What do Elon Musk and Jack Welch have in common? Well, it’s not their ability to create shareholder value.

Elon Musk’s first week at the helm of Twitter mirrors Jack Welch’s approach to capitalism. Musk’s approach to cutting executives and employees is a knee-jerk reaction to cutting costs. Such tactics have not created lasting wealth for GE, and are even less likely to do so now for Twitter.

In his first week at the helm of Twitter, Elon Musk took a page from a playbook once used by executives who relied on cut-and-burn tactics to create shareholder value. But, today, mentalities are changing and employees are recognized as the basis of value creation.

It remains to be seen whether Twitter will survive the severe cuts in its workforce, but the evidence is weighing against it.

Musk has already dismissed key senior staff and his board. And when he fired half of Twitter’s roughly 7,500 employees, he apparently asked management to identify low-performing and high-performing workers. He then fired underperforming employees by harshly excluding them from their business accounts.

A week after taking office, Musk was quoted like telling remaining employees, “If you can’t do hardcore, then Twitter isn’t for you.” He warned of bankruptcy and ordered staff back to the office, despite current widespread workplace trends favoring remote working.

These heavy-handed tactics were a game-changer for Twitter, including the careers site championed a “culture that is supportive, respectful and has a pretty cool vibe.”

Jack Welch’s Playbook

Musk’s approach recalls an era of corporate governance and leadership that has long fallen out of favor. They include the approaches taken by the CEOs of General Electric, Coca-Cola, Enron and Walmart. At the time, CEOs were viewed as corporate heroes who sought to create value by buying and selling businesses and then cutting whatever costs they could. Employees were not considered people, they were simply capital and part of the cost equation.

Jack Welch, the former CEO of General Electric, is often held up as an example of this approach.

In his 2001 book Jack: straight out of the guts, Welch describes how he created shareholder value by eliminating his workforce. He proudly writes of his approach to sorting employees into three categories: the top 20% are productive, passionate and fun. The “vital 70%” are essential to operations. It’s the bottom 10% that’s the problem, he says. They are enervators, procrastinators and time wasters. To be successful, Welch argued, managers must identify and dismiss such poor performance.

There is no doubt that Welch has created value for shareholders. During his tenure as CEO, GE’s market capitalization grew from $12 billion in 1981 to $410 billion in 2001. But it would be a mistake to believe that this success is due to its approach to human resources. Rather, it was through corporate raids – buying, breaking up and often selling businesses.

GE’s market capitalization grew because of the companies it acquired, not the value it created by creating new products and services, which forces companies to invest in their people. GE was simply an earlier form of hedge fund.

Welch’s approach has drawn its fair share of criticism. Last year, Paul Polman, the former CEO of Unilever, described Welch as “the most destructive shareholder value machine that has ever existed on earth. And, after Welch’s retirement, no other CEO found a way to build wealth on the machine Welch built.

David Gelles denounces Welch’s tactics in his book The man who broke capitalism: How Jack Welch gutted the Heartland and crushed the souls of corporate America – and how to undo his legacy. In a June 2022 article for the New York TimesGelles directly compares Welch to Musk: “When Elon Musk brokers his $44 billion deal to buy Twitter using the poo emoji — that’s the world Jack Welch helped create.”

Doubtful capitalism

Both Musk and Welch embody a dubious type of capitalism that has long been shunned – treating employees as capital or costs, rather than the foundation of value creation. This is pre-2000s capitalism, characterized by the Enron accounting scandal, the British Petroleum oil spill and the global financial crisis of 2008. It was a period of short-term thinking embodied in the acquisition , disposal and downsizing of companies.

In a study I conducted with Shoonchul Shin and Juyoung Lee, we found that before the 2000s, CEOs were less likely to be fired when they downsized in response to poor financial performance. That relationship faded around the turn of the century, however, when shareholders began to expect CEOs to invest in employees to help them build their business, not fire them just to cut costs.

And it’s for good reasons. As Mark Murphy reports in his Forbes columnlaying off employees can erode productivity, quality and the ability to recruit.

A study of Jody Hofer Gittel and his colleagues shows that after the September 11, 2001 attacks on the World Trade Center, the American airlines that recovered the fastest were those that did not lay off because they managed to maintain employee morale after the crisis.

The future of Twitter and old-school capitalism is bleak

Even when this article is published, Twitter news changes from minute to minute. Musk’s cuts have been deep and the negative effects are already evident. Several Twitters frames resigned in the key areas of privacy, compliance and security. Major advertisers have suspended ad spending amid the chaos, leading to what Musk said was a “massive drop in revenue.”

This result was predictable. Mr. Musk should have learned the follies of Mr. Welch’s slash and burn tactics – but it appears not.

As other tech companies face similar decisions to deal with major financial disappointments, the question will be whether CEOs have the sensitivity to recognize that the world has changed. Whether or not they survive may very well depend on whether they embrace a fairer form of capitalism.

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