ENDS & MEANS: Current Approaches to Businesses, Careers & the Unexamined Life

Automotive Manufacturing & Production, Sept, 2000 by Gary S. Vasilash

Some people work just for money Some people think that you ought to get more out of life. The choice is yours.

Jack Welch is a jerk.

When I uttered that observation to a businessman who lives in the Cincinnati area, instead of getting the argument that I was hoping to provoke--after all, isn't the head of the high-flying old economy corporation General Electric held in the highest esteem by all other businesspeople because of his seemingly skillful management abilities?--I heard heated confirmation of my characterization. The businessman in question was incensed by the gutting of the GE Evendale plant, the aircraft engine manufacturing facility just north of downtown Cincy. And that, Alan A. Kennedy explains in The End of Shareholder Value: Corporations at the Crossroads (Perseus Publishing; $26), is only one of the multitudinous things that Welch has done that will, presumably, come home to roost like ravens over the GE headquarters in Fairfield, Connecticut.

First, a word about this whole "shareholder value" approach. Kennedy explains, "This philosophy has come to entail getting as much as you can as fast as you can for shareholders, who almost always include (through options or direct shareholdings) managers of the enterprise itself." While the bulk of the book is spent looking at various aspects of that in some detail, let's just break this down into two pieces, that of the shareholders and that of the managers.

So far as the shareholders--the people who have invested money into an enterprise--seem to be concerned, they're placing bets and want quick returns. It is almost like Vegas: If the slot machine doesn't pay off in comparatively short order, then move to another. In terms of investments in companies, it is essentially the same thing--but in some ways, the move from one company to another can be made even faster, thanks to electronic trading. So if one stock isn't paying right now, then just point and click.

The managers, of course, are interested in being rewarded: companies turning in good earnings reports on a quarterly basis are those that are inclined to pay well; given that many of these managers have stock options, they, too, are interested in the valuation of the stock.

Puffing It Up By Kicking 'Em Out

Here's where the trouble sets in, according to Kennedy: "The real problem is in the details of what companies have done to achieve inflated stock price levels. Across the board, companies have cut back on staffing." Some of this so-called downsizing is understandable because of efficiencies and improvements. But not all. "Others, however," Kennedy observes, "involved reductions in the human capital companies will likely need to build a profitable and sustainable future." As you may have noticed, whenever a company announces layoffs, its stock valuation usually goes up as a result. Which is potentially a bizarre situation, much like rewarding a farmer for turning his seed corn into malt liquor.

More, Kennedy continues, "Along with slashing human capital, companies have cut heavily into their R&D spending in pursuit of higher profits and a higher stock price now. Although difficult to measure directly, reductions in R&D spending in due course restrict the flow of ideas for future products and technologies... Without new products and technologies, any business will eventually stagnate." Swell.

So what about the poster boy for managerial magnificence? According to Kennedy, under Jack Welch's watch some 120,000 people lost their jobs, "savings for the most part extracted from GE's traditional manufacturing businesses." And "While he was extracting costs of all kinds from GE's traditional manufacturing businesses, Welch invested heavily in financial services as a means to induce increased earnings for the company." Instead of making money by making things, the focus on making money by dealing with financial instruments. R&D? Kennedy writes, "GE still spends only about 3.3 percent of its manufacturing revenues on R&D. By contrast, Honda Motor Company of Japan spends 5 percent of its revenue on research, NEC of Japan spends 7 percent of its revenue, and high-tech companies like Microsoft spend as much as 10 percent of revenue on R&D." Perhaps the rationale is that if you are making fewer things, R&D is ancillary. And finally, Kennedy maintains that one of the things that GE has invested in under Welch i s GE stock: buying back about $30-billion worth. This can raise the price of the stock. But it doesn't necessarily do anything for, say, improving productivity.

The question becomes: What next? Kennedy, while acknowledging that GE will keep chugging along, warns that things may not look so rosy for the long run, especially as drivers for growth (e.g., intellectual capital in the form of people; R&D) have been trimmed.

One of the consequences of companies relinquishing their own abilities to make things (and to invent things) is that supplier companies have had to come to the fore. And these suppliers have tended to become bigger and bigger in order to do all that is expected of them. Kennedy warns that there is the possibility that these megasuppliers, which were historically beaten down on price (here the euphemism is "cost down") before they got so big, may get to the point where they are essentially in control of an automaker's fate, and so those companies with good supplier relations may have an easier time of getting innovative, quality products out the door.