Welch denounces profits obsession

Jack Welch, the executive regarded as the father of the “shareholder value” movement, has said that the obsession with short-term profits and share-price gains that has dominated the corporate world for more than 20 years was “a dumb idea”.

The former General Electric chief told the Financial Times the emphasis that executives and investors had put on shareholder value since he spelt it out in an 1981 speech was misplaced.

Mr Welch, whose record 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.

“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 at New York's Pierre hotel in 1981, shortly after taking the helm at GE.

In the speech, titled “Growing Fast in a Slow-Growth Economy”, Mr Welch outlined his beliefs in selling underperforming businesses and aggressively cutting costs to deliver consistent profit rises that would oustrip 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 that 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 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”.