Ponzi 4: Former GE Chief Jack Welch says obsession with short-term profits, share price gains was “Dumb Idea”
"Ponzi 4: Former GE Chief Jack Welch says obsession with short-term profits, share price gains was “Dumb Idea”"
File this one under “now they tell us” or maybe “the former drug kingpin says crack is not healthy for you.” The Financial Times reports the shocking not-quite-deathbed conversion:
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”….
“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.”
Uhh,”your products,” Jack? Still, an amazing statement and 2 out of 3 aren’t bad.
I realize this is not the same as Jack denouncing the whole system as a Ponzi scheme (see “Is the global economy a Ponzi scheme, are we all Bernie Madoffs, and what comes next? Part 1). It’s not like he said “your main constituencies are your employees, your customers and the next generation.”
But escaping the Ponzi scheme requires a massive national and global investment in the trifecta of energy efficiency, cogeneration, and renewable energy (see “An introduction to the core climate solutions“). And that requires companies to make investments maximizing long-term profits and minimizing lifecycle costs — not maximizing short term profits and minimizing first costs.
Having spent a decade working with leading businesses on greenhouse gas mitigation strategy, helping (many of) them to adopt energy efficiency, renewable energy, and cogeneration technologies, I can attest that the single biggest reason senior company executives and corporate energy managers turned down even highly profitable investments was the companies’ obsession with short-term profits. A four- to five-year payback is, for instance, typical for a major energy efficiency upgrade and/or an onsite combined heat and power system, which can cut energy bills 25% to 50% (see the hundred case studies in my 1999 book, Cool Companies: How the Best Businesses Boost Profits and Productivity by Cutting. Greenhouse Gas Emissions).
Now that is a simple return of some 20% to 25% per year — comparable to or even higher than most of the other kinds of investments companies make. And that high return comes with a far lower risk than any of those other investments. And that high return also often come with productivity gains, as I and others have documented at length.
But it requires making a capital expenditure now (or increasing debt to borrow the money for the retrofit), to reduce operating expenses for the next 10 to 20 years. That hurts short-term profits and shareholder value — at least in the Welch-created world of now, now, now.
So perhaps Welch’s statement might be the first crack in the short-term-profit fa§ade. Here are more excerpts from this amazing story:
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.…
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….
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.
Sadly, most businesses today still haven’t done what the best businesses did on energy efficiency and cogen in the 1990s. And yes I realize that most companies don’t feel they have the money to make such investments right now.
But the Obama administration and Congress are working hard to help underwrite part of those investments with tax credits and loans — and incentivizing the utility industry to do the same by pushing smarter regulations (see “Waxman puts utility decoupling in the stimulus“).
So I expect a real resurgence in corporate energy investments over the next few years.
Note to self: Perhaps it is time to reprint some of the case studies I published a decade ago.