On Thu, Mar 12, 2009 at 11:39 AM, Doug Henwood <dhenwood at panix.com> wrote:
> Financial Times - March 12, 2009
> <http://www.ft.com/cms/s/0/294ff1f2-0f27-11de-ba10-0000779fd2ac.html>
>
> Welch rues short-term profit ‘obsession’
> By Francesco Guerrera in New York
>
> Jack Welch, who is regarded as father of the “shareholder value” movement,
> has said the obsession with short-term profits and share price gains that
> has dominated the corporate world for over 20 years was “a dumb idea”.
>
> In an interview for the Financial Times’ series on the future of
> capitalism, the former General Electric chief said the emphasis by
> executives and investors on shareholder value since he spelt it out in a
> speech in 1981 was misplaced.
>
> Mr Welch, whose stellar record in his two decades at GE helped make
> shareholder value popular, said that it was wrong for managers and investors
> to set consistent earnings growth and steady share price increases as their
> overarching goal.
>
> “On the face of it, shareholder value is the dumbest idea in the world,” he
> said. “Shareholder value is a result, not a strategy...your main
> constituencies are your employees, your customers and your products.”
>
> Mr Welch spoke at the weekend, before Thursday’s news that GE, which he
> left in 2001, had been downgraded by Standard & Poor’s, losing the pristine
> triple A rating it had held since 1956.
>
> Mr Welch’s comments on shareholder value come as the credit crisis and the
> global economic slowdown have caused a radical rethinking of many of the
> corporate and financial beliefs that held sway over the past few decades.
>
> In a similar shift, Alan Greenspan, the former chairman of the Federal
> Reserve and a high priest of laissez-faire capitalism, told the FT last
> month the US might have to nationalise some banks on a temporary basis to
> fix the financial system.
>
> The birth of the shareholder value movement is commonly traced to a speech
> Mr Welch gave at New York’s Pierre hotel in 1981, shortly after taking the
> helm at GE.
>
> In the speech, entitled “Growing Fast in a Slow-Growth Economy,” Mr Welch
> outlined his beliefs in selling underperforming businesses and aggressively
> cutting costs in order to deliver consistent profit rises that would
> outstrip global economic growth.
>
> GE, he told analysts then, ”will be the locomotive pulling the GNP, not the
> caboose following it,” according to reports of the speech.
>
> Mr Welch said last week he never meant to suggest that setting, and
> meeting, profit expectations quarter after quarter in an effort to boost a
> company’s share price should be the main goal of corporate executives.
>
> “It is a dumb idea,” he said. “The idea that shareholder value is a
> strategy is insane. It is the product of your combined efforts - from the
> management to the employees”.
>
> However, GE’s success under Mr Welch - during his tenure, the
> conglomerate’s market capitalisation rose from $13bn to $400bn while profits
> grew tenfold to almost $14 billion - prompted many executives to place
> greater emphasis on shareholder value. Many fund managers also backed
> concept because they are judged on a quarterly basis.
>
> Asked to comment about recent remarks by Jeff Immelt, his successor at GE,
> that “anybody could run a business in the 1990s. A dog could have run a
> business,” Mr Welch said he agreed with the concept because economic
> conditions were better.
>
> “It was an easier time to be a CEO in the 1990s,” he said.”The wind was on
> our backs. Up until 2007, this was easy. Now, it is really difficult”. Mr
> Welch declined to comment further on GE.
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