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What Do Elon Musk And Jack Welch Have In Common? Hint: It’s Not Their Ability To Create Shareholder Value

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Elon Musk’s first week at the helm of Twitter mirrors Jack Welch’s approach to capitalism. Musk’s approach to cutting executives and employees is a gut reaction to cut costs. Such tactics did not build enduring wealth for GE, and are even less likely to do so now for Twitter.

In his first week at the helm of Twitter, Elon Musk took a page from a playbook once used by executives who relied on slash-and-burn tactics to create shareholder value. But, today, attitudes are changing and employees are recognized at the basis of value creation.

It remains to be seen whether Twitter will survive the deep cuts to its workforce, but the evidence weighs against it.

Musk has already fired key senior executives and his board. And when he laid off half of Twitter’s roughly 7,500 employees, he apparently asked management to identify low- and high-performing workers. He then fired low-performing employees by unceremoniously locking them out of their work accounts.

A week after taking over, Musk was quoted as telling remaining employees: “If you can't perform hardcore, then Twitter is not for you.” He warned of bankruptcy and ordered staff back to the office, despite current widespread workplace trends favoring remote work.

These strong-arm tactics were a radical departure for Twitter, whose careers website championed a “culture that’s supportive, respectful and a pretty cool vibe.”

Jack Welch’s Play Book

Musk’s approach harkens back to an era of corporate governance and leadership that has long fallen out of favor. They include the approaches taken by the CEOs of General Electric, Coca-Cola, Enron and Walmart. Back then, CEOs were seen as corporate heroes who sought to create value by buying and selling companies and then cutting whatever costs they could. Employees weren’t seen as people, they were simply capital and part of the cost equation.

Jack Welch, the former CEO of General Electric, is often held up as the exemplar of this approach.

In his 2001 book Jack: Straight from the Gut, Welch describes how he created shareholder value by culling his workforce. He writes with pride his approach to sorting employees into three categories: The top 20% are productive, passionate and fun. The “vital 70%” are critical to operations. It’s the bottom 10% who are the problem, he says. They are enervators, procrastinators and time-wasters. To be successful, Welch argued, managers must identify and dismiss these low performers.

There is no question that Welch created shareholder value. During his time as CEO, GE’s market capitalization went from $12 billion in 1981 to $410 billion in 2001. But it would be a mistake to believe this success came from his approach to human resources. Rather, it was through corporate raiding – buying, stripping and often selling companies.

GE’s market capitalization grew because of the companies it acquired, not the value it created through building new products and services, which requires companies to invest in employees. GE was simply an earlier form of hedge fund.

Welch’s approach has garnered its fair share of criticism. Last year, Paul Polman, the former CEO of Unilever, described Welch as “the most destructive shareholder value-creating machine that ever was on earth. And, after Welch retired, no other CEO has found a way to create wealth on the machine Welch built.”

David Gelles denounces Welch’s tactics in his book The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America — and How to Undo His Legacy. In a June 2022 article for the New York Times, Gelles directly compares Welch to Musk: “When Elon Musk negotiates his $44 billion deal to buy Twitter by using the poop emoji — this is the world that Jack Welch helped create.”

Questionable Capitalism

Both Musk and Welch embody a type of questionable capitalism that has been long discarded — treating employees as capital or costs, rather than as the foundation for creating value. It’s the capitalism of the pre-2000s, characterized by the Enron accounting scandal, the British Petroleum oil spill and the 2008 global financial crisis. It was a time of short-term thinking embodied in acquiring, divesting and downsizing companies.

In a study I undertook with Shoonchul Shin and Juyoung Lee, we found that prior to the 2000s, CEOs were less likely to be dismissed when they downsized their firms in response to poor financial performance. This relationship vanished, however, around the turn of the century as shareholders began expecting CEOs to invest in employees to help build their companies, not lay them off to simply cut costs.

And, that’s for good reasons. As Mark Murphy reports in his Forbes column, laying off employees can erode productivity, quality and ability to recruit.

A study by Jody Hofer Gittel and her colleagues shows that after the September 11, 2001 attacks on the World Trade Center, the U.S. airlines that recovered most quickly were those that did not lay off workers because they were able to maintain employee morale after the crisis.

The Future for Twitter and Old-School Capitalism is Bleak

Even as this article is posted, the news for Twitter changes by the minute. Musk’s cuts have been deep and the negative effects are already evident. Several Twitter executives have resigned in the key areas of privacy, compliance and security. Major advertisers have paused their ad spends amid the chaos, leading to what Musk has said has been a “massive drop in revenue.”

This outcome was foreseeable. Mr. Musk should have learned the follies of Mr. Welch slash-and-burn tactics — but it seems not.

As other companies in the tech sector face similar decisions to address major financial disappointments, the question will be whether the CEOs have the sensibilities to recognize that the world has changed. Whether they survive or not may very well depend on whether they embrace a more just form of capitalism.

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