Why Jack Welch's protégés are failing.

Commentary about business and finance.
March 4 2003 6:34 PM

Do They Know Jack?

Jack Welch's disciples have gone forth to preach his gospel. So far, most of them are failing.

How are Welch's disciples faring?
How are Welch's disciples faring?

Under Jack Welch, General Electric became not only the most valuable U.S. company and the exemplar of capitalism American-style but also a high-tension management academy. Welch focused on developing leaders and prepared dozens of executives to take senior posts, including his eventual successor, Jeffrey Immelt. Welch's disciples were supposed to spread the gospel to corporate America, bringing Welchism to the heathens. And, lo, Jack made Six Sigma, and it was good.

In recent years, at least six Welch protégés have been tapped to lead large companies ranging from Home Depot to Intuit. And while it may be too soon to make definite conclusions about their success as a group—and the extent to which they have propagated Welchism—the early returns are discouraging. By the measure that Welch valued most—the company's stock price—most are failing, and two have already lost their jobs. Two others, however, are quietly succeeding.

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The first to flunk was Gary Wendt. In June 2000, the former head of GE's incredibly profitable GE Capital unit parachuted into Conseco, a large, debt-laden Indiana insurance company plagued by reckless acquisitions and egregious executive compensation. (Wendt is more popularly known as the respondent in a celebrated corporate-wife divorce case.) But in his 28 months as CEO, Wendt didn't make things better. At the outset, he accepted a massive $45 million cash bonus (thus violating the Welchian principle of aligning the CEO's net worth directly with that of fellow workers and shareholders). Throughout his tenure, Wendt issued a series of exhortatory turnaround memos, even as the company continued some of its poor lending practices. Ultimately, Wendt was unable to deliver on his promises. He stepped down as CEO last October and Conseco filed for Chapter 11 in December.

Last month, onetime Welch deputy Paolo Fresco was stripped of his responsibilities at Italian industrial giant Fiat. Fresco, who spent more than 30 years with GE, rose to vice chairman of General Electric International and in the '90s glory years was a member of GE's three-person management team. In 1998, he was tapped to head Fiat, the Italian automotive giant.

Dubbed l'Americano, Fresco consciously aimed to mimic GE by creating a diversified conglomerate that would no longer rely on autos for its health. In 1999 alone, Fiat spent about $10 billion on acquisitions in areas like farm and construction equipment. But Fiat paid for its diversification with too much borrowed money. And as the core auto business continued to wilt, the company's finances teetered like that tower in Pisa. Fresco was inhibited in part by the influence of the controlling Agnelli family and by the cultural and legal obstacles that prevented the kind of mass firings Welch specialized in. Soon it was Fresco, al fresco.

Two other Welch disciples are struggling mightily. After losing the succeed-Jack sweepstakes, Robert Nardelli, head of GE's power systems division, left to run Home Depot in December 2000. Lacking retail experience, he nonetheless designed a game-plan straight out of the Welch playbook: Replace the existing folksy, decentralized management style with a headquarters-based technocratic one. Thus far, it hasn't worked.

Nardelli engineered a series of moves that made financial sense but not retail sense. To save money, he increased the use of part-time workers for busy weekends—the proportion of part-timers rose from 30 percent in December 2001 to about half in the spring of 2002. But that shift hurt service and alienated customers. In an effort to increase clout vis-à-vis suppliers, Nardelli centralized purchasing for the company's 1,500-odd stores. That angered store managers accustomed to tailoring their merchandising mix to local tastes. And the institution of lean inventories—a gimme in manufacturing companies—has led to occasional bare shelves, a no-no in retailing. Home Depot's stock is off by more than half since Nardelli's arrival, and the chain has lost ground—and even more crucial buzz—to Lowe's.

Upon succeeding Welch at GE, Jeffrey Immelt confidently proclaimed: "What I will say is that GE will always outperform any market that we're in." In fact, under Immelt, GE has underperformed the major indices. Of course, the former head of GE's medical unit had the misfortune to start his new job on Sept. 10, 2001. And in the past two years, the units that provided ballast to GE during the 2000-2001 slowdown—financial services, power turbines, jet engines—have run out of steam. With Welch having captured much of the low-hanging fruit with his well-publicized digitalization and Six Sigma programs, Immelt has been focused on generic efforts: technology, expanding services, increasing sales in China and Europe. GE is also rolling out a new advertising campaign: "Imagination at Work." It's not working on the imagination of investors.

Welch's successful protégés have gone about their business quietly. In January 2000, Stephen Bennett left GE Capital, where he was an executive vice president, to run Intuit, the tax software company. Although he arrived just before the technology meltdown, Bennett has managed to increase profits and revenues consistently, in part by bringing greater strategic and financial discipline to a company that still had vestiges of a startup culture. The stock, while still below its early 2000 peak, has far outpaced both the Nasdaq and the Dow during his tenure.

James McNerney of 3M has had the most success emulating Welch. In January 2001, McNerney, who had run GE's aircraft engine unit, decamped to Minneapolis, where he found a company in the mold of General Electric circa 1982: a 100-year-old multi-division industrial giant with a strong heritage of research and development and a loose management culture.

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