Neil Collins\'s Profile
If only GE Jack had listened to his wife
Suzy Welch is a clever girl. She was a bright journalist who married one of America’s industrial heroes, the then chief executive of General Electric, Jack Welch. Now she has joined the burgeoning ranks of authors of self-help books (which include her husband) with the irritatingly titled 10-10-10.
In it, Welch expounds her philosophy of good decision-making. Before deciding what to do, you should think about the consequences in 10 minutes, 10 months and 10 years. It’s impressive to spin out such a banal thought into a decent-length article, let alone a whole book, but she’s managed it.
Alas, she failed in the more challenging task of persuading her husband to adopt this simple mantra. “Neutron Jack” as Welch was nicknamed as a result of his capacity to destroy jobs while leaving GE’s businesses undamaged, was so obsessed with the short term that his long-term legacy has brought this huge company to its knees.
GE invented the electric toaster, provides America with its domestic appliances, powers its aeroplanes and towers over its industrial landscape. It employs over 300,000 people in over 100 countries. None of these businesses has gone seriously wrong. Perhaps the executives automatically thought 10-10-10, knowing the alternative was long-term decline.
Welch, though, was obsessed with driving up earnings per share, quarter by quarter, and in 1992, when he had been in charge for 11 years, he decided that financial services was the future.
Exploiting its prized AAA credit rating, GE borrowed cheaply and lent expensively, looking more like a bank with every passing year. Over the next 15 years, gearing on the tangible common equity in its balance sheet rose from 13 times to 142 times, according to Steve Eisman at FrontPoint Financial.
His sums show that GE has less common equity – net of goodwill and intangibles – today than it did in 1992, but its balance sheet is four times as big. Welch’s successor, Jeffrey Immelt, has had to bolster the balance sheet of GE Capital by transfusions from the parent – in other words, from the retained profits of those dreary old industrial businesses.
In the last year, he’s shipped $14.5 billion across, but such is the dire state of GE Capital’s books that JP Morgan believes it needs between $10 and $15 billion more, and concludes that GE is more valuable without GE Capital than it is with it.
This bomb has been a long time ticking, and although Welch stepped down eight years ago, the explosion is largely the long-term result of his decisions. The shares have recovered from their panic low of March, but at $14 are still only at the level they first passed in 1996. If only Welch had followed his wife’s 10-10-10 decision-making rule, GE shareholders might have avoided their profitless decade.