An Interview with Jack Welch
What follows below is the transcript of my interview with legendary former General Electric chairman & CEO Jack Welch on The Kudlow Report Monday night. We covered a lot of ground. Mr. Welch awarded high marks to Fed chief Ben Bernanke for his handling of the financial crisis, and described his performance on 60 Minutes Sunday evening as “magnificent”. He wasn’t as charitable to Washington policymakers though, chiding them for fumbling the AIG bonus boondoggle. Welch said the Feds ought to start acting like a board of directors in dealing with AIG brass. In other words, Washington owns AIG, so they ought to start acting like it. We also discussed the recent brouhaha surrounding his comments on shareholder value to the Financial Times.
LARRY KUDLOW: Now, CNBC exclusive, we welcome back business legend Jack Welch, former chairman and CEO of General Electric. All right, Mr. Welch, it is always wonderful to see you sir. We’ve got to do the news of the day, it’s not exactly what I thought we were going to talk about, but we will get to your Financial Times interview in a moment or two. I’ve got sound from Ben Bernanke last night on 60 Minutes about AIG. If you would just take a listen, and then we’ll talk.
Fed Chairman Bernanke on 60 Minutes:
I slammed the phone more than a few times on discussing AIG. I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy.
KUDLOW: You know Jack, I hate like heck to sound like Barney Frank, but I think I’m going to sound like Barney Frank by asking you this question. If the US government can cram down General Motors auto workers, the UAW contracts, compensation, benefits and what not, why can’t we cram down AIG? After all, really unlike GM, at least so far, the American taxpayer is the primary owner of AIG, certainly the primary creditor.
JACK WELCH: Hey Larry, why don’t we step back for a minute. There’s been 24 hours of wild emotion over this thing. Who owns AIG? The US government owns AIG. Now why are they not taking charge of their situation? They appointed a CEO; it’s their CEO. He happens to be a very good man, Ed Liddy, who ran Allstate for many years. They ought to be working as a board of directors with their CEO on what the compensation ought to be. Then they ought to be either agreeing with their CEO, who’s making $1 a year, and doing it as a good citizen, or they ought to get their own man in there, this administration ought to put somebody in.
KUDLOW: But they’re saying, you know Liddy, okay he’s a good man. Basically I agree with you Jack. But you know Liddy is throwing up this blue smoke at us about the contracts. He says there are contracts.
WELCH: Larry, Larry, Ed Liddy is their CEO! They’re the board of directors! Why are they not working with the CEO to get a resolution? These guys want to be critics on the outside, and not owners on the inside. They are owners.
KUDLOW: Geithner and his group should have called Liddy down to Washington. I don’t understand this. And just sat him down and say, okay, here is the way life works. Here’s the way it’s going to work. Is that what you’re saying?
WELCH: It should have been resolved between Liddy and the Treasury, or the Fed, or whoever it is that represents the US government who is the owner of AIG! The idea that these guys who own it, can now all throw rocks at it, makes no sense. It would be like a board of directors throwing rocks from the outside and not being responsible.
KUDLOW: Well why didn’t we put them in bankruptcy in the first place? Some kind of government sponsored bankruptcy which nullifies and voids all the contracts? Why didn’t we do that? In fact, for that matter, why didn’t we do it for General Motors?
WELCH: Look Larry, I’m not going to get into whether Lehman was right, AIG was right, the way they handled that. We’ve already crossed that bridge. I want to stay on this one though. I don’t think these guys as owners, are acting like owners who want to get their $180 billion dollars back. They’re not acting like owners. Let’s challenge them to work with the chairman, to work as a board of directors. Have them designate Geithner, or Bernanke, or whoever, and have them work it out so that the government is working in concert with the CEO, not at cross-purposes, Larry.
KUDLOW: So what you’re saying is we need a grownup in the Treasury. Is that what you’re saying? We need someone with some business seasoning in the Treasury to do exactly the kind of thing you’re recommending?
WELCH: We need a government group representing the owners who are responsible for dealing with the CEO in the same way governance happens in any company. Not having—we’ve got the New York State attorney general, we’ve got Barney Frank, we’ve got everybody—the government owns the company!
KUDLOW: So they’re really not doing their job. They’re whining a lot. They’re whining a lot, they’re throwing a lot of faux populism. But you’re saying they have other tools. They should just do their job.
WELCH: My argument is Larry, they ought to work with the CEO as any owner would. As we do with our private equity companies. Try to encourage the CEO to get the right answer so we get a return on our money. I don’t want this $180 billion to just go up in smoke because we’re all fighting with each other.
KUDLOW: All right, I hear you. Now hang on Mr. Welch, hang on. We have so much more for you to do…Kudlow Report, stay with us, we’ll be right back.
KUDLOW: All right we’re back with business legend and great friend Jack Welch. Of course, the former chairman and CEO of General Electric, the parent of this network. Mr. Welch I cant help but admire your green tie. I’m sure there’s an inner meaning to that.
WELCH: [Laughter] I don’t think so.
KUDLOW: Okay, tomorrow’s St. Patrick’s Day. Anyway, Ben Bernanke makes his national television debut on 60 Minutes. They have a couple more viewers than his usual CNBC venue. Here’s Mr. Bernanke on the economy with a touch of optimism. Let’s hear it.
Fed Chairman Bernanke on 60 Minutes:
Ben Bernanke: We’ll see the recession coming to an end, probably this year. We’ll see recovery beginning next year. And it’ll pick up steam over time.
Scott Pelley: You think the recession is going to end this year?
Bernanke: In the sense that this decline will begin to moderate, and we’ll begin to see leveling off. Now we won’t be back to full employment, but we will see, I hope, the end of these declines that have been so strong the last couple of quarters.
KUDLOW: All right Jack, what do you think? That’s his forecast. Now he’s had some that turned out okay, and some not okay, and we’re all guilty of that. What do you make of it?
WELCH: Well I’m sort of in his corner. I’m not a great expert on this, but I’m in his corner. Larry I have a fact here that may be of some interest. I’m involved with a private equity firm, a partner in a private equity firm, Clayton Dubilier, where we have several companies. A beauty company; a car rental company; an industrial distribution company; a food services company. And February was the first month since May, where we did not have sequential downs over the prior month. February was about equal to January, and so was early March.
Now I gave this comment, this little tidbit, and said don’t take it to the bank or do anything else at a JP Morgan conference a week ago. And as I went to lunch, several CEOs came up to me and said, ‘you know we’re seeing the same thing. We didn’t want to say it.’ So Larry there is sort of a feeling, now it’s by no means guaranteed, but there is somewhat of a feeling that the acceleration down has somewhat moderated. And we seem to be flattening out a touch.
KUDLOW: Well I like the story, and we try to show some of this stuff each evening. We’ve seen a bottoming, even an increase in key commodity prices—the Baltic Dry Index. Here’s one Jack, core retail sales, underlying retail sales, which feed into GDP, have actually been up two straight months. And the energy price plunge in retail gas, real incomes, disposable incomes from consumers have been up the last four of five months. So there may be some stability.
Let me throw one more Bernanke sound tape at you. Here’s his pitch to Main Street and backing around the country.
Bernanke on 60 Minutes:
You know I come from Main Street, that’s my background. And I never have been on Wall Street. And I care about Wall Street for one reason and one reason only. Because what happens on Wall Street matters to Main Street.
KUDLOW: Jack is he making the sale in your judgment? Is he winning the support of the people? This is such a controversial issue. Opinion polls show that folks do not like these bailouts. Do you think Bernanke himself personally made the sale last night?
WELCH: Well he gave a tremendous presentation Larry last night. He was thoughtful. He was measured. He really radiated confidence. And we need more than anything else, confidence. And he also laid out the challenge for the political forces. He said the pressure will be do we have the political will to make the fix? And that is a real challenge for Washington. He said we’re going to need to go after it with a vengeance. He studied the Depression more than anyone. He’s making a lot of right moves; he’s made a lot of right moves. I’ve been supporting him in our column for the last four months. I think he’s made a ton of right moves, and I happen to believe that he laid the gauntlet down to Washington. Do they have the political will to back up what he needs, the firepower he needs, to get the job done Larry. I think he did a magnificent job.
KUDLOW: You know, I worked for Arthur Burns and Paul Volcker at the New York Fed. Of course like you I knew Greenspan very, very well. I think this is the best television communications performance of any Fed chairman in my lifetime. And I agree with you sir, he did get the job done. And I think he did more to help Obama and all the issues toward recovery than anything we’ve seen so far. He stood alone. He deserves reappointment doesn’t he?
WELCH: Absolutely Larry. He did a job on a broad spectrum. H e grabbed the country and he challenged the politicians.
KUDLOW: All right. So Jack, let me go to this controversial Financial Times—holy cow, I’ve never seen such a thing for you. You give a little interview in the Financial Times and you’re all over the blogosphere, the Internet, and what not. It says here Jack Welch regarded as the father of shareholder value, he is now saying the obsession with short term profits is all wrong. And I’m going to read you the key quote, the money quote. “On the face of it Mr. Welch said, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy.” Please, elaborate.
WELCH: Larry, I was having an interview on the future of capitalism. And I was asked, what do you think of shareholder value as a strategy? I said it’s the dumbest idea possible. It isn’t a strategy; it’s an outcome. A strategy is something like, an innovative new product; globalization, taking your products around the world; be the low-cost producer. A strategy is something you can touch; you can motivate people with; be number one and number two in every business. You can energize people around the message. They come to work every day. It’s tangible. It’s something they can feel and be proud of.
Shareholder value? What the hell is that Larry? It’s the result of you doing a great job, watching your share price go up, your shareholders win, and dividends increasing. What happens when you have increasing shareholder value? You’re delivering better employees to their communities and they can give back. Communities are winning because employees are involved in mentoring and all these other things. Customers are winning because you’re providing them new products, value propositions…
KUDLOW: But we’ve got to have profits. Profits are the mother’s milk…
KUDLOW: …not just of the stock, but of the whole company. A healthy company’s got to have earnings. And it’s got to have capital investment. Now, what do you say now? What’s your advice now? Or let me put it differently. If you were at the business roundtable meeting yesterday, all the bigwigs met with President Obama—not yesterday Thursday, I beg your pardon. I’m time insensitive. If you were there, what strategy would you have recommended to your colleagues and to your president?
WELCH: Look, it’s always the same. You’ve got to eat while you dream. You’ve got to deliver on short-range commitments, while you develop a long-range strategy and vision and implement it. The success of doing both. Walking and chewing gum if you will. Getting it done in the short-range, and delivering a long-range plan, and executing on that Larry. That is what it’s all about. That’s what management is—making choices. Any jerk can have short-term earnings. You squeeze, squeeze, squeeze, and the company sinks five years later. Any jerk can sit there and say, ‘hey, come back in five years, I’m doing my long-range thinking.’ Get out of here. Management is all about managing in the short term, while developing the plans for the long term.
KUDLOW: Is it time, as some people say—now this is interesting, Fred Smith, our great friend, the CEO of FedEx, he’s got to be one of the smartest businessmen in this country.
WELCH: Very good.
KUDLOW: He says we’ve got to do something to boost American manufacturing and industry, the stepchild of business. We always talk about tech. We always talk about financial services, and Lord knows, we’re spending multiple fortunes of taxpayer money today on financial services. Jack, GE once was a great industrial manufacturing superpower. I don’t know, it seems to have receded in its priorities. I’m not asking you GE specific. In general, what could this country do to boost its manufacturing and industrial base?
WELCH: Larry, again, obviously we have to do the education job, we can’t be having H1B visa restrictions and sending the best and brightest technical people we get and send them home. We’ve got to change government policy on that regard. But just a quick line on GE Larry, I can’t let you get away with that. GE is without question, the leader in jet engine manufacturing, with sophisticated engineering and design. It’s the leader in power generation, power plants all over the world, powering electricity…
KUDLOW: But it’s a smaller share of the company. I mean, I’m not an analyst of General Electric. As I’ve said on this program…
KUDLOW: I heard [GE CEO] Jeff Immelt give a brilliant speech, I was there in South Carolina at the New Years weekend. But Jack, it has shrunk. Right?
WELCH: No it hasn’t shrunk!
KUDLOW: Look at financial services. GE Capital became the big swinging you-know-what and the manufacturing side took second place.
WELCH: Larry, manufacturing grew from something in the neighborhood of $20 billion to $90 billion over the period. Financial services grew faster. But manufacturing became bigger and more powerful during that period. That’s why manufacturing throws off $10 to $15 billion of cash flow that will support the financial services through this period.
KUDLOW: So you’re saying it never left, it’s still there, and nationwide it’s still there. Is that your message?
WELCH: Well I think you’ve got some great industrial companies. You’ve got United Technologies, you’ve got Emerson Electric, you’ve got Eaton, you’ve got all kinds of good industrial companies. Larry, this is somewhat of a myth. But I’ll tell you one thing, Fred’s right. We’ve got to have the policies to keep the best and brightest in our country.
KUDLOW: Well he wants immediate write-offs of investments. He wants full cash expensing for investments to lower the cost of capital. That is something I am not hearing from Washington, frankly, in either party right now. And I think that would help. You’re right about the H1B visas. We’ve got to get out of here. Mr. Jack Welch, I love getting smacked down by you. It is my favorite smack down anywhere.
WELCH: I didn’t mean to Larry, I love being with you. Thanks for having me.
KUDLOW: All right sir, it’s wonderful to see you again.