In an oft-quoted 1981 speech, General Electric CEO Jack Welch laid out the principles. The questions companies need to ask during what he called “slow growth” periods, he told financial analysts meeting at the Pierre Hotel in New York City, were “how big and how fast” a company could grow. “Management and companies that hang on to losers for whatever reason, tradition, sentiment, their own management weaknesses, won’t be around in 1990.” “Neutron Jack” practiced what he preached: each year he fired the managers with the lowest returns, ensuring a sharp focus on the bottom line. This focus often had an impact on health: the Big Three auto companies chose to invest heavily in polluting SUVs because these vehicles produced windfall profits that kept investors happy— even as they contributed to the longer term decline of the auto industry. In this environment, concerns about the long-term safety of new products or the sustainability of a production practice inevitably lost precedence to profitability.
Financialization: “Financialization” has been defined as a “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.” As investor demand for profit increased, the returns on investments in mortgages, derivatives, or commodities futures were higher than for those in industries that produced goods or services. This increased the demand for short-term results in the traditional industries and contributed to rapid acquisition and selling of companies. Increased use of leveraged buyouts, junk bonds, and hedge funds were among the consequences of the increasing financialization of corporate America. Between 1990 and 2010, the financial sector’s share of total corporate profits doubled in the United States, reaching as high as 44 per cent in 2002. The fast growth and high profits in this sector exacerbated the pressure on consumer corporations to match these returns or risk losing capital to these more promising investments. Over time, companies that made products to sell to consumers lost ground to companies that bought and sold risk, depending on these new financial firms for investment and loans. Maximizing shareholder value often trumped holding on to long-term customers, leading to more volatile markets and ever more urgent quests for blockbuster products that would please investors even if they harmed consumers.
The story of the leveraged buyout of RJR Nabisco, a leading tobacco and food company, told by Bryan Burrough and John Helyar in their book Barbarians at the Gate, shows how companies became more concerned with making deals than with making products. In 1988, Henry Kravis, one of the originators and a master of leveraged buyouts, took on RJR Nabisco CEO Ross Johnson in a battle for control of the corporation that had made its fortune from selling tobacco (Camel and Winston), alcohol (Heublein Spirits, maker of Smirnoff vodka and Don Q Rum) and processed food (Oreos and Mallomars). The drama featured a cast of more than a dozen other leading companies, banks, and law firms: Shearson Lehman Hutton, American Express, Dillon Read, Drexel Burnham Lambert, The First Boston Group, Forstman Little, Goldman Sachs, Lazard Frères, Morgan Stanley, Salomon Brothers, Skadden Arps, and Wasserstein Perella. In the end, Kravis signed a $31.4 billion deal for one of America’s premier companies—at the time, the highest price ever paid for a corporation.