Once mighty, now dropped from the Dow, GE's situation says much about the average American, too.
Some companies are built for a quick buck. Others are created for the ages, such as they are in the fast time warp that is American capitalism.
Among the latter is General Electric, formed in 1889 and based on the many breakthroughs of Thomas Edison.
GE is still with us, but this week it will be dropped from the Dow Jones Industrial Average, a stunning fall. It was an original member of the index in 1896 and had been part of it continuously since 1907.
One can argue this is mere symbolism. GE’s market capitalization is almost twice as much as the company that will replace it, Walgreens Boots Alliance. But its shares have fallen 55 percent over the past year, a drag on the Dow.
Apple replaced AT&T in 2015 with no ill effects on the latter, which recently swallowed Time Warner.
Financial Times columnist John Authers sniffed, “This is only a minor technical adjustment to a meaningless and obsolete index.”
Maybe — it’s true that the Dow has limitations. For example, Amazon, one of the world’s biggest technology companies, isn’t on it. The index is a fraction of the stock market, which is a fraction of the overall well-being of the nation.
But a closer look reveals that General Electric’s decline says much about what ails the American economy.
David Blitzer, chairman of the index committee at S&P Dow Jones Indices, told the Wall Street Journal that with the switch, “the DJIA will be more representative of the consumer and health care sectors…. Today’s change to the DJIA will make the index a better measure of the economy and the stock market.”
He spoke more truth than perhaps he realized.
GE once embodied American know-how, industrial might and the rising, secure middle class.
The company built everything from electric motors and light bulbs to locomotives, airplane engines and computers. GE founded the Radio Corporation of America (RCA) and co-founded NBC. One of its scientists, Ernst Alexanderson, was instrumental in developing television.
“We bring good things to life,” as the company’s long-time slogan went.
In 1955, GE employed more than 210,000. By 1980, the headcount was 411,000, many represented by unions, all paid good money with full benefits.
Then came Jack Welch.
As chief executive from 1981 to 2001, Welch upended the giant. His aggressive cuts and pressure for short-term results drew plenty of criticism. “Neutron Jack,” like the neutron bomb, eliminated people but left the buildings intact.
He bragged about reducing the U.S. payroll to 299,000 by 1985 through sales of units and layoffs. At the same time, he was making acquisitions, expanding into emerging markets and areas where GE faced peril, such as finance.
Initiatives such as “rank and yank,” where 10 percent of managers were fired each year, were widely copied GE morale-busters. For example, Microsoft had its hated stack ranking — gone now, and the company is performing better.
The consequences of Welch’s tenure played out in scores of once-prosperous towns across the country, such as hard-hit Schenectady, N.Y. Many never recovered.
But he was also lionized, too. Fortune magazine named him Manager of the Century. He mentored some of the most important next generation of CEOs, including Boeing’s Jim McNerney. His aggressive management style was widely copied.
But Welch, who has lost his luster, didn’t operate in a vacuum.
He was the most skillful operator in a new style of American capitalism, where institutional investors and a demand for ever-higher stock prices ruled an impatient Wall Street. Mergers, industry consolidation and layoffs pleased the markets.
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Meanwhile, union busting was empowered by President Ronald Reagan in the 1981 air-traffic controllers strike. When they defied an order to return to work, he fired all 11,000. (Paradoxically, Reagan was the only American president to have led an AFL-CIO union.) Private-sector bosses took their cue, largely unencumbered by a weaker National Labor Relations Board. Replacements were typically paid less.
Workers were increasingly seen as a “cost center,” a liability to the bottom line. Companies sought cheaper labor in the South, long before NAFTA.
Whatever the talk of “our employees are our greatest asset,” the walk was often different by the 1980s. Wall Street and business schools taught Lean and Mean! If It Ain’t Broke, Break It! Do More With Less (including wages and benefits, but not in executive compensation)!
Nearly every American older than 40 working in the private sector lived through this. Every American will live with the lower economic mobility and opportunity that resulted.
One wonders if it would even be possible to build a GE, especially investing in its innovations, with today’s loot, flip and merge capital markets. Amazon might be an example — but it’s already nearly a quarter-century old. No wonder startups are declining at an alarming rate. No wonder Northwestern University economist Robert Gordon says we’re stuck without job-growing leaps such as electrification.
Given this environment, apologists might argue that Welch saved GE from the destruction that befell the likes of Westinghouse, Bethlehem Steel, Woolworth and the Pennsylvania Railroad — once mighty, now gone.
On the other hand, Welch set up the company to be badly wounded by its GE Capital unit, which came to grief in the financial panic a decade ago. His fear-based culture made it risky to tell the boss unpleasant truths. Hand-picked successor Jeffrey Immelt was criticized for running a “success theater” that concealed trouble.
Immelt’s successor, John Flannery, was left to do the triage, including cutting the dividend and spinning off such venerable divisions as the locomotive unit. Last year, Flannery said “everything” was on the table, presumably even a breakup of the conglomerate.
After GE’s departure, the Dow will still contain some pillars of the American economy, and even producers of good jobs. Among them: Boeing, Microsoft, Intel, IBM, Procter & Gamble and Caterpillar.
But they are no longer synonymous with the middle class, or job-creating innovation, or widely shared prosperity. Some of the 30 stocks are very now: Amusements, electronic distractions and low wages.
Some companies are built for a quick buck, others for the ages. The demise of the latter is always complicated.
But it takes a special blend of greed, hubris, incompetence and bad luck to make this mess, whether you’re GE or U.S.