By Francesco Guerrera in New York
Published: March 13 2009 02:00
Last updated: March 13 2009 02:00
Jack Welch, who is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years, has said that it was “a dumb idea” for executives to focus so heavily on quarterly profits and share price gains.
The former General Electric chief told the Financial Times the emphasis executives and investors had put on shareholder value – which began gaining popularity after a speech he made in 1981 – was misplaced.
Mr Welch, whose record at GE encouraged other executives to replicate its consistent returns, said managers and investors should not set share price increases as their overarching goal. He added that short-term profits should be allied with an increase in the long-term value of a company.
“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 before yesterday’s news that GE, which he left in 2001, had lost its triple A rating from Standard & Poor’s.
His comments, made in an interview for the FT’s series on the future of capitalism, come as the economic crisis has caused a radical rethinking by many leading executives and policymakers.
Alan Greenspan, former chairman of the Federal Reserve and a high priest of laisser-faire capitalism, told the FT last month that 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 shortly after heading up GE.
In the speech, titled “Growing Fast in a Slow-Growth Economy”, Mr Welch did not mention the term, but outlined his beliefs in selling underperforming businesses and cutting costs to increase profits faster than global economic growth.
GE “will be the locomotive pulling the GNP, not the caboose following it”, he was quoted as saying. Mr Welch last week said he never meant to suggest that boosting a company’s share price should be the main goal of 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.”
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”.
Copyright The Financial Times Limited 2009