Thank you, Jack Welch

In an interview with the Financial Times, Jack Welch stated, “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.” I admit I have had reservations about Jack’s wisdom in the past, probably because I remember Neutron Jack and haven’t been as forgiving as many of my colleagues. But this reversal in his thinking is dead on.

I see far too many of my clients, good people with good motives, obsessing on pleasing Wall Street analysts, and taking actions that may well reduce their stock’s value two to three years out. They have slashed budgets on many longer-term strategies, such as research and development, talent retention and development, even preventive maintenance on their equipment. All of it in the name of improving margins and a short-term increase in share value (or so the analysts say). Here are a few points, and I will let our bloggers add theirs as well, including dissenting points of view.

• The war for talent is still ongoing. There is and will be for some time, a shortage of leadership talent as a result of the baby boomers leaving the workforce. There will be plenty of “bodies” available, but that doesn’t equate to talent. Cutting back on development efforts to grow your own leaders will leave you at the mercy of the market when the economy picks back up. You will end up paying more for outside talent instead of developing your bench strength now.
• Cutting material costs and pushing suppliers to cut corners to meet cost targets is impacting quality. These short-term measures will have long-term costs with increased warranty costs and lost sales because of the damage to the “brand.”
• Instead of spending so much time with the Wall Street gang, why not spend that time talking to the constituents Jack calls out; employees and customers. You might just find out that your cost-cutting measures have led to employee disengagement and a loss in brand equity.
• If you must cut costs, start at the top. In the organizations I work with, the front lines are bearing much of the cost pressure. One client has even eliminated the free coffee at the daily pre-production meetings of supervisors! The front line is the place in your organization where all the knowledge and staff work must come together as product. Be careful whom you are messing with.

There are many more examples, but this should start the conversation. The real changes necessary for a resurgence of our economy, and with it lasting shareholder value, has to start in the boardrooms and the executive suite. Maybe they ought to call Jack.

Mike Neiss posted this on March 13, 2009, in Strategies.
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