Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (28 page)

“Firestone’s historical excellence and disastrous response to global competition and technological innovation posed a paradox for industry observers,” Sull wrote. “Why had the industry’s best-managed company turned in the worst performance in a weak field? Closer analysis reveals that Firestone failed not despite, but because of, its historical success.”

Firestone had been built to prosper in the stable postwar United States. According to Sull: “An ossified success formula is just fine, as long as the context remains stable.” But in a period of revolutionary change—which is what many industries, countries, and the world economy as a whole are experiencing today—“ossified success formulas” aren’t enough, and the outsiders who are good at responding to revolution can outflank the establishment.

Firestone’s fate, as explained by Sull, is a cautionary tale of what Jennings, from his frontier market vantage points, warned the cozy Auckland elites might happen to them: “Basically, we are living in a world that is more competitive than any other era, where change is faster and less predictable, and where long-established orders—whether they are economic, political, or industrial—are being challenged and supplanted. In this world, the difference between ‘success’ and ‘failure’ is greatly magnified. This applies to specific labor market skills, businesses, industries, and entire countries.”

And Firestone, with its active inertia, sounds a lot like Wall Street in 2007 and 2008. Many—even most—of the leaders of the country’s big financial companies knew their businesses were built on a bubble. But the structure of their companies and of their industry made it impossible to pull back.

In early July 2007, on a visit to Tokyo, Chuck Prince, then CEO of Citigroup, gave an interview to journalist Michiyo Nakamoto. Credit markets had not yet frozen, but there were enough signs of trouble to prompt Nakamoto to ask Prince about the turmoil in the U.S. subprime mortgage market and difficulties financing some private equity deals. Prince believed the ocean of cheap, globalization-fed money Citi was then still sloshing around in would eventually dry up: “A disruptive event now needs to be much more disruptive than it used to be. . . . At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way.”

Today, those remarks read like a prescient description of the overnight collapse in lending triggered by Lehman’s bankruptcy just over a year later. But even though Prince thought a “disruptive event” was inevitable, he also believed we hadn’t reached “that point” yet. In the meantime, it was his job to keep on doing business as usual: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Corporate PR would today cite that line as a cautionary illustration of why bland jargon is the most prudent idiom for business leaders. Prince’s vivid phrase not only made it onto the front page the next day, it has become one of the catchphrases of the crisis: a Google search on it more than two years later turned up nearly one and a half million references. One of the days on which it was evoked most energetically was November 4, 2007, when Prince resigned and his dancing comment became shorthand for Citigroup’s larger failure to anticipate the crisis under his leadership.

Prince deserved his pink slip: during his tenure in the corner office, Citi increased its exposure to the subprime market, grew its credit default swap business (including the number of swaps it kept on its own books), and stashed billions of dollars in risky off-balance-sheet vehicles. But he wasn’t wrong about dancing to the music. When the music stops, the loser is the one left without a chair, but the rules of modern capitalism don’t allow the big players to sit down prematurely, either.

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Peter Weinberg is a Wall Street patrician—his paternal grandfather was a seminal early partner of Goldman Sachs and his mother is a Houghton, the great WASP family that founded Corning, Inc. Weinberg sat out the last years of this bubble thanks to what he admits to be lucky circumstance. He’d teamed up with legendary Wall Street deal maker Joe Perella in 2006 to found a boutique advisory firm, and they spent the next twenty-four months focused on raising money and assembling a team. But Weinberg, a seasoned investment banker who rose to run Goldman’s London office before striking out on his own, believes it is almost impossible for the CEOs he has spent a career advising to stop their ears to the boom-time music.

“I’ve been through probably six crises now in my thirty years in the business, and it’s the pendulum of capitalism,” Weinberg told me in June 2009, sitting in a conference room in his firm’s modernist offices in the GM Building on Fifth Avenue. “It’s very, very hard to lean against the wind in a bubble. Very, very hard. And very few people can really do it. . . . What if one of the heads of the large Wall Street firms stood up and said, ‘You know what? We’re going to cut down our leverage from 30 to 1 to 15 to 1. And we’re not going to participate in a lot of the opportunities in the market.’ I’m not sure that chief executive would have kept his job. . . . It is very hard to separate yourself from the herd as a leader of a large financial institution.”

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This is an even more familiar story in the entertainment, media, and technology businesses. Consider the music industry. Venerable Warner Music, battered by the Web, is today owned by Len Blavatnik, another Russian veteran of that country’s economic upheaval who, like Milner, hopes his skills can be applied to disruptive technological change in the West. And in the technology industry, the cycles of transformative change are so fast that even successful revolutionaries can swiftly be outflanked.

That has already happened to Microsoft. The big question today is whether it will happen to Google. Like Sull’s managers—who see the coming threat, but are able to respond to it only by doing more of the same—the Googlers understand what is happening. In 2010, Urs Hölzle, one of Google’s first ten employees and the company’s first engineering vice president, wrote a memo that company insiders called the Urs Quake. In it he warned that Google was falling behind Facebook in social networking and needed to catch up immediately.

Google’s chiefs listened and they launched an effort to do so, called Emerald Sea, after an 1878 painting by Albert Bierstadt. The painting, which the Googlers working on the project had re-created and displayed in front of the elevators near their desks, depicts a wrecked ship being buffeted by an enormous wave. Google, they believed, was the ship, and the social networking revolution was the wave: Google would either learn to ride it—or drown. Even for Google, a company whose insurgent founders are still in their thirties, responding to revolution is hard.

One reason Google may have a chance is that the business leaders of Silicon Valley, like those in the emerging markets, made their first fortunes by responding to revolution. For them, constant change is the status quo. Indeed, responding to revolution is so central to Silicon Valley culture that the most successful entrepreneurs have developed a culture of continuous revolution.

Caroline O’Connor and Perry Klebahn, at Stanford’s design school, call this the ability to “pivot.” Groupon, which began as a platform for collective political action; PayPal, which started as a way of “beaming” money between mobile phones, and then pivoted to become eBay’s banking network; and Twitter, which was a later iteration of a failed podcasting start-up, are all, according to O’Connor and Klebahn, examples of successful pivots.

Another illustration they cite is WorkerExpress. Joe Mellin and Pablo Fuentes launched that company as a way for home owners to schedule hourly construction workers using text messaging. When the idea didn’t take off, Mellin and Fuentes studied the research they had done before starting WorkerExpress and realized it would be smarter to target their efforts at large contractors who needed temporary help on job sites. Their pivot worked and even in the teeth of the post-2008 construction bust they built a successful Web-platform company.

One of the examples of a pivot most cited by technorati is the story of Flickr, the photo hosting and sharing site. Flickr’s genesis was in 2002, when its founders, Caterina Fake and Stewart Butterfield, created a multiplayer online game called Game Neverending. Fake and Butterfield could see two revolutions happening in the technology world—the rise of social media and the rise of games. They hoped to cash in by putting them together. But Game Neverending failed and Ludicorp, the Vancouver company Fake and Butterfield established to create it, was running out of money. They had noticed, though, that one of the game’s features, a photo- sharing add-on they’d developed in just eight weeks, was popular. So Fake and Butterfield tried again, this time using the photo-sharing technology to create a stand-alone Web site. It worked. Flickr was launched in February 2004. In March 2005, just thirteen months later, Yahoo! acquired it for a reported $35 million. At the beginning of 2012, the site reported that it was hosting more than seven billion images, about one for each person on the planet.

The pivot is about recognizing when you are on the wrong track and changing course—and that, too, is central to Soros’s ability to respond to revolution.

Chanos, who leased office space from Soros’s Quantum Fund in midtown New York between 1988 and 1991, agrees. “One thing that I’ve both wrestled with and admired that Soros conquered many years ago is the ability to go from long to short, the ability to turn on a dime when confronted with the evidence. Emotionally that is really hard.”

“My conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions,” Soros told me. “I reexamine them all the time and recognize when I am on the wrong track. . . . I know that I’m bound to be wrong and therefore am more likely to correct my mistakes.”

“It’s an almost aggressive pessimism about his own ideas, that he is going to be the first person to find out what’s wrong with his theory, rather than what’s right with his theory,” his son Jonathan told me.

Pivoting is so hard for traditional Western companies that Jennings predicts they will be overtaken by bolder, more agile emerging market champions. “The businesses and institutions underpinning the economies currently going through economic transformation will not only be catching up with the West, but eventually taking over leadership,” he said. “At that point, it will be their business models and institutions that may have to be reexported.”

Already, the premium on responding to revolution has created tremendous upheaval in corporate America. A 2010 study by Deloitte, the tax and consulting firm, measures something it calls the “topple rate,” the speed at which big U.S. companies lose their leadership positions. Between 1965 and 2009, the topple rate more than doubled. Even in the C-suite, it turns out, life is more precarious than ever. “The group of winners is churning at an increasing and rapid rate,” the report found. “Nearly every advantage, once gained, is shown to be temporary.”

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The winners of the entrepreneurial sweepstakes of the technology revolution like to think they are mostly smarter and harder working and more determined than everyone else. Tony Hsieh offered me a gentle version of this view. “I could start off anywhere in America with a hundred dollars and by the end of the year I would be a millionaire,” he said. “I really think I could. That is just how I am.”

Some of that is surely true. But part of winning from moments of revolutionary change is the lucky combination of having the right skills, the right character, and the right position in society at the right time.

Timing is equally important in the Silicon Valley gold rush. Consider Jonathan Kaplan, creator of the Flip video camera. Kaplan isn’t a scientist or an engineer. But from the time he graduated from college in 1990 he knew he wanted to be an entrepreneur; early on, he decided the technology industry and San Francisco were where his odds were the greatest. He spent a decade barely getting to first base, mostly with software start-ups that were good, but not great. Then, in 2005, a friend told him technology had advanced so much it was possible to make a video camera as small and easy to use as most regular cameras were at the time. From that powerful insight, the Flip camera was born. It was such a success that Cisco acquired the company for $590 million in 2009.

The Cisco deal turned out to be as well timed as Kaplan’s original epiphany—two years later, video technology had advanced so much further that smartphones had become video cameras, and Cisco closed down Flip, taking a huge corporate write-down.

Kaplan, a multimillionaire, had left his job at Cisco two months earlier. But that, Kaplan insisted, shouldn’t detract from the inspirational power of his initial ability to respond to revolution.

“There are a lot of young entrepreneurs who look at Flip as a huge success, and they should continue to,” Kaplan told the
New York Times
. “The demise of Flip has nothing to do with how great a product it is. Companies have to make decisions that sometimes people like you and I don’t always understand.”

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Sheryl Sandberg, the world’s most successful female executive, is another example of the power of being in the right place at the right time. Sheryl is brilliant—she was one of Larry Summers’s smartest students—and one of the best operating executives around. But the skill that made her fortune is the ability to understand where the action is. She made the perfect, unconventional choice—twice.