The Shareholder Supremacy

0:00This is an iHeart Podcast.

0:30Thomson Reuters and specialized bikes have since they upgraded to the next generation of the cloud. Oracle Cloud Infrastructure. OCI is the blazing fast platform for your infrastructure, database, application development, and AI needs, where you can run any workload in a high availability, consistently high performance environment, and spend less than you would with other clouds. How is it faster? OCI's block storage gives you more operations per second. Cheaper? Better? OCI costs up to 50 % less for computing, 70 % less for storage, and 80 % less for networking. Better? In test after test, OCI customers report lower latency and higher bandwidth versus other clouds.

1:12This is the cloud built for AI and all your biggest workloads. Right now, with zero commitment, try OCI for free. Head to oracle.com slash strategic. That's oracle.com slash strategic. So I love Square. They make paying for stuff at a store really easy. I just use them at Court Street Grocers to buy a sandwich here in Brooklyn, New York. Their stuff's reliable, easy to use, and it just works for both businesses and their customers. Square keeps up so you don't have to slow down. Get everything you need to run and grow your business without any long-term commitments. And why wait? Right now, you can get up to$200 off Square hardware at square.com slash go slash better offline.

1:50That's S-Q-U-A-R-E dot com slash G-O slash better offline. Run your business smarter with Square. Get started today.

2:03Hello and welcome to Better Offline. I'm your host, Ed Zitron.

2:19In the next two episodes, I'm going to walk you through a theory I have about how the tech industry and capitalism at large, became the playground of arsehole do-nothing management dictators that see human beings as assets and the customer as kind of an annoying diversion from growth. But before I go any further, please check the episode details of this for a URL that has sources for everything that I'm talking about in this and future episodes. I want you all to be able to follow along with everything I'm saying. Don't take my word for it. Take the many, many links that I've included. It's important that you're just as informed as I am here.

2:53But now to the episode, and I promise you, once we're done with this two-parter, everything that's happening will make a little bit more sense, even though it all feels just chaotic and offensively stupid, disconnected from reality. In many ways, I've been working on this episode and its follow-up for years, watching these trends, getting steadily more pissed off, as you've probably heard, unable to see the big picture, because I've been picking up things as I go. Even since 2020, when I started writing my newsletter, there was something going on that I just couldn't quite get. It's been really hard to understand how companies like Meta can run terrible companies with decaying services that are also somehow wildly profitable.

3:36or how Meta, Microsoft, and Google keep proliferating this unprofitable, unsustainable generative AI tech that takes water from the desert and strains our power grids to produce these deeply mediocre outcomes based on incredibly vague promises and then see their stock prices go up despite them not making any money. And I've been craving this way to explain the whole growth at all costs mindset. it. I've explained what it is so many times, but there is an answer and it's fairly simple. The customer, and by extension, the service provided to the customer, isn't really the primary concern of many, many companies these days.

4:15It's all about shareholder value. And while this may seem a little bit obvious, it requires also a little bit of a history lesson to really explain how profoundly damaging what I call the shareholder supremacy really is. And I know you're probably going to think, well, we all knew that increasing shareholder value was what stocks were about, right? I really need you to understand what that means. Our journey takes us back almost 100 years, long before the creation of the internet, the iPhone, Facebook, the Better Offline Podcast, you know, the major things in the tech industry. We're going to talk about the figures that predate the villains I've covered in the past.

4:54The Altmans, the Sundar Pichai's, the Prabhagar Raghavans of the world. But despite their historical distance from this current era, these past figures are important to know and understand because they fundamentally shaped the culture and the psychology of today's managerial elite, and crucially, built the incentive structures that guide companies into hell. These stories explain the often paradoxical motivations of modern capitalism, where those who make short-term decisions that invariably result in long-term pain and in many cases decline, see a big reward, whereas those who built sustainable businesses that actually innovate and don't treat their customers and employees like that are ignored, if not actively maligned for a lack of growth.

5:38But like I said, it's time for a history lesson. In 1916, the Ford Motor Company had an idea, to use its surplus capital to invest in new plants to increase productions of Ford's Model T car, which the company had continually made cheaper or keeping wages for its workers high. Ford, who I should be clear was a horrible piece of shit, thankfully he's burning in hell right now, intended to cut dividends to shareholders in favor of investing in its employees and infrastructure, which angered minority shareholders who already incensed that Ford had prioritized the company's success and its employees' happiness over making the stock price go up, leading to the famous Dodge vs.

6:17Ford Motor Company case that would define, and ultimately doom, modern capitalism, and in many ways birthed the growth at all costs rot economy. The Michigan Supreme Court found that a business corporation is organized and carried on primarily for the profit of the stockholders, and that the powers of the directors are to be employed for that end, and intimated that cash surpluses should not be saved to invest in upcoming projects, but distributed to shareholders because Ford had shown that it was good at making money. Ford was directly forbidden from lowering prices and raising employee salaries and forced to issue a dividend by a court.

6:55That's the free market, baby. That's how it used to work, and I guess that's how it works nowadays. Anyway, to be clear, the statement around corporations' duty towards shareholders was made a beta dicta. This means it was not actually legally binding, despite over a hundred years of people acting as if it was, citing it in cases, using it as a justification to destroy so many lives in favor of growth. This statement, not even a legal precedent, a statement, was the beginning of what I call the shareholder supremacy, when companies moved away from building lasting, sustainable companies that created things and instead became these nasty growth bitches that focused on pleasing shareholders.

7:38It birthed a short-term mindset focused on increasingly abstracting a company away from the production of goods or services, and promoting growth mechanics that increase stock valuations and made for better balance sheets. The cult of shareholder supremacy, which some people call shareholder primacy, is one disconnected from production, and I'd argue humanity itself. It's this weird continual shell game where companies do things not to produce an outcome in real life or a thing that people like and pay for, but to manipulate investors and the markets themselves, though at this point, it kind of feels like investors and markets are kind of in on the con.

8:16These tactics should be immediately recognizable to anyone who's followed my work over the last few years. If a company's share price declines and management smells a shareholder revolt, they can juice their numbers by laying off a few thousand workers or adopting a specious new technology like generative AI or the metaverse, and then doing a big media blitz to show everyone how cool and growth hungry they are. Or they can do the really annoying thing, which is a share buyback program where the company just buys its own stock, which then bumps the value of the stock. That whole situation I really need to look into more because it doesn't seem good.

8:53And also on top of that, that money is being diverted away from research and development and employee salaries. And it was this movement, this shareholder supremacy movement, that created the nebulous creature known as management. I realize there are many definitions of management, but the manager we see today is a figurehead that exists to increase company value and make speeches rather than have any kind of domain expertise or bona fides. They're just a person with the ability to move numbers around and point at people and say, get this done, even if this, in this case, means make something worse as a means of cutting costs or lay off a few thousand people so that number go up.

9:34In the eyes of the shareholder supremacist, the CEO of a tech company isn't someone that builds or invests in or proliferates technology, but a kind of stage magician accountant hybrid that uses a combination of sleight of hand and vague promises to convince those around them that a company is the future, occasionally resulting in the company developing something involving technology. Yet it took decades for the damage from Ford versus Dodge to really set in, when in 1960, a horrible little man, a goblin creature, worse than hell, called Jack Welch, would join a company called General Electric, One founded, co-founded I should say, by lightbulb inventor Thomas Edison to sell things like lightbulbs and refrigerators, and yes I know, a bunch of military stuff too.

10:24But putting that aside for a second, Welch originally joined the company as a junior chemical engineer, a job he lasted in for roughly one year before he was given the power of the manager. I really cannot express enough how bad Jack Welch was for the world. His damage to the world itself To global economies To the hundreds of thousands of people Laid off because he taught people how to do this He is on the scale of a war criminal I'm sure he has led to actual deaths But he's definitely ruined lives He showed corporate America How unprofitable having a soul was He is, to quote Robert Evans on Behind the Bastards The reason you were laid off you and every single other person who was laid off to make a company more money.

11:16But I'll get to that. Eight years into his tenure, Welch would become the VP and head of General Electric's plastics division and, to quote David Gellis' The Man Who Broke Capitalism, believed that business was a Darwinian competition, where he was better than the rest, which caused him to push GE to the limits. In practice, this meant that Welch, as the manager of a factory trying to develop a new kind of plastic in 1963, continually pushed his team to move faster, run more experiments, whatever it took. Which led to a massive explosion at the factory, thanks to Welsh pushing his scientists to use an untested process, where oxygen moved through a highly volatile solution.

11:57If you've listened to the Behind the Bastards episode, don't worry, I'm not going to go over all of it. And I have my own nasty little take. Now, kind of like Robert said on Behind the Bastards, one would think that you'd get fired for blowing up a factory, especially if it was your decision making that led to the explosion, but this story instead became a kind of noxious management consultant fable about failure, and was, to quote David Gellis, a point of pride for Welch, one that demonstrated a healthy appetite for risk. Welch became GE's head of plastics five years later in 1968 and would use his aggressive and dangerous tactics to grow norrell, a kind of plastic that's well suited for things like electronics, into a billion dollar business.

12:42And crucially, becoming head of plastics gave Welch his very first stock options and potentially his first erection, which in turn began his obsession with stock valuations. And I'm of course referring to the stock options giving him that obsession. In 1977, Welch was one of a chosen few in line to take over the then CEO Reg Jones and was handed a series of business units to run as a test to see if he had it in him, including GE's appliance businesses and most important of all, GE credit, which I'll get back to in a minute because it's extremely bad what happens with that.

13:26Parking shouldn't slow you down. ParkWiz gives every driver a shortcut. Book ahead. Save up to 50 % and skip the hassle of circling the block. Park smarter. Park faster. ParkWiz. Download the ParkWiz app today and save every time you park. So I've shopped with quints before they were an advertiser and after they became one, and then again before I had to record this ad, I really like them. My green over shirt in particular looks great. I use it like a jacket. It's breathable and comfortable and hangs in my body nicely. I get a lot of compliments. I liked it so much I got it in all the different colors, along with one of their corduroy ones, which I think I pull off, and really that's the only person that matters.

14:03I also really love their linen shirts too. They're comfortable, they're breathable, and they look nice. Get a lot of compliments there too. I have a few of them. Love their rust-colored ones as well. And in general, I really like quints. The shirts fit nicely and the rest of their clothes do too. They ship quickly, they look good, they're high quality, and they partner directly with ethical factories and skip the middlemen. So you get top-tier fabrics and craftsmanship at half the price of similar brands. And I'm probably going to buy more from them very, very soon. Keep it classic and cool this fall.

14:30With long-lasting staples from Quince, go to quince.com slash better for free shipping on your order and 365-day returns. That's Q-U-I-N-C-E dot com slash better. Free shipping and 365-day returns. Quince.com slash better. Mint is still$15 a month for premium wireless. And if you haven't made the switch yet, here are 15 reasons why you should. One, it's$15 a month. Two, seriously, it's$15 a month. Three, no big contracts. Four, I use it. Five, my mom uses it. Are you playing me off? That's what's happening, right? Okay. Give it a try at mintmobile.com slash switch. A upfront payment of$45 for three-month plan,$15 per month equivalent required.

15:14New customer offer first three months only, then full price plan options available. Taxes and fees extra. See mintmobile.com. As Gellis recounts, Welch decided that despite its profitability and continued growth, appliances would face competition from overseas and that the right move was to start laying people off. This was a huge success at the company insofar as it boosted profits and other divisions copied his idea, gleefully firing thousands of people from a company that grew successful by investing in making itself a great place to work. It's so good, I love all of this, it makes me happy, I don't feel angry at all.

15:52Anyway, to quote Gellis, Welch dispensed with the notion that mass layoffs were a measure of last resort, and labor was a cost, not an asset. Before Welch, layoffs were something that happened when the company was collapsing, not as a means of boosting one's balance sheet. Thank you, Jack Welch. Thank you very fucking much. I'm actually not being angry enough here. There is no way to show how angry a person should be at Jack Welch for this. I hope he burns in goddamn hell with Henry Kissinger, and Ronald Reagan, and Maggie Thatcher, and the rest of these bastards. I should do a shirt around the arseholes, that does sound good.

16:33Anyway, forget all that for a second, we have a podcast to record. Continuing the story about this piece of shit, Welch would become CEO in 1981, and in the space of two years would lay off over 72 ,000 people. One tactic he would employ was stack ranking, also known as the vitality curve, or as you'll soon understand why, rank and yank. Where high ranking managers were forced to rank their subordinates and fire the bottom 10%. This tactic later spread to and poisoned countless other companies, including Amazon, Google, Activision Blizzard, and Microsoft, which has since stopped using it. It's worth noting, though, that not every implementation of stack ranking usually results in immediate payroll cards.

17:18Those perceived as low performers may be denied bonuses or raises or issued warnings, or put on a performance improvement plan, which is almost always a precursor to a firing, kind of like taking a break from a relationship. Or they're just encouraged to leave or bullied into doing so. But even in the most benign, for lack of a better word, form, it's a pretty horrendous management tool. If you have a team of 10 excellent workers, but only 8 can get a bonus or a positive ranking, you have 2 left out who are considered inadequate, not based on a litmus of whether they're good at their jobs, but whether they're not as good at their jobs as other people.

17:57You're pretty much guaranteed to kill morale and team cohesion But perhaps that was the point Welch's nasty, shitty little philosophies Have deeply damaged the concept of management itself Turning managers into these tiny little accountants That see labour as Welch did, as a cost centre And managers as this protected class above the fray They don't do work, they tell you to do work Their job is showing your work to someone else And saying it's theirs they're the ones telling you that you must come back to the office despite the fact that you can't tell what the hell they're doing all day they're there all the time but they don't seem to produce anything other than reports these people are a direct symptom of the poison in the veins of capitalism which i know is far from goddamn perfect but it's so much worse than it was caused by Jack Welch, who reframed the definition of a good company to mean one that grows profits while controlling labor costs.

19:00And this is how Jack Welch got the nickname Neutron Jack, referring to the thermonuclear bomb that kills people but leaves infrastructure intact. But I mentioned GE Credit earlier for a reason. GE Credit was where Jack Welch would really make his marking, get into the guts of the business. General Electric was, at a time, a reliable, profitable, and sustainable company, and was able to fairly easily mobilize capital, which of course Jack Welch loved, claiming that compared to the industrial operations I did know, this business seemed an easy way to make money, and that you didn't have to invest heavily in R &D, build factories, and bend metal to make money off of credit.

19:46In the first few years of his tenure, Welch would aggressively expand, according to David Gellis' The Man Who Destroyed Capitalism, G-Credit, buying up companies that had nothing to do with manufacturing, including Kidder Peabody, an investment bank that would eventually turn out to have falsified$350 million in profits, a thing that also didn't get Jack Welch fired. G-Capital would expand internationally, ballooning to$370 billion in assets by the time that Welch left the company in 2001. According to Gellis, and likely referencing a CNN article and including the links, at one point GE Capital was America's largest equipment leaser, leasing hundreds of thousands of vehicles, handling credit operations for companies like Kodak, becoming a backbone of America's increasingly debt-ridden economy.

20:34To quote Gellis, by the time that Welch left, GE Capital was effectively a giant unregulated bank, investing in all kinds of risky debt instruments, including insurance products, credit cards, I think even like Thai auto loans. It's so weird. And crucially, Welch's legacy is one where at the time he was considered a genius that had taken General Electric's market cap, which is just the sum of all available shares, from$14 billion to$400 billion, all through a very specific kind of financial trickery, where GE would move things around, laying people off, buying new companies, selling old companies, getting into new industries to match the numerical analyst expectations and make earnings targets.

21:21In a fawning and quite embarrassing piece from 1997, years before Welch would leave and GE credit would actually lead to its collapse in some levels, reporter John Curran describes how GE Capital grew by seeing new opportunities and immediately growing a new business in any new market it could, taking advantage of capital's low cost of funds, at one point both leasing equipment to companies and buying it back, refurnishing it, and selling it to other companies. Which isn't necessarily a bad business, but at this point how many goddamn businesses can you be in, Jack? Well you can't be in any, you're burning in hell.

21:56What a shame. In the space of a few decades, Welch had taken General Electric from a company that made light bulbs and refrigerators and plastics to one that continually played with the numbers as a means of boosting its stock price, including a$10 billion stock buyback in 1990. And the New York Times' John Halusha noted that GE was only investing 2.4 % of its revenues in research and development, nearly a full percentage point below the national average at the time. At this point, I really want to take a step back and just point at that, which is this was the first company that really just fucked with capitalism and there's a whole separate episode if i wanted to in the economist milton freeman who is also a scumbag who i also hope is burning in hell rant aside note what ge went from what ge became ge was able to raise these funds they were able to grow so big and do all this stuff because their company was so reliable they didn't have terrible turnover they had happy employees they had sustainable products They had their own products, their own patents they owned.

23:00They had scientists that worked there for decades. And then Jack Welch came along and destroyed all of that while making it, quote, a better company. What a worse company. This is the man who taught the market how to eat shit and love it. I am sorry that's gross, but that's really what we're looking at here. To be clear, at this point, General Electric was an absolute dog of a company As David Gellis noted in a Reddit thread, Welch operated at a time before Sarbanes-Oxley A sweeping series of financial reforms instituted after the Enron scandal That required companies to do these annoying little things like Disclose off-balance sheet financial arrangements So, you know, a series of loans or credit agreements you made with someone that are not on your balance sheet I have no idea how that was legal, but...

23:52And many other financial disclosures were also required that would have likely made what Jack Welch was doing before this a lot harder to play, which Welch claimed in 2002 would suck risk out of the system and cause people to not go for their dream. Gross way of putting it, Jack, but also wrong. These things only made people get a little bit clever. But Welch's tenure was one that destroyed General Electric's ability to innovate, while turning it into one of the most wildly profitable companies in the world. All through this nihilistic form of capitalism where growth is really all that matters, even if it means making worse products, constantly entering and exiting industries, reducing spending in research and development for the products that made your company's name, outsourcing multiple parts of the company to avoid paying benefits and higher American wages, and generally treating human beings like an inanimate asset.

24:48And yeah, if you're thinking this sounds like every company, this is why this is the guy As a result of all of this When Welch left General Electric, it entered a prolonged period of decline As it became obvious that it had become, as Gellis had called it A giant, previously at least, unregulated bank One operating in too many industries in a new regulatory environment that worked against them General Electric and its bloated, messy asset portfolio Were central to the 2008 financial crisis with GE Capital overexposed to the crisis while also invested in subprime mortgages that would eventually see the company fined$1.5 billion by the SEC.

25:26Though GE would still make nearly half of its profits from its financial arm in 2013, it would also sell off most of it of$26.5 billion starting in 2015. And while one might say, wow, this was a great moment where the company moved away from Jack Welch's legacy, The company would then proudly announce that this would allow them to return$90 billion to investors in the form of stock buybacks and dividends by 2018. I promise I'm not actually sure it ever kept, though it recently announced it planned a$15 billion buyback in May. I don't know, all this just kind of seems like a con.

26:12Parking shouldn't slow you down. ParkWiz gives every driver a shortcut. Book ahead, save up to 50%, and skip the hassle of circling the block. Park smarter, park faster. ParkWiz. Download the ParkWiz app today and save every time you park. This is Doug Gottlieb for The Doug Gottlieb Show. The Toyota Tundra and Tacoma are designed to outlast and outlive. backed by Toyota's legendary reputation for reliability. Get in the Tundra with available iForce Max hybrid engine, delivering exceptional torque and towing capacity. Or check out a Tacoma with available off-road features like crawl control. It can take you beyond the trails.

26:49Toyota trucks are built to last year after year, mile after mile. So don't wait. Get yours today. Visit buyatoyota.com for deals and more. Toyota, let's go places. So today's show is brought to you with support from Square, who I really love. They offer quick payment processing, really easy to use terminals. Everything spins up really quickly. Every store I use them in, I don't really think about the experience, which is exactly what I want from any kind of tech. The loyalty programs work really easily. They're over at Court Street Grocers, S &P, Van Leeuwen Ice Cream. They're just a very easy to use and straightforward piece of tech.