What a lousy couple weeks it has been for Jack Welch, GE's retired CEO. His divorce has spilled into the business news, pointing out how, even in retirement, GE is giving Welch access to the corporate jet, a New York apartment, a car and driver, and other goodies. He can't go to his country club for a diverting round of golf because a women's group has it under siege. (For the record, Augusta National is closed for the summer, but you get my point.)
According to Monday's Wall Street Journal, investors are incensed and some groups are putting pressure on the SEC to do something. (Can congressional hearings be far behind?)
In this case, the SEC should do something. It should tell all the complainers to shut up.
Corporate America needs some cleaning up, but Jack Welch and GE should be near the bottom of the list. Unless this is some Martha Stewart-engineered plot to get the villagers incensed about someone else, it serves no purpose at all.
In 1996, Jack Welch was considering retiring. He had been CEO since 1981 and was 61 years old. GE generally doesn't provide its executives with retirement agreements. But Welch in 1996 was Randy Johnson, Mel Gibson, Bruce Springsteen, and Rudy Giuliani all rolled into one: a guy at the absolute top of his game with enormous value wherever he went.
The company wanted him to stay longer, not work for anyone else, and be available when it needed him after he left. On December 20, 1996, Welch and GE reached an agreement, which GE attached to its publicly-filed annual report the next March. Welch agreed to serve under the terms of his prior contract until December 31, 2000 (later extended to August 2001). He also agreed to consult for the company up to thirty days a year, whenever requested. Welch would be paid based on his daily pay in his last year as CEO.
In addition, according to the agreement, "the Company shall provide Mr. Welch, for the remainder of his life, continued access to Company facilities and services comparable to those provided to him prior to his retirement, including access to company aircraft, cars, office, apartments, and financial planning services."
If You Don't Like It, Learn to Read
So GE spelled it all out: when Welch retires, he gets everything he had as CEO. That includes jets, cars, and apartments. So it didn't mention the details, like Knicks tickets or a box a Wimbledon. It wasn't required to disclose every perk and it wouldn't have made any difference to investors. He earned salary and bonuses of $5-16 million per year in his last six years, and the value of the stock options he received (also disclosed in every annual proxy statement, along with the existence of the 1996 retirement agreement) was much more. The value of the perks, above a certain threshold, had to be disclosed in the proxy, and totaled between zero to $171,000 per year during 1996-2001.
Nell Minow, a corporate governance expert who I generally respect for the care she takes in formulating her positions, knee-jerked on this one. According to the New York Times, Minow said, "I would have thought that perks like this had to be disclosed, and they were not. There is really no justification to pay for any living or traveling expenses at that level, particularly now that he is in retirement."
In 1999, Minow included Welch's contract on her website as an example of an excellent CEO contract. "It is short and to the point, and its primary purpose is securing the time, attention, and talent of the CEO to the company. It guarantees no special bonuses, payments, or perks and provides no special protection. Those people who say that those provisions are necessary to attract a top-performing CEO should take a look at what this top-performing CEO's contract looks like. The contract is a tribute to Mr. Welch and his board." In a footnote, Minow did express some reservations about the retirement provisions, but at least she saw them. "We trust that use of such services will be appropriate within the context of his future professional relationship with the company and will not interfere with the use of these services by full-time employees for corporate purposes."
If You Don't Like It, Move to Russia (Or Wherever We Tell People to Move When They Oppose the Free-Enterprise System)
Jack Welch had a lot of bargaining power. He was considered the best CEO in America, a reputation that has only improved since that time. He had created $150 billion in increased market value for investors in the previous fifteen years. He could have retired, or gone to another company on terms that would have made his package at GE look like chump change.
No one is going to say with a straight face that board-CEO contract negotiations are conducted at arm's length. But GE's board has always been considered good, and its members tend to hold a lot of GE stock. They could have told him he was asking for too much, or allowed him to follow through on his plan to retire and tapped one of the many able successors Welch had been grooming. But do you really want to let your superstar retire at the top of his game over the minor details of his contract?
If GE could turn back the clock and play hardball with Welch at contract time in 1996, I don't think it would do it. Since 1996, GE has doubled its earnings and increased cash flow 65%. Welch picked three top officers as possible successors, and he and the company settled on Jeffrey Immelt. Everyone thinks Immelt has done a great job in a tough environment and, though GE didn't benefit, 3M and Home Depot hired the two "losers" as their CEOs. Truly, Welch has a golden touch and the company was wise not to risk losing it.
Look how the shareholders did directly. Between the end of 1996 and when Welch stepped down at the end of August 2001, its stock price rose from $16.35 to $40.98 (and had been as high as $60). Shareholders also received ever-increasing quarterly dividends.
If GE could terminate the contract now, even with all this whining and complaining, I don't think it would do it. Having Welch available, with all his knowledge and connections, has to be helpful to Immelt as he faces a phenomenally difficult business environment in his first year on the job. And if GE did terminate the agreement, someone else would step up and take him on the same terms. In a heartbeat.
As a long-time investor in GE, we were lucky to have him, and lucky we've still got him.