The Man Who Broke Capitalism

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Felix Salmon: Hello and welcome to The Man Who Broke Capitalism episode of Slate’s Money, Your Guide to the Business and Finance news of the week and quite possibly of the past eight years. Because not only am I Felix Salmon of access on the show, but will. I’m joined, as ever by Emily Peck also of Axios. Hello. We are joined by Elizabeth Spiers.

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Host 2: II.

Speaker 3: And we are joined.

Felix Salmon: By David Jealous of The New York Times. David, welcome.

Speaker 3: Thank you so much for having me.

Felix Salmon: You are here to plug a book and oh, my God. Like, we have so much to talk about in this book. But first of all, what is the name of the book?

Speaker 3: The Man Who Broke Capitalism How Jack Welch gutted the Heartland and Crushed the Soul of Corporate America and how to undo his legacy.

Felix Salmon: Oh, my God. Gutting and crushing and souls. Yeah, you can tell this is going to be a meaty one. We’re going to talk about exactly that Jack Welch his legacy. We’re going to talk about Davos man and stakeholder capitalism. We’re going to talk about earnings smoothing. We’re going to talk about private equity. We’re going to talk about offshoring, outsourcing, financial shenanigans. It’s a meaty final episode, and it’s all coming up on Slate. Money. So for my sins, I have spent the last few days atop an ALP in Switzerland. David, you’ve been here as well. How many times have you been to Davos?

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Speaker 3: Be two.

Felix Salmon: Maybe two.

Speaker 3: Which is maybe enough.

Felix Salmon: I think one is pointless. Two is that you start getting there and then after that it’s diminishing returns. But this one was a kind of diminished one. It was postponed. The heads of state weren’t around. There wasn’t any snow. In any case, where we were was the spiritual heart of stakeholder capitalism is this thing called the World Economic Forum, which is run by this grumpy man called Klaus Schwab, who was kissing up to Henry Kissinger. And all manner of weird stuff is going on.

Felix Salmon: And you have written this book and I can’t wait to get into this with you. You have written a book which tries to basically take capitalists and then tell me if I’ve got this wrong, splits them into two camps and you have this evil, bad Jack Welch figure who’s the main character of the book and Jack Welch. It’s this avatar of everything that is wrong and bad about contemporary capitalism. And then on the other side, you have the touchy feely, lovely, friendly stakeholder, a capitalist among which you do actually name Klaus Schwab. Is that is that an accurate description of your book?

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Speaker 3: I’m happy to be on the podcast. I think of it more as this. It’s not it’s not, you know, better and, you know, not telling. David No, that is not an accurate description of the book. I do think without a doubt that Jack is the apotheosis of everything that is wrong with capitalism over the last 50 years, and that he was the progenitor of an economic system that we are all still living in and reckoning with. And it is also true that Klaus was among the voices that has tried to be a corrective force over the years.

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Speaker 3: And I do indeed point to some Davos men like Paul Polman and Dan Schulman, who regular CEOs there from companies like Unilever and PayPal that have in their own small ways tried to rebalance the social contract between large corporations and workers. But I am very quick to point out in the book that stakeholder capitalism is no panacea and that these companies are by no means without warts at all. And so while I appreciate the impulse to distill the book into a camp of evil capitalists and happy capitalists, we all know that the world is just not that simple.

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Felix Salmon: Okay, but we can agree on the evil capitalist bit.

Speaker 3: I think evil is a complicated word that I don’t think I use in the book.

Felix Salmon: You don’t use the word evil, but you definitely are about as harsh as you know I’ve ever read. Anyone be about Jack Welch. And people are pretty harsh on Jack Welch. You don’t cut him a lot of slack.

Speaker 4: I mean, with good reason, David backs it up.

Speaker 3: I want to distinguish here between Jack the man and Jack, the CEO, the businessman, because I think there’s this temptation in our society to mistake our critiques of systems for critiques of people. And ultimately, I do believe this is a book about a system in as much as it is a book about a man.

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Felix Salmon: But you’re you’re very rude about Jack the man as well. I mean, you know, the way that he was tweeting, the way that he was conspiracy theorizing, the way that he was buddying up to Donald Trump, the way that he was a bully in the way that he shouted at people. So he doesn’t seem to have a whole lot of redeeming features in this book.

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Speaker 3: And I held some stuff back. There was stuff that I couldn’t. There was something I couldn’t really verify. There are stories out there about Jack that didn’t make the book because I couldn’t really rely on the sources that were much, much worse than even the worst stuff that is in this book.

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Speaker 4: Why don’t we back up for a second and just lay out a little bit about more specifically who Jack Welch was, the former CEO of GE from what was it, 1981.

Speaker 3: To 2.

Speaker 4: 81 to 2001. Manager of the century. Blah, blah, blah. Let’s get that all out of the way. The book mainly covers what Jack Welch did when he was at GE and the behavior of his executive disciples as they went forth into the Fortune 500 and ruined other companies. Is my take.

Felix Salmon: You open the book by saying that he didn’t just sort of transform General Electric, but he created this. New cult, which you call Welch ism, which spread around the world. And you open the book by saying that Welch ism is like the default mode for CEOs these days and that most CEOs are Welch lists in one form or another. Who would you say is the foremost Welch list in the world right now?

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Speaker 3: I point to a few examples in the book. I point to the folks at 3G Capital, which is the Brazilian private equity firms that control companies, including AB InBev, Burger King, Tim Hortons. And I point to them because they point to themselves in that regard. They have stated over and over through the years that the way they run their companies is inspired by Welch and the way they run their companies as well documented by business journalists over the last decade or more is incredibly brutal with mass layoffs, with zero based budgeting that cuts units down to the bone and makes people justify every cost. And that under invests in research and development and often plays shenanigans with the financial results.

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Speaker 3: And all of that has been reflected in, as you see, settlements with Kraft Heinz recently, the list goes on. So they are, you know, sort of proudly the inheritors of Jack’s legacy. And those companies are frankly not doing too well.

Speaker 3: I think other companies incorporate aspects of watches in all sorts of different ways from Amazon’s labor practices and Japanese labor practices to Boeing, which, as I covered for a year, is still reeling under the effects of three decades of his proteges, transforming that company into one that resembled G.E. in as much as they could make it.

Host 2: So what do you consider the defining aspects of well-chosen?

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Speaker 3: I point to three main buckets of tactics that Welch used to transform GE. And they’re a largely complete but not totally complete list of what makes for watches. Those three aspects are downsizing, dealmaking and financialization. Downsizing was his relentless quest to make GE simply a smaller headcount company. In his first years, he instituted a series of mass layoffs and factory closures that destabilized the American working class. That gave him the name Neutron Jack, of course, which is he hated, but he could never shake when it comes to the dealmaking he did over more than 1000 deals, mergers and acquisitions during his 20 years as CEO and offloaded something like 300 to 400 businesses during that same time.

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Speaker 3: And that set in motion this enormous wave of dealmaking that continues to this day and the financialization. That’s a big fuzzy word. That means a whole lot of different things.

Speaker 3: But it’s seen most obviously in the enlargement of GE Capital, the finance division inside G.E., which ultimately came to account for a lion’s share of its profits and revenues inside a company that was once really an industrial company and ultimately allowed him and his successor, Jeff Immelt, to play all sorts of games with their earnings, smoothing out their earnings and sort of delivering exactly what they promised to Wall Street with a series of last minute adjustments and divestitures and settlements at the end of every quarter.

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Felix Salmon: So this is one of the things which struck me is that people have talked quite rightly at length about the way that G.E. would smooth its earnings, which is a polite way of saying lie about how much money it was making. It would use GE Capital and various other divisions to always hit the quarterly targets earnings. And Jack Welch was very proud of hitting those, like basically for 20 years in a row.

Felix Salmon: And what that story has fed into is a very popular narrative that Wall Street is far too short termist and only cares about quarterly earnings. And what we need to do is start spending much more time thinking about the long term and concentrating on long term shareholder value rather than just hitting this quarter’s earnings and this play off of like, are you going to be short term? It’s like Jack Welch, who just cares about this quarter. Are you going to be a long term astute, cares about the long term and future is something which I hear on a very, very regular basis.

Felix Salmon: And I think I kind of want to say it’s kind of out of date. Like it’s hard for me to think of any company that is famous for hitting its quarterly estimates. When GE was the most valuable company in the world, it got that way by doing exactly that thing. But when Apple was the most expensive company in the world, like no one’s ever accused Apple of massaging its quarterly earnings. So that doesn’t matter. And when Larry Fink starts saying we need to be long termist, it’s like, well, I mean, you know, we can talk about Larry Fink later, but is this just a Welch’s thing which has kind of died off at this point?

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Speaker 3: I think there’s a risk in using the Microsofts apples, Amazons of the world as proxies for the rest of the economy. As we know, the tech industry is unique in its ability to throw off enormous amounts of cash these days. I hear you that some of the largest companies in the world today are not being accused of doing the same sort of earnings shenanigans. But you don’t need to look far to find very well-known companies that are being accused of doing the exact same thing.

Speaker 3: Under Armour, Kraft, Heinz, which I mentioned, the list goes on. Many, many smaller industrial manufacturing companies are still getting caught up in these same sorts of games on a regular basis. And the risk when it comes to the distillation of thinking long term versus short term, I understand that there’s a temptation that can seem very reductionist, but what we’re talking about is actual decisions that executives are making.

Speaker 3: And those decisions include things like, are you going to spend your profits on share buybacks and dividends, or are you going to invest them in research and development? Are you going to squeeze your labor force as tight as you can, or are you going to invest in your workers and try to raise pay and benefits and do upskilling and all the things that we know can create a more vibrant, more engaged workforce that potentially is going to stay with you for the longer term. So the distinction between long term and short termism, I get consumed sort of abstract and conceptual. But what I try to do in the book is bring it down to the practical and talk about what the actual actions are that define long term and short term companies.

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Speaker 4: I think the reflexive way a lot of companies lay workers off in downturns or periods of uncertainty kind of lends credence to this idea that most companies still think short term. In fact, even the people which David lists the CEO as one of, like the more enlightened anti Welchman thinkers, they just laid off a bunch of workers themselves. And I think a lot about the beginning of the pandemic when the unemployment rate was like 25% or something because companies freaked out and just fired everyone. That’s the first instinct. And I think that does come. I don’t know if it comes straight from Welch, and that’s one of the questions I have for David, like how much of this as well is and how much is this like bigger trends that he got caught up in and was the avatar of. But that way that people, companies and CEOs just reflexively treat their workers kind of like disposable trash, pretty much even right now when there’s like a labor shortage and they’re supposedly not doing that is pretty remarkable.

Felix Salmon: One of the things that really jumped out at me at the book and I hadn’t quite thought about it this way before, is the way in which Jack Welch, with aggressively fire people, not just in bad times, but also in good times, that you’re always trying to improve your your earnings per share or whatever. And even if you’re growing great, and even if you’re making lots of money, you can always improve your profits by firing people.

Felix Salmon: And in a weird way, you know, we now live in this era of CEOs, you know, tearfully appearing on Zoom calls and saying this is harder for me than it is for you. And I’m so sorry that I have to fire you. And this is horrible. And, you know, I mean, that was famously what the Airbnb guys did at the beginning of the pandemic and that kind of thing. And and everyone’s like, Oh, wow, you’re so caring when you fire people. But at least then they kind of can point to perceived necessity, which may or may not be real. But like, that’s the rhetoric, right? Whereas with Jack, he never said, Oh, we need to fire these people. He just said, I can, therefore I will.

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Speaker 4: That was his performance review strategy was the culling of the bottom 10%, which was.

Felix Salmon: Then copied by Bill Gates, or is it still be Velma at Microsoft.

Speaker 3: It was Ballmer and Adam Neumann. Adam Neumann was doing this at We Work when he had $10 billion in the bank. He still thought it was a good thing to fire 10% of the workers every year just for shits and giggles.

Host 2: So he fired 20%. Do you think that at some level that strategy was heavily adopted simply because it’s a kind of thing you can do now, realistically and thoughtlessly, and it doesn’t require any particular strategy or genius.

Speaker 3: I think there’s something to that. I also think it’s sort of a perverse manifestation of this obsession in corporate America with efficiency, this belief that you can always do more with less, and that somehow if there are fewer people producing more stuff, that’s inherently a good thing. And that, of course, you know, may look good in your 10-K book gives no mind to the actual lives and livelihoods and communities and families of all those, you know, actual people who have those jobs.

Speaker 3: And this is one of the things that really struck me about Welch’s orientation and his ability to rationalize and justify some of his most extreme labor practices was the way in which he kept trying to essentially frame himself as a savior or as a good guy, as if he were doing a favor by laying these people off. He would say, you know, it’s a good thing that I’m firing you now because if I fired you later, you’d be closer to the end of your career, and it’d be even harder for you to get a job, right. And so as if people were going to thank him after that.

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Speaker 4: You can see that kind of rationale. Like in Netflix, they have this famous PowerPoint, remember, from like 2014 or something, 2015 where they talk about if you’re going to fire someone, you got to fire them right away. And that’s the best thing for them and the best thing for the company. And like firing is the most important thing you can do as a manager was sort of the rhetoric that I remember back then, but no accounting for how beyond the effects on the community and the person who’s fired the effects on the people who stay at the company are kind of mind blowing. Like if you know that in every performance review, the bottom 10% gets fired.

Speaker 4: Think about how your self-evaluation is going to go or how your peer reviews are going to go, and the amount of backstabbing and anti teamwork that takes place. And you see that kind of anti teamwork mojo all over the book and all over the Welch tactics where like he pits one division of the company against the other division and no one wants to work together because it would be bad for their bottom lines. I mean, it’s just it’s just seems so dumb in hindsight. I don’t understand it.

Felix Salmon: There was this wonderful part of the Susan Fowler book about Uber, where she talks about what stack ranking does for internal politics. And she explains this really well, that basically the entire job of everyone to Uber was to find someone to throw under the bus and persuade their managers that this other person was worse than they were so that the other person would get fired and not you. Right. And so that’s literally the opposite of teamwork.

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Speaker 3: And this became absolutely toxic at Microsoft, as you mentioned, Felix, in the early aughts under Ballmer when he adopted stock ranking. And sort of famously, I think there was a great Vanity Fair piece that went deep in depth into the absolutely corrosive culture that took root there.

Felix Salmon: So, David, this is a theme running through the book, which is that if you work for a big company like G.E., which can afford to look after you, then that is something we should aspire to. And the companies should look after us if they’re big and they can afford to. The alternative is what Jack Welch did, which is outsourcing both to smaller contractors who presumptively just have worse working conditions, or to foreign countries, which again presumptively have worse working conditions. And that basically one wouldn’t want to be the employee of one of those smaller contractors or, you know, an employee in Mexico or China or wherever it was the Jack Welch was outsourcing to. One wants to be the employee of G.E. and then once you get that precious job at a big company, then GE should look after you. Is that like a fair description of like the theme running through the book?

Speaker 3: I think I would question whether the agency is there. You keep saying one wants to work for a big company and I don’t presume to know what people want to do or what kind of jobs they want to have. The point that I’m trying to make is that if one does happen to work for a highly profitable company with, you know, millions or hundreds of millions or billions of dollars in annual profits, then I would like to believe that they could reasonably able to support themselves. And so my beef is with companies like Disney, which are flush with profits and yet still somehow have theme park workers sleeping in their cars. And that’s the point that I’m trying to drive home.

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Speaker 3: And that’s the legacy of Welch, because he was making titanic profits at GE, but he was the one that started redistributing them in fundamentally different ways than corporations had during the postwar years. And I document this right. In the 1953 GE annual report, the company proudly lays out exactly what percentage of its profits it’s giving to its employees, how much it’s sending to its suppliers. And they’re even screaming from the rooftops proudly about how much they’re paying in taxes to the government. All of that changed when Welch came and he deliberately, intentionally started siphoning those profits, not to distribute them widely to communities and employees and the government itself, but very relentlessly focused on driving them back to shareholders, back to investors. And there’s a whole intellectual architecture behind this theory, agency theory, etc..

Speaker 3: But the end result of the unchecked pursuit of shareholder profits is that we live in a world where employees at companies that make billions and billions of dollars of profits a year can’t afford to take care of their families in a meaningful way and get to the point where they have to choose between gas money and textbooks for their kids. And that, to me, just appears to be an economy that is wildly out of whack.

Host 2: Now, I used to a long time ago, I was an equity analyst. And I remember, you know, you see CEOs who were doing this and they would have worker problems and labor strikes and things like that, and they would always hide behind liability for shareholder lawsuits. There was the constant excuse. What do you think the remedy for that is? Because I feel like a lot of CEOs use that for cover when they want to make decisions like this.

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Speaker 3: It’s calling them on their bullshit. There’s no law like that law that everyone references, like, just doesn’t exist. There is no law that says that companies are required to maximize their short term profits for investors. That’s a myth.

Felix Salmon: Those lawsuits don’t exist, right? What you do have is activist investors who come in and try and push out the board and say, we want to take over the board and push out the CEO and do more Welch type things because we think we’ll make more money as shareholders if that happens. But they do that because they can not because they are legally obliged to.

Speaker 3: Absolutely. And it bears noting that in all of Welch’s 20 years of the company, they never faced an activist threat or a PR threat because he was doing it from within. He was already doing all the activist playbook stuff from within. There was no no more fat to cut and people could. See it from the outside.

Felix Salmon: You mentioned this earlier, and I wanted to pick up on that. You’ve mentioned Kraft Heinz a couple of times, as you know, a very Welch first company that, in fact, does the earnings massaging or did the earnings massaging the Welch was so ahead of the curve on. And that’s slightly surprising to me because 3G, mainly famous as a private equity firm and private equity is mainly famous.

Felix Salmon: If you talk to anyone in private equity, they say, well, the last thing we do is we don’t care about quarterly earnings. What we get was total return over the course of five years or ten years or however long we are holding period is. And we love to be able to invest and have that medium term horizon rather than the short term horizon. Kraft Heinz is slightly exceptional because it does still have some publicly traded stock. But if you are 3G, if you’re the private equity company that is effectively running Kraft Heinz, why would you care so much about massaging earnings on a quarterly basis?

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Speaker 3: Well, I think you nailed it, Felix. And you clearly know enough about Kraft, Heinz and 3G to understand that it is not a traditional PE fund that’s investing in, you know, taking companies private and trying to lead them up and make them more profitable and then spin them out. This is a group of individuals who control large pools of capital and have majority stakes in a lot of different public companies. And because there is that public float on companies, including Kraft Heinz and Restaurant Brands, International and AB InBev, they are deeply incented to maximize short term earnings and jack up the share price as fast and as quickly as they can, because that’s where a lot of their personal equity, the managers equity is. So again, I think it’s while 3G is in many respects a private equity firm, they don’t follow that traditional PE playbook that does try to take, in theory, a longer term horizon.

Felix Salmon: And where would you put the famous partner, Warren Buffett, on the Welch scale?

Speaker 3: It’s a great question. I mean, Warren is obviously an enormous value investor. I also think that there is a darker side to Buffett’s investment strategy. This is a story that I’ve wanted to write for a long time and for whatever reason, never sort of pin the down and nailed it. But, you know, Buffett has this portfolio of sins from his junk food companies to his trailer parks that are charging exorbitant interest rates to low income Americans, to if you look in some of Berkshire’s deeper holdings, there’s like not weapons manufacturers, but there are, I think, body armor and military uniforms. And I definitely questioned exactly where where all those products go.

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Speaker 3: So I think Buffett has a undeserved reputation as sort of the cute and cuddly capitalist. And of course, he did partner with 3G on many of their most recent deals. He has since sort of renounced that strategy and acknowledged that they were excessively focused on the short term and that he made some mistake in bets in getting in deep with that team. I think he still tries to save face and be polite about it all.

Felix Salmon: And most famously, of course, what Buffett has, which is what Welch has, is a massive financial arm that drives the entire company. Welch had the capital and Buffett has Burke, Qari and to a lesser extent Geico. And it’s the insurance and the massive amount of capital that sits in the insurance that allows him to do everything else.

Speaker 3: Yeah, I think the distinction clearly is that there’s a lot more transparency about exactly what is going on inside Berkshire’s financial assets, whereas during the eighties and particularly the nineties when GE Capital was getting so big, but before Sarbanes-Oxley and before, analysts had really started looking and closely and scrutinizing not just GE, but many other big companies with complex financial operations. There was very little transparency. You know, Welch himself called it The Blob, and analysts sort of understood it to be a black box. And they knew some of the activities, some of the assets. But a true accounting, I think, never happened at the time. And at this point, probably never will.

Speaker 4: How much of the behavior and the trends that you kind of attribute to Jack Welch would have happened anyway without Jack Welch? Take Jack Welch out of the picture and doesn’t all this stuff happen anyway? Is he just sort of like the biggest stand in for all of this, the easiest way to tell this story? Or did he make this all possible?

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Speaker 3: There is no doubt that when Jack took over in 1981, the economy was poised for dramatic change. We had stagflation. We had rising competition from overseas. Technology was changing rapidly whilst. It was poised for a huge run. The finance industry was on the cusp of major expansion. Given all of that new technology. But it was only when Welch himself took over. GE, which we have to remember and it’s easy to lose sight of. Today was one of just the singularly most influential companies in the country. Not only by virtue of its size and its extensive holdings in so many different industries, but because of its history as really the apotheosis of sort of what it meant to be a large corporation. This was the company that had set the bar for management training for practically 100 years.

Speaker 3: By this point, it was only when Welch, with his vision and his determination to make GE the most valuable company in the world, took over a company that big, that influential, and started employing tactics. As shrewd as those that we’ve detailed that everyone else started to fall in line.

Speaker 3: So were things going to change? Absolutely. But I argue that it was his overall reaction is overcorrection to a moment of, yes, a necessary resetting on some levels in the economy that set us on this trajectory that’s led us to the deeply unequal economy we have today.

Felix Salmon: The standard line about the trend in inequality from 1980 to call it 28 or even 2020. Is that what we saw around the world was increasing inequality within countries and decreasing inequality between countries, and that what the huge amount of outsourcing did was it really helped to create a massive Chinese middle class. It brought hundreds of millions of Chinese people out of poverty. The fact that this demand from big American and European corporations, mostly American, you know, could help workers around the world rather than just workers in America, was an incredible force for good globally, economically. It did cause more inequality within the US. But the upside globally in terms of workers was arguably bigger than the downside domestically. What would you say about that?

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Speaker 3: I think it’s critical to acknowledge the benefits of globalization at the middle level. And I made this point in my piece about Davos, which just ran right like we have Klaus and many others sort of singing the praises of globalization and its ability to lift people out of poverty. And that’s that Steven Pinker’s argument in large measure that things are overall getting better around the world.

Speaker 3: People might argue, again, I just come back to this notion of the choices that American executives made, and it’s a bit of a counterfactual, but I think it’s worth asking, would it have been possible to create have an economy where, yes, there was some outsourcing, maybe even a whole lot of outsourcing, but the American middle class didn’t fall quite so far behind. I think the answer is yes, because it wasn’t just the sending of jobs overseas that did this. It was the stagnation in wages. It was the reallocation of corporate profits away from research and development, away from wages and benefits and towards shareholder buybacks and dividends and executive salaries. And all of that is just as well established as the truth that globalization has been good for many millions of people in other countries as well.

Felix Salmon: So if I try and think like, what would that counterfactual look like as I sit here in Switzerland, I think it would actually look a bit like Switzerland or it would look a bit like Germany. You know, it would look like very large, very successful industrial companies, pharmaceutical companies, manufacturing companies, even cement companies, which don’t have the trillion dollar valuations that you see in the US Stock Exchange, but which do have much stronger worker representation, much stronger unions, and is still existing culture of, you know, jobs for life and well-paying jobs and that kind of thing. So is that better? And, you know, because when you’re here in Europe, a lot of people make the same complaints about, you know, in Germany and in Switzerland. Is they making in as you’re making about the United States, about like there are no good jobs anymore, the middle class is falling behind, you know, etc. and so forth. Do you think that’s a reasonable way to think about your counterfactual?

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Speaker 3: No, I don’t, because I think that America still has a whole lot of other things going for it that Europe simply doesn’t. Namely, Silicon Valley and the tech industry and our, you know, pharmaceutical and bioscience industry. There’s a level of innovation and education and sort of, you know, the great melting pot of this country, for all of its flaws that has been able to for the last 150 years or so, deliver corporate innovation. On a simply unprecedented scale.

Speaker 3: And I don’t think the counterfactual that we’re sort of entertaining here would preclude any of that from happening. I’m just talking about companies taking like marginally better care of their workers, which I don’t think would stop technology innovation from happening. I don’t think that would stop venture capital from being deployed. I don’t think that would stop immigrants from wanting to come here and study at our universities and start new companies. And this is I mean, it’s almost like this CEO argument. We’re like, well, we have to do this because otherwise we’re going to get sued. It’s like, no, you know, many of these things could exist. At the same time, we can’t have an innovative economy that also takes good care of its people.

Felix Salmon: Well, as a German, I’m just going to say that Biontech is German. And come on, how dare you say that the pharmaceutical innovation that’s happening in the US, it’s happening in Switzerland and in Germany.

Speaker 3: Yeah, but its founders were Turkish.

Felix Salmon: Well, even more to the point.

Speaker 4: I think one thing I thought was a really interesting throughline in the book and obviously comes from your reporting, is the line from Jack Welch to two fatal plane crashes, was that the inspiration for the book? I’m wondering because you basically you trace Welch ism all the way over to Boeing and you kind of outline how Boeing hook, line and sinker went to well-chosen because, you know, a disciple, more than one disciple ran the company essentially into the I don’t want to say into the ground, but kind of literally into the ground. And I’m just sort of curious about that aspect of the book.

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Speaker 3: Two things led me to this book. The first was writing the Corner Office column for the last five years or so where I interviewed hundreds of CEOs. And over and over, Welch’s name kept coming up, often unprompted, where he served as his reference point for other CEOs, which was shocking to me. And so that was just bugging me. And then after the second crash of the 737 Max, I became one of the top reporters on our team covering the fallout and what had happened at Boeing. And we quickly understood that, yes, there was a bad piece of software on this plane, but more deeply, something had happened culturally at this company over the last 25 years. And we started to try to understand that story.

Speaker 3: It was a story about Jack Welch three of his proteges starting in 1997 and who had worked directly for him, took over Boeing, Harry Stonecipher, then Jim McNerney, then Dave Calhoun, and deliberately and systemically changed this company from one that was relentlessly focused on aeronautical engineering and quantity airplanes into one that was a creature of Wall Street and was deeply focused on improving its share price, improving its earnings per share.

Speaker 3: And they did it in all the ways we’ve discussed over the course of this conversation, which is to say they did it with downsizing and trying to tighten their costs. When it came to labor, they did it with a huge amount of outsourcing, and ultimately they did it with a reallocation of their profits away from research and development and towards buybacks and dividends. And it got to the place where even engineers and test pilots and this is all come out in the congressional discovery that was a part of the investigation into the crashes. It got to the point where test pilots and engineers were worried about the stock price. And I don’t need to tell you that that’s not a company that I want to design in my airplanes. When you have people who are supposed to be thinking about the safety of your planes, instead thinking about the markets.

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Felix Salmon: Let me ask you about stock price, because one of your prescriptions, like all good non-fiction books, you have a solutions chapter at the end.

Speaker 3: I tried not to just for the right.

Speaker 4: To do that.

Speaker 3: They do. I tried not to. I said, I don’t want to write this chapter. They said, we’re not going to pay you unless you write the damn thing.

Felix Salmon: In that case, maybe it’s unfair to to ask you about JetBlue because. No, I mean, the Solutions chapter is always the weakest chapter of every book because there are no easy solutions. But one of the things you are relatively polite about is this idea of giving equity to employees, making them bought into the company in terms of stock and that. Also seems to be the thing that was part of the problem at Boeing. It’s also something that I’ve heard CEOs complain about that they know what their cost of equity is and the cost of equity is, you know, a lot higher than the cost of debt at most companies that most of the time. And they’re like, my employees just don’t value the equity that I’m giving them nearly as much as I value their equity, and I can use it for other things. So where do you stand on this? Because if there’s a new.

Felix Salmon: Yeah. Who were the managers of the 21st century? Right. They’re mostly the tech CEOs. Right. They’ll be like Reed Hastings or Tim Cook or Satya Nadella or people like that. And one of the things that makes them successful is their ability to make all of their employees rich by handing out lots of equity. And and then everyone’s happy because the stock goes up. But I’m not sure how that scale, whether that really scales.

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Speaker 3: I listen, if companies were paying their frontline workers really well and if the minimum wage wasn’t $7.25 an hour at the federal level, when if it had kept pace with inflation for the last 40 years, it’d be well over $25 an hour, I think I wouldn’t be banging this drum quite as loudly. But the degree to which frontline workers and lower and middle class workers have fallen behind, I think calls for, you know, drastic measures in an effort to correct it. And the top of my list is, you know, like, yeah, let’s raise wages and improve benefits. But a part of that list after all this time, I think making stock a part of the picture, making equity part of that menu of ways in which workers might be able to enjoy some of the fruits of their labor, I don’t think is such a radical suggestion.

Host 2: Yeah, you have a really interesting example. The people CEO who surveyed all of his frontline workers and discovered that they had essentially no disposable income at the end of the month and created a metric around it so that they could figure out, you know, what level they needed to bring up frontline workers do so that their lives were just sustainable. Do you see any other companies doing that? I’d never read anything about that. Is that a practice that you think people are going to adopt or is that unique to you?

Speaker 3: That particular program was quite extensive and it’s why it caught my attention. But we’ve seen many other companies, including companies like Walmart and McDonald’s, starting to raise their wages in meaningful ways. Not everyone is sort of doing the academic work that people did to understand that just how wide this gap is between need and means. But you don’t need to necessarily do that kind of academic research to understand that things are deeply out of whack for employees. You know, when employees at Sam’s Club and Costco are also on food stamps, something’s not working. I think more CEOs are starting to understand that. And the tight labor market, it’s prompting some action. But I still think we’ve got a long ways to go.

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Speaker 4: And we’ve got to work on the pay of the CEOs. Also, like not only is the pay of the workers too low, but exemplified by Jack Welch, the pay of the CEOs is ridiculous. I mean, David has a chapter on Welch’s retirement pay, which was $80,000 a month, just in like fresh flowers that he had in his hotel room positively. And the maid service? Yeah. I mean, just absolutely wild. There’s no reason CEOs should be getting such outsized paychecks. And we do see by some shareholders voting against CEO pay now, though, to no effect really completely non-binding.

Felix Salmon: Well, we saw that with Jamie Dimon. Right. Wasn’t wasn’t that news this this.

Host 2: Week paid a bonus.

Speaker 3: Yeah.

Speaker 4: Yeah. But so far, not really. We’re not really seeing big pay cuts for the CEOs. I think pay was up 14% or something last year. There’s a new analysis out on Friday.

Felix Salmon: It just strikes me that, you know, if you want to find a force that will look at the living conditions for the lowest paid workers in a company and really try and ensure that they get prioritized in terms of having pay rises and better health care and wind up with more disposable income. You know, one way of doing that is to hope that you have an enlightened CEO in the form of like Dan Schulman at PayPal. But a much better way of doing that is just unions.

Speaker 3: Absolutely. I call for a renaissance in the labor movement and we’re starting to see that. Right. Amazon and Starbucks are maybe sort of canaries in the coal mine. The media industry, as all of us on this call now, has certainly seen sort of a resurgence of union activity in the last several years. But when I think about these, you know, these sort of tectonic forces and I think about the narrative of this book, which really, you know, spans something close to 80 years from, say, the end of World War to. That, quote unquote, golden age of capitalism to sort of the rise of Welch ism over the last 40 or 50 years. I do think of it as a pendulum, and the pendulum has been swinging one way for a really long time. And, you know, whether we’re at that moment of pause before things start to swing back in the other direction, or whether the pendulum has begun to start to move in just fits and starts, I think we’re there.

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Speaker 3: And I think that’s what all these sort of ham handed efforts to articulate stakeholder capitalism or signed the Business Roundtable statement of the purpose of a corporation are amounting to. Because when you are, I believe, know this there is something different in the water when it comes to the way CEOs are talking about their role in society, their expectations of how they are to treat their workers and the community and the environment. And it’s going to be messy and there’s going to be wild contradictions and hypocrisy along the way. But it does seem to me that on balance, there is a reckoning underway, that at the end of the day is the beginnings of sort of a full throated repudiation of Welch ism that I believe is long overdue.

Felix Salmon: So the emphasis I would put there is on when you said talking about the greatest talker when it comes to such things and you mentioned him in the book is Larry Fink. And I did want to talk a little bit about Larry Fink because you give him a pass, right? You basically say it’s great that he’s saying these things. And I look at him and I’m like, well, you know, it is hard to find. I mean, if you’re going to complain about overpaid CEOs, he’s a legit billionaire. You know, he pays himself extraordinarily well.

Speaker 3: He was a founder as well. And I do make the distinction between founders and managers.

Felix Salmon: So it’s more okay for founders to become extraordinarily wealthy rather than managers.

Speaker 3: Yeah, I’ll die on that hill.

Felix Salmon: But yeah. So what he does is he runs trillions of dollars, mostly in passive investments. You know, you buy your iShares S&P 500 index fund and he just goes out and takes your money and puts it into 500 different stocks, which happen to be the 500 stocks in the S&P 500. And whatever happens today is me 500. It’s going to happen to your money. He has basically no discretion on that. But what he does have is an annual letter and he gets to write annual letters and parade around Davos and claim to be a stakeholder capitalist. The question which we’ve asked on this show before, but I want to ask you, because you’ve been looking at him and this whole issue for a long time, is.

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Speaker 3: What.

Felix Salmon: Effect does a letter from Larry Fink actually have on capitalism? Right. If the companies know that he has to buy their shares anyway because they’re in the S&P 500, they why do they care what’s in his annual letter?

Speaker 3: We have a story on the front page of today’s paper. I don’t know if you’ve seen it, but it gets into this very issue, and it’s about specifically the growing, coordinated Republican backlash against ESG investing, quote unquote, woke capitalism and Larry Fink in particular. And there’s a growing chorus on the right that is calling them out for some of this very hypocrisy.

Speaker 3: Now, you ask the question, what effect did these letters have? And I would argue that they actually do matter because CEOs are an incredibly sort of insular group. And Larry, for better or worse, is one of their sort of philosopher kings. And since he began banging the drum about stakeholder capitalism and ESG close to ten years ago now, I think his first letter that sort of really got into this was in 2014 or 2015. More and more CEOs have adopted similar language, and many people would say that this is a disaster and that because of Larry Fink and this broad stakeholder capitalism movement, we get to the point where, you know, Disney is caught up in the don’t say gay bill in Florida. And Levi’s is, you know, sort of the poster child for companies supporting Black Lives Matter or whatever the cause du jour might be.

Speaker 3: But the story we wrote today is specifically about something that many investors would say is a real material risk in the long run, which is climate risk. And Larry Fink’s message that corporations do need to consider the long term effects of climate change has set the table for the large scale adoption of net zero targets by companies all around the world. And so you ask what the effect is. I think that’s a part of the effect.

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Felix Salmon: It’s a really good answer. And I wrote in my newsletter this week about the new monotheistic religion of Davos, which, you know, used to be neo liberalism and is now net zero. It is. Truly impossible to find anyone in Davos who doesn’t talk about their net zero targets and how important it is to save the planet. Everyone now believes it and it is easy to forget how recently that was not the case.

Speaker 4: It’s interesting to think about how much damage like Welch ism has done and how much damage these companies do, and then pin your hopes to them trying to fix the climate and get to net zero. I just at the end of the day, it just seems like companies can do damage, but can they clean up the damage? Like, where is that evidence? I don’t know.

Speaker 3: It’s going to be really hard. And that’s why at the end of the book, I mean, in my Imperfect Solutions chapter, I don’t just point to the voluntary actions of enlightened CEOs. I call for meaningful regulation like we need our policymakers to, you know, get themselves together and develop a coherent framework for enforcing some of these policies and actually trying to set some guardrails on the economy and incentivize behavior from multinational corporations that might actually be beneficial to their constituents.

Felix Salmon: Which is actually a Segway, if I may. I’m going to take this opportunity to segway into the numbers round, and I’m going to come out with my number, which is 19, which is the number of extra kg of CO2 equivalent that you get in a 512 gigabyte iPhone compared to if you buy 128 gigabyte iPhone. So the 128 gigabyte iPhone 13 has 64 kilograms of embedded carbon in it. Your 512 gigabyte iPhone 13 has 83 kilograms of embedded carbon in it. It’s 30% more. And that’s just on the hard drive, which you don’t think of as being particularly carbon intensive. You know, it’s 19 kilos of carbon in that and.

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Felix Salmon: On the one hand, like it’s a good reminder of just how embedded carbon is everywhere. But on the other hand, it’s a really good reminder of what we can see. Now the companies like Apple are putting out environmental reports and they’re actually doing these calculations and they’re making them transparent to everyone. And that is a big positive move.

Speaker 4: I think what I’m hearing is I can spend less on my next iPhone and say I’m doing it for the planet.

Felix Salmon: Yes.

Speaker 4: I also don’t have to like go vegetarian. I can just buy a cheaper iPhone.

Felix Salmon: Emily, what’s your number?

Speaker 4: My number is 12.2 years. 12.2 years. That’s the average age of light vehicles in 2021. In the U.S., it’s a record high. People are driving older cars and light trucks now. My car that I drive is ten years old. So that’s young, relatively speaking. And this isn’t just because cars got insanely expensive in the pandemic. It was like a trend before that because I guess cars are better made now and they last longer, which you wouldn’t think. You know, these days. You buy things like bought a toaster recently, it’s just a piece of junk. And I did my research and the conclusion was all the toasters are junk, but not cars. Cars last longer. So there you go.

Speaker 3: I would read the toaster story was good story.

Speaker 4: Seriously, right there.

Speaker 3: On a story about why toasters are bad now.

Speaker 4: Thanks for the assignment.

Felix Salmon: I did get a pitch this week for a $200 pepper grinder and I’m like, you know, I’m sure that my grandfather was pageau pepper grinder, which is, you know, the king of pepper grinders. You can buy them for 30 bucks, will still be going strong in 50 years. No one ever needs to spend $200 on the pepper grinder when the best pepper green that you can possibly find is much cheaper than that. Elizabeth, what is your number?

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Host 2: Yeah, my numbers are a little bit depressing. It’s a nine and every 9 seconds. In 2020, air rifle is either manufactured in or imported to the US. And I look this up because, you know, a lot of the discussion around guns is about money and how much the gun lobby spends and how many guns people are buying. And right now there are around 16 million modern sporting rifles in circulation. So when you look at buyback programs and mitigation strategies, that’s the scope of what you’re looking at.

Felix Salmon: When you say rifle that you mean these are fifteens that seem to be.

Host 2: Yeah, that’s one of the most popular modern sporting rifles. That includes some things that are used for hunting, but they are still that’s the category that they’re in.

Felix Salmon: All right, David, your last and best, what’s your number?

Speaker 3: 85 billion. That is roughly the market capitalization of G.E. today, 20 years after Jack left the company, when shortly before his retirement, the market capitalization of GE was some $600 billion.

Felix Salmon: Now, is this before or after it was split in three and they actually split.

Speaker 3: Yet has not been split in three.

Felix Salmon: So when it’s when it finally splits into three, as they have said they are going to do, but they haven’t quite done yet, it will be like, well, they won’t exist anymore at that point.

Speaker 3: It will not exist anymore.

Felix Salmon: Is that bad?

Speaker 3: I don’t know that it’s a good thing or a bad thing, but it represents the the end and sort of the final repudiation of this grand experiment that he launched at GE and that the rest of the economy had to go along with for so long. And to me, you know, it was poetic that that news was announced right as I was finishing the book, because it made clear that, you know, for all of Jeff Immelt’s attempts to revive GE after he took over from Welch and for all of the sort of disastrous efforts that John Flannery then did in his short tenure as CEO, it finally took someone who quite literally came in with that private equity mentality and said, We’re going to split this damn thing up.

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Speaker 3: I’m going to have three very focused companies, and that’s the end of the story, one that began in the 19th century when that was instrumental to the rise of the American century. The 20th century, one that helped put men on the moon, helped win World War Two, helped give us toasters in the first place. It’s ended with a whimper. And that’s Jack’s legacy today.

Felix Salmon: David, thank you so much for coming on the show. It’s been a fantastic show. Come back for your next book, which I’m sure will be soon. Thank you, everyone, for sticking with us and for sending us your emails late. Many at Slate.com. Thank you to Jessamine Molli for producing from Seaplane Armada in Brooklyn. And yeah, we’ll be back next week with another sleep money.

Speaker 4: I wanted to ask about, you know, how Jack Welch destroyed the idea of loyalty to the company. I thought that was an interesting thing to explore. Like, it seems like CEOs today still expect you to be loyal and to act like you’re part of the family. But at the same time, they will lay you off as soon as things go south. So I think it was one of the good things that Welch got rid of the concept of loyalty and I wish like it would just go away entirely because it’s just garbage.

Speaker 3: There’s so much to explore in that. I mean, just up there, I almost heard two different things or three different things. I heard the truth that like Welch waged what was known as the campaign against loyalty. He literally was like, I don’t want my employees to count on GE at all. And he helped create this very transactional relationship between worker and employer, which I think in many ways still exists today and is and has gotten more extreme if you look at Amazon’s labor practices in particular, and I make that connection in the book.

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Speaker 3: Again, I want to talk about the agency here because I think there’s a difference between whether or not a an employee has the right to feel some measure of job security if he or she is working for a highly profitable company and doing respectful and good work and is not like, you know, completely flaming out or abusing his or her colleagues. That’s different than, I think, the imperative by an individual to tightly associate their identity with a company. And that to me is sort of a separate conversation, which I’d love to have.

Speaker 3: But the degree to which we allow our employer to define ourselves in some ways, I think is a totally worthy, but in my mind somewhat separate conversation, though it is related to one of the very first parts of the book that I get into, which is this degree that we sort of worship our bosses, the degree to which we in this society fetishize CEOs and allow them to be our cultural celebrities, our our philosopher kings, as I called Larry Fink earlier on. And that to me, is something that merits real reflection on all of our parts of the degree to which we hold up our business people as some of the most celebrated people in our society.

Felix Salmon: I do think that loyalty to a company is definitely insofar as it’s a good thing, it’s loyalty to a company into something which is much bigger than the CEO. Right. And loyalty to the CEO. I my grandfather worked his entire life for Porsche and felt great loyalty to Porsche, the company. I don’t know if he could even have named the CEO of Porsche. You know, he would have named his boss, maybe his boss, his boss as the people he was working for and had loyalty to. But like the top, corporate management was some other entity entirely. Whereas yeah, I think you’re right that nowadays if your idleness hambro working for Goldman Sachs, you know, you’re like, Oh yeah, I work for Goldman Sachs. That’s much more tied up with the identities of the men who run the company.

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Speaker 4: It’s like a bad boyfriend, like a Jack Welch is like, don’t even think about loyalty. Like, I’m not about that. We have no responsibility to you at all. But like also you should work your butt off for us and, you know, totally give yourself over to this company, but, like, don’t count on us for anything. Like, what is that?

Host 2: I got the impression from the book to you that Welch did expect a lot of loyalty from his immediate direct reports. So his standards for how he wanted his frontline workers to feel versus his immediate mentees and subordinates. There seems to have been a lot of cognitive dissonance around the concept of loyalty in that respect.

Speaker 4: I mean, should you be loyal to your company? Do you owe your company loyalty in 2022?

Speaker 3: I think the numbers would say that people don’t feel very loyal to their companies. I think all the data now makes it clear that the what we have thought about is the great resignation is actually sort of the great switch, the great move. Hmm. But, Emily, I’m going to give you another assignment. I want to read. The hot take on your boss is actually just a bad boyfriend. You are a font. And that idea. I read that in the second.

Speaker 4: I write it down.