As crazy as this headline may sound—why would anyone view a loyal, talented workforce as a liability to a company?—that's exactly what a certain influential school of management thought believes.
The origins of this school of thought are explored in a book I recently read about Jack Welch, The Man Who Broke Capitalism, by David Gelles. Welch, of course, now deceased, was the longtime CEO of General Electric (GE). Over the years (he was GE's chief executive from 1981 to 2001), Welch created enormous value for GE's shareholders while cutting a vast number of jobs and destroying livelihoods in the process. In 1999, he was named Fortune Magazine's "Manager of the Century."
Reading this account of Welch and his management thinking was especially fascinating to me. During my own MBA studies (back in the early '90s), we often discussed Welch and GE's famed leadership institute. Indeed, Welch was hailed by the best business minds of his day as the gold standard. But he also left behind a complicated, deeply destructive legacy.
Welch was the leading practitioner of what's commonly called "shareholder capitalism"—meaning that the first and paramount duty of management is to satisfy their stockholders. In this endeavor, Welch succeeded colossally, delivering remarkably (some have said suspiciously) predictable quarterly earnings on a regular basis that grew GE from a $14 billion organization when he took over to $600 billion at his retirement.
Gelles discusses Welch's focus on the three main management tactics he used to grow the value of his company. First, dealmaking—acquiring other smaller organizations. Second, financialization—employing a wide variety of accounting techniques (generally legal, though sometimes questionable) to smooth earnings to ensure optimal quarterly performance. Third, at the heart of Welch's approach, and of most interest for this article, was his relentless focus on downsizing or reducing staff expenses—aka humans.
"Before Welch came along," writes Gelles, "employees were regarded as a company's greatest asset. Without the rank and file, it was understood there would be no business at all. But to Welch, labor was a cost, not an asset. And as a cost, it was to be minimized."
Prior to the Welch era, layoffs were generally viewed in the business world as a last resort for use in times of serious crisis. Welch saw layoffs as a powerful financial tool that could be used proactively. "To Welch," Gelles writes, "downsizing was a means to improve profitability, a tool that could help him meet quarterly earnings targets. The damage to individual livelihoods, let alone entire communities, didn't seem to bother him."
For most of the 20th century, GE was a highly respected manufacturer of many technical products—from jet engines to light bulbs to washing machines, etc. As such, Welch presided over a vast industrial empire with more than 400,000 employees, so there were ample opportunities for cutting.
It's not easy to increase profitability by developing new products—this takes time, ingenuity, and invention. But it's very easy (at least in the short term) to increase profitability by reducing the number of employees.
Fewer people equal lower salaries and benefits, which means reduced expenses and leads to better quarterly results, which the market cheers and the recipients of shareholder capitalism enjoy.
Hundreds of thousands of GE employees were let go during the Welch era. Welch gained the nickname "Neutron Jack." No people left, went the joke... only the buildings were still standing.
As Gelles writes: "Achievement was measured not by jobs created, but by jobs cut."
The problem with all of this from a management standpoint (in addition, of course, to the massive human suffering) is that over the long term, you can't cut your way to prosperity. Employees in layoff mode become nervous, disturbed, and unhappy. Morale suffers, and ultimately, so does an organization.
I have seen this personally many times during corporate reorganizations. Anxiety is the prevailing emotion du jour. Employees are understandably more preoccupied with personal survival than productivity.
As Gelles describes, the GE that Welch left behind was no longer fundamentally in solid shape. Though its stock value was high, the long emphasis on reductionist financial solutions rather than on technological excellence, research and development, and product innovation harmed the company badly. It was no longer a technology leader. Rather than continuing to grow, GE was beset by problems; it sold some of its businesses, concentrated on a few, and eventually contracted to a fraction of its former size.
In the end, viewing employees not as an asset but as a liability—a nettlesome expense to be trimmed—proved to be something of a "sugar high": tasty but not nutritious, powerful but not sustainable.
This management approach remains an issue that the many disciples of Neutron Jack wrestle with today.
That's not to say there's no place in business for reorganizations and downsizing. Sure, there is. Companies can grow bloated, inefficient, and non-competitive—and need to be reorganized. Any reasonable MBA would agree with that. It's just smart management.
But that's quite different from constant reorganizations as a normal activity in a healthy company's everyday life.
Long-term business success requires product innovation, understanding markets, understanding consumer psyches, and creating things humans want and need.
Successful businesses require confident people to build and deliver these things. People who feel they are assets to their organization, not liabilities.
References
Gelles, D. (2022). The Man Who Broke Capitalism. New York, NY. Simon & Schuster Paperbacks.
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