's highly profitable financial arm, for "revenue smoothing," to achieve the desired consistency of earning performance. Second, as described in an article in Barron's by Jonathan R. Laing, without under-reserving in its reinsurance unit, earnings during Welch's last five years would have grown just 5.6% instead of 90.2%.
What happened here? Reinsurance firms require massive cash reserves to pay out in the event of a major disaster. Cash is not a concern for a giant like GE Capital, so Welch was legally able to draw down the GE Reinsurance's reserves. But when the division was sold to Swiss Re in 2005, GE had to pay billions of dollars to raise the business' cash reserves to levels acceptable to a buyer. Without GE Finance to enhance and smooth earnings, GE's growth stalled under Welch's successors.
Yet, in retrospect, if not for Welch's energy, innovations and financial engineering, GE might have hit hard times in the 1980s, like so many manufacturing conglomerates. Instead, Welch was the lodestar for substantive, successful, large-scale business growth.
Isaac Cheifetz, a Twin Cities executive recruiter and strategic résumé consultant, can be reached through catalytic1.com.
