Letters to MoneyWeek: More lessons from Jack Welch

published 16 February 2018

Bill Bonner's article describing how Jack Welch's legacy at General Electric (GE) now rests in tatters (MoneyWeek 881) was very interesting. Bill describes the crazy take-over culture that resulted in GE acquiring businesses it had no idea how to run. While I've no doubt that such a pursuit was, in any event, guaranteed to fail, there are perhaps other things to cite for GE and Neutron Jack's nuclear fallout.

If you read Leaders Eat Last by Simon Sinek, he cites the terrible culture Welch created at GE. Welch (pictured) was a new breed of CEO who had no real interest in employees or customers. It was all about short-term profits in the name of shareholder returns and, of course, the CEO's remuneration package. The bottom-performing 10% of managers were dismissed on a regular basis, with lavish bonuses for the best performers.

Sinek describes how GE's was a culture of both greed and fear. In pursuing such a strategy, if it can be called that, Welch created a company fit for the 1980s boom times, but totally incapable of coping in a recession. GE devoured itself from the inside out.

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He goes on to compare the stock-price performance of GE with that of Costco, which was run by James Sinegal. Sinegal was the opposite his mantra was putting customers and employees first. By taking care of that, the numbers would reflect their efforts. In turn that would look after stakeholders. Put people first and the profits follow.

If you look at both firms' long-term share-price performance, it's clear to see which strategy worked. Even Welch eventually derided the concept of shareholder primacy. Investors would do well to review in detail an organisation's managers and their interactions with their teams. Does the customer experience reflect the management and marketing messages? Ultimately the numbers are a reflection of the cohesive efforts of people and their relationships.

We agree that investors overlook corporate culture at their peril. Carillion (see below and on page 32) may be a recent example.

Why small firms shun insurance

Your article on trade-credit insurance (MoneyWeek 882) made for interesting reading, but sadly you missed the most salient point as to why it has very little take-up among small and medium-sized enterprises acting as contractors in the construction industry

The supply chain in construction consists of many different types of suppliers such as plant hire, materials and contractors. While most of the supply chain will enter into some form of contract for supplying goods and services, generally only contractors enter into a relationship with the principal contractor (eg, Carillion).

This relationship binds them to the main contract terms and conditions in particular payment provision, which can be extremely onerous. As a consequence of this arrangement, and the Construction Act, any matters not resolved over payment provision quickly becomes a dispute. Once in dispute, third parties are locked out by the contractual arrangements of their clients along with the small print in their insurance cover. So paying for something you are unlikely to benefit from makes little sense.

Make executives responsible for deals

I have been reading with interest the development of problems at Carillion, where there appears to have been a complete disconnect between the performance of individual contracts and the remuneration of the responsible executives who signed off on low-ball bids. This is a problem which was encountered and addressed in computer leasing many years ago.

In those days in the computer-leasing industry, account executives were paid a modest basic salary. Commission was not paid on leases as they were sold, but only when the leases ran to term or otherwise terminated and the full financial position was understood. As you can imagine, this made for some thin years when you were starting out, but rather better years when you were retiring and in the process of winding down your lease portfolio.

If such an approach were applied to executive remuneration in a contract-based industry, such as infrastructure projects and outsourcing projects, any tendency for low-ball bidding would be inhibited because of the high likelihood of a disastrous effect upon the project's financial performance at contract end. Bonuses would only be paid when projects were successful and the money was there. Public-sector procurement would benefit, as the lowest bid would have been constructed more carefully than appears to be the case at present.

How attractive is the VCT Isa?

Your article on innovative Isas (MoneyWeek 881) is useful, but misses a key feature of the Octopus Titan VCT Isa. Yes, the ongoing tax benefits are the same (tax free) as conventional stocks and shares Isas, but the initial transfer attracts tax relief of 30%. This means an investor can transfer, say £50,000, from an existing Isa and claim back £15,000 in tax. Furthermore, if dividends are reinvested these also count for tax relief. As the tax year end rapidly approaches, some MoneyWeek readers may well find this an attractive option. They should tread carefully, not because the tax benefits are no better than other Isas (they are), but because of the higher risk that VCTs pose.

It's a minor point, but we'd still disagree that the tax benefits are better than other Isas. The VCT tax relief is independent of the Isa status, so there is no difference between transferring across cash from an existing Isa and investing fresh cash from outside an Isa. There may be a small number of people who find this convenient given their wider financial affairs, but overall it's hard to see why this product will interest most investors.

Writing to MoneyWeek

MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for information only and should not be relied upon in making investment decisions. Please note that our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to provide individual investment advice. Email us at editor@moneyweek.com,or write to us at Editor, MoneyWeek, Dennis Publishing, 31-32 Alfred Place, London, WC1E 7DP.