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The 100 Best Companies to Work For 2016 A ND T V E GO MARCH 15, 2016 • FORTUNE.COM

T HE Y ’

Everything you need to know to land your dream gig P. 141

6 7 8 , 100 JOBS OP! E NO W



T U R M O I L . . . . . . . AT Z A P P O S P. 206 C R I S I S . . . . . . . . . A T T W I T T E R P. 116 S E C R E T S . . . . A T P A L A N T I R P. 124





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March 15, 2016 Volume 173 Number 4



Introduction and the List 141 The 2016 List In our 19th ranking of America’s greatest workplaces, we honor the champions of corporate culture. Here’s how they measure up. By Robert Levering, with additional reporting by Erin Bartulski, Jonathan Chew, Ed Frauenheim, Claire Groden, Milton Moskowitz, and Tabitha Russell CHAPTER II:

Empowering Employees 166 My Five Days of “Bleeding Green” A firsthand account of working at Publix, America’s happiest supermarket. By Christopher Tkaczyk Our inside man at Publix: No. 67 on this year’s list


The New Workforce 181 Accenture’s Millennial Hiring Spree The company hired 90,000 young workers last year. What does it know that you don’t? By Claire Zillman

publix: patr ick ja mes miller

182 Five Things You Can Do to Attract Millennial Talent Here, a few ways your company can compete for the best and brightest new stars. By Claire Groden

debt problem, but one thing stands in the way: the law.

192 The Health Care Hiring Boom

199 Tech’s Diversity Fixer

By Claire Zillman

Here are this year’s best employers in medicine—with secrets from their recruiters.

Joelle Emerson, founder of Paradigm, is working to balance the talent distribution in America’s innovation capital.

189 A Millennial Favorite—at 94 Nearly a century old, Edward Jones is still a cool place to work. Its chief tells Fortune why. By Christopher Tkaczyk CHAPTER IV:

How to Get Hired

186 Hot New Perk: Paying Down Student Loans

190 Tips From Recruiters at the 100 Best Companies

Business is trying to help solve the nation’s $1.2 trillion school

What talent seekers look for in a job candidate.

By Laura Lorenzetti CHAPTER V:

By Leena Rao

Leading Change in the Valley


194 The Garden of Eden

balancing Work and life

VMware’s verdant California campus is a calm, eco-friendly respite. If only its business outlook were as serene. By Michal Lev-Ram

202 At Ikea: No Ranks, No Rancor The egalitarian ethos runs deep at the Swedish furnishings giant—a place where no one seems to be at the lowest rung on the corporate ladder. By Beth Kowitt

By Christopher Tkaczyk

ON T H E C OV E R : i l l u s t r a t io n s b y MICHAEL BRANDON MYERS



March 15, 2016 Volume 173 Number 4


98 Hoaxwagen. How the massive diesel fraud incinerated Volkswagen’s reputation—and will hobble the company for years to come. By Geoffrey Smith and Roger Parloff

116 Fixing Twitter

By Erin Griith

206 The Zappos Experiment

The data analytics company has built a substantial mystique— and a $20 billion valuation with investors—around its work for the intelligence community. Can it woo more corporate clients without giving away its secrets?

Pavel Durov earned fame as “Russia’s Mark Zuckerberg.” Now his Telegram messaging app has 100 million users and counting, and the reclusive entrepreneur finds himself back in the spotlight—and at the center of a global debate.

The online shoe retailer has always focused on its people as much as its customers. But now a radical transition into “self-management” has left it reeling. Can the company regain its mojo?

By Michal Lev-Ram


By Jennifer Reingold

By Vivienne Walt




134 Building an Encryption Empire


t h i s pa g e: p ho t o i l l u s t r a t io n b y JUSTIN METZ

courtesy of v w

Breaking news, celebrity feuds, and political revolutions turned Twitter into a media juggernaut. Unfocused management turned it into a train wreck. On the company’s 10th birthday, here’s how returning CEO Jack Dorsey plans to get Twitter back on track.

124 Palantir Connects the Dots


Fly toward something better with the help of 80,000 employees who do everything they can to help you explore what’s possible.

March 15, 2016 Volume 173 Number 4


Macro 19

Closer Look

Why people are worried we’re in a recession— and why it’s too soon to panic. By Stephen Gandel and Chris Matthews 22

Zen and the Art of Dealmaking

With enthusiastic C-suite support, mindfulness has become a big business of its own. By Jen Wieczner 24

Movie Magic

Why Hollywood isn’t worried about China’s slowdown.

research behind increasing productivity—and happiness too. By the Fortune staff

Betting on Your Neighbors


Five immediate ways to fight cybercrime.



Book Excerpt: Good for the Money

In a scene from this posthumous memoir, the late CEO of AIG recounts his battle for control of the insurance behemoth. By Bob Benmosche 36

The 21st-Century Corporation

Despite the likes of Facebook and Uber, startling new research finds that high-growth young U.S. firms are in decline. By Geoff Colvin


passions & Perks 49

Silicon Beach Surfers

These L.A. techies are socializing, networking, and having fun by riding the waves. By Scott Gummer 53


The 2017 Bugatti Chiron: A toy for billionaires, yes. But we can fantasize, right?


By Jennifer Alsever 28

Is software better at managing people than you are?

Executive Read

By Jennifer Alsever

Human Capital

Object of Interest

Samsung unveils its Gear 360 virtual-reality camera. Here’s what it could do for business.


By Don Reisinger

By Robert Hackett and Nicolas Rapp

How long it takes to break a passcode.



Banks are using new biometric technologies to detect scammers.

A Boom With a View

By Jeff John Roberts

Business realities rain on the parade of ondemand startups. By Erin Griith


The Future Is Now

Artificial intelligence, analyzed—with insights from Nvidia CEO Jen-Hsun Huang.


By Andrew Nusca



The Return of the Big Shorts

Zeroing In


SoFi aims to be the bank of choice for millennials.

Dogfish Head brewery finds success by appealing to adventurous palates.



By Sue Callaway

Craft Beer

Insurance meets the sharing economy.

Three new books take a deep dive into the

The Growth Guru

By Verne Harnish

By Tom Huddleston Jr. 26


By Leena Rao

The recent market correction has made some bearish investors look like geniuses. Others are learning that even short-sellers need a good long game. By Michelle Celarier

By John Kell 12 LETTERS 14 EDITOR’S DESK 220 BING!



sur fers: bryce duff y

Directors of boards: a Silicon Beach Surfers crew

March 15, 2016 fortune


EDITOR Alan Murray DEPUTY EDITOR Clifton Leaf DIGITAL EDITOR Aaron Task ASSISTANT MANAGING EDITORS Leigh Gallagher (Fortune Live), Adam Lashinsky (technology), Brian O’Keefe (international), Patricia Sellers (conferences), Nicholas Varchaver (investigations) SENIOR EDITORS AT LARGE Geoff Colvin, Brian Dumaine, Nina Easton ACTING CREATIVE DIRECTOR Peter Herbert DIRECTOR OF PHOTOGRAPHY Mia J. Diehl EDITORS AT LARGE Peter Elkind, Roger Parloff (legal affairs),

Jennifer Reingold, Shawn Tully SENIOR EDITORS 2YPZ[LU)LSSZ[YVT Scott DeCarlo (lists), Matthew Heimer,

Andrew Nusca, Dan Primack, Christopher Tkaczyk SENIOR RESEARCH EDITOR Marty Jones SENIOR WRITERS Susan Z. Callaway, Erin Griffith, Beth Kowitt, Michal Lev-Ram, Leena Rao ASSOCIATE EDITOR Anne VanderMey WRITERS Scott Cendrowski, Erika Fry, Robert Hackett, Tory Newmyer, Jen Wieczner WRITER-REPORTERS Jonathan Chew, Claire Groden, Sy Mukherjee REPORTER Douglas G. Elam (lists) CONTRIBUTORS Sheila Bair, Stanley Bing, Jon Birger, Joshua Brown,

John Cassidy, Katherine Eban, Ezekiel Emanuel, Dinah Eng, Kate Flaim, Edith Fried, Scott Gummer, Marc Gunther, Verne Harnish, Paul Keegan, Carol Loomis, Roger Lowenstein, Rita McGrath, Bethany McLean, Jeffrey Pfeffer, Elaine Pofeldt, Becky Quick, Janice Revell, David Sloan, Lawrence J. Shine, Jeffrey Sonnenfeld, Richard K. Tucksmith, Vivienne Walt (Paris) COPYROOM Ben Ake (copy chief), Jonathan Brown, Maria Carmicino, Judith Ferbel, Lauren Goldstein, Edward Karam, Kathleen Kent EDITORIAL ASSISTANTS Sharon Lawrence (assistant to the editor), Kelly Champion, Zhang Dan (Beijing) PREMEDIA Richard K. Prue (executive director), Angel Mass (senior manager)

INFORMATION GRAPHICS DIRECTOR Nicolas Rapp ART STAFF Josue Evilla, Michael Solita (art directors) PHOTOGRAPHY STAFF Armin Harris (associate photo director),

Michele Taylor (associate photo editor), Hildegarde P. Vilmenay (office manager) F O R T U N E .C O M

SENIOR EDITORS Lauren Covello (Venture), Stephen Gandel, Verne Kopytoff,

Pam Kruger, Scott Olster, Geoffrey Smith EDITORS Daniel Bentley, Stacy Jones (graphics), Rachel King,

Polina Marinova (Venture), Nin-Hai Tseng, Tom Ziegler SENIOR WRITERS Barb Darrow, Philip Elmer-DeWitt, Katie Fehrenbacher, Mathew Ingram, Phil Wahba AUDIENCE ENGAGEMENT EDITORS Will Federman, Zak Middelmann WRITERS Ben Geier, Tom Huddleston Jr., John Kell, Kia Kokalitcheva, Laura Lorenzetti, Christopher Matthews, Jeff John Roberts, Lucinda Shen, Jonathan Vanian, Valentina Zarya, Claire Zillman (London) ASSOCIATE EDITORS Melanie Sena, Benjamin Snyder PRODUCERS Christina Austin, Burcu Noyan INTERACTIVE DESIGNER Analee Kasudia PHOTO EDITOR Kacy Burdette VIDEO Mason Cohn (senior producer), Megan J. Arnold, Sara Haralson, Chris Joslin, Stephen Valdivia (associate producers)



Ryan Baise, Sarah Matteson, Laurie Minor, John Winterhalder DALLAS: Julie Lee (Neese & Lee) DETROIT/CANADA: Melissa Homant (executive director, multimedia),

John Wattles (sales manager), Amy Simer DÜSSELDORF: Thomas Stickelmaier (director), Christiane Ploog GENEVA: Irina Hartmann (director) JAPAN: Kotaro Aikawa (regional director) LONDON: Tim Howat (director), Christian Cecchi, Kelly Goodwin LOS ANGELES: Brad Souva (director), Ani Barsamian, Lewis Newmark NEW YORK / WASHINGTON, D.C.: Lindsey Kintner (multimedia director), Sean Adrian,

Tina Dhariwal, Mark Isik, Emily Janocha, Tim Mullaly, Adriana Schwarz, Lian Weinstein, Sarah Weitzman, Steven Zampieri HONG KONG: Judy Fong, Elizabeth Kwong PARIS: Magali Bois-O’Neill (director), Sandra Litas SAN FRANCISCO: Monica Sembler (director), Alena Haas, Doug Harrison, Lindsey Lee, Peter Romero SINGAPORE: Linda Lim, Karen Mong INTEGRATED MARKETING Shannon Hollingsworth (executive director), Sheyna Bruckner (director), Veronica Clerkin, Christine Fulgieri, Tess Konter (senior managers), Brittany MacWright (manager), Jourdan Cohen (associate manager), Asia: Florence Thote, Rosa Chow (senior research manager) Europe: Phil Cutts (brand development director), Daphne Vandeborre (creative director)

DIGITAL PLANNING AND CLIENT SERVICES Karen Szeto, Colleen Tully (directors),

Fabian Fondriest, Courtney Kern, Melissa Tacchi CREATIVE SERVICES Joe Alesi (executive creative director), Natalie Ryan (director), Clarice Lorenzo LIVE MEDIA Delwyn Gray (senior executive producer), Jennifer Current, Janine Lind, Megan Marcel, Cindy Shieh, Kristin Smith, Virginia Slattery CONSUMER MARKETING + REVENUE Ann Marie Doherty, Lydia Morris, Stephanie Solomon (VPs), Eric Szegda (VP, Retail), Andrejs Lazda, Steven Mastrocola, Randi Erber, Nicole Padovano, Christina Mejia, Nicole Zingaro EUROPE: Harvey Gidley (associate circulation director) HONG KONG: Rick Kam, Susie Pattison (directors) CONSUMER INSIGHT Barry Martin (vice president), Andrew Borinstein (executive director), Joel Kaji (senior director), Mac Dixon (senior research manager), Brian Koenig (senior associate research manager), Rachel Lazarus (associate research manager) COMMUNICATIONS Kerri Chyka (vice president), Erin Madigan White (director), Ashley Calame (associate director), Kelsey Rohwer (manager), Raina Dembner (publicist), Hailey Murphy (coordinator) FINANCE Wajeeha Ahmed (vice president), Wynne Wong (executive director), Arbena Bal (associate director), Paula Esposito, Catherine Keenan, Dan Torockio (managers), Robert McKee, Paul Yoo PRODUCTION Carrie Mallie (senior director), Valerie Langston (director), Gary Kelliher, Elizabeth Mata (managers), Shaik Aashiq (specialist), Nelson Luk (director, Asia) CONTENT MARKETING AND STRATEGIES Jamie Waugh Luke (director of content), Alec Morrison (editor), Cindy Murphy (executive director), Gregory Leeds, Ron Moss, Christiaan Rizy (directors), Joel Baboolal, J. Thomas Lewis, Sarah McCarrick, Blair Stelle, Melissa Brice PRODUCT DEVELOPMENT AND ENGINEERING Brett Krasnove, Alexander Doolan, David Oh, Xiran Ou, John Ciacia, Michael Angelo, Aadi Deshpande


TIME INC. EXECUTIVE VICE PRESIDENTS Jeff Bairstow, Rich Battista, Colin Bodell, Mark Ford, Greg Giangrande, Lawrence A. Jacobs, Steve Marcopoto, Erik Moreno, Evelyn Webster REVENUE & INNOVATION Andy Blau (senior vice president, advertising sales & marketing, finance), Mark Ellis (senior vice president, corporate sales), Matt Bean (senior vice president, editorial innovation), Lauren Newman (vice president, sales), Dan Realson (vice president, digital), Cara Deoul Perl (vice president, creative director), Steve Cambron (vice president, marketing ad solutions), Christine Wu (vice president, strategic client solutions), Lori Dente (vice president, finance), Caryn Klein (vice president, research & insights), Nancy Mynio (vice president, digital ad operations), Kavata Mbondo (vice president, yield and programmatic), Lori Kaplan (executive office manager) DIGITAL Jennifer L. Wong (president) TECHNOLOGY AND PRODUCT ENGINEERING Colin Bodell (CTO), Alam Ali, Linda Apsley, Adam Days, Robert Duffy, Amanda Hanes, Hugues Hervouet, Simon Loxham,

Leon Misiukiewicz, Keith O’Sullivan, Ben Ramadan, Ashis Roy, Eric Schoonover, Vita Sheehy (VPs)




Over 12 million working Americans trust The Hartford for income protection.1 They’re proof that we know what it takes to deliver. Look closer and you’ll see why. Our seamless Voluntary enrollment experience gives employees the products they want with the leading-edge personal education they need to make smart choices. All with the exceptional service and claims support that has been our hallmark for decades. See for yourself. Talk with a representative from The Hartford today. Email VOLUNTARY@THEHARTFORD.COM or visit THEHARTFORD.COM/VOLUNTARY. Prepare. Protect. Prevail.® 1

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Accident Insurance Critical Illness AD&D Disability Life

March 15, 2016

l et t er s

If someone asked me who I would want picking educational goals, methods, and standards: (1) self-made billionaire and philanthropist Bill Gates; or (2) a group of “local” people who are not succeeding as well in life but are on the “local” school board in a country that is massively underperforming, I shouldn’t even have to answer. Ben Faden Hoboken, N.J.

I suggest Common Core be called “Crony Core,” as business gets schooled by the fact that imposing arbitrarily rigorous standards helps no one really. The subject almost always boils down to poverty and what to do about it, not to education as such. Gene Lundy Lawndale, Calif.

Moo Juice

Core Meltdown As the parent of two elementary school children, I found “Business Gets Schooled” (Jan. 1) enlightening yet limited. The article may leave readers thinking, “What’s so bad about Common Core?” The grass-roots uprising opposing these standards stems from concerns about developmental content appropriateness, validity, and fairness of the testing, implementation, and teacher evaluations. Readers need to know that these issues help better explain why “big business got schooled.” Without that, your article may lead those people not fully informed to support the Common Core curriculum. Liz Savitsky Huntington, N.Y.



Excellent piece by Beth Kowitt, “Big Agriculture Gets Its Sh*t Together” (Feb. 1). Many people associate Big Agriculture with foreign investment and corporate greed. This article is about people solving problems for the betterment of mankind. While reading it you can easily connect the dots on what two pioneers are doing to solve a variety of problems. Thanks for a great read. Charles Bertrand Cape Girardeau, Mo.

Race in the C-Suite Re “Leading While Black” (Feb. 1): Ellen McGirt has put together a superb article.

Most of the issues concerning diversity in the corporate world are surrounded by the fear of the unknown, the fear of change, and preconceived thoughts about diferent cultures. There are plenty of examples of whites and blacks coming together in corporate America: Reginald Lewis and Michael Milken; Michael Jordan and Phil Knight; Russell Simmons and Rick Rubin. Credit is due to all the executives and their counterparts who are working hard to efect change. Roy Haynesworth Fairton, N.J.

Horns of Plenty? Re “Good Luck Getting Out!” (Feb. 1): The unicorn meltdown is in full swing. Artificially bloated companies are now facing layofs, down rounds, fire sales, and all the unsavory stuf that they deserve. While you can blame investors for creating this situation, I don’t think the entrepreneurs are innocent. If you accept cocaine, you should also accept the consequences. Sramana Mitra Menlo Park, Calif. LETTERS TO THE EDITOR Please include your name, address, and daytime phone number. Letters may be edited for clarity and space. MAIL Fortune Letters, Time Inc., 225 Liberty Street, New York, N.Y. 10281 EMAIL Letters sent to this email address may appear in these pages or on SUBSCRIBER SERVICES/ NEW SUBSCRIPTIONS For 24/7 service please use our website: You may also call 800-621-8000 or write to Fortune, P.O. Box 62120, Tampa, Fla. 33630-0604.

p ho t o g r a p h b y SAM KAPLAN


 '% $"#'(!&'






editor’s desk

The Pinnacles and Pitfalls of Corporate Culture “Today, human capital is the most valuable capital in every company, no matter what industry it is in.” So says my colleague Geof Colvin, and I’m inclined to agree. In a world where many of the most valuable products can be produced in infinite quantities at no additional cost, where money is lent by central banks at zero interest rates (or less), and where innovation is the only thing that provides sustainable value, talent is key. That’s why our annual Best Companies to Work For list, now 19 years running, has become our most popular franchise (see our package of stories that begin on page 141). Companies fight to get on this list each year because they know it will help them attract the very best talent. Potential employees refer to the list year-round to line up their dream jobs. It drives change: The best workplaces get a little better each year in a race to the top. All we can say is, You’re welcome. But what defines a great workplace? It’s not just free food, generous benefits, and nap pods (although those clearly don’t hurt). You’ll see one word throughout this issue that attempts to capture the essence: culture. Today’s workers are looking for a corporate culture that values them and their contributions. That’s particularly true for members of the millennial generation, who are less likely to



March 15, 2016

be married and less likely to participate in organized religion than previous generations, and therefore more likely to see their employers as a principal connection to society. Closely tied to culture is purpose. Steve Howe of EY tells us the two go hand in hand: “To improve its culture, a company must first define its purpose: Why does it exist, and what greater good does it serve?” In this issue we ofer a number of stories that shine a bright light on companies that have successfully answered that question, and others that have come up short. On the positive side there is Publix (page 166), where our own Christopher Tkaczyk went underground to capture why the 86-yearold grocery chain is so satisfying to employees. That stands in contrast to Jennifer Reingold’s story on Zappos (page 206), which provides a fascinating window into a company that has always attempted to make its employees’ happiness a top goal, but has recently faltered. Geofrey Smith and Roger Parlof take a deep

dive into Volkswagen (page 98), a company whose culture badly failed it—and then some. We still don’t know how high up the corporate ladder knowledge of the “defeat device” used to fool U.S. regulators went. But if higher-ups didn’t know, that leaves the question: Why not? What was it about the company’s culture that led engineers to think they could undertake such a fraudulent efort and not let managers know? Leadership is critical to culture, but fixing a broken one is no easy task—as Erin Griith’s sharp analysis of Jack Dorsey’s eforts to turn around Twitter (page 116) demonstrates. Then there is Palantir (page 124), which began life in the defense business but has readily adopted the “change the world” rhetoric of Silicon Valley and now finds itself on the knife’s edge in the battle between security and privacy, as Michal Lev-Ram writes. So read this issue and take heed. Creating a successful business culture isn’t easy. But it is more important than ever before. We hope these stories will serve as a guide.

alan murray Editor @alansmurray

p ho t o g r a p h b y WESLEY MANN

BATMAN V SUPERMAN: DAWN OF JUSTICE and all related characters and elements © & ™ DC Comics and Warner Bros. Entertainment Inc.


I N T H E A T E R S M A R C H 2 5, 2 0 1 6


THANKS TO THOUSANDS WORKING TOGETHER HELPING MILLIONS PLAY TOGETHER. ® ® FORTUNE and FORTUNE 100 Best Companies to Work For are registered trademarks of Time Inc. and are used under License. FORTUNE and Time Inc. are not affiliated with, and do not endorse products or services of, Activision Blizzard.

WHY CONSUMER STAPLES SHOULD BE ON YOUR SHOPPING LIST. Greater Return Annualized Total Return by Sector (1985–2015)*

Lower Risk






Standard Deviation of Annual Total Returns (1985–2015)*




Health Care


Consumer Staples 14.5% Energy


Consumer Discretionary



Consumer Discretionary






Telecom Industrials Health Care

Materials Telecom

Consumer Staples 14.3% Utilities

Strong performance and lower risk aren’t boring. The consumer staples sector has historically delivered relatively low risk and high return, plus dividends, through steady demand in up and down markets over the past 30 years.*

Stock up on opportunity



Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully. Past performance is no guarantee of future results. Because of their narrow focus, sector funds tend to be more volatile than funds that diversify across many sectors and companies. *Source: Haver Analytics, Fidelity Investments, as of July 31, 2015. Past performance is no guarantee of future results. Sectors are defined by the Global Industry Classification Standard (GICS) and are based off the top 3,000 U.S. stocks by market capitalization. Annualized Total Return by Sector (1985–2015): Health Care (14.93%); Consumer Staples (14.47%); Energy (11.15%); Consumer Discretionary (11.13%); Industrials (10.94%); Technology (10.73%); Utilities (10.49%); Financials (10.41%); Materials (10.04%); Telecom (9.16%). Standard Deviation of Annual Total Returns (1985–2015): Technology (25.45%); Materials (20.73%); Consumer Discretionary (19.27%); Financials (19.26%); Energy (19.08%); Telecom (18.93%); Industrials (17.72%); Health Care (15.93%); Consumer Staples (14.32%); Utilities (14.02%). Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2015 FMR LLC. All rights reserved. 727880.2.0

MARCH 15, 2016

Macro In 1929, shown here, Wall Street’s terror was justified. The same for 2008. Now? Not so much.



The problem with being a contrarian when it comes to the economy is this: If everyone believes we’re headed for a recession and acts that way, then we probably are. Mood, confidence, and uncertainty matter. Fortune recently partnered with polling firm Morning Consult to ask 2,000 people if they thought a recession was imminent. The answer from 38% of respondents was yes. About a quarter couldn’t decide, and

just 36% said no—not exactly optimistic. Indeed, there’s a lot to be worried about these days. The stock market has been rocky. Corporate profits have flatlined. The price of oil has plunged on concerns about weak growth in China and elsewhere in the world. There are mounting worries about the banks. And CEOs, like PepsiCo’s Indra Nooyi, are saying the economy looks as rocky as they have ever seen it.

photo by a p

By Stephen Gandel and Chris Matthews




March 15, 2016




measures of the labor market for signs of weakness. If initial unemployment claims start to rise consistently from today’s historic lows, manufacturing malaise could be metastasizing.



MANUFACTURING IS IN A RECESSION And yet most professional forecasters think a recession is unlikely. A recent poll of Wall Street economists pegged the chances of one occurring in 2016 at 21%—up from a year ago but still relatively low. What’s more, many of the key measures of the U.S. economy (most notably the unemployment rate below 5%) are still strong. Of course, it’s hard to escape the drumbeat of negative news, particularly in this election cycle. So if you’re still inclined to stuf your mattress with cash, here are the key recession triggers to watch—plus a few reasons to stay calm and carry on. FIVE THINGS TO KEEP AN EYE ON


OIL IS CRASHING When oil started falling, economists were bullish on growth, as cheaper gas tends to give consumers more spending money. But no one anticipated the magnitude of the commodity’s collapse. “Contemplate a world that produces 90 million barrels of oil per day, or 32.9 billion per year,” investment consultancy High Frequency Economics’ Carl Weinberg wrote in a note to clients. “Reducing the value of that production by $100 per barrel subtracts $3.3 trillion from world income, which is only $70 trillion to begin with.” Adds Weinberg: “That is a big ouch.”

Capital spending in extractive industries like oil fell 35% in 2015. If the decline continues, expect oil to weigh on the economy. If capex spending levels out, however, low gas prices should start being a boon to the U.S. economy rather than a drag.



Manufacturing these days is only a small portion of the economy, and ISM’s nonmanufacturing index is still expanding at a healthy clip. WHAT TO WATCH FOR:

Keep track of surveys of the service sector as well as

LENDING WILL GET TIGHTER In the Federal Reserve’s January survey of loan officers, just over 8% responded that they planned to toughen lending standards on corporate borrowers; it was the highest percentage since 2009. Tightening credit doesn’t always lead to a recession. But every recession starts with that. At the same time, companies are having to pay more to borrow, particularly if they have low credit ratings. In December, the difference between borrowing costs of junk-grade and investmentgrade companies rose to just


1 10%



60 58



56 54






48 –50 –60


46 44





JAN. 2014

FEB. 2016



Oil has fallen before. There was a similar (though not as huge) shock to the commodity in 1986, when the price fell from $30 a barrel to $15, which didn’t tank the economy. Even more encouraging? The vast majority of economic activity in the U.S. is in the service sector, which does generally benefit from cheaper energy prices.



March 15, 2016

JAN. 2014

JAN. 2015

JAN. 2016




dimon: k imber ley w hite—gett y im ages; z a ndi: chr is goodney—gett y im ages; nooy i: a lex goodlett—gett y im ages; cook: mik e bl a k e—r euters


The warning signs of a global slowdown aren’t limited to energy markets. As the Chinese economy has weakened, commodities have slumped, andmanufacturershave been forced to slash prices in order to compete with panicked Chinese factories producing at full tilt. The closely viewed survey of U.S. manufacturing executives by theInstitute for SupplyManagement in February showed the sector contracting for the fifth month in a row.



1.5 1.0






0 Q1 2007

Q4 2015




2015–16 2%


Great Recession






25 Above-average financial market stress






2008–09 –30

23 –2

–40 JAN. 2007


Q4 2015





over 7%. Typically, when the spread has gotten that big, Goldman Sachs noted, a recession has followed.


The good news is that while the spread has risen, the fact that interest rates are still low means that companies—especially investment-grade firms—are still paying historically low prices to borrow. And when it comes to consumer loans, lending officers say they are continuing to make credit card, auto, and other loans more available, not less.

Average earnings for the companies in the S&P 500 dropped in the fourth quarter of 2015 vs. a year ago, according to FactSet—marking the third straight quarter that profits have fallen year over year. Collectively, Wall Street analysts predict earnings will continue to sink past the spring, before rebounding slightly in the second half of 2016.



Two years after the financial crisis, the Federal Reserve Bank of St. Louis developed an index to track financial stress. The higher the index, the more danger. During the crisis it would have registered a six. Right now, it’s below zero, though it has been creeping northward.

The silver lining is that profits were way up coming out of the recession, and margins are still near all-time highs. Plus, much of the current profit slump is coming from just one sector: energy. Earnings of companies in the oil and gas industry dropped nearly 75% in the



Q1 2014

FEB. 2016



quarter. And before companies started reporting their numbers, analysts had been expecting an earnings drop of closer to 5%— worse than the nearly 3% we got. WHAT TO WATCH FOR:

If earnings outside of the oil industryturnsouthaswell,thenthe economymighthavearealproblem. So far that hasn’t happened: Excludeenergycompaniesand those that get more than half of their income overseas, and the fourth quarter’s “big profit drop” turns into a 7% increase, according to Standard & Poor’s.

reflecting, among other things, deeper suspicions about the health of the U.S. economy. The market is a leading indicator of economic activity, and recessions are almost always preceded by falling stock values. REASON NOT TO WORRY:

Stock market declines of 10% or more are not uncommon during economic expansions, as dips in 2010 and 2011 have shown. Bear markets, however, in which the S&P 500 falls more than 20%, have happened only two times outside a recession since 1900. WHAT TO WATCH FOR:

5 STOCKS ARE FALLING As you are probably aware, American stock investors have been irritable of late. The S&P 500 fell 13% from July to mid-February,

Pay attention to the bond market. A yield-curve inversion— where short-term interest rates outpace long-term rates—is a far more reliable indicator of recession than equity markets. If that happens, the market’s panic will be a little more justified.


March 15, 2016




buying sprees Last year was the largest ever for M&A, and a choppy market hasn’t stopped the dealmaking in 2016. Here, a few of the most acquisitive companies of the past 12 months. BLACKSTONE 38 acquisitions



By Jen Wieczner FROM BRIDGEWATER’S RAY DALIO and Salesforce’s Marc Beniof

to Goldman Sachs traders and Google programmers, Big Business loves meditation. And these days a growing crop of meditation gurus love business right back. In 2015 the meditation and mindfulness industry raked in nearly $1 billion, according to research by IBISWorld, which breaks out the category from the alternative health care sector. But even that doesn’t count the revenue from the more than 600 mindfulness apps now available (Headspace recently raised $30 million and has been downloaded 6 million times) or the burgeoning category of wearable gadgets designed to help people Zen out (the popular Muse connected headband measures brain activity during meditation for $299). This year 22% of employers will ofer mindfulness


–41% 22

Thanks in large part to Wall Street’s first credit crunch since the Great Recession, private equity deals are down 41% worldwide so far in 2016 and


down 42% in the U.S. That affects not only deals involving junk bonds, private equity’s favorite fuel (down 72% ), but also investment-grade

March 15, 2016

training—typically priced between $500 and $10,000 for large-group sessions—a percentage that could double in 2017, according to a survey by Fidelity Investments and the National Business Group on Health. Despite its proliferation in the oice, “meditation historically was not designed to help you achieve material goals,” says Elizabeth Sudler, who previously taught mindfulness at Goldman Sachs. The objective is usually more holistic. At the sleek, just-opened New York City meditation studio MNDFL, chief spiritual oicer Lodro Rinzler notes, “We don’t do this to double our portfolio.” But it couldn’t hurt—the unlimited annual MNDFL membership costs $2,200.

issues ( down 30%). While it’s unclear exactly why investors are fleeing (see the previous page for a list of economic fears), it is clear that PE firms

are having a tougher time making their math work—meaning fewer options for companies in pursuit of a buyer. —DAN PRIMACK

WPP 35





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CHINA’S market sellof and







Syrian refugees in Greece charge their phones while waiting at the Macedonian border.



March 15, 2016

of Syrian refugees is a big, hairy logistical problem, and Fortune 500 companies from Google to Goldman have donated vast sums toward solving it. In October, President Obama thanked Kickstarter and Twitter for launching new software that makes it easier for nonprof-

market for films by the end of 2017—helped along by a growing middle class, a still vibrant consumer sector, and the rapid expansion of the country’s theaters. It also doesn’t hurt that the industry is historically recessionresistant. During the last U.S. downturn, box-oice receipts actually rose. China, it seems, is no diferent. That’s good news for U.S. companies. Last year three American movies, Avengers: Age of Ultron, Jurassic World, and Furious 7, cracked the top five highestgrossing films in the country, with Furious 7 falling just short of the $393 million earned by the country’s No. 1 hit, a local product called Monster Hunt. While the country’s cinematic tastes tend toward the domestic, partly because of strict regulations on foreign releases, the relationship between the U.S. and China is “symbiotic,” says Tuna Amobi, entertainment analyst for S&P Capital IQ. The number of partnerships between the U.S. and Chinese film studios is growing, as the two swap expertise. Slowdown or no, Hollywood’s love afair with China is far from over. —Tom Huddleston Jr.

its to collect funds. But the challenges run deeper than “click to donate.” Most refugees travel without identification, and long waits to get work permits, bank accounts, and spots in schools impede assimilation. For example, in Finland, which accepted 32,480 refugees last year, the government was so overwhelmed it reached out to the tech industry for help—enlisting an online payments startup, a jobs site, and a company that

deals in freelance invoicing. By just giving cash, says Brian Reich, project director of UN Refugee Agency unit The Hive, “we’re distinctly limiting” the impact companies can have. And there’s another benefit of industry aid for all involved: As refugees get comfortable in their new homes, they may prove to be loyal future customers too. —ERIN GRIFFITH

i l l u s t r a t io n b y LINCOLN AGNEW

holly wood: or igina l photos by u ni v ersa l pictur es, wa lt disney/m a rv el studios, edko films; r efugees: pier r e crom—gett y im ages

devalued yuan rattled global markets this year, but even trillions of dollars of stock losses can’t keep Chinese audiences away from the movies. In early February the country set records, spending nearly $280 million at the cinema in a single week over Chinese New Year. In January box-oice totals jumped 41% from the year before, according to ComScore—a remarkable feat considering that last year, the country’s ticket sales grew nearly 50%, hitting $6.8 billion for the year. In other words, China’s economic turmoil has yet to put a damper on projections that the country will surpass the U.S. as the world’s top

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that entitles them to longer appointments and home visits, among other perks. This retainer, which patients typically pay out of pocket, can run $1,800 a year or more. One such firm, Qliance, counts Jeff Bezos and comedian Drew Carey among its investors. Another, MDVIP, recently sold to PE firm Summit Partners for a reported $350 million. A key benefit of the concierge model is that the extra money allows doctors to spend more time with fewer patients, rare in an era of doctor shortages. There are an estimated 6,000 concierge-style offices today, up 25% from just a few years ago, and Bain estimates that the number could triple. That won’t help with the dearth of doctors, but there are plenty of practices whose financial prognoses look healthier. —Lauren Silva Laughlin



demand these days, and not just from patients. Physician’s offices are increasingly being snapped up by hospitals and investors alike. Acquisitions rose 47% last year, to hit 88, and though few prices are reported, those that were totaled over $2billion. For hospitals, adding MD offices can increase economies of scale as margins tighten under the Affordable Care Act. It’s also a good deal for investors who want in on promising health care businesses. Take concierge medicine, a model in which doctors charge patients a monthly fee 120








0 2006






March 15, 2016


Insurance Meets the Sharing Economy “UBER FOR P&C COVERAGE” ISN’T AS CRAZY AS IT SOUNDS.

By Jennifer Alsever IS “DELIGHT” not a word you typically associate with your insurance company? Silicon Valley wants to help. Lemonade, founded by entrepreneurs Daniel Schreiber and Shai Wininger, is a startup that borrows from the on-demand, sharing-economy ethos of Uber and Airbnb, with plans to take on the highly regulated and firmly entrenched insurance industry when it begins selling property and casualty insurance to New Yorkers this spring. The goal: Imbue the industry with a sense of mutual trust—rather than, say, hate. The company is one of a few startups ofering peerto-peer insurance, which operates by pooling insurance premiums from people

who know and trust one another. That pot of money is used to pay members’ claims, and members then keep any unused cash. Its competitive advantage for users is that the insurance company doesn’t gain anything from denying claims, and is therefore more willing to reach settlements. Larger reinsurers provide backup in case damages exceed available funds. Of course, insurance “is not an easy industry to tackle,” notes CB Insights analyst Matthew Wong, but Lemonade is getting traction. Last month it recruited an executive team from the C-suite of companies like AIG and ACE and appointed Duke University’s Dan Ariely as chief behavioral oicer. Last year Sequoia Capital led a $13 million seed round for the startup that was the largest of 2015. And in February it got backing from seven of the largest reinsurers, including Berkshire Hathaway. “I thought the response from the insurance industry would be antagonistic,” Schreiber says. “Instead it’s been, ‘We’ve been waiting for you.’”

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How to Have a Good Day: Harness the Power of Behavioral Science to Transform Your Working Life By Caroline Webb

The title How to Have a Good Day might suggest a collection of well-meaning but nebulous homilies about life. This work is just the opposite. Economist and former McKinsey partner Caroline Webb has crafted a practical primer. Most of the advice is tailored to the work world, but with a twist: Her insights are rooted in behavioral science from the likes of Nobel Prize– winning psychologist Daniel Kahneman. So when she advises you how to structure your day to maximize creativity (avoid multitasking, batch together similar challenges, and take breaks), she’s not just riffing or sharing bromides; she’s offering wisdom based on the science of how human beings actually operate. —Nicholas Varchaver TIP If everybody instantly agrees that a certain plan is right, challenge it. Play devil’s advocate, make others find an objection, or go through the exercise of doing a postmortem before the fact.

The Happiness Equation: Want Nothing + Do Anything = Have Everything By Neil Pasricha

Ecclesiastes could have told you as much. Wealth and success do not lead to happiness. In fact, they can yield the opposite. While the biblical book deals with the age-old

Further re ading






By Jake Knapp, John Zeratsky, and Braden Kowitz

By Vijay Govindarajan

By Gretchen Rubin

Practical insights on strategic thinking from a venerated businessschool prof.

A new edition of the happiness guru’s bestselling badhabit buster.

Three partners at Google Ventures lay out their (very) fast strategy for elevating companies.

challenge via poetry and prose, author Neil Pasricha has opted to blog his way out of this pickle. In The Happiness Equation, Pasricha, a popular online writer, takes readers on a sprawling, informal, and entertaining tour of the field of positive psychology, complete with handdrawn scribbles and plenty of exclamation points for good measure. His well-being hacks aren’t exactly new, but they’re useful. Happiness is about behavior change. Take brisk walks. Reduce the number of decisions you make. Don’t retire, ever. Change your routine first, and your emotional health will follow suit. —Scott Olster TIP Pasricha’s ninth and final “secret” to happiness: Don’t always take advice. Most pearls of wisdom conflict with one another (even in good books). Trust your gut.

Smarter Faster Better: The Secrets of Being Productive in Life and Business By Charles Duhigg

Instead of presenting a unified theory of self-improvement, Pulitzer Prize winner Charles Duhigg’s latest book is a jawdroppingly well-sourced series of rules and tips assembled from a range of case studies in productivity best practices. At Google, researchers found that who you put on a team matters less than the group’s social norms (everyone should talk in meetings, everyone should feel safe sharing even bad ideas). At Disney, directors embrace the terror of brainstorming on a deadline, and at GE employees develop stretch goals as well as incremental ones to help realize them. Duhigg even profiles a nursing home, finding that the healthiest seniors are the ones who rebel against the system. Some rules, it turns out, should be followed more closely than others.—Anne VanderMey TIP If you read a new idea in a book, force yourself to stop and explain it to someone. Doing anything with new information makes it easier to digest and retain.

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The CEO VS. the Chairman: Inside an Epic Boardroom Showdown

In 2009 former MetLife CEO Bob Benmosche was called out of retirement, which he was enjoying at his sun-swept villa in Croatia, to head up troubled AIG. The giant insurance company had precipitated the financial crisis of 2008 and survived only because of an unprecedented $182 billion government bailout. Benmosche was the fifth CEO in as many years. At the time he took over, few believed taxpayers would ever get their money back. In five years at the helm, Benmosche downsized AIG, returned it to profitability, and repaid the government, plus interest. But his tenure was a rocky one, characterized by conflicts with the U.S. Congress, his board, and his board chairman, former American Express CEO Harvey Golub. Benmosche felt Golub got more involved in management decisions than he should have. Golub, for his part, complained Benmosche was making major strategic decisions without consulting the board. Benmosche died from cancer on Feb. 22, 2015. In the last year of his life, he told the story of his career to Peter Marks and Valerie Hendy for his posthumous memoir, which will be published in April. What follows is an excerpt from that book. We have chosen this excerpt because it involves one of the hottest debates in corporate governance today. Should companies have a chairman of the board who is separate from the CEO? Many shareholder advocates argue yes. But a number of chief executives say the dual authority can lead to the kinds of conflicts that precipitated the following events. Fortune reached out to Harvey Golub for his take on the events in the narrative that follows. He declined to comment.

i l l u s t r a t io n b y JEFFREY SMITH

It was July 14, 2010. Bastille Day. Weirdly apt for the board meeting to occur on a holiday celebrating liberation. Because one way or another, it was going to end in freedom for me. “Either he goes or I go” may be a cliché, but it perfectly suited this particular day at the oice. Maybe—and it’s a long shot—if Golub and I were both less headstrong we could have forged some kind of authentic partnership. We both liked to spend leisure time in Florida, and perhaps, if we had gotten together over golf … ah, I don’t even play golf. Ultimately, our visions were in such serious conflict that

or igina l photogr a phs, golub: scott eells—bloomberg v i a gett y im ages; ben mosche: peter foley—bloomberg v i a gett y im ages

Bob Benmosche, right, made no secret of his untenable relationship with Harvey Golub, left: “I don’t get along with Harvey,” said the AIG CEO.

I concluded it was pointless to continue down this path. I needed to do something drastic. And so I did. In the annals of corporate showdowns, the one that ensued was kind of wild. It put knots in the stomach of hard-nosed people with stern constitutions tested over years of tough business and fiscal decisions. “We had the most dramatic board meeting of my career,” said Jim Millstein, the restructuring expert recruited by the Obama administration. “I’ve never seen anything like it.” The board met on the 18th floor of

70 Pine Street. The directors were all there. I went point by point through the changes I’d made since becoming CEO, beginning with my eforts to get the workforce to believe in AIG again, the battles with [government pay czar] Kenneth Feinberg over compensation, the clawback of the bonus money, the improving situation with AIG’s financial products unit [which sold the toxic securities that precipitated the meltdown], the subsequent hiring of new

talent, the sale of American Life Insurance Company. And then I launched into a discussion of future plans: the proposal for an IPO of American International Assurance in the fall; the sales of other units, such as the Star and Edison insurance companies in Japan and Nan Shan in Taiwan; the need for our investment department to make improvements. The board, though, had a question for me, one that, of course, I figured was coming. How, they wanted to know, was I going to get along with Harvey Golub? “I don’t get along with Harvey,” I said. Golub was sitting right there. It could not have come as a shock to him; as recently as the day before, some of my senior people had been in a conversation with him about how untenable the situation was. I explained that it was about more than getting along, that the conflicts between us were serious. “Look,” I added. “We really need to think about leadership and vision because we’ve really come through a terrible time. We can’t continue to have these battles. It’s not working well.” By this point, lawyers had been summoned to the room, attorneys from powerhouse firms: Simpson, Thacher for the board and Davis, Polk for the Fed. I was asked to make it clear right then and there that I was not going to submit my resignation. “I don’t know that I’m not going to resign,” I said. “But we’ll find out today.” The room tensed up. Was I in or out? What was crazy Bob up to? The fact was I was not up to anything. I didn’t want to resign, but I would if I had to. Croatia in the summertime was looking mighty tempting. “You can’t have a company without a CEO, and without it being announced,” one of the lawyers said. And with that, the board asked both Golub and me to leave the room. They were going to meet without us in executive session and try to figure out

March 15, 2016





what the hell to do. Back in my oice, I really wasn’t sure what would happen next—whether this really was my last day at AIG. As the board met behind closed doors, Golub walked through my open one. “You know,” Golub said, “I think I need to work on my relationship with you.” What the fuck? “Harvey, we don’t have a relationship,” I said. “We’re not going to have one. All I can tell you is that the board needs to make a decision today where we’re going. But I think only one of us can be here tomorrow.” The conversation was without rancor. Golub seemed alternately to want to mollify me and keep me on the ropes. I added, “So if you want to be the CEO …” “No, look,” he said. “The fact is I know it’s easier to get a chairman than a CEO. There’s no contest here. But I really feel that we should work together. It’s going to take time—the next three or four months—to do that.” But we were out of time, and I saw no advantage in prolonging the agony. “It’s just not going to work, Harvey. And so if the board wants you to stay on, that’s great. Then I’m going to leave at the end of the day and go to Croatia, and you’re running the company. It’s yours. I’m done.” What I was thinking was, I’ve got to get the hell out of here. I could no longer see any upside in staying. Here I was trying to save this company, and I was being treated as if I was the problem. Fuck it, life’s too short, I said to myself. I considered all the money I had coming to me, a lot of it, from my tenure at MetLife: a $100,000-amonth pension after taxes for the next 20 years; I had close to $20 million in deferred compensation and 401(k)s. I had 1.7 million MetLife stock options and owned almost half a million shares. “What am I doing to myself?” I thought. The feelings I wrestled with



—Bob Benmosche

weren’t pleasant: If I did leave, I would go out as someone who tried to save AIG but couldn’t get the job done on his watch. “That’s my legacy?” I asked myself. “How terrible.” But rather that than stick around. Prolonging this turmoil and letting AIG go down as a result was no option at all. With that, Golub left my oice. Millstein would later fill me in on the events that followed, which he described as “like the third act of Shakespeare, where everybody goes crazy. Eventually order is restored, but in the third act, shit happens that you just can’t believe.” Golub went to talk to the board, and his misgivings about me spilled out. “I’m not sure if leaving Bob in charge of the firm is the right thing to do,” he said, according to those present. “You know, after all, he’s threatened to resign a couple of times, and I’m really uncertain, and I think if I do it, I’m just leaving you guys open to this again, being held hostage. He’s very unpredictable, he’s very volatile, and I’m not sure he’s

March 15, 2016

really fit to run the company, and I feel like it would be dereliction of my duty as a director and as a fiduciary oicer to allow this to go on.” The strained silence in the room was broken by an unlikely voice addressing Golub directly: that of Morris Oit, a director who had never been a big fan of mine. “I’ve got to say, for the good of the firm and the future of this company, I think you have to resign,” Oit told Golub. “We can’t go through another CEO change. We’ve had five in five years. Bob has got the loyalty of his team, he’s gotten the company to stand up and fly right, and despite the fact that he and I have disagreed on important matters, as have you, he’s the right leader for this firm.” Other directors spoke up, echoing Oit, telling Golub that the only way for him to lead now would be to leave. And at last he did. While Shakespeare was happening in the conference room on the other side of the 18th floor, I was still cooling my heels in my oice. An hour or so passed, and no one had come to get me. So finally I wandered over to the conference room to see if I could get an update on my fate. To my astonishment, everyone had left. “Where’s the board?” I asked someone. “The meeting’s over,” they said. Little did I know that Harvey was out and a new chairman installed: Steve Miller. Nobody called me in, nobody discussed it with me. I did find a draft of Golub’s resignation letter on a desk, so I knew I still had a job. But it’s a fact that no one on the board, on that day or ever, spoke to me about Golub’s departure.

Excerpted from Good for the Money: My Fight to Pay Back America, by Bob Benmosche, with Peter Marks and Valerie Hendy, St. Martin’s Press, April 2016. BOB BENMOSCHE was president and CEO of AIG from 2009 to 2014.

Previously, he served as CEO of MetLife, where he was instrumental in taking the insurer public, and was an executive at Paine Webber and Chase Manhattan. Shortly after taking the top job at AIG, Benmosche was diagnosed with cancer. He died in February 2015 at the age of 70.

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HAT IF the conventional view of startups and entrepreneurship in the U.S. turns out, like so many conventional views, to be wrong? Substantial recent research suggests that it is. So brace yourself for decidedly counterintuitive findings that may help explain some of our era’s economic puzzles. First surprise: Startups aren’t increasing in the U.S. On the contrary, entrepreneurship has been declining for decades. The startup rate has fallen sharply over the past 30 or so years, from 14% of total companies in a given year to about 8%, say multiple papers by researchers Ryan Decker of the Federal Reserve Board, John Haltiwanger of the University of Maryland, and Ron S. Jarmin and

W 36


March 15, 2016

Javier Miranda of the U.S. Census Bureau. That’s bad news because the rise of new companies is an important way in which capital and labor get reallocated from low-productivity uses to high-productivity uses. But this bad news gets worse. That’s the second surprise: Some kind of turning point occurred around the year 2000, marking a distinctly 21st-century phenomenon. Until then, startups, even in declining numbers, followed a familiar pattern that was crucial to America’s economic health. Most of them would fail within a few years, but a few would grow extremely fast. Those rare supersuccesses, say the researchers, “yielded a sustained and disproportionate contribution

of startups to job creation.” In addition, “these highgrowth young firms were relatively more innovative and productive,” so they also made outsize contributions to productivity growth. Surely the rise of Facebook, Uber, and Airbnb prove that spectacularly successful startups are alive and thriving, even if some valuations got inflated, right? No—those few highly visible examples are misleading, says the research. In fact, highgrowth young firms have been in decline since 2000, they say. Some startups still grow faster than others, obviously, but the wide margins by which explosive successes exceeded the norm have withered. And it’s precisely the of-the-charts success of these megawinners that contributed so heavily to the U.S. economy’s pre-2000 health. The result is that after 2000, “not only is the economy rolling the dice less frequently [that is, launching fewer startups], but the likelihood of a young firm being a highgrowth firm has declined,” say the researchers. What happened? The academics don’t know and are trying to find out. Regardless of the explanation, one can’t help imagining that maybe these trends are contributing to several intractable problems in the U.S. economy: stagnating wages, long-term unemployment, low productivity growth, and overvalued unicorns as VCs compete for ever fewer high-growth startups. There’s no firm evidence yet. But to understand today’s business dynamics, let’s start by accepting this disorienting reality: At least for now, the 21st-century corporation is actually less likely to be a high-growth newcomer.

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MARCH 15, 2016

Venture HUM A N C A PI TA L

Is Software Better At Managing People Than You Are? Judgments about human qualities— and decisions about hiring and firing— are increasingly affected by algorithms. Is that a good thing? By Jennifer Alsever IN DECEMBER, Cisco U.K. vice

president Eleanor CavanaghLomas found a way to persuade a stubborn manager to change his approach to a reorganization after getting some fresh insight into how he views the world. Her secret? Data analytics. Cavanagh-Lomas got advice on how to talk to the manager by logging in to Team Space, a web-based app built by Cisco

i l l u s t r a t io n s b y HARRY CAMPBELL

engineers. There she can see an algorithm’s assessment of her 15 direct reports, based on a 15-minute multiple-choice test each one takes. The algorithm uses those selections to identify a hierarchy of nine “strengths” and then ofers recommendations on how that person works best and what energizes him. When Cavanagh-Lomas learned that this manager doesn’t give up easily, she acknowledged that quality in a conversation and asked him to try a diferent tack for a short time. If it failed, he could return to his method again. “The software gives you coaching tips tailored to their own style and

how they need to hear feedback,” she says. It worked, she adds. We’ve all heard of management by the book; welcome to management by the algorithm. “People analytics” is fast emerging as a tool in the perpetual war to retain and attract talent. Companies have started hiring data scientists and building or buying software that predicts who will leave and who will make the best senior vice president. “It’s like Moneyball for HR, letting you make better decisions,” says Josh Bersin, principal at Bersin by Deloitte, the HR arm of the consulting giant, “and this year it has really peaked.” In the past 10 months, he says, the

March 15, 2016





percentage of companies using predictive HR analytics has doubled, from 4% to 8%. Last year, investors put $2 billion behind companies making apps for hiring, performance management, even wellness. Bersin says he wouldn’t be surprised if HR teams soon begin intervening when employees who wear heart rate monitors show signs of stress. “It’s going to dramatically change the way we work,” says Ryan Hammond, head of people analytics at HiQ Labs, which uses external data from multiple sources to predict which employees are most likely to be poached.



Started in 2012, HiQ has 25 Fortune 500 customers. The HR apps run the gamut. For example, eBay designed algorithms to reveal which workers might jump ship, using information on tenure, compensation, promotions, and feedback scores from managers. IBM unveiled Blue Matching four months ago, using its Watson technology to connect thousands of employees with job opportunities. The software tallies data about each person’s role, skills, experience, location preference, and performance and then suggests openings for the employee.

March 15, 2016

General Electric is now testing machine learning to identify candidates for key promotions. Using HR data and profiles from a LinkedInstyle internal system, the software looks at correlations between the career paths of successful GE executives and others who have had similar jobs or leadership training. “We don’t do anything that would creep you out,” says James Gallman, GE’s strategic workforce planning leader. Executives handle the final vetting of candidates. As we all know, technology isn’t always perfect. Using these apps requires particular care. For instance, relying only on past hiring data to build predictive algorithms could reinforce problems, says Hammond of HiQ. “Hiring discrimination, for instance, could get baked into your algorithms,” he says. Then there are the all-too-human factors—say,

a sick child—that could afect performance without being counted in software inputs. Bersin describes a grocery chain that used software to uncover high turnover at several stores and then fired the manager. The turnover turned out to be seasonal and the dismissal unwarranted. The apps also risk treading on employees’ privacy. Electronic badges can now use sensors to track who is talking to whom and register the tone of voice. Software can mine keystrokes and email activity. Laws don’t prevent companies from capturing such data, but transparency will keep employers from breaking their trust, argues Corey Ciocchetti, a law and ethics professor at the University of Denver. “Otherwise,” he says, “at some point it will backfire.” Trust and transparency will be key as Cisco makes its Team Space app available to its 72,000 employees in coming months, says senior vice president Ashley Goodall, who leads the efort. He says Cisco designed the software to pinpoint the patterns, behaviors, and factors that add up to a successful team and a fruitful career. Leaders can use it to stay engaged with team members, see how their group stacks up against the best, and receive recommendations to improve. Already the software helped CavanaghLomas spot an unhappy senior manager and adjust her role to keep her engaged. Otherwise, Cavanagh-Lomas says, the manager would probably have quit. “Most of us are curious about how we can be better,” says Goodall. “This app understands who you are and how you’re going to be at your best. We think that’s going to give us an advantage in the marketplace.”



5 Declare an orange alert

Your best IT pro is powerless if employees are blowing holes in your security. “Your people need to know what exposes data,” says David Stelzl, author of Data@Risk and founder of the consultancy Stelzl in Charlotte. Get them up to speed with securityawareness training in a program such as SANS Securing the Human, says David Davenport, CEO of MotherG, a managed IT services firm in Chicago.


Lock down your phone You risk a lot if you talk business on the same device your kids use to download games. A rogue program, says Stelzl, could hack into your phone and “see your calendar, see you through a camera without you knowing it, and listen to you through the microphone.” He recommends Check Point’s Mobile Threat Prevention, which detects malicious apps, and Capsule, which helps create a secure mobile environment.

a irewalL—and more

Strengthen your firewall with intrusion prevention tools and consider adding DPI-SSL services, which pre-approve Internet traffic before it gets to you. To deal with those who slip past the wall, some larger companies are increasingly using behavior-based analytics and access controls. Together, these tools collect data to see how users are operating inside the network—and identify and isolate bad actors quickly.

Confer with competitors

Battening down the hatches on your own will get you only so far. Your IT team should be sharing best practices and intel with friendly members of your industry. One way is through Security Colony, a portal where firms can exchange ideas for a subscription fee of $2,000 a year. Even better, free your IT team from crisis control for a day or two and send them to a conference where they can talk shop. It’ll cost a lot less than undoing the damage of a major hack.

Avoid hostage situations More hackers realize there’s big money in taking over the computers of firms and demanding cash to set the data free. McAfee Labs reported a 165% uptick in ransomware in one recent quarter. Davenport recommends a technology called OpenDNS. It’ll prevent you from stumbling onto hackers’ sites where you might otherwise download malware. “It filters the good sites from the bad,” he says. v e r n e h a r n i s h i s t h e au t hor of s c a l i n g u p.



March 15, 2016

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Increasing the Velocity of Letting go of certain decision rights is a key to increasing growth, effectiveness and collaboration—and a mark of mature leadership. BY SHIDEH SEDGH BINA & NATHAN OWEN ROSENBERG SR.

Execution Bottlenecks, lack of velocity in execution, inger-pointing and stagnation—it’s no secret that even leading companies around the globe struggle with these types of issues. Left untreated, these issues can hobble productivity and chip away at optimal performance. But there is an often-overlooked solution to these common problems—something that can result in profound and meaningful growth, increased efectiveness and heightened morale if implemented correctly. What’s the solution? Take decision rights seriously: Methodically determine where and how decisions get made in the organization. When the right people are empowered to make the right kinds of decisions, there is a higher level of focus and better thinking. Bottlenecks disappear and remarkable results emerge with greater velocity. A study published in the Harvard Business Review in 2010 showed that decision efectiveness was correlated to corporate inancial returns 95 percent of the time. Furthermore, of the nearly 800 organizations surveyed, those that were most efective at decision-making generated total shareholder returns 6 percentage points higher than less efective irms. The value is clear. So why do so many companies overlook the importance of decision rights? One of the bigger issues we’ve found is decision rights are assumed to go hand in hand with certain roles and be inherent in a job and position within the corporate hierarchy. The assumption is that the higher the pay grade, the more empowered a person is to make decisions. That may have been true in the old, hierarchical command-and-control organization where business moved at a measured pace,

information rested in the hands of the few, decision-making was top-down and work happened in clearly diferentiated silos—but, as we know all too well, times have changed. Today organizations are highly matrixed and even networked, creating blurred and overlapping lines of accountability. With customer-centricity a key lever for competitive advantage and new technologies giving real-time access to information across the enterprise, decisions can and should happen faster and closer to the customer. And in matrixed organizations, very few decisions can be made in isolation. Therefore in almost any enterprise, efective, fast execution requires collaboration and shared decision-making.

When the right people are empowered to make the right kinds of decisions, there is a higher level of focus and better thinking. Bottlenecks disappear and remarkable results emerge with greater velocity. A Change in Organization Design is a Change in Decision Rights As the sociologist Max Weber irst noted in the early 20th century, enterprises use organizational structure to enhance performance. While there is a cacophony of papers, books, blogs and discussions about the topic of organization design, there is relatively little discourse about the true design function of organizations—the facilitation of the decisions needed to generate value, realize strategies,

overcome threats and exploit opportunities. Because aligning on decision rights is not an easy task, we see very few intentional efforts at addressing this critical aspect of organizational performance. As Harvard Business School Professor Emeritus Michael C. Jensen said in a Harvard Management Update article, “Allocating decision rights in ways that maximize organizational performance is an extraordinarily difficult and controversial management task.” Given this challenge, there is often a serious and detrimental lapse in communication within organizations. The conversation between top executives and their leadership teams to decide who owns the ability to make certain decisions relating to speciic parts of the enterprise simply does not take place. The gears of execution, and productivity, stop moving as people look up to their department head or the CEO to act and point the way forward.

Deciding to Decide Consider a recent example of a CEO who had previously served as his company’s COO. Despite positive intentions, he quickly found that the people who reported to him felt hamstrung because he was heavily involved in operational decisions. It was clear that the range of motion people had to fulill their responsibilities was far too narrow for them to truly create the greatest value in their roles. Giving up decision rights is both liberating and terrifying. We all tend to believe our own judgment is superior to someone else’s. Unfortunately, this is a very immature managerial perspective. This particular CEO understood that. To become pragmatically comfortable with relinquishing some decision rights, he held a series of conversations with his team to negotiate a inite set of decision rights he would retain, as well as how other decision rights would be distributed. His team in turn experienced a greater range of motion and an immediate elevation in performance.

The Middle Manager Blues One of the biggest errors companies can make is over-centralizing decision rights, Jensen says. Often as a leader, “you think you can make better calls.” But decision rights must be put in the hands of the person possessing the relevant information and line of sight to have the greatest positive impact. In fact, if you take the time to thoughtfully consider the purpose of executive roles and their true accountabilities, it becomes evident that the CEO and the two levels beneath her or him at dynamic, high-performing organizations must retain very few decision rights. Why? One key reason is that the purpose of their roles is to ensure the biggest, most sustainable future, set direction and establish the requisite conditions for realizing enterprise intentions. That purpose has a inite set of mis-

sion-critical decisions. To have an executive engaged in decisions that don’t align with the purpose of his or her job is a waste of time and money. Moreover, the highest levels of the organization are often too far removed from the customer or the process to have the perspective and information to make the appropriate decisions. Just as a message is quickly distorted in the “whisper down the lane” game, so does a decision run the risk of becoming erroneous as it moves away from the point of relevant information. Lastly, and perhaps most signiicantly, moving a decision away from the point of action and execution adds unnecessary time to the execution cycle. Over-centralizing the decision-making process can also cause tension at the middle-management level. Insigniam’s 2014 Middle Management Survey revealed that 50 percent of middle managers say their primary job frustration is that decision-making is taken out of their hands. This, in turn, created a sense of stress, dissatisfaction and a feeling of loss of power to get work done. Twenty-ive percent of managers involved in such situations said they only intended to stay with their current company until they received a better ofer.

The highest levels of the organization are often too far removed from the customer or the process to have the perspective and information to make the appropriate decisions.

Deciding to Establish Decision Rights How can organizations best address this key component of performance? Engage people to craft the decision rights needed to fulill their job. This means having critical conversations where people can answer important questions: Q




What is the purpose of my job? Why have my role? What does the organization count on from me — what am I accountable for? What decision rights must I retain to deliver on my commitments and the purpose of my job? With whom do I share decision rights? What decisions must I be involved in with others—who must I enroll, get input from and notify?

Amazingly, the very act of having someone consider these questions will create a more accountable and efective executive or manager. Because decisions in a complex organization cannot be made in a vacuum, the process of

of middle managers say their primary job frustration is that decision-making is taken out of their hands. Source: Insigniam’s 2014 Middle Management Survey

setting these rights must happen in a series of collaborative discussions and negotiations. This in turn solidiies alignment and creates better visibility, which can facilitate faster, better execution. It takes time and requires candid and uncommon conversations, but what’s the alternative? A slow-moving organization embroiled in constant breakdowns that stem from the fact that people don’t fully understand the purpose of their role or haven’t fully identiied what they are accountable for. Indeed, human capital is the most valuable asset in a company’s portfolio. Unlocking this competitive advantage means empowering teams across the leadership spectrum to make decisions that will positively impact the organization’s ability to be efective. IQ This is an excerpt from 2016 Spring Issue of Insigniam Quarterly. For the full article and other perspectives on innovative management and leadership, go to Over 30 years ago, Insigniam pioneered the field of organizational transformation. Today, executives in large, complex organizations use Insigniam’s consulting services to generate breakthroughs in their critical business results. Insigniam’s innovation consulting enables enterprises to identify and cross into new strategic frontiers to rapidly generate new income streams. Insigniam provides executives of the world’s largest companies with management consulting services and solutions that are unparalleled in their potency to quickly deliver on strategic imperatives and boost dramatic growth. Offices are located in Philadelphia, Laguna Beach, London, Paris and Hong Kong. For more information, please visit Copyright © Insigniam Holding LLC. All rights reserved. Confidential and Proprietary. May not be reproduced in any form, by electronic or print or any other means, without the express written permission of Insigniam. Visit for contacts.


As a naval aviator, test pilot and astronaut, Mark Kelly has been recognized for his courage and determination. A true pioneer, he appreciates the innovation, craftsmanship and utility of the Exospace B55, the first Breitling connected chronograph. This multifunction electronic instrument, powered by an exclusive COSC chronometer-certified caliber, reinvents the connected watch by dedicating it to the service of aviation professionals. Performance, functionality, and reliability. Welcome to the world of tomorrow’s technology. Welcome to our world.

MARCH 15, 2016



IT IS NOT unusual for

people who work in tech and startups to be up before the sun, though on this crisp winter morning it is not because these dedicated souls never went to sleep. This hardy squad of a half-dozen men and women, most in their twenties and thirties, has gathered on the edge of Los Angeles’ Venice Beach by dawn’s early light to surf—not the web, but waves. Connected by shared

Meet the Silicon Beach Surfers In Los Angeles, these techies are socializing, networking, and having fun by riding the waves.

By Scott Gummer

passions both professional and personal, members of the Silicon Beach Surfers disconnect from their devices, tether only to their surfboards, and paddle out. Part professional association, social club, and networking group, Silicon Beach Surfers was founded four years ago by Rob Lambert as an ofshoot of, the industry clearinghouse that Lambert runs, which serves

Founder Rob Lambert, center, with a dawn squad of surf-happy tech professionals after a prework session near the Venice Beach pier

p ho t o g r a p h s b y BRYCE DUFFY

March 15, 2016




as an online hub for the fast-growing L.A. tech and startup scene. Lambert enlisted a few surfing friends, they brought friends, and so on. Today Silicon Beach Surfers has 513 members. They meet at a handful of surf spots between Manhattan Beach and Malibu, though it’s not as if a flotilla of techies ever commandeers a beach. Most members are too busy. “I live in Westwood but work in Burbank,” says Mike Takahashi, senior manager of digital at Disney, “so I don’t get out and surf as much as I want.” Still, Takahashi stays plugged in via the Surfers’ private Facebook group, which not only updates members about which breaks the swells are hitting best but also announces upcoming events like mixers, product demos, and photo and video shoots. The nature of networking is to advance oneself, but Silicon Beach Surfers say they are more collegial. “When we do talk about work, it is usually about shared experiences,” says Kelsey Doorey, founder and CEO of Vow to Be Chic, an e-commerce site for designer bridesmaid dress rentals. “I might say, ‘Here’s a challenge that I’m working through. Have you faced this?’ ” Aaron Godfred not only found his job through the group but has, in turn, used it to hire others. Godfred got interested in the startup space while working in development at Morgan Free-




Lambert, surfing, says etiquette is key; Ali MirRasekhian (below), sales director at Surf Air, readies to paddle out.

man’s production company, Revelations Entertainment. Through a startup newsletter, he learned about the group. After he began surfing with Lambert, Godfred heard about a Silicon Beach LA–hosted job fair, where he connected with Omaze. The company, which raises money for charity by raffling of unique experiences with celebrities, soon hired Godfred as director of video production. “We were going out to the desert to blow stuf up with Arnold Schwarzenegger, and I found a drone operator for the shoot by posting on the surf group Facebook page.” Lambert fosters member interaction and enjoys making introductions, though he has one hard-and-fast rule: “If you ‘pitch up’ in the group and it gets back to me, you are out.” “Pitching up” refers to when people who are lower on the totem pole hit up members who are higher up. “A lot of members get pursued and pitched all day every day, so they come here to get away from that,” says Lambert. “The idea is to build a rapport through surfing, and then those conversations can happen organically.”

All prospective members serve a 30-day trial period, which, Lambert notes, “is not for the person to see if they like the group, but rather for the group to see how she or he fits.” Lambert receives about 10 to 15 applications a week. The form includes questions that are intended to weed out wannabe surfers: What is the length, brand, and model of your go-to surfboard? Where is your go-to surf break? The acceptance rate is about 30%. Lambert has ousted only three people: two for pitching up, and one for being the kind of aggressive “lone wolf ” surfer who hogs all the waves. Etiquette is a big part of surfing, just as it is in golf. Golf was forever the

ultimate business networking activity. It is losing favor, most notably among millennials, because golf takes too long. That is especially true as more people will hit a shot, send a text, hit a shot, check email, hit a shot, then pick up the ball without finishing the hole so they can take a call. Balance is also a big part of surfing, and being forced to unplug completely—even if just long enough to ride one wave—fairly guarantees a fresh perspective, which is when the big ideas hit. Scott Gummer is the author of the novel Parents Behaving Badly and a novice surfer.

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a ll photogr a phs courtesy of bugatti

A Couture Car— for $2.6 Million A TOY FOR BILLIONAIRES, YES. BUT WE CAN FANTASIZE, RIGHT? By Sue Callaway


PINNACLE LUXURY COLLECTIBLES are not easy to craft, so when

a new one surfaces, it is news indeed. Such is the case with the 2017 Bugatti Chiron, a 1,500-horsepower sports car painstakingly engineered and crafted by hand. Like the Veyron it replaces, the Chiron will be a limited-production vehicle destined for only the wealthiest of buyers. The base price is 2.4 million euros ($2.6 million), the minimum wait time is 18 months, and so far only buyers who already own a Bugatti Veyron (or two) have been allowed to see a full-scale model.


$2.6 million


18 months


2.2 seconds (est.)

March 15, 2016


261 mph




Fortune got an up-close look in February. Just as a prospective customer might, I visited the Bugatti estate in Molsheim, France, where founder Ettore Bugatti once greeted customers. After a full day of brand immersion, buyers have a lavish dinner with company executives, designers, and engineers. I was ushered into the newly renovated Remise Sud, a regal building that houses a library and customer lounge adorned with bespoke Bugatti furniture. (Ettore’s father, Carlo, was an artist and furniture maker.) This is where purchasers meet with designers to choose the colors, trim, and custom options. Bugatti chairman Wolfgang Dürheimer greeted the handful of international press gathered, and then design director Achim Anscheidt spoke about the form and proportions of the Bugatti. Next we headed to the newest building on-site, the Atelier, a gloriously lightfilled assembly area where Bugattis are finished. There before us sat the Chiron, low, wide, and utterly stunning. From its fluid form, extreme creases, and rich blue paint to its horseshoeshaped aluminum grille, the high levels of craftsmanship were obvious. At the front, flanking the grille, were eight eyes—four square LED headlights on each side. The side profile was dominated by a strong backward “C” swoosh—a line created to optimize aero-





dynamics and cooling. The rear view was my favorite, with a razor-thin horizontal taillight that incorporates brake lights, turn indicators, fog lamps, and reverse lights all in one. Above that glowing band were two split rear windows—every bit a historical cue from important vintage Bugattis, and yet also entirely modern. The chief engineers gathered around us and proceeded to describe, component by component, the Chiron’s system, for which Bugatti has filed some 50 patents. The 1,500-horsepower

W-16 engine has two banks with eight cylinders each and four turbochargers. Engine parts that were aluminum in the Veyron are carbon fiber, further reducing weight, as does the new titanium muffler and exhaust system. That setup yields a mindbending 1,180 pound-feet of torque, all available from 2,000 rpm. The zero to 60 is about 2.2 seconds in the all-wheel-drive Chiron. Top speed on the street is limited to 261 mph. Bugatti wants to better the current production-car record of 271 mph on the racetrack, set

in a Hennessey Venom GT, its chief rival in speed. Other innovations: a proprietary lithium iron phosphate battery that cuts the weight of a traditional car battery by half. Highresolution displays have crisp graphics. The sound system has four highperformance tweeters, each with a one-carat diamond diaphragm. The harder the diaphragm’s material, the better the sound. So Bugatti’s may be as good as it gets. And there’s a threedimensional Bugatti badge on the front, made of sterling silver—“the only thing we wanted to feel heavy on the car,” said Dürheimer. So far, Bugatti has presold 160 Chirons. Who are the buyers? The ultrarich, of course, and, increasingly, younger customers from Silicon Valley, the Middle East, and Russia. Dürheimer explained, “When you have a billion dollars at 25 years old, you have lots of other cars. By the time you are 35, you’ve had them all and are ready for a Bugatti.”

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Crafting Beer For Serious Foodies

60 Minute IPA

This citrusy, dry beer is boiled with more than 60 Northwest hops.

From maple syrup to roasted chicory, Dogfish Head Craft Brewery is finding success by appealing to adventurous palates.

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how his brewery comes up with its unusual flavors, and the Dogfish Head Craft Brewery founder may surprise you by reciting from 19th-century essayist Ralph Waldo Emerson. While sipping beers and touring the Milton, Del., brewery, located roughly 16 miles of the Atlantic Coast, Calagione also speaks of finding inspiration from Minnesota-based punk rock

p ho t o g r a p h s b y CHRISTOPHER LANE

Sam Calagione, owner of Dogfish Head, makes a test batch at the original brewpub at Dogfish Head Brewings & Eats, in Rehoboth Beach, Del.

band the Replacements and a Chinese brewing process that is 9,000 years old. “I wanted to use the limitless array of culinary ingredients to bring a limitless degree of creativity into commercial brewing,” Calagione says, explaining his method

of brewing as many as 70 different styles of beer a year. It sounds wild, but it works. At one point, the brewery was the smallest operation in the country; today it is America’s 13th-largest craft brewer. Overall, craft beer has been a fast-growing

March 15, 2016

Namaste White

The name is a nod to Calagione’s wife’s love of yoga. It is made with dried orange slices, lemongrass, and coriander.




industry, now making up over 11% of the $102 billion domestic beer market. Case sales of craft beer jumped 18.8% last year and easily bested the industry’s 2.1% increase, says market research firm IRI, which tracks sales at supermarkets, gas stations, and other retail outlets. When Dogfish Head made its debut in 1995, it was part of a second wave of small breweries that were following pioneers Sierra Nevada and Samuel Adams. While Sierra Nevada found inspiration from England’s pale ales and Sam Adams produced lagers based on German styles, Dogfish Head leaned on cuisine. Early beers included Chicory Stout (a dark, breakfast-themed beer made with roasted chicory), Immort Ale (with maple syrup from the Calagione family farm in Massachusetts), and Raison D’Etre (raisins, beet sugar). “People thought we were thumbing our nose at tradition when we put cofee or maple syrup into beer,” Calagione says. With all the experimentation at Dogfish Head, how does the brewery decide which beers make the cut? An internal team of 45 tasters meets daily. New beers are introduced slowly, beginning with an initial small batch. Feedback from distributors, social media, and beer bloggers all help determine whether the beer is rolled out nationally. Tweaks to the recipe also occur during the market-testing period. To Calagione, beer is









1. A brewer shovels out the used grains. 2. Calagione

and a brewmaster put black limes in panty hose, which serves as a filter. 3. Taps at Dogfish Head’s brewpub. 4. At the brewery’s lab, samples are tested weekly for quality control. 5. Coriander is sized up.

“liquid food.” He prefers to turn to the culinary world for inspiration rather than toward European beer styles. He has plenty of company, as 71% of craft-beer drinkers say they buy beer to complement their food, a Nielsen survey has reported. Just 20 years ago, getting ale lovers to try a Belgian white beer was a leap. There are far more exotic oferings on bar taps today as Americans become increasingly adventurous. “The average consumer is geeking out more on what they eat and drink,” Calagione claims. “Everything is more flavorful.”

Beer lore sides with Calagione. Ancient recipes indicate beers were once made with ingredients like safron, sake rice, and honey. When Dogfish Head opened, many were adhering to the Reinheitsgebot— a 500-year-old German purity law that rigidly defined beer. Dogfish Head has helped lead the charge by pushing back against those standards; other craft brewers have followed. Calagione, 46, got his first taste of the beer business waiting tables at a Manhattan bar after graduating from Muhlenberg College. Inspired, Calagione bought a home-brewing kit and, on a whim, added overly ripe cherries to the mix. “The beer turned out wonderfully,” recalls Calagione. He stood on his cofee table and told his roommates he had discovered his passion. Figuratively and literally, he got a buzz from the idea of making his own beer. The next two batches

“sucked,” but Calagione persevered. He quickly raised $220,000 in an initial round of funding. Thinking creatively has led to frothy success. Dogfish Head produces 250,000 barrels of beer annually. Typically, the company’s beers retail for $52 a case, far above the $35-per-case average for craft. High quality and innovation are why Dogfish Head can charge more, Calagione says. That brings us back to Emerson—the external voice that guides Calagione. The quote? Perhaps not surprisingly, it’s in praise of ignoring the well-trod path— and finding your own: “He who would gather immortal palms must not be hindered by the name of goodness, but must explore if it be goodness.” For Calagione, that goodness should come in a pint.

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MARCH 15, 2016


DOUBLE VISION WHAT: A dual-lens camera capable of capturing 30-megapixel photos or high-resolution video in 360 degrees. TUNNEL VISION: It’s intended to work with Samsung’s Galaxy smartphones and its Gear VR virtual-reality headset. SEEING IS BELIEVING: The Gear 360 stitches together 180-degree images from its fish-eye lenses to create virtual environments. FEAST FOR THE EYES: With dust- and splash-resistance, the Gear 360 can be used to monitor progress at a construction site or show prospective patrons what

TICKER TAPE A collection of curiosities

it’s like to dine outside at a restaurant. Indoors, it can be used to showcase a newly renovated hotel room. SEEING EYE TO EYE: The technology has support from Facebook, whose Oculus VR unit powers Samsung’s virtual-reality headset. Says Facebook CEO Mark Zuckerberg: “Over the last year we’ve been working to make Facebook the best platform for 360-degree videos.” OUTTA SIGHT: Market researcher TrendForce estimates that the virtual-reality market could be worth $70 billion by 2020. —Don Reisinger


Global Internet traffic per month this year


March 15, 2016






OMETHING WASN’T RIGHT. An uneasy feeling

swept over the security specialists watching activity at the bank. A sensor in the branch, located in a port city on the East Coast, had detected unusual heartbeats and body heat patterns from new customers who had come to open an account. Something was wrong. These “customers” had entered the country days before as human cargo on a ship from Europe. Now a criminal gang was using them to orchestrate financial fraud. But the biometric sensors installed at the bank branch detected patterns that pointed to telltale signs of stress, tipping of the bank to the ruse. This episode, which took place last year, is one of the more dramatic examples of how the financial services industry is deploying various types of biometric technology to rebuf sophisticated criminals. A new generation of tools beyond fingerprints and iris scans can measure qualities like body temperature and blood circulation at a short distance and without alerting the subject. “Each heart rate is unique,” says Barnabas Szilagyi, a principal at Capco, a company that helps large banks identify security threats and comply with “know your customer” laws. “The new tech can sense what’s in your veins, your blood pressure and body heat, and identify with great accuracy who you are.” Much of this technology is still in a pilot phase, but Capco says applications could easily extend

beyond retail banking. Trading-desk managers could use sensors to track heart rates and body heat among traders so that they are alerted when unusual patterns reveal, for example, that a deal is about to be made. Sensors are critical to these biometric tools, but it’s the analytics software that makes them shine. In the East Coast fraud case, Capco’s tech first determined that a spike in suspicious bank account applications occurred around the same time every month. It then cross-matched those dates with local shipping records to conclude that the “customers” were linked to the monthly arrival of a ship from a small European country. Such records are

just one of hundreds of external data sets that banks can use to spot patterns. Others include illegal ATM transactions and credit card payments to massage parlors—both of which soared when the phony bank customers came to town. Improvements to existing technologies like speech recognition are also helping the fight against fraud. A person’s voice can act as a unique identity marker to help banks recognize repeat calls from known fraudsters. The industry has placed 60,000 voices on a blacklist to date—a clear example that biometrics are money in the bank for financial firms.

“Networked sensors open uncharted paths to surveillance.” ber k m a n cen ter at h a rva r d u ni v ersit y study


March 15, 2016

i l l u s t r a t io n b y MCKIBILLO


an orange is. Amazing things happened in 2015: Microsoft and Google beat the best human at image recognition for the first time. Baidu beat humans in recognizing two languages. Microsoft and the China University of Technology and Science taught a computer network how to take an IQ test, and it scored better than a college postgraduate.




here have been recent major advancements in artificial intelligence. Yes, in an area of AI called “deep learning.” The system basically learns by itself using a lot of data and computation. If you keep showing it pictures of an orange, it eventually figures out what

What are we seeing at the commercial level? Google, Microsoft, and Facebook are using AI, whether it’s the voice recognition on your phone or the items displayed in your news feed. We’re using the same technology for autonomous cars because we can now achieve superhuman levels of perception.

Huang onstage at an Nvidia event in San Jose

“Strike that balance.”

bloomberg t v



March 15, 2016


What are some of the challenges with automotive? So many. Oh, my God. You have two industries with very different cultures. The auto industry is about assembling mechanical things that become a car. It is not as comfortable with the idea of an empty vessel for which you develop software over the next 10 years. A living thing that becomes more useful over time is a very alien concept in a mechanical world. That’s a real challenge for an industry that, for 100 years, shipped a product that’s complete from the day it left the lot. Every company is becoming a digital company. A computer company. Nokia was the world’s first digital phone maker. But Apple’s iPhone is the world’s first phone built from computers, with an operating system. Steve [Jobs] stood onstage and said, “We’ve actually got Linux in here, guys,” and people didn’t get it. His point: You can now develop applications. They’re both digital; they both have 1s and 0s. But that’s not the distinction. Will computer companies top mechanical companies? Hard to say. I’ll put it this way: In another five years, if mechanical inclination is the only thing you have going, you’re dead. You are so Nokia’d.

hua ng: k im kulish—cor bis; gates: mich a el gottsch a lk—photothek v i a gett y im ages

Where are we on the adoption curve? Last year AI went from research concept to engineering application. Two years ago we were talking to 100 companies interested in using deep learning. This year we’re supporting 3,500. We’re talking about medical imaging, financial services, advertising, energy discovery, automotive applications.

What does that mean for Nvidia? Selling GPUs [graphics processing units]. The data center is the biggest market for us. Every one of them is going to be AI-powered. If you want to customize a service for one user and you have a billion users, you’ll never be able to provide good enough recommendations unless you use something like AI.

In Good Company We are honored to be named to the FORTUNE list of “100 Best Companies to Work For” – and the credit goes to our more than 14,000 financial advisors, our branch teams and our homeoice associates. Together, we make Edward Jones a great place to work. Working in partnership, we help our clients reach their long-term financial goals. We share a culture of caring: for our clients, our communities and one another.

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weeks away from his wedding when he was laid of from his project management job at a telecommunications company. Berrizbeitia, 29, was devastated. Worse, he was the breadwinner in his relationship. Eventually he found a new role at BP through an unexpected source: Social Finance, known as SoFi, the company through which he refinanced his student loans. “It’s completely diferent than any other financial institution,” he says. “I don’t understand why more banks don’t do this.”

The brainchild of former Wells Fargo trader Mike Cagney, SoFi aims to be the bank of choice for millennials. It’s a common goal of many companies in the burgeoning financial technology, or “fintech,” industry. But SoFi distinguishes itself by ofering its members job placement, career counseling, and wealth management advice alongside the usual loans and mortgages. The five-year-old company has even dabbled in the world of dating to match like-minded members at singles events. For Berrizbeitia and nearly 200,000 other young profes-

0.04% women-led tech startups headed by a black woman

sionals who emerged from the 2007–08 financial crisis skeptical of big banks, SoFi has become preferred over traditional choices like Wells Fargo, Bank of America, and Chase. The company’s services are aimed at employed college graduates who demonstrate “a responsible financial history” and have a favorable ratio of income to expenses. Approachability, thanks to its conversational marketing, adds to SoFi’s appeal. “This might sound weird,” its website declares, “but we genuinely want you to succeed.” “Financial services lost sight of what consumers actually need from a bank,” says CEO Cagney. “There haven’t been any recent innovations on the consumer side of the business.” SoFi makes most of its money by selling its loans to hedge funds and investment banks. (The rest comes from fees.) The San Francisco company has issued $7 billion in loans to date; $3 billion of that has come in the past six months. That growth has attracted the attention of Japanese juggernaut SoftBank, which last year invested $1 billion in SoFi—still the largest single investment in fintech. There’s still a long way to go. SoFi claims just a sliver of the $1 trillion mortgage market. As it takes on consumer debt, it will face increased regulatory scrutiny. And as it expands into new services like credit cards and direct deposit, it faces the reality that it must become more like Wells Fargo to continue growing. SoFi will resist the pitfalls, Cagney insists: “We are on the cusp of a major change in banking.”

project di a ne



March 15, 2016

i l l u s t r a t io n b y SHOUT







It would take an average of

2,700 YEARS to find a six-character alphanumeric (letters plus numbers) and case-sensitive passcode by hand

FOUR TO SIX DIGITS stand between most iPhone users’ personal data and the prying eyes of snoops, criminals, and investigators. To access records stored within, a hacker has little choice but to barrage a lock screen with possible PINs until the electronic tumblers click. Problematically, these “brute-force” attempts trigger built-in time delays—and potential data wipes. A court recently ordered Apple to develop an operating system stripped of such barriers to aid an FBI investigation into the December shootings in San Bernardino, Calif. The company has emphatically objected for fear that the tool could be abused. Depending on the strength of a user’s passcode, however, anyone’s iPhone could easily remain a black box. —RobertHackett Average time a computer would need to unlock a weakened iPhone (80 milliseconds per attempt, no forced delays)

103 YEARS for a six-character alphanumeric passcode

Average time a hacker would need to unlock a weakened iPhone by hand (three seconds per guess, no forced delays) SOURCES: APPLE; DAN GUIDO, CEO, TRAIL OF BITS

72 YEARS for a six-character alphanumeric and case-sensitive passcode

33 MONTHS for a six-character alphanumeric passcode

7 DAYS for a four-character alphanumeric and case-sensitive passcode

8 MONTHS for a four-character alphanumeric and casesensitive passcode

4 HOURS for a four-number passcode

7 MINUTES to break a four-number passcode with a computer, a likely scenario for the San Bernardino gunman’s iPhone


for six numbers

for six numbers



March 15, 2016



for a four-character alphanumeric passcode

for a four-character alphanumeric passcode

208 DAYS with the forced delay for wrong guesses now used by Apple

gr a phic: nicol as r a pp


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profits on order Business realities begin to rain on the parade of on-demand startups. By Erin Griffith




March 15, 2016


Follow Erin Griffith on Twitter (@eringriffith) or at fortune .com/boom.

carrying a $2 billion valuation, in December upped prices by 50% and laid of 12 recruiters. Homejoy, a housecleaning service with $64 million in funding, abruptly shut down last summer. In the fourth quarter of last year, the number of venture capital investments in on-demand startups plunged to just 34, almost half that of the prior quarter and its lowest level in two years. Even engineers, the mother’s milk of Silicon Valley, have begun to ask potential employers wonky financial questions like “Do you have negative gross margins?” before they take a job. In other words: Do you lose money on each transaction? Are you handing out dollars for 85¢? Are you Wile E. Coyote, moments before hurtling of a clif? No one really wants more dot-bombs. So a lesson to those who relish on-demand luxuries: It’s cool to summon a midnight manicure with a tap of your smartphone. Just don’t expect it to cost any less than it used to.

illustr ation: rya n inz a na

HE ON-DEMAND ECONOMY is here, friends, and if you aren’t using an Uber-like app for all your grocery, housecleaning, parking, lawn mowing, and personal butler needs, you are missing out. And even if you’re not, have you considered the Uber for massages? How about haircuts? Or perhaps flowers, restaurant reservations, laundry, booze, marijuana, dog walking, cat sitting, or pizza? What about HourlyNerd, the Uber for on-demand business consultants? Today’s startups for on-demand services have stretched a good idea to its utter limits. Amid the scramble to re-create the success of the original “Uber for X” company—Uber—venture investors poured $17.8 billion into the category last year, according to CB Insights. The wave of on-demand startups has drawn obvious comparisons to and Webvan, two notorious “dot-bombs” of the 2000 tech bubble. But on-demand acolytes argue that this time it’s diferent. There weren’t enough people using the Internet in the days, they say, and the country’s delivery networks weren’t built out. Sixteen years later we have mobile phones, big data, and an army of willing “gig economy” workers. (There is even a tier of startups building software to help “Uber for X” companies manage said armies of workers.)

And sure, today’s ondemand startups are more eicient, more technologically advanced, and more realistic than was. But the dot-bombs taught us one lesson that still applies today: Moving stuf from point A to point B is expensive and complicated, and no amount of Internet magic can change that. Delivering goods and services is, at its core, a lowmargin logistics business. With investors entering 2016 with more caution (and emphasis on profits), cracks are beginning to show in once-promising companies. DoorDash and Postmates, two well-funded delivery startups, are struggling to retain their workers, according to a New York Times report. Instacart, the grocery-delivery business

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MARCH 15, 2016


The Return of the Big shorts The recent market correction has made some bearish investors look like geniuses. But others are learning that even short-sellers need a good long game.

By Michelle Celarier Notable short-sellers (clockwise from bottom left): James Chanos, Daniel Loeb, Bill Ackman, and David Einhorn

i l l u s t r a t io n b y JOHN RITTER




SHORT, AND SUFFERING The recent performance of two Kynikos funds, short-only Ursus and net-long Global Capital Partners, shows the hazards of shorting stocks during a bull market. $2.5 MILLION

AT MICHAEL’S, a cheery, art-

filled eatery in Midtown Manhattan where media, finance, and entertainment celebrities go to be seen, James Chanos somehow achieves invisibility. Chanos, whose $3 billion Kynikos Associates hedge fund firm is headquartered next door, has a regular table for lunch in the far corner of the glass-walled back room— Siberia to most patrons— where he downs his Cobb salad and Diet Coke away from the crowd. Keeping a low profile may benefit the 58-yearold contrarian right now. Chanos is best known for shorting stocks—making investments that pay of when share prices decline. In 2015, Chanos’s short-only fund, called Ursus (Latin for “bear”), was up 10%, trouncing the S&P 500. This year has also started with a bang. And with so many of his peers losing money, it’s probably best to avoid chances to say “I told you so.”



March 15, 2016









decade ago. Last year, only 15 short-biased hedge funds reported results to Hedge Fund Research, down from 54 in 2008. Those that remain managed just $4.7 billion, a tiny portion of the $3 trillion hedge fund universe. To profit from a falling stock, short investors borrow shares and sell them, assuming those shares will be cheaper to buy back and return to lenders in the future. When a short call is wrong and the stock rises, the downside is unlimited. Recent results at Ursus show how treacherous the strategy can be: A dollar invested in Ursus at the beginning of 2007 would have been worth about 68¢ at the end of 2015, according to estimates by its



investors. If you didn’t get in until 2009—when the last bull market started—your $1 would have dwindled to about 38¢. Chanos is hardly alone on this front. One of the bestregarded short-only firms, Kingsford Capital Management, last year was down to about $250 million in assets, from $1.8 billion in 2008, investors say. Not all of that is due to investing losses: Judging (correctly) that it would be hard to find shorts after 2008’s bear market, Kingsford founder Mike Wilkins gave about $800 million back to investors at the end of that year. Kingsford broke its losing streak last year, registering a 5% gain. Full-time short-sellers

pr ev ious page, or igina l photogr a phs: loeb: mich a el nagle—the new yor k times/r edu x; ack m a n: dav id a. groga n—cnbc/nbcu photo ba nk v i a gett y im ages; einhor n: scott eells—bloomberg v i a gett y im ages; ch a nos: dav id or r ell—cnbc/nbcu photo ba nk v i a gett y im ages


You can blame China for Chanos’s success. With 40% of the Ursus portfolio shorting Chinese stocks—from homebuilders to banks to Alibaba—he is profiting from the country’s economic slide and betting that it’s far from done. Chanos has been warning of a Chinese real estate bubble since 2009 and is now homing in on China’s indebtedness; he regularly tells investors that China is on a “treadmill to hell.” Hell for most investors can be heaven for shortsellers. Well-known “shorts” like Chanos are reporting big gains from their bearish calls. Investors spooked by the recent stock correction are flocking to their funds again, while the Oscar darling The Big Short, about the guys who successfully bet against the housing bubble, is reminding the public just how prescient they can be. But today’s wins also underscore how hard life has been for short investors in recent years. The epic stretch of uninterrupted gains from 2009 to mid-2015 saddled them with big losses, chasing many pros out of the business. “A very long-term bull market has ground people up,” says David Rocker, who retired from his namesake short-oriented hedge fund a


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have always been a rare breed. For most money managers, shorting is just one arrow in the investing quiver, a hedge against losses elsewhere in their portfolios. Daniel Loeb’s $16.3 billion Third Point firm, for example, has $4.5 billion in equity shorts, he recently told investors. Even Chanos currently holds the majority of his firm’s assets in funds that are either long on stocks or market-neutral. And overall within the shorting world, there’s been a shift in recent years. While broadbased short-biased hedge funds have been in decline, there has been an uptick in managers making very public short bets. Aside from Chanos, few

of the best-known “activist shorts” are primarily short-sellers. Only 7% of Bill Ackman’s $13.4 billion at Pershing Square Capital Management is devoted to his famous, nearly fouryear-old short on Herbalife. Shares of the multilevel marketing company are down 26% since August, making the short one of Ackman’s few winners in a rocky year. David Einhorn, renowned for a timely short of Lehman Brothers in 2008, has made a number of unsuccessful short bets since then— including against Green Mountain Cofee Roasters and Chipotle. But the CEO of $8.6 billion Greenlight Capital hasn’t given up. He recently announced shorts of

WHAT THEY’RE SHORTING NOW Here are some of the stocks that the best-known shortsellers are betting against in 2016.

JAMES CHANOS KYNIKOS ASSOCIATES The short:Tesla Quote: “To sell millions of cars— which is where the stock is valued— they’ve got a long way to go.” (Tesla sold about 55,000 cars in 2015.) Performance: Down 31% since October.


BILL ACKMAN PERSHING SQUARE The short: Herbalife Quote:“The only question we have is whether fundamentals take it down before the regulators do.” (Herbalife has denied violating any laws or regulations.) Performance: Down 26% since August.


DAVID EINHORN GREENLIGHT CAPITAL The short:Netflix Quote: After shares rose last summer despite an earnings miss: “Apparently Red Ink is the New Black.” Performance: Down 24% year to date.

March 15, 2016

it’s a business where you bang your head against the wall every single day.” —DAN DAVID, CO-FOUNDER, GEOINVESTING

Netflix and Amazon, both of which are down more than 20% this year. Adam Kommel of Activist Shorts Research says there were 175 such short calls in 2015, compared with 119 in 2013. On average, companies targeted by activist shorts saw their stocks fall 35% in 2015. As with Ursus, China’s woes are pumping up the performance. Two research outfits that earned Street cred exposing Chinese stock frauds, Muddy Waters and GeoInvesting, are launching hedge funds that channel their analysis into short bets. Carson Block has raised $100 million for Muddy Waters Capital. The 20 stocks Block has shorted have an average loss of 25% since he bet against them, according to Activist Shorts. “Investors are now seeing short managers as insurance against a correction,” Block says. GeoInvesting started shorting small Chinese companies it suspected were fraudulent in 2011. It has made 46 short calls since then, and the company says that a portfolio based on its picks would have had annualized returns of 56%. Geo’s latest China short is a New York Stock Exchange–traded real estate company, SouFun, which Geo alleges has made “fake contracts.” SouFun has dismissed some employees

for unspecified wrongdoing and has said it has “zero tolerance” for improprieties; still, the stock is down 30% since Geo targeted it in October. Co-founder Dan David is launching a short-biased hedge fund on March 1 and says he hopes to keep it small, with no more than $50 million in assets. As funds get bigger, he says, it becomes hard to borrow enough shares to make a big profit from a short position. That said, greater scale can enable short specialists to attract institutional investors looking for a hedge—one reason Chanos has been able to stay in the game since the early 1980s. Chanos diversifies with about 50 short positions at any given time. Since 2007, he has gone public with 33 short calls on specific stocks—more than all but four of the 46 investors tracked by Activist Shorts. Twenty-four of those stocks now trade lower than when Chanos began shorting them. Alibaba shares are down 20% since Chanos targeted it last November, while Tesla has fallen 31% since his October mention. In one sense, today’s shortselling successes may have been inevitable. Even bullish investors have recently fretted that stocks worldwide were overpriced and due for a correction; early this year, the shares of good companies and shaky ones alike got clobbered. The next time the broader market is on an upswing, the gap between the shorts’ pessimism and conventional wisdom will widen once more—and their emotional mettle will be tested. “It’s a business where you bang your head against the wall every single day,” says Dan David. “You age.”

© 2016 United Airlines, Inc. All rights reserved.


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How the massive diesel fraud incinerated VW’s reputation—and will hobble the company for years to come. By Geoffrey Smith and Roger Parloff P H O T O I L L U S T R AT I O N B Y J U S T I N M E T Z

March 15, 2016



n late 2008 a publication called Green Car Journal compared the five finalists of its annual Green Car of the Year award. “Fulfilling this growing desire for vehicles with better fuel economy and overall environmental performance is no easy thing,” it noted. “Rising to the top is the 2009 Volkswagen Jetta TDI.” The car was the winner because its “groundbreaking clean diesel” engine managed to meet America’s “stringent tailpipe emissions standards” while also delivering “admirable fuel eiciency,” “satisfying performance,” and “a very reasonable” price.



March 15, 2016


That award was recently rescinded. The Jetta—like at least 14 other so-called Clean Diesel models sold by Volkswagen Group under its VW, Audi, and Porsche marques from 2008 to 2015—was actually the automotive equivalent of Piltdown Man. It was a hoax. About 580,000 VWs in the U.S.—and almost 10.5 million more worldwide—weren’t really “green” at all. As the world began to learn in September, when the U.S. Environmental Protection Agency issued a shocking “notice of violation,” the vehicles met emissions standards for dangerous oxides of nitrogen, known collectively as NOx, only when running their paces in an artificial, indoor lab setting. Volkswagen has admitted this. Software in the engine recognized the telltale signs of the testing regimen and turned up the emissions-reduction equipment when its exhaust was under scrutiny. But once the car was driven onto actual roads, the equipment adjusted and the vehicle disgorged up to 40 times the permissible levels of NOx. For seven years Volkswagen’s advertising campaigns flogged these vehicles’ bogus eco-friendly credentials in print, media, and even Super Bowl commercials. In one memorable example, the “green police” stop a long line of smog-belching cars but wave a lone, righteous diesel from VW’s Audi division through with a cheery, “You’re good to go, sir.” “Hoax,” of course, is a layman’s word. But plenty of legal terms also arguably apply, including “consumer fraud” and “false advertising.” They are fueling an explosion of litigation. That and the horrific reputational damage are subjecting Volkswagen to one of the severest challenges in its nearly 80-year history. The U.S. Department of Justice and the EPA have filed a civil suit that could theoretically subject VW to up to $45 billion in fines (though, in fairness, no one expects penalties quite that draconian). The DOJ and the EPA are also pursuing a criminal inquiry, as are prosecutors in Germany, France, Italy, Sweden, and South Korea. All 50 state attorneys general in the U.S. are also on the warpath, armed with state laws that, nominally at least, are every bit as crushing as the federal law. All of that comes on top of more than 500 class actions filed on behalf of owners and lessors of Volkswagen diesel cars—an unprecedented number, according to Elizabeth Cabraser, a leading mass-disaster plaintifs attorney who is heading a 22-lawyer steering committee trying to bring order to the sprawling mess. There are also class actions by used car dealers, dealers for competing models (such as Chevy diesels and Toyota hybrids) who claim unfair competition, and shareholder suits.

In part, the huge number of suits reflects the fact that plaintifs lawyers smell blood. Volkswagen has already made public admissions that come close to conceding legal liability. “This is not a whodunit type of case,” said federal judge Charles Breyer, who is overseeing the litigation, at a hearing in January. The numbers also reflect genuine rage at VW. An extraordinary number of educated middle-class or affluent plaintifs feel deliberately snookered on a subject they are passionate about. Unlike in Europe, where more than half the cars are diesels, they are rarities in the U.S.—about 0.5%—and they cost more than gasoline-powered models. Accordingly, Americans chose them specifically for a trait that turned out to be a lie. Says Cabraser: Diesel buyers are “looking for the sweet spot between high mileage, performance, and environmental responsibility. They read Consumer Reports, do comparison shopping, do the math. They were highly invested in these vehicles … They were attempting to protect and preserve the environment.” Volkswagen has set aside 6.7 billion euros ($7.3 billion) to make its cars comply with emissions rules—but the sum doesn’t begin to take into account the fines, compensation, restitution, and attorneys’ fees the company will eventually have to fork over. U.S. regulators rejected VW’s first recall proposals in December, and at press time it was still not at all clear whether they’ll ever approve “fixes” for many U.S. cars, or whether they will demand VW buy them back instead. In late February an angry Judge Breyer twisted the vise even tighter, ordering the company to determine, by March 24, whether it can fix the cars. VW has skidded into the guardrails at every turn since the scandal emerged. Even its attempts to project contrition so far have been ham-fisted, halfhearted, and fumbled. CEO Martin Winterkorn quickly resigned, top executives apologized, a number of engineers were suspended, and the company appointed an American law firm, Jones Day, to perform an internal investigation. But the company’s new worldwide CEO, Matthias Müller, infuriated regulators with legalistic

March 15, 2016






March 15, 2016

It has refused to ofer its millions of European customers any compensation. In Europe, some think the American reaction to the scandal is overwrought, driven by contingency-fee lawyers and politicians eager to help domestic automakers gain ground against a European rival. After all, General Motors paid a comparatively modest $900 million to settle a federal criminal inquiry relating to faulty ignition switches that led to the deaths of 124 people. Even the EPA has acknowledged that all diesel cars together account for only about 0.1% of NOx in America’s air supply. But emissions aren’t a mere abstraction—NOx kills. Consider the impact of diesel engines in Europe, where three-quarters of the world’s diesels are sold. According to the European Environment Agency, 500,000 people there died prematurely in 2012 as a result of poor air quality. The biggest contributors were nitrogen oxides and cancer-causing particulate matter. Diesel engines are the biggest source of NOx and a significant emitter of particulate matter. (VW flatly denies, in its written statement to Fortune, that NOx represents any proven health threat. “The scientific data currently known to us does not give a clear picture of the efect of nitrogen oxide in environmental concentrations on people and no completely validated statements can be made about the actual risk potential.”) But if the environmental agency’s science is correct, then those disturbing numbers point to a broader problem: Europe has favored diesels and looked the other way when automakers—including but hardly limited to VW—game the system. Emissions Analytics, a U.K.-based consulting company, says it has tested the real-world emissions of more than 400 diesel cars. Only five (including one Volkswagen) actually met the standard they were licensed to, according to CEO Nick Molden. “On average, diesels were emitting four times the regulated maximum,” he says. “Volkswagen was in the middle of the pack.”

WHO GOVERNS WHOM? it’s difficult to exaggerate how intertwined Volkswagen is with German institutions—from its government, politicians, and regulators to its unions. It was conceived, of course, by Adolf Hitler, who wanted it to spread mobility to the masses the way that Henry Ford had done. VW was nationalized after World War II and returned only fitfully to private ownership. All these decades later, VW remains formally connected to the government. Lower Saxony, the state where the company is based, owns 20% of its voting rights, but the state’s power is even greater than that. By law, Lower Saxony has been granted veto power over VW’s strategic decisions. Then there are the informal connections: Gerhard

smok e: a n taga in—gett y im ages

hedging and excuses in an interview with National Public Radio in January. “It was a technical problem,” he told NPR. “We had not the right interpretation of the American law … We didn’t lie. We didn’t understand the question first.” (Volkswagen declined to make Müller or other executives available for interviews. The company answered a handful of questions in writing but declined to comment on the vast majority, stating, “These topics are subject to ongoing investigation or to privacy protection.”) VW’s misbehavior did not come out of nowhere. The company has a history of scandals and episodes in which it skirted the law. Each time—till now—it has escaped without dire consequences. The company’s immense power, it seems, meant never having to say it was sorry, at least not in Europe. VW has a legacy as a quasi-state entity that has long steamrolled regulators there. The company and the auto industry are so crucial to Germany that Chancellor Angela Merkel has repeatedly intervened to stave of or weaken emission regulations. VW is driven by a ruthless, overweening culture. Under Ferdinand Piëch and his successors, the company was run like an empire, with overwhelming control vested in a few hands, marked by a highoctane mix of ambition and arrogance—and micromanagement—all set against a volatile backdrop of epic family power plays, liaisons, and blood feuds. It’s a culture that mandated success at all costs. Volkswagen’s goals were audacious: It aspired to be the biggest seller of cars in the world under Piëch protégé Martin Winterkorn. Sales of U.S. diesels were crucial to the mission. The company has continually protested that top executives— otherwise noted for their punctilious attention to detail—were ignorant of misbehavior. But the evidence suggests, at minimum, that some were alerted to possible cheating well before it became public. Even before that point, one has to wonder how the brass could have been blind to conduct that was so central to achieving the company’s goals. The company has acknowledged and even apologized for the fact that its diesels used dual-strategy software worldwide. (It has largely blamed a handful of rogue engineers.) Yet VW has steadfastly denied that its software constituted an illegal “defeat device” as the term is defined under European law.

1.0 gram/kilometer














The gap between rules and reality NOx emissions have been dropping in Europe. But the difference between the legal limits (dark shading)—which auto companies comply with in their lab tests—and the actual on-road emissions (light shading) has persisted.

ca r b l a b: nick u t—a p; emission test: w est v irgini a u ni v ersit y cen ter for a lter nati v e fuels, engines a nd emissions; protest: peter steffen—a fp/gett y im ages

Exposed From top: A CARB spokesman describes the lab-testing process; the “real-world” apparatus that revealed VW’s deception; Greenpeace activists demonstrate at a company plant in Wolfsburg.

Schröder, who was Chancellor before Merkel, and Sigmar Gabriel, who is currently her vice chancellor, have both served as VW directors in their function as governors of Lower Saxony. The nexus between the company and the government that is supposed to regulate it could hardly be tighter. Traditionally Lower Saxony has used its powers to encourage creating and maintaining jobs within the state. More than 110,000 of VW’s worldwide labor force of 589,000 work at its immense headquarters in Wolfsburg and four other plants in Lower Saxony. That employee base has helped give VW massive clout. Time and again the German auto industry—the largest in the country—has been able to brandish the threat of job losses if legislation contrary to its interests is passed. The result: a patchwork of regulation watered down to the point of meaninglessness.

In 2009, for example, the German government amended its rules so that inspections of emissions performance would be based solely on readings from a car’s own “onboard diagnostic” system, effectively ceding total control to the automakers. At VW, at least, regulators wield less power than unions. By law, labor receives board representation at all but the smallest German companies. Time and again the Works Council, or Betriebsrat, which holds eight of VW’s 20 board seats, has played a decisive role, mobilizing the support of the state government to get its way over the interests of private shareholders.

“VICTORY IS FUN … BUT I CAN’T CELEBRATE” one man, at least, was able to impose himself on this formidable and politicized structure: Ferdinand Piëch, a brilliant engineer and a ruthless, terrifying manager who dominated VW for more than two decades. Chief executive from 1993 to 2002, and chairman from 2002 till early last year, Piëch, now 78, infused VW with an ambition and drive that made the most of its political heft, presiding over a culture that was, if not above the

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When Piëch resurfaced in 1972 at Audi, by then owned by VW, he dragged it upmarket almost single-handedly with a series of engineering innovations, such as the four-wheel drive system for the Quattro. Under Piëch, Audi was also the first to enjoy commercial success with a technology called “direct injection” in diesel cars. Later generations of the technology would become an industry standard, including for VW’s Clean Diesels.

“I WILL REPLACE ALL OF YOU” it was at audi that Piëch developed his reputation for utter ruthlessness with subordinates. “I consciously allow those in

w in ter kor n: m a r ija n mur at—epa/cor bis

law, then not above stretching it, by many accounts. In large measure VW owes its scale and its culture to Piëch—who was more or less born into Volkswagen. He is the grandson of Ferdinand Porsche, who built cars for the Austro-Hungarian imperial family before World War I, long before Hitler tapped him to build the People’s Car. After World War II, Piëch’s uncle Ferry Porsche led a de facto research and development center for VW, an arrangement that provided income to build the sports cars for which Porsche is now famous. Meanwhile Piëch’s formidable mother, Louise, created an import, sales, and servicing network that became Europe’s largest car distributor. The quest for colossal achievement and a contempt for anything that gets in the way or falls short run like parallel threads through Piëch’s life. In his own account, Auto. Biographie, he comes across like the demonic oil prospector Daniel Plainview in There Will Be Blood when he writes, “The struggle for victory is fun, but I can’t celebrate something once it’s been won.” Overcoming dyslexia, Piëch became an engineer and joined Porsche in 1963. He squabbled constantly with his cousins, not least when he risked the company’s future by overspending to complete the 917 (which became Porsche’s most successful race car). Years of infighting drove the family to remove its members from company management. Piëch didn’t improve relations with the Porsches when he later had two children with the wife of his cousin Gerhard, adding to the five he had had by his own first wife; five more with two other women followed. The family hostilities would reach an apex decades later, when Porsche tried to acquire VW, and Piëch outmaneuvered his cousins and ended up swallowing Porsche instead.

mer k el: odd a ndersen—a fp/gett y im ages; piech: nigel tr eblin—a fp/gett y im ages

VW’s powers Clockwise from left: Ex-CEO Martin Winterkorn checks a car’s undercarriage; Chancellor Merkel with Matthias Müller, who has since become VW CEO, and Winterkorn; Ferdinand Piëch, the man most responsible for the modern Volkswagen.

whom I’ve lost trust to starve by the wayside,” he once told Der Spiegel. It was only a slight exaggeration. In the nine years he was CEO of the Volkswagen group, he ousted three Audi CEOs. The one who finally lived up to his expectations was the man who would eventually follow him at VW, Martin Winterkorn. Piëch took the helm of the entire company, Volkswagen Group, in 1993, when it was nearly bankrupt. He exploited that crisis to present himself to skeptical unions and politicians as the only one radical enough to turn the company around. Then he browbeat the Betriebsrat into accepting a four-day week, with a pro rata pay cut. That same year he hired José Ignacio López de Arriortúa, then GM’s head of purchas-

ing, away from the Detroit giant, seeing a kindred spirit in the Basque who had bullied auto suppliers into lowering their prices. The move backfired disastrously. VW ultimately paid $100 million to settle civil claims of corporate espionage and pledged to buy $1 billion in parts from GM. Piëch boasted of his willingness to threaten employees into giving him what he demanded. Bob Lutz, a veteran of GM, Ford, and Chrysler, recalled in a first-person article for Road & Track last November how Piëch told him the secret of the fourth-generation Golf ’s remarkably tight body fits: “I’ll give you the recipe. I called all the body engineers, stamping people, manufacturing, and executives into my conference room. And I said, ‘I am tired of all these lousy body fits. You have six weeks to achieve world-class body fits. I have all your names. If we do not have good body fits in six weeks, I will replace all of you. Thank you for your time today.’ ” Even then, the reality wasn’t good enough. “The photos were still touched up to make the fits look tighter,” says Bertel Schmitt, who wrote advertising copy for VW at the time.

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NOx-ious Diesels These models, all with TDI technology, were among the 15 with cheating software. Their value is diminished, and VW must now fix—or buy—the 580,000 sold in the U.S. (Another 10.5 million, including other models, were sold elsewhere.)

VW Jetta 2009–15


VW Touareg 2009–16


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things to worry about such grubby little matters. From the witness stand, he mocked a lawyer who stumbled over his notes as he cross-examined Piëch. “Those who buy Lamborghinis can pronounce it however they want,” said Piëch. “Everyone else should pronounce it properly.” Volkert, after his conviction, tried to pin the blame on the chairman. “Anyone who knows how things are in the company finds it hard to imagine that all that happened without Piëch,” he told the press. “There was little he didn’t know about.” Piëch has always asserted his innocence and never faced prosecution. He didn’t respond to questions emailed by Fortune.

VOLKSWAGEN’S SALVATION: CLEAN DIESEL? it’s against this background, seething with political and family rivalries, that VW made its ill-fated 2005 move to crack open the U.S. market with “Clean Diesel,” the Next Big Thing. At that point Piëch’s turnaround had borne fruit. Early moves into emerging markets such as Brazil and, above all, China, had paid of handsomely. Revenues and profits had taken of. But the U.S. remained a long-running disaster. VW had nearly 19% market share in Western Europe in 2005. In the U.S. it had a scant 2%. The days when Herbie the Love Bug and camper vans filled with hippies and surfers had captured the public’s imagination were long gone. Between 1988, when VW abandoned a 10-year experiment making a U.S. version of the Golf at an old Chrysler factory in Pennsylvania, and 2011, when it opened a new plant in Chattanooga, the company didn’t make a single car in the U.S. That put it at a big disadvantage not just to Detroit, but to Japanese rivals who had set up stateside. Clean Diesel would change all that, contended Bernd Pischetsrieder, whom Piëch had plucked from BMW to succeed him as CEO. U.S. gas prices were then soaring toward $3 a gallon, and climate change was looking like an ever more dire threat. Pischetsrieder concluded that if VW could combine performance, modest price, and environmental appeal, it could

VW Passat 2012–15

VW Golf 2010–15

VW Beetle 2013–15

ca rs: courtesy of v w, audi, a nd porsche

In 2004, after Piëch had moved from the CEO’s seat to chair the supervisory board, the VW system generated another scandal that dwarfed the López afair. It emerged that the company had, for nearly 10 years (beginning less than two years into Piëch’s reign and soon after the deeply unpopular cuts to hours and wages), been showering high-ranking labor representatives with, among other things, prostitutes for Betriebsrat members and all-expensepaid luxury shopping trips to Paris for their wives. Betriebsrat head Klaus Volkert was treated especially kindly, getting 2 million euros in bonuses over 10 years, while his Brazilian mistress was subsidized to the tune of 400,000 euros. Both Volkert and a VW executive were convicted of criminal abuse of oice as a result. Piëch personally signed of on a big, unscheduled increase to Volkert’s pension. The center-left Social Democratic Party came of particularly badly in the scandal, with senior oicials exposed as feasting at the trough. Peter Hartz, VW’s chief of personnel and the architect of Chancellor Schröder’s radical labor reforms, pleaded guilty to criminal charges. It emerged that some sitting SPD lawmakers were drawing salaries of over 5,000 euros a month from Volkswagen, allegedly for nothing in return. (Two lawmakers were convicted of receiving illegal payments.) The dirt flew in all directions, but none stuck to Piëch. Summoned to testify in 2008, he presented himself as a maligned titan too busy with higher


restore its rightful place in the world’s biggest auto market. But the U.S. presented daunting regulatory obstacles. American environmental protection has always focused on pollution, particularly Southern California smog—precisely what the NOx emissions from diesels exacerbate. That state’s powerful regulator, the California Air Resources Board (CARB), given extraordinary powers under the federal Clean Air Act, led the U.S. to adopt stringent NOx restrictions. Europe had taken a diferent approach. Diesel was noticeably cheaper and more plentiful than gasoline, a crucial advantage in a region lacking in oil. Having signed the 1997 Kyoto Protocol, European governments were also more focused on climate change and the reduction of greenhouse gases, especially CO2. Good fuel economy—the diesel engine’s long suit—reduces CO2 emissions. EU states started to tax vehicles according to their CO2 output. And they placed less importance on NOx and carcinogenic soot, which diesels produce in higher quantities than gas engines. “A range of policy choices skewed the market in favor of diesel, whereas in the rest of the world this didn’t happen,” says Greg Archer, who heads the Clean Vehicles arm of Transport & Environment, a nongovernmental organization based in Brussels. At the start of the 1990s diesels accounted for about 10% of the light-vehicle fleet in Europe. By 2014, 50% of all new vehicles licensed in the EU were diesels.

“NO ONE HAD THE COURAGE TO ADMIT FAILURE” the job of executing on Pischetsrieder’s vision of a hit U.S. diesel car fell to a group of engineers in Wolfsburg. Their key challenge was designing an engine that could satisfy America’s stringent NOx regulations without sacrificing performance or fuel economy, while remaining competitive in sticker price. This was occurring just after VW received what amounted to a public warning about its emissions. In 2005 the company agreed to pay a $1.1 million fine after the EPA alleged that VW

Porsche Cayenne 2013–16

Audi Q7 2009–15

Audi A8 2014–16

had received numerous reports in 1999 and 2000 about a defective exhaust part, which was causing excess carbon monoxide and other dangerous emissions, but failed to report the defect to regulators, as required, until the EPA came across it in a random test. Only then had VW instituted a recall—of 329,000 cars—at a cost of $26 million. VW did not admit wrongdoing, but it did sign a consent decree promising to “enhance its system for monitoring and reporting emission-related defects.” Adding to VW’s challenge, the U.S. had announced even stricter rules for 2009. These permitted maximum emissions of 44 milligrams of NOx per kilometer, about one-fourth the 180 mg/ km permitted by the Euro 5 standard that would also take efect in 2009. (Even the Euro 6 standard, which took efect in 2014, permits 80 mg of NOx per kilometer—still nearly twice the U.S. limit.) Diesel trucks have long used a costly and bulky NOx-suppression method known as selective catalytic reduction. SCR involves squirting an ammonia-infused fluid, urea, into the exhaust, which converts the NOx into nitrogen, CO2, and water. By 2006, as the VW engineers pursued their task, rival DaimlerChrysler was already marketing clean diesel cars that used an SCR system. VW licensed the technology—but then chose not to use it, possibly because of changes at the top. In November 2006, CEO Pischetsrieder was forced out by chairman Piëch, under pressure from the Betriebsrat. (The CEO had tried to lengthen the work without full compensation and lost the ensuing battle.) The new chief was Winterkorn, a Piëch favorite, whom he had hired at Audi 25 years earlier. Even as Piëch maneuvered, there’s a sign that VW engineers were considering the use of software that would let the company cheat on its emissions testing, according to a recent article in the Süddeutsche Zeitung, which attributed the information to a preliminary report from VW’s internal investigation. At that point in November 2006, it appears, it was simply talk; no evidence has emerged that Piëch knew about it. By August 2007 the deal to use Daimler’s technology had been scrapped. It’s unclear precisely why, though some accounts have posited vanity: Volkswagen wanted its own system.


The pressure seemed to intensify inside VW. It wasn’t “acceptable to admit anything is impossible,” a company whistleblower told Jones Day, according to the Süddeutsche Zeitung. “Instead of telling management that they couldn’t meet the parameters, the decision was taken to manipulate. No one had the courage to admit failure. Moreover, the engine developers felt secure because there was no way of detecting the deceit with the testing technology that existed at the time.” It was, the whistleblower said, “an act of desperation.” A fateful decision had been made. But that’s not what was presented to the outside world. In spring 2008, VW announced the solution to its U.S. woes: a new engine that used a variation on the direct injection that Audi had used under Piëch years before and many had used since. VW billed it as a “nextgeneration turbo diesel developed especially for the North American market.” But the biggest selling point was that this highperformance diesel was clean. This engine had a diferent technology than VW had previously used to reduce emissions, a solution called the lean NOx trap. The technical details don’t really matter. The bottom line is that the engineers couldn’t get it to work, at least not without unacceptable consequences for fuel economy or drivability. No matter. The 2009 VW Jetta diesel, equipped with the lean NOx trap and defeat-device software, launched in April 2008 and would soon be followed by similarly equipped VW Golfs and Audi A3s. More than 145,000 of the vehicles would be sold over the next three years.

A MICROMANAGER WITH TITANIC AMBITIONS by this time, Piëch had already been out of the day-to-day running of the business for six years. He and the CEO were presented as the Dream Team: Piëch was the visionary patriarch, Winterkorn the perfectionist master of detail. Winterkorn might have been a notch less imperious than the chairman, but he still displayed an almost theatrical oiciousness: He publicly dressed down his juniors at an auto salon for failing to build a steering column that could be adjusted as smoothly as a Hyundai’s. He was known for carrying a micrometer to check the minutest measurements of cars. VW routinely transported twice as many vehicles



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to auto shows as it planned to display because Winterkorn was known for vetoing a particular selection if he detected the slightest imperfection. Like his mentor, Winterkorn had outsize ambitions. One of his first acts as CEO was to unveil a plan to overtake both General Motors and Toyota by 2018 to become the world’s No. 1 automaker, “not just in units, but in profitability, innovation, customer satisfaction, everything,” as he put it. Winterkorn wanted everything. His approach seemed to work. VW grew rapidly during his tenure, surpassing Ford as No. 3 in global sales in 2008 and leapfrogging General Motors into second place in 2014. In the first half of last year, VW briefly edged Toyota for the top spot. Between 2007 and 2014, Winterkorn more than doubled the group’s operating profits and dividends. Revenues hit 200 billion euros for the first time in 2014. Still, VW would find it hard to reach the global pinnacle without significant sales of diesels in the U.S.

THE CHEATING DEEPENS as the first decade of the 21st century ended, VW was enjoying accolades and healthy sales for its green diesels. But there were hints that the German auto industry, if not VW in particular, was uncomfortable with the U.S. emissions rules. Merkel herself weighed in on the issue in April 2010. The Chancellor met that month with California Gov. Arnold Schwarzenegger and CARB chief Mary Nichols at the Four Seasons in Beverly Hills, according to comments that Nichols made to the publication Handelsblatt (which were confirmed to Fortune by a CARB spokesperson). As soon as Schwarzenegger left the meeting, it seems, Merkel pounced on Nichols and said, “The strict nitrogen oxide limits in California are damaging German carmakers,” Nichols told the publication. “I never experienced a similar intervention against our environmental laws by a politician either before or after.” The lobbying yielded nothing. (A spokesperson for Merkel did not respond to requests for comment.) Meanwhile there are hints that by 2011, word of VW’s cheating was circulating to higher levels. A whistleblower allegedly revealed the use of a defeat device to Heinz-Jakob Neusser, a Volkswagen brand-development boss and, later, management board member, according to the Süddeutsche Zeitung. (Neusser, who didn’t respond to a request for comment, was suspended after the scandal erupted.) Roughly three years had passed since VW had begun its deception. The engineers viewed the ruse as a stopgap measure, Volkswagen has suggested, and hoped to abandon it when better technologies became available. Now, in 2011,

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instead of stopping or slowing down, the company intensified the misbehavior. Volkswagen introduced a new generation of exhaust configuration, which used the more tried-and-true SCR system, in some models. But even the new configuration employed defeat devices, VW has admitted. The engineers did this, Volkswagen chairman Hans Dieter Pötsch acknowledged in a presentation to shareholders in December, to overcome a major inconvenience associated with SCR. The technology necessitates a tank to carry all the urea that must be squirted into the exhaust. But unless that tank is impractically enormous, the fluid must be replaced frequently by a licensed service station, which would annoy the consumer. VW wanted each tank of urea to last at least 16,000 kilometers, so it could be replaced when the owner came in for a routine servicing and oil change. By installing a defeat device, the urea was conserved suiciently to meet this goal—although it meant belching illegally high levels of NOx. Almost 90,000 of these Passat diesels, from the 2012 to 2014 model years, were sold. During that same period VW sold another 180,000 Golfs, Jettas, Audi A3s, and, beginning in 2012, Beetles, all still equipped with the fraudulent LNT system. By model year 2015 the company was able to introduce a third generation of its Clean Diesel car. All would now come with the superior SCR system—but all still came with defeat software too. Volkswagen sold about 33,000 third-generation vehicles though September 2015.

“We got a lot of pushback. [VW] said our testing was inaccurate, that we hadn’t taken into consideration a variety of circumstances.”

DOUBTING THEIR GAUGES historically, regulators in Europe and the U.S. have relied on highly controlled lab tests when monitoring pollutants like NOx. The tests are performed on platforms called chas-



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sis dynamometers, or dynos, where the car is locked into place while its wheels spin on rollers. The artificial environment lets scientists control variables, like ambient temperature and wind, and ensure that all vehicles are subjected to an identical simulated-driving sequence. Unfortunately that approach makes it possible to cheat. Software in the car’s engine control unit can detect when the vehicle is being subjected to the unique series of routines that characterize a test. It can, therefore, instruct emissions-control equipment to kick in during a test but switch of under real-world driving conditions. It is also possible to test emissions during real-world driving, using a portable emissions measurement system, though the process is cumbersome. In 2011, after government researchers conducted a series of those tests, the European Commission found that diesel cars were spewing as much as seven times more NOx on actual roads than they were in the lab. Other experiments—for both gasoline and diesel cars—revealed similar results. (The discrepancies have been increasing. In 2001, European cars of all sorts were getting 7% fewer miles per gallon on the road than they demonstrated on the dynamometer. By 2014 the gap had widened to 40%.) These results did not necessarily mean that carmakers were using illegal defeat devices. The in-lab test regimen used in Europe was quite old—test cars were never equipped with air conditioning, for instance—and it was possible that the mix of driving situations simulated during the test simply no longer reflected modern-day reality. Still, engineers at the nonprofit International Council on Clean Transportation suspected that at least some of the disparity might reflect carmakers’ gaming the system and exploiting lax European compliance and enforcement mechanisms. In Europe, for instance—unlike in the U.S.— countries do not spot-check emission levels, and failings, when detected, are not punished as severely. In addition a car model certified as compliant in one EU country must be accepted as compliant in all others—a situation that can lead to shopping for the most lenient testing service. In collaboration with CARB, the ICCT contracted with a group of engineers at West Virginia University to compare the NOx emissions of three U.S. diesel cars in and out of the lab. The researchers’ hypothesis was that any discrepancy would be far less than what European researchers were finding because of the more robust U.S. regulatory regimen. Armed

Accelerating time to value with such results, the ICCT hoped to persuade the European Commission to beef up its own policing. Due mainly to happenstance—which models proved easiest to rent or borrow—the researchers ended up with a BMW X5 and two VWs, a Jetta and a Passat, as test vehicles. In the researchers’ test drives, the BMW appeared to confirm ICCT’s hypothesis: Its emissions were as good on the road as on the dyno, staying within the NOx limits. When they tested the VWs, however, the results were perplexing. “We were seeing a disparity,” says Greg Thompson, the principal investigator. At first they doubted their gauges, he says, but when the data persisted, “we knew there was something causing a dual operation.” The Jetta was belching 15 to 35 times the permissible levels of NOx, while the Passat was emitting five to 20 times the maximum. That didn’t prove VW was using a defeat device. “We then had just two data points,” Thompson stresses—two vehicles from a fleet of thousands. “There could’ve been reasonable explanations.” Maybe something was just malfunctioning. The key findings of the West Virginia group—already known to CARB and the EPA—were revealed for the first time on March 31, 2014, at a conference in San Diego on emissions testing. Though the researchers identified the test cars only as Vehicles A, B, and C, the makes would have been easy to guess for auto engineers. In the U.S., VW was the only manufacturer selling a passenger diesel with a lean NOx trap, or 2.0 liter diesels with an SCR system.

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to have reached Wolfsburg quickly. By late April an internal Volkswagen presentation discussed strategies the company could use in response, according to a recent New York Times report: “One option was for Volkswagen to ofer to update the engine software. But the update would not bring emissions down to the required levels, the presentation said.” The West Virginia University researchers’ 117-page report was published on May 15, 2014. “We were just thinking, How do we fix this?” says CARB spokesperson Stanley Young. “We were still assuming it was a technical issue.” Some people at VW, it appears, suspected it wasn’t a technical snafu—and that information may have reached the top of the company. According to accounts in Bild am Sonntag and other publications, in May 2014, Bernd Gottweis, a former VW oicial who had come out of retirement to help with the emis-

5 Questions That Will Determine VW’s Fate How soon Volkswagen can put the Clean Diesel mess behind it depends on these key issues:

Is fixing the U.S. cars possible? VW has started recalls in Europe to make its diesels comply with emissions rules, but it can’t do that in the U.S. until regulators approve a plan. They rebuffed VW’s first try, and some people doubt repairs are even possible for most of the cars. VW may need to buy back those vehicles.


How high up does responsibility go? The results of VW’s internal probe are expected in June, while discovery in the consolidated class actions is supposed to finish by December. The extent of VW’s exposure to punitive damages—which will affect the size of any settlement—will hinge on whether, and when, top executives knew of wrongdoing.


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sions issue, wrote CEO Winterkorn a memo about possible repercussions from the report. The company “would not be able to give oicials ‘a sound explanation for the dramatically elevated’ nitrogen oxide emissions,” his memo warned, according to the New York Times, and regulators were “likely to investigate whether Volkswagen cars were equipped with ‘a socalled defeat device.’” CARB took the lead in questioning Volkswagen about the results and doing additional testing. Some 10 meetings were held between CARB’s engineers and VW’s, says CARB spokesperson Young. (His organization did not permit its engineers to speak to Fortune because of ongoing litigation and investigations.) “We got a lot of pushback,” according to Young. “They said our testing was inaccurate and didn’t take into consideration a variety of circumstances that occur on the open road, in traic, load, incline, exceedances with engineering limits.” The Justice Department and EPA have since alleged in their suit that VW oicials “impeded and obstructed” CARB’s inquiry by providing “misleading information,” “conceal[ing] facts,” and making “airmative misrepresentations.” In late 2014, Volkswagen suggested to CARB that since it was already planning a voluntary recall relating to some hardware durability issues in the exhaust system, it would make software changes at the same time that would fix the emissions anomalies. The recall was completed by the spring of 2015. As that was occurring, turmoil bubbled up yet again inside VW. The patriarch, Piëch, made one move too many. When the company’s momentum began to cool, he attempted to oust Winterkorn. This time, though, the protégé outmaneuvered his mentor. Winterkorn allied himself with the unions—and Piëch’s own cousins. The board turned against him, and the chairman stepped down in April. Meanwhile VW’s diesel emissions imbroglio wasn’t going away. After

Will criminal prosecutions occur? Prosecutors in the U.S. and five other countries are believed to be probing the events. “It’s only fair that the people who are responsible for committing [corporate] crimes be held accountable,” a top Justice Department official announced nine days before the scandal surfaced.

How big will civil penalties be? Federal law theoretically authorizes about $45 billion in fines for the environmental violations the EPA has alleged. State laws collectively authorize a nearly equal sum. Though no one expects such draconian sanctions, more realistic numbers are impossible to estimate until more is known about the facts.

Mitigation? For environmental damage that can’t be undone, plaintiffs lawyers—and regulators—can ask for open-ended forms of relief beyond compensation to car owners. These might include efforts by Volkswagen to clean up the environment or a promise to beef up its commitment to electric cars.

Accelerating protection the recall CARB tested the vehicles anew. They flunked again. “There was a slight reduction in NOx,” says Young, “but it wasn’t significant enough.” A year had passed since the study revealing VW’s odd emissions results and since Winterkorn was reportedly warned of a possible defeat device. The company kept selling diesels—and CARB’s engineers kept testing. The results got fishier. “One of the telltale signs,” says CARB’s Young, “was that the car was running much cleaner when cold than when it was hot—contrary to standard automobile engineering.” Finally came the coup de grace. “We tweaked the test in the lab to fool the car into thinking it was no longer in the lab,” says Young, “and that it was out in the open road. The emissions jumped.” Clearly the car had a defeat device.

CONFESSION AND DENIAL in july 2015 the EPA ran out of patience. It issued an ultimatum: The agency would not certify any of the VW’s 2016 model year 2.0-liter diesels until it received a credible explanation for what CARB was finding. In meetings over the next several weeks, according to CARB, VW engineers finally admitted what they had denied for months—that since 2008 the company had installed undisclosed software in diesel engines that triggered a “second calibration intended to run only during certification testing.” On Sept. 3 a Volkswagen oicial formally signed a document to that efect. The document remains confidential, but CARB has stated that in it “VW admitted … that it designed and manufactured its 2.0-liter diesel vehicles with defeat devices to bypass, defeat, or render inoperative elements of the vehicles’ emission-control system.” (VW declined comment.) The world learned of the scandal

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about two weeks later, when the EPA issued a formal notice of violation relating to nearly 500,000 2.0-liter diesel cars—stretching across seven model years and three generations of exhausttreatment configuration. Next, the regulators scrutinized VW’s 3.0-liter, six-cylinder diesels—mainly SUVs and luxury cars. Sure enough, these engines contained defeat devices too, though they worked a bit diferently. The method shows how finely tuned the cheating was. A key phase of the standard U.S. emissions test lasts exactly 1,370 seconds. Audi’s software, the regulators discovered, was calibrated to emit a legal amount of emissions for precisely 1,370 seconds. When the 1,371st second elapsed the software switched settings, so that the car spewed up to nine times the permitted amount of NOx, the EPA alleges. How’s that for German engineering? On Nov. 2 the EPA issued another notice of violation—this one for five models of Audi, the Porsche Cayenne, and the VW Touareg. Their engines were developed by Audi engineers in Ingolstadt, Germany, about 300 miles south of Volkswagen’s Wolfsburg facility, where the first group of purported badapple engineers worked. That means two groups of engineers were allegedly breaking the law in parallel for seven years, with seemingly little in common except the upper-level executives they answered to.

AFTERMATH: BAD TO WORSE vw’s response to the exposure of its chicanery was revelatory in its confusion. Within a five-day period, CEO Winterkorn publicly apologized on behalf of the company, disavowed any personal knowledge of wrongdoing, vowed to stay on as CEO—and then resigned. The board, for its part, pledged a full and independent



March 15, 2016

Within five days of the revelations, VW’s CEO apologized, disavowed knowledge of wrongdoing, vowed to stay on— and then resigned.

investigation but then confidently averred that Winterkorn “had no knowledge of the manipulation of emissions readings.” The board also promised to establish “a new mind-set” at the company, with “more capacity for criticism”—seemingly conceding there was something poisonous about the culture Winterkorn presided over. So who did the board select to lead the “unsparing” cleanup it was promising? Two company insiders with longterm ties to Winterkorn. Matthias Müller, Porsche’s chief and a 30-year VW veteran, was named CEO, while CFO Hans Dieter Pötsch was moved to chairman. Since September at least 11 top executives, including two top engineers who oversaw development of the engines in question, have been suspended or have departed. More than once the company has shown signs of being in denial. In early November, when the EPA declared that VW’s 3.0-liter engines were also using defeat devices, the company insisted that “no software has been installed” in those vehicles “to alter emissions characteristics in a forbidden manner.” But 21 days later its Audi division, which made those engines, admitted that, yes, they too incorporated a defeat device. The scandal’s impact is not abating. Last month VW put of the announcement of its annual results until April and postponed its annual shareholders meeting until June, at which time it is expected to reveal the results of the Jones Day internal probe. The German KBA, or Federal Vehicle Agency—an arm of the Ministry of Transport—has already approved the company’s proposed European recall in which VW will “fix” most of the millions of afected cars there with a software update, requiring just 30 minutes to efectuate. The agency has evidently accepted VW’s contention that the switch will have no appreciable impact on fuel economy or performance—begging the question why the ofending software was ever put there in the first place. (European cars had diferent emissions-reduction hardware than U.S. cars, so the software had diferent impacts, VW has said. It declined to elaborate, however, for Fortune.) In the U.S., Judge Breyer is pushing the class action forward on a very fast track and appointed former FBI director Robert Mueller to ride herd on the parties to settle. “I am deeply concerned about vehicles being on the road which are polluting,” Breyer said at a hearing, during which he recalled his youth in a California that was choked by smog. “We all ought

Accelerating analysis to move as quickly as possible to resolve this in a sensible way.” In February the judge, fed up with waiting, slapped VW with the March 24 deadline to propose specific “fixes”—or be prepared to start buying vehicles back. Both sides have committed to complete the discovery process by the end of 2016—lightning-quick by U.S. standards. But it seems increasingly unlikely that any fix for the lean NOx trap vehicles—roughly 60% of the diesels involved—will ever be approved by regulators. A buyback may be needed for those. Plaintifs lawyers—and regulators too—will also be pressuring VW for steps known as “mitigation” to make up for the damage to the environment that can’t be undone. These might include commitments by Volkswagen to expand its eforts in the arena of electric cars. Indeed, CEO Müller has already promised a range of at least 20 hybrid or electric vehicles by 2020. In Europe, meanwhile, German carmakers continue to fight emissions regulations. The European Union has moved forward with plans, already on track before the scandal, to mandate onthe-road testing in 2017, supplementing the all-too-easy-to-fool lab testing. But Merkel reportedly pressed the EU to relax the new standards, apparently after she was lobbied by the German Auto Industry Association. Sure enough, the new European rules will permit diesel cars to produce more than double the NOx on the road than they’re permitted on the dyno until 2020, and even after that, 1.6 times more. Back stateside, it’s a much diferent picture. Judge Breyer doesn’t give a damn what Merkel or the European auto industry think. Here, VW is defenseless and grievously exposed. It’s stuck on cruise control, hurtling toward a devastating reckoning.

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By Erin Griffith @eringriffith



March 15, 2016

Fixing Twitter Breaking news, celebrity feuds, and political revolutions turned Twitter into a media juggernaut. Unfocused management turned it into a train wreck. On the company’s 10th birthday, here’s how returning CEO Jack Dorsey plans to get Twitter back on track.


N LATE JANUARY the Tweeps needed a kumbaya moment, and Jack Dorsey

knew exactly how to give it to them. Donning a ball cap, white T-shirt, and zippered neon-orange high-tops, Twitter’s co-founder-turned-CEO-turnedpariah-turned-executive-chairman-turned-interim-CEO-turned-permanent-CEO stepped onto a small stage at the weekly all-hands meeting in Twitter’s San Francisco headquarters. The week had been hard, he admitted to a standing-room-only crowd of over 1,000 employees. But he had a plan to fix everything. ¶ The previous Sunday, Jan. 24, news had leaked that four of Twitter’s top executives were leaving, forcing Dorsey to tweet a terse, defensive response. From the outside, it looked as if the social media service was bleeding talent and fumbling to react. In reality, the shake-up was part of Dorsey’s plan, a plan that he now explained in more detail to his co-workers. The departures, he said, were all part of Twitter’s turning a page. ¶ The meeting quickly became a sort of corporate pep rally. Rank-and-file engineers and salespeople stepped up to the mike, efusively telling one another why they work

i l l u s t r a t io n b y EDDIE GUY




March 15, 2016

otic, crazy-balloons catastrophe, moving in every direction but forward. In October, a few months after former chief Dick Costolo resigned, Dorsey oicially became Twitter’s CEO. He’s simultaneously running Square, the payments company he founded and took public last year. In February he finally answered that pesky existential question: According to Dorsey, “Twitter is live: live commentary, live connections, live conversations.” Twitter did not make Dorsey available for an interview. But conversations with advertisers, investors, and 15 current and former employees reveal confidence in him. Most of them—even the bitter ones— said some version of, “If anyone can do it, it’s Jack.” The question is whether anyone can do it. Twitter’s product has insinuated itself into the fabric of international discussion, and the company earned $2.2 billion in revenue in 2015 (with a net loss of $521 million). But because Twitter failed to take that success to the next level, it hasn’t

Jack’s Tasks

Twitter believes it can draw the world’s “largest daily connected audience” if it delivers on these five priorities.

Reine the service

Cater to influencers

Twitter is making bold bets (a Facebook-like algorithm) and minor tweaks (no more periods before an @reply) to improve its users’ experience.

Tweets from media, artists, jocks, and politicians are key to Twitter’s appeal, but those big names need better tools.

dorsey: ya na paskova—bloomberg v i a gett y im ages

at Twitter. (“Because this product saved my life” and “Because one tweet can change the world” and “Because I’ve never believed in a mission more.”) Anthony Noto, Twitter’s exbanker CFO, declared, “It’s just us!” echoing earlier comments—“No one is coming to save us”—from a staf-wide memo. That may sound like an odd rallying cry, but employees latched onto the underdog message. There was cheering. There was tweeting (#OneTeam, #LoveWhereYouWork, #ItsJustUs). “It was a moment of Jack at his best,” says senior director of corporate development and strategy Jessica Verrilli, whom Dorsey recently lured back to the company just a few months after she had left. “It was electrifying.” A jolt of electricity is exactly what Twitter needs. With stalled user growth, a stock trading at 30% below its IPO level, and a revolving door of executives, the past two years have been among the worst in Twitter’s history. And all the company’s missteps seemed to play out in public—especially on Twitter itself, where power users of the service pounced on every shortcoming and continually predicted its demise. “They’ve run out of eyes to be black,” says Chris Sacca, an early investor who still holds a substantial stake. “This is a company that has taken every punch possible and is still standing.” (Sacca believes Twitter’s worst days are behind it.) Most vexing is the fact that Twitter, which turns 10 years old on March 21, is still grappling with the existential question that’s plagued its existence throughout: What is Twitter? Five years ago Dorsey didn’t think the company needed an answer. “It’s diferent things to diferent people at diferent times,” he said at a conference. The ambiguity has taken its toll, leading to sluggish innovation, strategy whiplash, and internal dysfunction, all of which intensified—along with the scrutiny—after Twitter went public in November 2013. Worst of all: In a tech culture where constant evolution and perfection of “product” is the gold standard, Twitter’s product development had become a cha-


costolo: fr a ncois g. dur a nd—gett y im ages

Former CEO Dick Costolo (above) turned Twitter into a revenue-generating enterprise but stumbled on product development; Jack Dorsey (left) has streamlined Twitter’s product team since officially returning as CEO in October.

met the lofty expectations the media, tech, and financial worlds had for it, and that it had for itself. Twitter has 320 million monthly active users—impressive, but well short of the billion-user milestone that separates a digital-media superpower from an also-ran. Alphabet owns seven billion-user products. Facebook has two. Three years ago, at its IPO, most observers thought Twitter could get to the billion-user mark too. But since then the company’s product has stagnated, while competitors—Facebook, Instagram, and Snapchat—have continually made their services better and more essential to their users. Incredible, singular events happen on Twitter, from Kanye West’s wild rants to Donald Trump’s latest bullying. But the best of Twitter gets embedded around the web, analyzed on TV, and even quoted in stodgy old newspapers. So despite Twitter’s 95% brand awareness, many regular people—those who aren’t influencers in media, finance, activism, sports, politics, or pop culture—have decided they don’t need the app. Investors, in turn, have decided Twitter is worth a mere $12.5 billion—a far cry from Alphabet’s $494 billion market capitalization and Facebook’s $308 billion. Twitter’s management, led by the would-be superman Dorsey, isn’t giving up. But this could be the company’s last chance to get it right.

Curb abuses Online harassment and hate tweets have scared away many users. The company has promised better technology and policies regarding safety.

Play more video The live-streaming app Periscope is arguably Twitter’s biggest recent success. The company will invest more heavily in event broadcasting.

Build an app army Twitter hopes to increase its reach through apps built with its Fabric developer platform.

N 2011, Dick Costolo, Twitter’s re-

cently promoted CEO, decided that Twitter should make $20 million that year from a product focusing on live events, like concerts and big football games. There was just one problem: Not only did the events product not exist, but the vision of what it might look like didn’t exist. All Twitter had was a catchy concept and a revenue target. Twitter’s product managers had to scramble to create something advertisers might pay $20 million for rather than build something Twitter’s users might want. It was revenue first, product second, epitomizing everything that was wrong with Twitter’s strategy, according to employees familiar with the project. And to no one’s surprise, the $20 million didn’t materialize that year, because no “events product” shipped. It’s hard to overstate how much companies like Twitter live and die by their products— the apps and websites they build and their constant improvements to those oferings. It’s critical, according to Silicon Valley wisdom, that the products have a clearly defined “vision.” Even more critically, products must emphasize user experience over revenue. If a company gets too greedy and ignores what users want, that company is dead. Users are a fickle bunch. Just ask Myspace. Twitter’s culture, leftover from playing catch-up to its own early runaway growth, has been more reactive than visionary. Its style has been to build things “the crafty, hack-y way,” as a former executive puts it. That adds to Twitter’s charm, but it doesn’t motivate product managers to dream up ambitious long-term projects. Many of Twitter’s most innovative features, including the hashtag, @reply, and retweet, were actually invented by users. “We always had a long list of stuf that we were slogging through, and we would only look quarter ahead to quarter ahead to quarter ahead,” says COO Adam Bain, a 5½year veteran of Twitter’s sales side. As CEO, Costolo had strengths, although being a “product visionary” wasn’t one of them. He was well-versed in teaching managers how to manage. And he pulled of something Twitter’s previous two CEOs,


Flown the coop April Underwood Director of Product

Twitter’s high executive turnover and frequent reorganizations in recent years have

Peter Morelli Senior Director of Engineering

Rishi Garg VP, Corporate Development and Strategy

Raffi Krikorian VP, Engineering, Platform

Gabriel Stricker Chief Communications Officer




including Dorsey, had not: bringing an air of relative stability to the freewheeling, Fail Whaling startup. He whipped Twitter into a revenue-generating business, taking it public in 2013 with a 73% first-day stock pop that drove its valuation to $22 billion. He also took a bold stab at the “What is Twitter?” question in the company’s public ofering document with four simple words: public, real-time, conversational, and distributed. But even during the successful IPO, investor concerns about slowing user growth lurked beneath the surface. Eager to show he could jump-start growth, Costolo put his No. 2, COO Ali Rowghani, in charge of Twitter’s product division. A glowing Wall Street Journal profile dubbed Rowghani “Twitter’s Mr. Fix-It.” Rowghani found a disorganized, overstafed product and engineering team that couldn’t agree on anything. Every team seemed to overlap with every other team, because no matter the name (“Growth” or “Timeline,” say) they were all essentially working on the same thing: the tweet. A rule that any team could test a new feature on 1% of Twitter’s users was meant to spur creativity, but soon Twitter was running more than 100 tests at once with little coor-



March 15, 2016





dination. “It quickly got to the point where it was like throwing darts on a board rather than testing a hypothesis,” a former executive says. What’s more, Twitter continued to grapple with its identity. Within six months of its IPO, the company’s biggest product initiatives no longer matched Costolo’s “public, real-time, conversational, and distributed” description. A feature called “While you were away” showed users old tweets they might have missed—the opposite of real-time. Updates to “direct messages,” Twitter’s one-on-one messaging service, were by definition not public. Meanwhile Instagram and Snapchat were grabbing attention with their own public, conversational, and occasionally real-time products, taking market share that should have been Twitter’s. By May 2014, Twitter’s stock price had been slashed by more than half from its January high, and Costolo was under pressure. He took control of product development back from Rowghani, prompting his COO to resign on June 12, 2014. Looking back, many insiders point to that day, exactly a year before Costolo stepped down as CEO, as the clearest sign Costolo was doomed. “That was the moment everyone realized Dick was running scared, looking over his shoulder,” a former executive says. (Costolo did not respond to multiple requests for comment.) High turnover and regime changes plagued Twitter through the next 12 months. The company lost two vice presidents of engineering, a product head, a media head, a director of product, and a senior director of engineering (see timeline above). The lack of continuity only intensified the short-term thinking among Twitter’s product builders. Any progress on new features “would be blown up every six months” by another reorganization, says a former executive. The dysfunction reached an apex in May 2015 when Sacca, the early investor, published a series of blog posts longer than the U.S. Constitution outlining the company’s shortcomings. Investor cries for Costolo’s head intensified, not helped by Twitter’s June 3 shareholder meeting, where he reiterated his latest vision: “to connect everyone to their world.” (AT&T once used a similar mission statement.)

stymied product innovation—allowing competitors to gain ground.

Christian Oestlien Todd Jackson VP, Product Management Director of Trevor O’Brien Product Director of Product Management Management Mike Gupta Former CFO, SVP of Strategic Investments

Akash Garg Senior Director of Engineering, Growth, International Glenn Otis Brown Senior Director of Twitter Amplify

Alex Roetter SVP, Engineering

Neil Shah Director of Corporate Development

Brian Schipper Head of Human Resources Katie Jacobs Stanton VP, Media

Kevin Weil SVP, Product Baljeet Singh Senior Director of Product Jason Toff GM of Vine





Still breaking the internet Business woes aside, Twitter is where the biggest names in politics, media, and the arts break news and change the zeitgeist. Here are three of Fortune’s favorite world-changing tweets from the past year …

President Obama @POTUS oba m a: m a r k w ilson—gett y im ages; sw ift: a n thon y h a rv ey—gett y im ages; jen ner: jon kopa loff—filmm agic/gett y im ages; w est: jason l av er is—filmm agic/gett y im ages

Cool clock, Ahmed. Want to bring it to the White House? We should inspire more kids like you to like science. It’s what makes America great. 424,521 RETWEETS 439,999 LIKES

16 Sep 2015

Taylor Swift @taylorswift13 “And you can want who you want … Boys and boys and girls and girls.” #lovewins #FINALLY 104,274 RETWEETS 157,036 LIKES 26 Jun 2015

Caitlyn Jenner @Caitlyn_Jenner I’m so happy after such a long struggle to be living my true self. Welcome to the world Caitlyn. Can’t wait for you to get to know her/me. 255,410 RETWEETS 403,427 LIKES

1 Jun 2015

… and one from a famous guy begging for money.

Kanye West @kanyewest Mark Zuckerberg invest 1 billion dollars into Kanye West ideas 38,276 RETWEETS 63,290 LIKES 14 Feb 2016



A week later Costolo stepped down. It was his idea, he insisted in interviews. Things at Twitter were just fine. In a statement that bewildered anyone who had been following along, Costolo said, “We have great leaders who work well together and a clear strategy.” Since then at least 16 high-level managers and executives have left, and the company’s tactics have completely changed.


ACK DORSEY has said Twitter should

be “the most powerful microphone in the world.” Lately it’s been a powerful microphone for people to complain about Twitter. When, in January, Twitter changed its star-shaped “favorite” button into a heart, users loudly protested. When the Twittersphere learned that the service would expand its iconic 140-character count, the vitriol was so strong that Dorsey had to tweet a clarification. On news that Twitter would use a Facebook-like algorithm to sort its fast-moving stream, the Internet boiled over in rage, elevating the hashtag #RIPTwitter to a trending topic. Passionate users will always react passionately to big changes. But the real takeaway, Twitter executives will tell you, is the speed at which Twitter is introducing these changes. In the past Twitter’s product managers would debate for ages over barely noticeable tweaks. But in recent weeks, “we’re shipping, we’re


shipping, we’re shipping,” says Verrilli, the corporate development director. “That is the energy and the momentum that characterizes the company right now.” (The other takeaway is that the changes appear to be working: Twitter says the heart button got 6% more use in its first week than the star button averaged since it was invented.) Before it could ship, ship, ship, Twitter had to clean house. In October, Dorsey laid of 8% of its 4,200-person staf. “Some of the people that got laid of were amazing,” says a former product manager, “but you can’t have a bunch of people doing the same job.” Then Dorsey had to fix Twitter’s broken product process. He borrowed a strategy from Apple by appointing a “DRI” (directly responsible individual) in charge of decisions for each product. He also insisted that designers be included earlier in the development process. Dorsey killed features that he believes focus

on boosting short-term metrics without adding much to the overall Twitter experience, like a “follow” button that appeared on individual tweets. His message to employees is “think bolder.” At a January executive retreat, he handed out copies of the book Mindset: The New Psychology of Success, which includes motivational, if vague, lines like “Becoming is better than being.” The right mind-set, according to Mindset, is a “growth mindset.” And in February, Dorsey finally delivered his “Twitter is live” mission statement. “Hearing about and watching a live event unfold is the fastest way to understand the power of Twitter,” he wrote in a letter to investors. And okay, sure! People tweet more when there is breaking news or when they’re watching a live event like the Super Bowl. Periscope, the fastgrowing video app Twitter acquired last year, is primarily live. Having reorganized and declared a mind-set, a vision, and a set of priorities (see sidebar, page 118), Dorsey is now in recruiting mode. Hiring coups so far include former Google chief business oicer Omid Kordestani as executive chairman, former American Express chief marketing oicer Leslie Berland to run marketing, and former Apple PR executive Natalie Kerris to head communications. There’s also the efusive rehire Verrilli, who says, “If you are here, you’re here because you believe in this place and you’re trying to create something great.” Indeed, staring at one of the many neon-blue signs at Twitter’s oices

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that command you to #lovewhereyouwork when you actually #hateit would be miserable. Disgruntled employees have no shortage of wellfunded startups to jump to, and scores have done just that, landing predominately at Uber, Lyft, and Slack. (Some Twitter employees are calling Slack, a business messaging software startup, “the New Old Twitter.”) There’s even a Slack chatroom where hundreds of Twitter alumni at diferent companies share articles and gossip about their former employer—it’s called Flown the Coop. Those who stayed got a giant thank-you gift from Dorsey in October when he announced plans to give a third of his Twitter stock (worth $122 million at press time) to the employee equity pool. Through the drama, Twitter’s advertising business, run by the wellrespected COO Bain, has remained a bright spot, and revenue grew 58% last year. Despite Facebook’s best attempts to court so-called influencers, Twitter is still the go-to place for politicians, business leaders, athletes, and Kanye West to make important announcements. When West publicly asked Facebook CEO Mark Zuckerberg to give him $1 billion, did he make the request on Facebook? Nope—he tweeted it. Tony Eik, vice president of media and connections at ad agency R/GA, says buying ads on Twitter works great for reaching prominent professionals and leaders who drive public debates. The scale may not be there, he says, but the influence is. Twitter isn’t profitable, but it has a $3.5 billion pile of cash. And

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though an unusually high percentage of its shares are held by short-sellers, many analysts believe that the company has hit the bottom—it can only go up from here. Just two out of 43 analysts covering Twitter have a sell rating on the stock. “Now it’s all about execution,” says Bob Peck, an analyst with SunTrust Robinson Humphrey. “It’s more of a ‘show me’ story now.” In its decade of existence Twitter has survived enough drama and dysfunction to kill 100 startups of its size—it has taken every punch possible, as Sacca says, and is still standing. If Dorsey can transform “crafty, hack-y” Twitter into a focused, productexecution machine, the missteps of the past few years should give way to stability and growth. Twitter has a solid brand, a solid business, and an influence that’s impossible to quantify. That may have to be enough for now—superpower status is out of reach.


Michal Lev-Ram

Data analytics company Palantir has built a substantial mystique—and a $20 billion valuation with investors— around its work for the intelligence community. Can it woo more corporate clients without giving away its secrets? Photographs By Brad Wenner

CEO Alex Karp and philanthropy team leader Karin Knox share a light moment with colleagues (from left) Josh Harris, Nick Zamiska, and Ryan Taylor at Palantir’s headquarters.

March 15, 2016





WHEN YOU LIVE and work in Silicon Valley, you grow accustomed to a kind of semantic saturation from overused buzzwords. Terms such as “disruptive,” “innovative,” and “mission driven” come to mind—all favorites among Valley startups, whether they’re building operating systems for robotic arms or phone-based bowling games. So it captures your attention when the CEO of one of the most buzzed-about of those startups sidesteps that kind of language and instead explains his company’s decision-making process as “80% Piaget and 20% Hobbes.” The CEO is Alex Karp of Palantir Technologies, the Palo Alto– based data analytics company that may or may not have helped track down Osama bin Laden. Karp holds a Ph.D. in social theory, which explains why that Piaget-Hobbes formula (more on that in a moment) figures in his view of how to manage and give purpose to a business. And like the formula, Palantir’s version of the tech industry’s “change the world” ethos becomes more distinctive, and more of a departure from the Silicon Valley norm, as you dig into it more deeply. Palantir, currently valued at about $20 billion, is one of tech’s biggest “unicorns.” Its two main products, Gotham and Metropolis, serve the same basic purpose—bringing together massive, disparate data sources and scouring them for connections and patterns that aren’t obvious to the human eye. And yes, those software suites are named after the home cities of Batman and Superman, respectively. There’s nothing ironic about the superhero references: Having deployed their products to address crises like cybercrime, natural disasters, and the ugly byproducts of civil war, Palantir’s employees firmly believe that they’re members of the Justice League. When business leaders talk about the promise of big data, they often point to Palantir, even though the company and its clients are generally tight-lipped about exactly what the company does and how. This much we do know: Commercial customers rely on Palantir to detect fraud, study consumer behavior, and search



March 15, 2016

Tracing Patterns Engineers in work pods at Palantir’s Palo Alto offices (above); CEO Karp leads colleagues in a tai chi class at headquarters.

for a competitive edge. Clients range from J.P. Morgan Chase to chocolatier Hershey to Bridgewater Associates, a global investment management firm. Private customers now account for about 75% of Palantir’s revenue; the company said it had $1.7 billion worth of commercial bookings, or commitments to spend, in 2015. But as recently as six years ago the company sold exclusively to the government sector. And that’s why Palantir’s mystique carries a unique tinge. The company has its roots in, and is still best known for, antiterrorism and spycraft. Intelligence and national security agencies use its tools to flag suspicious activities, tracking the movement of money, contraband, and shady operators. Put simply, Palantir’s technology can enable governments and companies to monitor people. And that means Palantir faces the same theoretical and practical quagmire that other technology companies are now grappling with—the challenge of balancing safety and privacy. Apple, of course, has drawn a line in the sand on this issue, diving into a legal battle with the Justice Department over iPhone security. Facebook, Google, Microsoft,

and other tech giants have lined up behind it. But Palantir’s orientation difers—and that’s where Piaget and Hobbes come in. Jean Piaget was the psychologist who espoused the merits of hierarchy-free play for children; Thomas Hobbes was the 17th-century philosopher who believed that a strong central authority was the only option for maintaining peace. Palantir hasn’t taken a public stance on the iPhone dispute. But it operates under the assumption that small Hobbesian incursions on privacy are necessary to preserve our Piaget-style freedom of action, including in business. Palantir co-founder Peter Thiel argues that smart intrusion ultimately means less intrusion. “The government was collecting a lot of data [in the war on terrorism], more than they could analyze,” says Thiel. “If we could help them make sense of data, they could end indiscriminate surveillance.” “This is protecting civil liberties through the use of software,” says Karp, referring to the company’s partnerships with governments, “and therefore protecting societies from hitting the button against all civil liberties.” It’s a tricky balancing act, but it’s at the core of Palan-

tir’s operations—and one that will guide the company as it takes on serious business challenges. Launched in 2004 by Karp and a group of techies led by PayPal co-founder Thiel, Palantir has raised about $2 billion in funding over the years from investors like hedge fund Tiger Global, Yelp co-founder Jeremy Stoppelman, and Thiel’s venture firm, Founders Fund. The company will have to return some of that investment at some point, possibly through a public ofering. As unicorn euphoria fades, Palantir may face increasing pressure to do so; indeed, in late February, Morgan Stanley marked down the value of its stake in Palantir by almost a third. Palantir expects to reach profitability by 2017. It doesn’t report current revenue, but the company told Fortune that it brought in more than $1 billion in 2014 and that its 2015 commercial bookings nearly doubled from the previous year; that

March 15, 2016




figure suggests that growth is steady if not explosive. To maintain momentum the company will need to keep expanding its commercial services—a challenging task when your corporate raison d’être prevents you from saying much about what you do. “We’ve always been bad at marketing and sales,” admits Karp. But in interviews this winter, Karp and his colleagues gave Fortune a rare, close-up look at how they operate. They also took Fortune inside some of their humanitarian projects—most notably, an ambitious refugee-relief efort in Syria—which aim to show a skeptical public that Palantir’s data mining can be an unequivocal force for good. IT WAS A HUMANITARIAN PROJECT that





By processing first introduced Palantir to the data collected U.K. division of Spain’s Santander by humanitarBank. In 2015, both companies ian agencies, signed on to a charity-funded iniPalantir aims tiative to look into connections to alleviate one between illicit financial networks of the world’s and global human-traicking most severe rings. The initiative didn’t marefugee crises. terialize—British restrictions on information sharing among banks got in the way—but Palantir’s software impressed Santander chief operating oicer Juan Maria Olaizola. “You can say that we went from a blind date to marriage in less than six months,” says Olaizola. Today Santander is using Palantir’s tools to figure out whether their customers are up to anything nefarious. Palantir’s analytics software can harness the bank’s proprietary data and match it against public information to check whether customers have been connected to bad acts, past or present. That “public information” typically includes criminal databases, huge streams of data from social media, and a variety of other sources. (These sources are the stuf that privacy advocates’ nightmares are



March 15, 2016

ON JUNE 10, 2011, a grainy, homemade video appeared on YouTube. With the Syrian flag draped across the wall behind him, Lt. Col. Hussein Harmoush held his identification card up to the camera, then announced in Arabic that he was splitting from the Syrian army and joining the opposition forces. The video—which show-

cased in real time one of the first public breaks from the Syrian regime— caught the attention of a young intern at the Carter Center, an Atlanta nonprofit founded by former President Jimmy Carter and his wife, Rosalynn. “By the summer of 2012, there were thousands of documented defectors on YouTube,” says Chris

made of, and Palantir and its clients uniformly decline to talk about them with specificity.) In theory, Santander or any other customer could perform this checking itself, but it would need to find engineers with the right expertise and spend a long time building code—a potentially inefective and time-consuming process. Thanks to the efort Palantir put into Gotham and Metropolis, it has the talent and data ready to roll. A typical deployment starts with Palantir employees embedding with a customer, poring over potential data sources, and identifying problems. Olaizola describes Santander’s relationship with Palantir as “a joint efort of exploration and discovery.” That exploratory approach is central to Palantir’s process, a contrast to the classic fee-based relationship with a software provider. Typical commercial contracts with customers last an extraordi-





McNaboe, now manager of the Carter Center’s Syria Mapping Project. McNaboe started painstakingly entering information gleaned from each upload into a spreadsheet. A single video could hold upwards of 70 different data points. “You could see the names of the [rebel] groups, their location, their weapons of choice, uniforms, and other symbols,”

McNaboe explains. Through a Carter Center donor, McNaboe and his boss connected with Palantir, and the two organizations partnered. As Syria’s civil war and refugee crisis raged, a joint team within the two organizations plugged data from at least 3,000 YouTube videos into Palantir’s Gotham software tool. Eventually additional

narily lengthy five to 10 years, though Karp says clients aren’t locked in if they’re unsatisfied: “We believe that a good partnership is one where a client can leave.” Because the relationship may last for years, Palantir’s embeds can keep folding in new kinds of data and applying its tools to diferent problems as a client’s needs change. Palantir isn’t the only game in town: Competing vendors include big-data player Splunk and IBM, with its i2 software. But while some have complained about Palantir’s costs, its technology and people seem to command respect, even among companies that didn’t hire it. Palantir vets its clients as tightly as they vet Palantir. The data challenge that a company’s case presents must be compelling, and the information that will be analyzed must be made freely and totally available to Palantir’s researchers, no strings attached. Those standards apply to




data sources, including news reports of government attacks on rebel-held areas, were also fed into Gotham, creating a robust, realtime map of which civilian populations were getting hit hardest. The abundance of data gave the Palantir team an idea: Why not create an early-warning system that uses pattern recognition

to predict the next violent escalations? The team found that airborne “barrel bombings” by the government are harbingers of a wider attack and can increasingly determine where those follow-up attacks are likely to be. The end goal: To anticipate assaults and send aid workers and supplies where they’ll be needed most by refugees. Today another Carter Center partner, Mercy Corps, is getting its humanitarian-aid teams up and running on the system. (The Carter Center does not have its own teams in Syria.) “We’re still at the start of this relationship,” says Karin Knox, head of Palantir’s philanthropy engineering team. “But there is a lot we can do, like triage who needs what and where.” As for Harmoush, he eventually recanted his opposition to the Syrian government, and then vanished. In war there are some mysteries even Palantir can’t solve.

humanitarian projects too: One key to Palantir’s new Syria initiative, for example, is a huge database assembled by enterprising researchers at the nonprofit Carter Center (see sidebar). The client’s and Palantir’s ideologies must align too, which sometimes means walking away from big contracts. When a tobacco company wanted to use Palantir tools, Palantir turned down the partnership, Karp says, for fear the company would harness the data to pinpoint vulnerable communities to sell cigarettes to. Among clients who do make the cut, in most cases the “Why Palantir?” rationale is the same. The client has data, and plenty

March 15, 2016




of it, and buying Palantir’s formidable analytics expertise is more cost-efective than developing its own. Zurich Insurance has worked with Palantir to develop data-mining software to help it price policies more accurately—an arena where tiny changes in risk assessment can create a big competitive edge. In 2015, TurboTax maker Intuit used Palantir’s tech to investigate eforts by identity thieves to fraudulently file for tax refunds. Palantir’s consumer expertise is growing too. Hershey uses Palantir technology to better understand and anticipate purchasing trends. (Fun fact: Palantir’s tools helped discover that when Hershey’s chocolate is placed next to marshmallows, sales go up.) The company has also partnered with payment processor First Data on a product called Insightics, which utilizes First Data’s voluminous credit card records to provide advice to small businesses— helping decide, for example, whether an ice-cream store’s customers are dispersed enough geographically to justify opening a second store. ON A MONDAY AFTERNOON, Karp leads a tai chi class

in a courtyard at Palo Alto headquarters, standing in front of a phalanx of 30 or so Palantirians. The rank and file closely follow their leader’s slow and subtle movements. He occasionally stops to adjust the position of an employee’s hands and posture. It’s guidance, not correction: As he later tells a reporter, “We are an antiauthoritarian culture.” In other words, the culture is more Piaget than Hobbes. But Palantir’s roots are intensely Hobbesian. It’s impossible to write about the company without writing about the Central Intelligence Agency. While Palantir’s technology first took shape as a homegrown antifraud algorithm at PayPal, the CIA’s venture capital arm, In-Q-Tel, was its first outside investor, and until 2010, its only customers were in intelligence, law enforcement, and defense. (Such users now include the Federal Bureau of Investigation and the Navy Seals, among many others.) In-Q-Tel has invested in more than 100 startups, but only one has been associated with the 2011 killing of Osama bin Laden. For years, tech and security insiders have theorized that Palantir’s analytics helped the government pick up bin Laden’s scent. It’s a link Palantir has never confirmed or denied. “I can’t comment on our specific national security successes,” Karp says when asked by Fortune. “Maybe a diferent way of answering is that not everybody likes our ailiation with national security, but



March 15, 2016

we’re very proud of it…That also involves finding terrorists and Playing Defense Karin Knox and her sometimes taking them out.” philanthropic team Whether or not those terror(top); Palantir’s public safety mission, ists include bin Laden, its susexpressed in a slogan pected role has made Palantir referencing the Lord an object of intrigue, as have of the Rings trilogy the eccentricities of its corporate culture. Karp’s wild hair and typical oice garb (brightly colored tracksuits) may not stand out in Silicon Valley, but his doctorate in social theory from Frankfurt University does. References to the Lord of the Rings fantasy trilogy permeate the company. Its name stems from the palantiri, crystal-ball-like objects whose users can see events all over the world. And a sign at headquarters exhorts the staf to “Save the Shire”—a rallying cry about protecting innocents in a violent world. As Karp tells it, work for private-sector customers was almost an afterthought to saving the Shire. But other founders have said they always had the private sector in mind. In a speech to a Stanford University class in 2013, Palantir co-founder Stephen Cohen told students that even as they worked on antiterrorism projects, the founders also thought, “Let’s hope big enterprises use a Silicon Valley approach to understanding their data.” As Thiel puts it, “It turned out that efective analysis is very

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valuable in a lot of diferent markets.” Not everyone is so sure that the connection between national security work and for-profit customers is a benign one. “Alex Karp regards the work of Palantir as sanctified,” writes Alec Ross, former senior adviser for innovation at the State Department and author of the book The Industries of the Future. “But I don’t believe that these kinds of capabilities will stay bottled up and only be put to work in the common interest. Perhaps we can trust Palantir not to engage in dodgy projects, but it won’t have a monopoly on this kind of intelligence capability.” IF THERE’S ONE PLACE on the planet that can one-up Silicon Valley’s do-gooding lingo, it’s the village of Davos, where leaders who spend the year worrying about shareholder returns take a weekend of to worry about improving the world. This January at the World Economic Forum, the usual crowd of snow-boot-clad CEOs and politicos coalesced at the village’s conference center. But outside, in a downtown storefront, Palantir established a sobering but memorable public presence. As heads of states and CEOs tromped through Palantir’s sleek, nearly all-glass entryway, they were met with bold-lettered words proclaiming: war in syria, a growing international humanitarian crisis. Inside the pavilion was an interactive digital map of the Syrian region, which has been embroiled in war for five years and counting. Small blue dots marked areas controlled by opposition forces, red stood for Syria’s government, black was ISIS factions, and orange marked Kurdish territory. When visitors swiped along a timeline at the bottom of the large touchscreen, the colored dots shifted around, representing the changing spheres of control in the country. The display was powered by Palantir’s software. At the back end, thousands of data points—accounts from social media,



WHAT BUSINESS CAN DO WITH BIG DATA So far, successful applications of data analytics have been few and minor enough to leave many skeptics unconvinced. But some of Palantir’s early projects— the ones it will talk about, at least—hint at big data’s promise. STUDY YOUR CUSTOMERS … Number crunching can help companies in retail see how product placement affects sales. Palantir helped Hershey figure out, for example, that sales rose when the chocolate was placed next to marshmallows. … AND FIND MORE OF THEM Insightics, a joint project of Palantir and payment processor First Data, analyzes customer info for small businesses. Among its products: heat maps, based on credit card data, that show businesses where customers live and help them decide whether (and where) to expand. SET THE RIGHT PRICE Insurers’ profits often rise or fall on “mispricing risk”: essentially charging too little for insurance policies relative to the losses they incur. Palantir says its analytics software lets insurers price policies more accurately; Zurich Insurance is one of its key clients. SPOT FINANCIAL CROOKS Palantir originated as an antifraud tool at online payment processor PayPal. Intuit (maker of TurboTax) has used its pattern-recognition software to spot fraudulent tax returns, and financial institutions, including the U.K. division of Santander Bank, rely on it to spot customers with possible criminal histories.

NGO field reports, news reports—were updated in real time and converted immediately into a visualization of the complexity of the power struggle. (A new data point that will soon be added to the platform: the price of bread in diferent towns, since rising prices are often a sign that aid is needed.) Another display showed a large image of a mobile app, an early-warning system Palantir hopes will help aid organizations anticipate the location of the next big wave of violence, enabling them to provide aid to civilians even before the wave hits. Even onlookers who hadn’t heard of Palantir—and there were many—were intrigued, and the buzz among influencers was notable, according to several Davos attendees. “What we wanted to do at Davos with our booth is say, ‘Look, this is a very diicult situation,’” says Karp. “‘But we can help every country spend less on resources and have a much bigger impact on mitigating the situation.’” If it seems like a stretch to use the same software to sell chocolates, catch crooks, and provide tents and soap more quickly to refugees—well, it is and it isn’t. The Syrian civil war isn’t just one of our era’s most consequential humanitarian crises; it’s also the first such large-scale conflict to amass massive, messy mounds of digital data. (An example: There are more than 3,000 videos of testimony from Syrian defectors on YouTube.) Palantir’s humanitarian eforts leverage its fine-grained ability to piece together critical patterns from those mountains of information. That, of course, is the very strength that prompts companies to hire Palantir. And projects like the Syria efort display those strengths in a very public way, without an obscuring scrim of confidentiality. Just as important, doing good reinforces Palantir’s sense of mission, both within its own ranks and to potential clients. It’s the kind of opportunity that makes Karp wax almost poetic. “We are conviction addicts,” he says. “We really want to believe in what we’re doing.” You can tell people this in a marketing pitch, he adds, but there’s no substitute for the work itself. “When you work with them, they can see that you have conviction.”




The 31-year-old co-founder and CEO of Telegram Messenger— perhaps the world’s most controversial messaging platform—is standing on the terrace of a sprawling hotel suite in London’s Mayfair district on a chilly mid-February morning. In his impeccably pressed black shirt, black jacket, and black trousers, the slight, pale-faced young man looks as if he could be a concierge at this high-end establishment. But Durov is hardly that. The man known to many as “Russia’s Mark Zuckerberg”— he founded Russian social-networking giant VK in his twenties, before being forced out—has checked into these sumptuous digs alone so he can quietly plan a major event four days later: his keynote address at the Mobile World Congress in Barcelona. Telegram specializes in encrypted messages, but there’s nothing hidden about Durov’s goal for the event: He wants everyone to know that his 2½-year-old company is now a serious player in the digital world. Telegram has just reached 100 million monthly active users. Those users are sending some 15 billion messages a day, according to Durov. And 350,000 new users around the world are signing up for the service every day. To make the most of the moment, Durov is also planning a late-night bash for 500 people after his DUROV ON THE ROOF speech—a challenge, he confesses, given OF A LONDON HOTEL IN his fairly solitary nature. But he’s deterFEBRUARY. RATHER THAN mined to grab as much attention as posHAVE AN OFFICE, HE AND sible in Barcelona. That explains the conHIS SMALL TEAM ARE stant monitoring of his phone. “NOMADS,” MOVING FRE“I just need to check the invitations,” QUENTLY TO RENTALS IN he says, tapping on his iPhone 6s as DIFFERENT COUNTRIES. he messages a colleague about the arrangements for the part. The Grammy Award–winning DJ Mark Ronson and star magician David Blaine are flying in to perform. “We want to be less formal and have more fun,” says Durov. It could be Durov’s last chance to party for a while, as the roiling controversy over encryption heats up. Durov’s startup is caught squarely in the middle of a global fight over whether companies should ofer customers tightly encoded communication services in an era when terrorist groups have seized on social networks to fuel recruitment and plot attacks. The issue has taken on new urgency thanks to Apple CEO Tim Cook’s recent refusal to decrypt an iPhone for the FBI.




March 15, 2016




Durov argues that governments are taking a wrongheaded approach. “The political solutions proposed against encryption are not going to work against terrorism,” he says. “If you block sites like Telegram, the terrorists will not even notice.”

FOR DUROV, the global debate is unfolding a long way

them. By packaging it as an app, Durov figured, they could ofer THE MOBILE WORLD anyone a means of easily sending CONGRESS IN BARCEencrypted messages. They put it LONA IN FEBRUARY. HIS out in August 2013 with no formal TELEGRAM SERVICE IS announcement. SIGNING UP 350,000 Secrecy is second nature to NEW USERS A DAY. Durov. Though he almost never speaks by phone, Durov says he keeps three diferent phone numbers, which he changes frequently “like personal hygiene, like changing your toothbrush,” he says. Durov originally based Telegram out of a small Berlin oice. But he and his core team—Nikolai and three engineers—now work out of a series of houses and apartments rented mostly on Airbnb .com. After a month or two at any one place, they move on. Durov describes his team as “nomads.” He says Telegram is registered in several countries, including the U.K. Durov explains the peripatetic lifestyle as a reaction to his experiences in his homeland. “I did not want to make the same mistake of relying on a single jurisdiction,” he says. “No matter how good a place looks, you don’t know what crazy new regulation they will introduce.” His company is certainly at the center of a heated debate. Since NSA contractor Edward Snowden revealed the U.S. government’s mammoth surveillance programs in 2013, tech companies—including Facebook, Google, and Apple—have raced to install default encryption on their devices and platforms. And customers have become far more focused on how to protect their private data. Throughout 2014 and much of last year, it seemed that the tech industry’s move toward tighter encryption was unstoppable. Then came Paris. On Nov. 13, 2015, approximately 10 gunmen (the figure reDUROV DELIVERS A


a lbert ge a—r eu ters

from where he started. Just 10 years ago he was a college student sitting in his bedroom in his family apartment in St. Petersburg, Russia, frantically working on a prototype for a social network that could replicate the new Silicon Valley startup that everyone was suddenly talking about: Facebook. Durov’s creation, which he named VKontakte (“in touch” in Russian), looked a lot like Facebook, even down to its blue color scheme. With the help of his mathematician brother Nikolai, Durov grew VK (as it became known) into a $3 billion company, and it remains Europe’s biggest social network. Predictably, the site earned Durov—a bookish teetotaler who has Old World manners—comparisons to Zuckerberg. Just like his American contemporary—both were born in 1984—Durov became hugely wealthy long before his 30th birthday. But unlike Zuck, Durov found himself in an intense standof with his country’s security services and, by proxy, with President Vladimir Putin. In December 2011, Durov woke to find armed Russian security forces outside his St. Petersburg apartment, threatening to bash in the door unless Durov shut the VK account of Russian opposition activist Alexei Navalny. Durov refused and posted news of the government’s actions online. For Durov, the battle lines were drawn. In December 2013, under pressure, he sold his remaining shares in VK to a business partner of Alisher Usmanov, the billionaire Putin loyalist who has a controlling stake in now owns 100% of VK. After Russia’s war with Ukraine erupted, Durov again refused government orders—this time, in April 2014, to hand over the personal data of Ukrainian opposition leaders—and then posted fiery comments online. On April 21, 2014, he was fired as CEO of VK and, shortly after, left Russia. “It was painful,” he says, sitting in his London hotel suite. “But now looking back, I do not feel sorry at all.” With an estimated $300 million in cash in the bank—now securely stored in dollars in Switzerland, according to Durov— the entrepreneur and his brother Nikolai started over. First they bought themselves citizenship of the Caribbean island of St. Kitts. (For a $250,000 donation to the country’s Sugar Industry Diversification Foundation, an individual can get full citizenship and a passport that allows visa-free travel throughout Europe.) Then they began to focus on building their new company. Telegram began as a side project. Durov and his brother cobbled together an encrypted-messaging system to communicate without the Russian security services snooping on

“ N E V E R I N H I S T O RY H AV E AU T H O R I T I E S H A D S O M U C H I N F O R M AT I O N O N T H E I R H A N D S A S T H E Y D O T O D AY,” S AY S D U R O V. “A N D T H E Y S T I L L C O M P L A I N A B O U T G R O U P S ‘ G O I N G D A R K .’ ”






0 AUG. 2013



APRIL 2014


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FEB. 2016

mains unclear) opened fire outside cafés and in the Bataclan concert hall in the French capital, killing 129 people. The attackers, aligned with the Islamic State, or ISIS, had apparently plotted the operation for months, partly online. Many critics quickly singled out Telegram as having unwittingly enabled the ISIS plotters to communicate. French intelligence oicials dispute that, saying that at least some of the operation seems to have been planned without encryption. But ISIS had apparently embraced Telegram’s userfriendly platform as a means to communicate and spread propaganda. Its simple encrypted-messaging system, Secret Chat, has been pinpointed as a possible way for terrorist groups to plot attacks. For ISIS, another attraction was Telegram’s “public channels” feature, which Durov launched last September, enabling users to broadcast hidden messages to hundreds of people. A week after the Paris attacks, Durov scrubbed 78 ISIS channels from Telegram’s servers. Yet encryption experts—Durov included—believe such eforts work only temporarily. “After Telegram shut down the ISIS channels, a lot of them reconstituted and redeveloped” on the service, says Aaron Brantly, a counterterrorist analyst at the Combating Terrorism Center at West Point, who monitors terrorist groups’ communications on Telegram and other platforms. Of all the sites those groups use, he says, “Telegram is one of the top three.”


one day in January—just a short walk from where the attacks occurred—Durov tells me he is still deeply sad about the terrifying violence. But he says it isn’t possible to scrub ISIS from the encrypted parts of the platform. “We do not read private information and private messages,” he says, slowly picking at a plate of Russian blini and salmon. Durov is a small eater. When I ask whether ISIS is still using Telegram, he says,

“Probably, but we have no way to check that.” Durov argues that the real problem is “ineicient, lazy, incompetent” government agencies. “Never in history have authorities had so much information on their hands as they do today,” he says. “And they still complain about groups ‘going dark.’” The encryption arguments have only intensified since a couple, who were apparently supporters of ISIS, shot 14 people dead in San Bernardino, Calif., in December. On Feb. 17, Apple’s Cook refused to comply with a federal court order to unlock the San Bernardino shooter’s iPhone for the FBI. Cook says he regards the FBI’s demand as a critical prelude to weakening encryption. When I meet Durov in London the morning after Cook’s decision, the Apple-FBI battle is leading the news. “He is doing the right thing,” Durov says when I arrive. The conflict could impact Telegram, possibly boosting efforts to prevent tech companies from building watertight encryption. “Even if the FBI loses this case, what they have won is ammunition,” says Nate Cardozo, staf attorney at the Electronic Frontier Foundation in San Francisco. “They will take that loss to Congress to say, ‘We need to mandate backdoors by law.’ ” Durov’s priority right now is to keep his company growing massively. He says he’s convinced that 100 million users is “only the first major milestone.” That figure is a small fraction of the 1 billion people using Facebook-owned WhatsApp. But Durov points to Telegram’s rapid growth momentum. A year ago, new sign-ups to Telegram were about 100,000 a day; now that number is 350,000 a day. It’s hard not to remember that WhatsApp was acquired by Facebook for a stunning $19 billion in 2014, though the messaging service has struggled to develop a business model to support its purchase price. For now, Telegram is not for sale—or even open to investment. Durov says “the most famous” Silicon Valley venture capital firms have approached him with ofers of financing, though he will not name them. “We do not need the money,” he says. That is true—for the moment. Telegram is burning through more than $1 million a month of Durov’s personal savings, a sum he says is “bearable for the foreseeable future”—but not forever. Durov says he’s beginning to explore ways for Telegram to make money, perhaps by letting developers build services on top of Telegram’s platform, with the company taking a cut of the profits. “We still have a few years,” he says, “but it would be responsible for us to come up with a business model within a year or two from now.” Until then, Durov will celebrate a little—and move on to the next location.

March 15, 2016




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By Robert Levering

W I T H A D D I T I O N A L R E P O R T I N G B Y:

Erin Bartulski, Jonathan Chew, Ed Frauenheim, Claire Groden, MILTON MOSKOWITZ, and Tabitha Russell


Michael Brandon Myers Ma rc h 15 , 2 016 / F O R T U N E . C O M




20 16 15 13 13 6 6 4 7


INDUSTRY BREAKDOWN This year’s ranking of the 100 Best Companies to Work For is dominated by companies in the professional services, insurance, and finance industries.





the pay of their workers? Welcome to the 19th annual installment of Fortune’s 100 Best Companies to Work For. As you read through this list, you’ll find companies with remarkable perks. But eye-popping perks are only the tip of the iceberg. What really makes a workplace a great place to work are the people practices that forge trust across the enterprise. That’s the kind of thing that doesn’t show up on company benefits lists. We select the firms on our list primarily based on the results of what employees tell us anonymously about their workplace culture. (See page 87 for the methodology.) This year we were struck by the prevalence of egalitarian practices at all 100 companies. Take Hilcorp, the Houston-based oil and gas company that doled out $100,000 bonus checks after it met some daunting five-year financial goals. In December the company’s president, Greg Lalicker, defended spreading the wealth as crucial to the company’s success: “In order to create better alignment across all employees, our bonus structure treats

everyone equally. We have a culture that we are all in this together.” The big bonus checks at Hilcorp stand out because of the dollar amount, but the inclusive attitude expressed is what we see at many, if not most, companies on this list. Nationwide, the $36 billion mutual insurance and financial services giant, raised the minimum wage of its call-center workers to $15 an hour from $10.50. Salesforce CEO Marc Beniof made good on his commitment to gender equity by reviewing

the salaries of every Salesforce employee and earmarking $3 million to shore up the paychecks of underpaid women. And according to the National Center for Employee Ownership, employees of six of the 100 Best Companies own all or a majority of the shares of their firms: Burns & McDonnell, PCL Construction, Publix Super Markets, Robert W. Baird, W.L. Gore, and TDIndustries. As we compared the results from this year’s Great Place to Work Trust Index employee survey with those of

F O R T U N E . C O M / Ma rc h 15 , 2 016

our 1998 list, we saw that measures related to fairness showed the biggest improvements: The number of employees who said yes when asked if they felt they were “paid fairly for the work they do” jumped 13%; there was a 17% increase, likewise, in employees who believe they are “treated as a full member here regardless of my position”; and a 26% bump in those feeling that they have an equal “opportunity to get special recognition.” Perhaps the 100 Best Companies have something to add to the national debate about fairness and economic equity that has become such a hot topic on the presidential campaign trail. After all, corporate America’s leadership has been ahead of much of the rest of society before on such issues as recycling and diversity. Many corporations also ofered domestic-partner benefits years before courts and legislatures took action. In fact, many leaders at the 100 Best Companies see promoting fairness as part of a social mission. Salesforce executive vice president Cindy Robbins explained its gender equity initiative in these terms: “At Salesforce we believe that businesses can be great platforms for change. Making the world a better place for everyone and being financially successful are not mutually exclusive endeavors.” Or consider John Mackey, co-

pr ice john: r ich a r d dr ew—a p im ages

“We know that associates who are fully engaged in their jobs take significantly greater accountability for business results … We listen to our associates and do our best to continuously make their jobs better.”

for a company that gives every employee a bonus of $100,000? Or one that takes all employees and their guests for a weeklong trip to a Mexican resort, complete with performances by LL Cool J and Sublime? Or one that caps its top executive salary at 19 times that of the average annual wage—when CEOs at the largest U.S. firms average more than 300 times


cole burston—gett y im ages


CEO of Whole Foods, who capped his own salary at 19 times that of the average company worker. He insists that many companies today embrace a more egalitarian attitude toward workers as part of an expansive vision of business aims. These companies, Mackey says, “are keenly aware that they have a higher purpose that goes beyond making money, and they take proactive measures to respect all their stakeholders, including customers, employees, investors, communities, suppliers, and the environment.” Looking beyond Mackey, we were curious whether other CEOs of the 100 Best Companies were more restrained than their peers in terms of compensation. So we asked Equilar, a firm that specializes in executive compensation research, to run the numbers. It compared CEO pay at the 39 publicly traded companies on this year’s list with CEO pay among the S&P 500. Equilar found that the median CEO pay at publicly traded 100 Best Companies was about 19% less than at the S&P 500 ($8.3 million vs. $10.3 million). Obviously, reducing CEO pay by 19% will not solve income inequality. But you may find it worthwhile to look at all the ways these exemplary companies create more equitable workplace cultures within an increasingly unequal society. Maybe some of the practices you read about here can be part of the solution.

Google (Alphabet)

GOOGLE RETAINS its place at the top of the list for the seventh time by sparking the imagination of its talented and highly compensated workers, and by adding perks to an already dizzying array of freebies. Last year it enhanced health care coverage by offering virtual doctor visits, second-opinion services, and breast-cancer screenings at headquarters. One Googler explained, “The company culture truly makes workers feel they’re valued and respected as a human being, not as a cog in a machine. The perks are phenomenal. From three prepared organic meals a day to unlimited snacks, artisan coffee and tea to free personal-fitness classes, health clinics, on-site oil changes, haircuts, spa truck, bike-repair truck, nap pods, free on-site laundry rooms, and subsidized wash and fold. The list is endless.” H Q … M O U N TA I N V I E W, C A L I F. E M P L O Y E E S . . . . . . . . . . . . . . 5 7, 1 4 8 JOB OPENINGS .........1,000+


is a co-founder of Great Place to Work, the longtime research partner for Fortune’s annual list of the 100 Best Companies to Work For.

Ma rc h 15 , 2 016 / F O R T U N E . C O M


Itâ&#x20AC;&#x2122;s nice to be one of the best places to work.

It’s even nicer making your place one of the best places to work. We’re thrilled to see Workday on Fortune’s 100 Best Companies to Work For list, and we’re grateful to our employees who made it possible. There’s no doubt, it is a great place to work. A huge part of what makes it great is that we keep the focus on people. We built a better finance and HR system so our customers can do their best work, make better decisions, and grow their businesses. And a 98% customer satisfaction rating tells us we’re on the right track.




Quicken Loans



H Q ..........SHEBOYGAN, WIS. EMPLOYEES .............. 1,110 JOB OPENINGS ............... 54

HQ ......................... DETROIT EMPLOYEES ............ 11,504 JOB OPENINGS .............186

H Q . . . . . . . . . . . . . . . . . . . . . . C A R Y, N . C . EMPLOYEES .............. 6,859 JOB OPENINGS .............230

“Have fun” is a core value at this insurer. Four PingPong tables and a popcorn machine sit outside the cafeteria. There are selfie days and beach bashes, and a summer family picnic is packed with rides, $250 door prizes, a casino, and life-size foosball. The lucky winner of Bossy Bingo left the festival with $5,000.

The online mortgage lender has invested more than $1 billion in the revival of Detroit by buying 2.6 million square feet of commercial space. It also provides a $3,500 incentive to team members who rent a home in the area, or $20,000 in forgivable loans for a home purchase, and chips in another $5,000 for home improvements.

Just about every benefit known to corporate America—on-site childcare, swimming pools, medical clinics, fitness centers, car detailing, nail salons, shoe repairs—is on offer at this business software company. Said one employee: “I can get massages, pick up prescriptions, take photography classes, and get physical therapy.”




The Boston Consulting Group

Robert W. Baird

Camden Property Trust

HQ .......................... BOSTON EMPLOYEES .............. 3,023 JOB OPENINGS ....... 1,000+

H Q . . . . . . . . . . . . . . . . . . . . M I LW A U K E E EMPLOYEES .............. 3,058 JOB OPENINGS .............121

HQ ....................... HOUSTON EMPLOYEES .............. 1,747 JOB OPENINGS ............... 70

This global consultancy has spent $110 million in the past 10 years to address the burnout problem endemic to the industry. BCG recently instituted a program called PTO—Predictability, Teaming, and Open Communication—that offers better work-life balance and reports a 74% increase in intentions to stay for the long term.

Everyone at this employee-owned financial services firm has the samesize office in its newly renovated headquarters. The company also takes care of transgender employees with a health insurance policy that will provide up to $75,000 for gender reassignment surgery, hormone treatments, and therapeutic services.

This REIT gave employees a Have FunD Bonus, with amounts tied to tenure, that averaged more than $5,000 per employee. Even the three newest team members hired that week got $1,000. Two employees later won all-expenses-paid trips to the Super Bowl—for submitting their stories about how they spent their bonuses.




Wegmans Food Markets


Edward Jones

H Q . . . . . . . . . . . R O C H E S T E R , N .Y. EMPLOYEES ............ 44,272 JOB OPENINGS .............461

H Q . . . . . . . . . . . . . . . . . . . . . . C A R Y, N . C . EMPLOYEES .............. 2,272 JOB OPENINGS .............312

H Q . . . . . . . . . . . . . . . . . . . . . . . S T. L O U I S EMPLOYEES ............ 38,693 JOB OPENINGS ......... 3,969

This family-owned supermarket allows employees to write their own weekly schedule or take time off at the spur of the moment, no questions asked, simply by logging in to the company’s online system. Wegmans also promotes employee health with immunizations, yoga sessions, cooking classes, and an on-site wellness coach.

Employees reap top rewards from this design consulting firm that specializes in infrastructure and urban planning. Engineers, planners, and environmental scientists work on projects to build bridges, sewer systems, and airports. Combined profit sharing and 401(k) match amounted to over 17% of salaries last year.

Over 4,700 associates joined the ranks of the country’s fourth-largest financial services firm last year: 75% of new financial advisers came from employee referrals. With more than 11,900 U.S. brokerage offices, the firm fosters companywide camaraderie by hosting summer regional meetings for employees and their families.

F O R T U N E . C O M / Ma rc h 15 , 2 016

doughtie: dav id ca n non—gett y im ages

“We encourage our people to reframe and elevate the meaning and purpose of their work and give them the opportunity to share how their work makes an impact.”

ACUITY Insurance

H Q . . . SOUTH SAN FRANCISCO EMPLOYEES ...... 13,704 J O B O P E N I N G S . . 1,000+

Genentech THE 40-YEAR-OLD biotech

gr av es: courtesy of bur ns & mcdon nell; genen tech: courtesy of genen tech

firm asked for staff input before building a new 68,000-squarefoot employee center. Features include a farmers’ market, a spa, pool tables, massage chairs, a fitness center with saunas, a primary- and urgent-care clinic, and a career-development hub. Other amenities include nap pods, a coffee bar, a cafeteria with international cuisine, and even a bike-storage room with lockers and showers— and cyclists are paid $12 each day they commute.


W.L. Gore & Associates


Nugget Market


The Container Store

H Q ................ N E WA R K , D E L . EMPLOYEES .............. 6,579 JOB OPENINGS ............... 61

H Q . . . . . . . . W O O D L A N D , C A L I F. EMPLOYEES .............. 1,555 JOB OPENINGS ............... 78

HQ ............ COPPELL, TEXAS EMPLOYEES .............. 4,281 JOB OPENINGS ......... 2,272

This maker of Gore-Tex and Glide dental floss hosts celebrations for business milestones, has dedicated fun committees, and raises money for a philanthropic fund. Last year Gore contributed the equivalent of 12% of pay to the associates’ stock-ownership plan, with another 3% to their 401(k) accounts as a gift, not a match, for a total contribution of 15% of pay.

This 90-year-old Californiabased family-owned grocery store has never had a layoff and offers employees industry-leading wages and stellar health care benefits, including 100% company-paid premiums. To qualify, employees are required to work only 22 hours a week. Employees have also been given company trips for snowmobiling and white-water rafting.

The storage-products retailer hires only 3% of applicants, but those who make the cut are rewarded with higher-than-average pay and a fun-loving culture, with traditions like We Love Our Employees Day, chili cookoffs, and a soapbox derby. Part-time workers have access to health insurance—it recently lowered the amount workers have to kick in for co-pays and deductibles.

Ma rc h 15 , 2 016 / F O R T U N E . C O M


“Employee ownership creates a powerful connection between employees and the firm, which results in greatly enhanced productivity, higher employee retention, and ultimately business success that is then equitably shared with all employeeowners.”




CHG Healthcare Services



H Q . . . . . . . . . . . . . S A LT L A K E C I T Y EMPLOYEES .............. 1,833 JOB OPENINGS ............... 50

HQ ................... KALAMAZOO EMPLOYEES ............ 12,579 JOB OPENINGS ......... 1,348

Scott Scherr, founder and CEO of this cloud human capital management company, is regarded as a hero by employees, all of whom are made stockholders when they join the company. Ultimate also has what is arguably the most generous 401(k) plan in the business world: The company matches employee contributions at a rate of 40%, with no cap.

Peers at this medical staffing firm nominate colleagues who exemplify the philosophy of “putting people first.” This year four winners and their guests will get a paid trip to Kenya to participate in a service project and go on a safari. Offices also have a carnival wheel that consultants can spin when they make successful placements to win prizes like gift certificates or PTO.

To make sure employees understand how the company’s medical device products are used, Stryker encourages them to observe surgeries and attend trade shows and ride along with sales reps during meetings with customers, as well as hear patient stories. One inspired employee remarked, “I see the face of someone who is alive because of our product, and that’s amazing.”




Burns & McDonnell

NuStar Energy


H Q . . . . . . . . . K A N S A S C I T Y, M O . EMPLOYEES .............. 4,973 JOB OPENINGS .............650

HQ ................. SAN ANTONIO EMPLOYEES .............. 1,235 JOB OPENINGS ................. 8

HQ ....................... HOUSTON EMPLOYEES .............. 1,400 JOB OPENINGS ................. 8

This engineering design firm is working on a new passenger terminal at LAX, a student-housing complex in Qatar, and a power plant at a Dallas hospital, and it’s celebrating 30 years of being employee-owned. Workers receive annual stock awards—some of the long-term, lowest-paid staff are among the largest shareholders, and no one owns more than 2%.

Carved over the entrance of the San Antonio headquarters of this oil pipeline and terminal operator are the words THE BEST IS YET TO COME. NuStar employees are rewarded for their achievements with gifts, parties, and recognition events, and also receive 100% health care coverage, a rich 401(k), a defined-benefit pension plan, and companywide bonuses.

Five years ago CEO Jeff Hildebrand proclaimed that if the oil and gas producer reached several daunting goals (doubled its equity value, net production, and reserves), he was going to give everyone $100,000. Sure enough, the goals were met, and employees received personalized suitcases with their checks (though more recent hires had their bonuses prorated).




David Weekley Homes

Kimpton Hotels & Restaurants


HQ ....................... HOUSTON EMPLOYEES .............. 1,336 JOB OPENINGS .............115

HQ ............. SAN FRANCISCO E M P L O Y E E S . . . . . . . . . . . . . . 7, 7 5 4 JOB OPENINGS .............697

HQ ............. SAN FRANCISCO EMPLOYEES ............ 11,723 JOB OPENINGS ......... 1,487

This upscale custom homebuilder flies every new employee to Houston for Weekley 10, which includes two days of Jeopardy, building and selling Lego homes, and learning Weekley-isms such as “growth review” rather than “performance evaluation.” A big hit is a video skit in which the CEO, dressed in tights and a cape, tells new hires the story of the company’s history.

This chain of boutique hotels and restaurants offers six weeks of parental leave, hearing and vision care, backup childcare and eldercare, and women’s preventive care, and it has been a leader in providing benefits to same-sex couples and transgender employees. There’s even pet insurance, and in the event of a pet’s death, employees can take PTO for bereavement leave.

The global cloud-computing company has logged over 1 million volunteer hours and donated more than $85 million in grants. Employees get six paid days a year to volunteer, and one employee told us, “We have the flexibility and support to volunteer on our own yet be supported by the company.” To prove it, staff donations are matched dollar for dollar.

F O R T U N E . C O M / Ma rc h 15 , 2 016

johnson: courtesy of dav id w eek ly homes

“Many of the things that make our team special can’t be trained or taught. While experience and skills are important to consider, we look for candidates with the right cultural fit for our company. We utilize our interview process to help determine how candidates reflect and exhibit our values, vision, and purpose so that there’s a successful fit for both parties. We work hard to ensure we have the right person in the right seat on the right bus … and then it’s a win for everyone!”


HQ ................ WESTON, FLA. EMPLOYEES .............. 2,547 JOB OPENINGS .............800


Ultimate Software





H Q . . . . . . . . . . . M T. L A U R E L , N . J . EMPLOYEES .............. 1,456 JOB OPENINGS ............... 54

At this manager of more than 2 million cars, trucks, and utility vehicles for more than 3,000 companies, employees who submit cost-savings or revenue-generating ideas are entered into a quarterly raffle to win PTO. If their suggestion is implemented, they share in the projected savings or revenues it creates, from $200 to $15,000.

roberts: courtesy of cr edit accepta nce; r ei: courtesy of r ei


Baptist Health South Florida

H Q ....... CORAL GABLES, FLA. EMPLOYEES ............ 14,792 JOB OPENINGS .............626

The hospital system is Florida’s second-largest employer and is popular with “boomerangs”: Over 1,300 former employees have returned to take advantage of a policy that allows those returning within five years to retain their seniority status and preserve their benefits, such as retirement vesting and paid-time-off accrual.

BRETT A. ROBERTS H Q . . . . . . . . . . . . . . . . . . . . . . . . KE N T, WASH . E M P L O Y E E S . . . . . . . . . . . . . . . . . . 11,924 J O B O P E N I N G S . . . . . . . . . . . . . . . . . . 761


THE NATION’S largest consumer co-op now gives employees two annual Yay Days, which are paid time off to go outside and use the gear they sell for outdoor activities such as hiking, biking, climbing, camping, and skiing. Unlike many other retailers, REI wants staff to spend their careers here. To help convince them, it funneled $60 million toward incentives and retention, giving every employee an automatic 5% contribution to their 401(k) and an additional 7% profit-sharing bonus.


Credit Acceptance

H Q ........ SOUTHFIELD, MICH. EMPLOYEES .............. 1,321 JOB OPENINGS .............137

“Layoffs are a last resort” at this auto lender, which works with car dealers nationwide to enable them to sell cars to consumers regardless of their credit history. Its rationale for this policy: “Team members know that suggesting improvements and efficiencies will not necessarily lead to a decrease in job opportunities.”

Ma rc h 15 , 2 016 / F O R T U N E . C O M

“We spend a lot of time listening to team members through townhall meetings, roundtables, and surveys, and we are very good at following up on the feedback we receive. There is nothing worse for employee engagement than asking for feedback and then ignoring it.”







H Q . . . . . . . . . . . . . . . . . . . . . . P A L O A LT O EMPLOYEES .............. 1,694 JOB OPENINGS ............... 62

H Q . . . . . . . . PLE ASA N TO N , C A LI F. EMPLOYEES .............. 3,440 JOB OPENINGS .............589

H Q . . . . . . MOUNTAIN VIEW, CALIF. EMPLOYEES .............. 6,300 JOB OPENINGS .............859

This law firm, which advises top tech companies like Facebook, Yelp, and Google, helps staff decompress by holding Nintendo Wii dance-offs, outdoor movie nights, and family Halloween Spooktaculars. Partners are compensated based on their overall contribution, not merely for the amount of business they bring in.

This cloud-based HR and finance software maker celebrates Bring Your Parents to Workday. All new hires receive a backpack with a laptop, a branded license plate cover, a Workday baseball jersey with their employee number, and a pair of red socks, to be worn on the last day of the quarter as per company tradition.

The developer of TurboTax, QuickBooks, and Mint financial management solutions gives employees creative freedom by allowing them to spend 10% of their working time on projects and ideas of their own, even if they are not related to their assignments. This unstructured time has given birth to some of the company’s best products.





Baker Donelson

St. Jude Children’s Research Hospital

HQ ...... PORTSMOUTH, OHIO EMPLOYEES .............. 2,414 JOB OPENINGS ............... 89

HQ ........................ MEMPHIS EMPLOYEES .............. 1,376 JOB OPENINGS ................. 7

HQ ........................ MEMPHIS EMPLOYEES .............. 3,968 JOB OPENINGS .............260

Employees at this hospital spend more than 40,000 hours volunteering in the community, and last year they donated nearly $45,000 to help upgrade the newborn nursery. One unusual benefit: Spouses, dependent children, and even adult children of employees qualify for up to $10,500 in tuition reimbursement.

This law firm balances hard work with gumbo and chili cook-offs and birthday beer carts. Attorneys appreciate that the firm has demystified the path to becoming partner, called “shareholder” here: Associates can view one another’s performance stats, and CEO Ben Adams explains the final decision-making.

Employees look forward to the annual Memphis St. Jude Marathon Weekend, which raises money for the children they care for each day. One employee who had cancer told us, “Each year it provides me with another opportunity to give back so that we can help countless other children have anniversaries of their own.”




Veterans United Home Loans

Plante Moran


HQ .............. COLUMBIA, MO. EMPLOYEES .............. 1,745 JOB OPENINGS .............140

H Q . . . . . . . . . SO U TH F I E LD, M I C H . EMPLOYEES .............. 2,021 JOB OPENINGS ............... 86

HQ ................. SAN ANTONIO E M P L O Y E E S . . . . . . . . . . . . 2 7, 5 9 5 JOB OPENINGS .............287

The nation’s largest dedicated VA lender, which is committed to helping veterans and service members become homeowners, makes its debut on our list. The firm sends all new hires $10 before their first day on the job to spend on someone else to enhance that person’s life—it provides an icebreaker talking point for their first day.

This accounting firm added domestic-partner benefits last year, as well as a new diversity council and additional rewards for employee suggestions. Most team members enjoy three to four weeks of vacation per year, and the firm allows them to buy up to two more weeks at a 20% discount. In 2014, 255 employees took advantage.

Last year this financial institution became the official Military Appreciation Sponsor of the NFL. In Phoenix, employees and NFL Pro Bowl players helped refurbish a park; in Denver, employees and the Broncos hosted nearly 100 military members for the first-ever event that brought the military and the NFL together.

F O R T U N E . C O M / Ma rc h 15 , 2 016

long: courtesy of v eter a ns u nited

“The worst thing a company can do is to try to force a change in culture. Many executives think that culture is something they can just change with policies or events, when in reality the culture of a company is not something pushed from the top down. It is the collective result of the personalities, the passion, the results, and the trust that the folks of the company bring in every day. You impact that by hiring the right people, allowing them to be themselves, reinforcing the positive things they are doing, and creating an environment that doesn’t try to force them into being something they are not.”

Southern Ohio Medical Center

Get the unified finance and HR system that has a 98% customer satisfaction rating. At Workday, we maintain an intense focus on our customers. That’s why we chose not to build on the technology of the past. We started with a clean sheet of paper and built from the cloud up to deliver a system that shows customers how to grow. It’s the reason we have the highest customer satisfaction rating of any major enterprise software provider.

Based on a Workday survey of the executive sponsor of each of its customers in 2015. Workday and the Workday logo are registered trademarks of Workday, Inc. ©2016 Workday, Inc. All rights reserved.


Perkins Coie




Scripps Health

H Q . . . . . . . . . . . . . . . . . . . . . . . . . S E AT T L E EMPLOYEES .............. 2,170 JOB OPENINGS ............... 70

H Q . . . . . . . . . . . . . . . . . . . . . . P A L O A LT O E M P L O Y E E S . . . . . . . . . . . . . . 7, 7 8 5 JOB OPENINGS ......... 2,000

HQ ..................... SAN DIEGO EMPLOYEES ............ 13,281 JOB OPENINGS .............572

“Decisions usually made by consensus rather than in a top-down fashion,” one attorney at this law firm told us. Employees are encouraged to take time off to recharge with paid twomonth sabbaticals.

The maker of virtualization software has a 105-acre campus with more than 1,500 trees, including a palm-tree oasis and a skyway. The on-site gym offers classes in meditation, tai chi, and yoga.

The hospital system provides career coaching and offers up to $7,300 per year for tuition reimbursement and scholarships, as well as 1,876 training and continuing education courses focusing on development.


courtesy of r iot ga mes


World Wide Technology


Alston & Bird




H Q . . . . . . . . . . . . . . . . . . . . . . . S T. L O U I S EMPLOYEES .............. 3,320 JOB OPENINGS .............131

H Q . . . . . . . . . . . . . . . . . . . . . . . . . AT L A N TA EMPLOYEES .............. 1,548 JOB OPENINGS ............... 32

HQ ............. NEW YORK CITY EMPLOYEES ............ 26,640 J O B O P E N I N G S . . . . . . . . . 7, 3 0 0

This systems integrator opened a medical clinic at its St. Louis headquarters. Staffed with a physician, nurse practitioner, two registered nurses, and two medical assistants, the clinic offers free primary and urgent care.

This 120-year-old law firm offers an array of perks for new mothers: up to 18 weeks of paid leave for attorneys and 12 weeks for support staff, and up to $10,000 for adoption or surrogate-related expenses.

To encourage employees to focus on the greater purpose in their work, this accounting and professional services firm launched a 10,000 Stories Challenge for which staff shared the positive impact of their work.

HQ ........... LOS ANGELES EMPLOYEES ........ 1,304 JOB OPENINGS .......273

Riot Games NEW RIOTERS are

welcomed with “Denewbification”: an intensive immersion that starts with—what else?—a session of gaming. If they decide Riot is not a fit within their first 60 days, they are offered as much as 10% of their annual salary (up to $25,000) as an incentive to quit. An open paid-time-off policy places no limit on vacation or sick days spent outside the office.

Ma rc h 15 , 2 016 / F O R T U N E . C O M





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44 THE 100

Navy Federal Credit Union

H Q . . . . . . . . . . . . . . . . . . . V I E N N A , VA . EMPLOYEES ............ 12,604 JOB OPENINGS .............277


New employees at the world’s largest credit union attend an orientation that includes a military experience module to create awareness and empathy for situations faced by their members.



Build-A-Bear Workshop

H Q . . . . . . . . . . . . . . . . . . . . . . . S T. L O U I S EMPLOYEES .............. 3,334 JOB OPENINGS ............... 24

CEO Sharon Price John has rallied employees with more store competitions and opportunities to win more prizes through the Atta Bear recognition program. A 14year veteran says, “I feel like I work for a new company.”


Hyatt H Q . . . . . . . . . . . . . . . . . . . . . . . . . C H I C AG O E M P L O Y E E S . . . . . . . . . . . . . . 41,340 J O B O P E N I N G S . . . . . . . . . . . 3,197


Texas Health Resources

HQ ........ ARLINGTON, TEXAS EMPLOYEES ............ 18,381 JOB OPENINGS ......... 1,206

This faith-based health network trains employees to serve as “promise coaches” to help mediate conflicts, and it promotes community giving and departmental team building by encouraging employees to volunteer.

F O R T U N E . C O M / Ma rc h 15 , 2 016

THE GLOBAL HOTEL CHAIN has spent an average of $50,000 updating employee cafeterias to make them feel more like restaurants. Every hotel now has a lounge where colleagues have access to computers, TVs, and videogames. From the CEO on down, everyone at Hyatt is on a first-name basis, and hotels regularly host Night Owl Breakfasts, when managers serve meals to night-shift workers, share information, and gather feedback.

Hyland, creator of OnBase

HQ ........... WESTLAKE, OHIO EMPLOYEES .............. 1,788 JOB OPENINGS .............101

Employees at this business software firm enjoy perks like flex days, paid sabbaticals, on-site fitness classes, and a clinic with a nurse, chiropractor, physical therapist, dietitian, and health coach.



HQ ............. NEW YORK CITY EMPLOYEES ............ 35,878 JOB OPENINGS ......... 3,300

As long as they work 20 hours a week, everyone at this Big Four professionalservices firm is eligible for full-time benefits. The company has promoted more than 250 partners and directors who use flex time.

how e: courtesy of er nst a nd you ng; h yatt: courtesy of h yatt

“To improve its culture, a company must first define its purpose: Why does it exist, and what greater good does it serve? Then it must make sure that all of its people can see themselves in that purpose: How can they make a difference every day by living that purpose and making it real? And then—this is key—leaders must highlight the importance of the company’s culture and celebrate great examples that demonstrate the strength and advantage of the culture. In these ways, a company’s culture will evolve and strengthen, but its purpose will never change.”


You rely on your employees. The feeling is mutual. At Aflac, we know the most important ingredient to your success is your employees performing at their best. Which is why we help offset costs not covered by major medical insurance and pay your employees directly.* And with One Day Pay,SM we make it a priority to pay claims as fast as possible.** All so you can give the people you depend on, something they can depend on. See what Aflac can do for your business at *Unless otherwise assigned. **One Day PaySM available for most properly documented, individual claims submitted online through Aflac SmartClaim ® by 3 p.m. ET. Aflac SmartClaim ® not available on the following: Disability, Life, Vision, Dental, Medicare Supplement, Long-Term Care/Home Health Care, Aflac Plus Rider, Specified Disease Rider and Group policies. Aflac processes most other claims in about four days. Processing time is based on business days after all required documentation needed to render a decision is received and no further validation and/or research is required. Individual Company Statistic, 2015. Individual coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, individual coverage is underwritten by American Family Life Assurance Company of New York. Worldwide Headquarters | 1932 Wynnton Road I Columbus, GA 31999. Z160117B








HQ ............. COLUMBUS, GA. EMPLOYEES .............. 5,224 JOB OPENINGS ............... 85

H Q . . . . . . . S A N R A FA E L , C A L I F. EMPLOYEES .............. 3,865 JOB OPENINGS .............292

H Q . . . . . . . . . . . . . . . . . . FA I R FA X , VA . EMPLOYEES .............. 1,324 JOB OPENINGS ............... 95

The insurer celebrated its 60th birthday with an entire year of events: parties, contests, and giveaways ending with a special day ringing the closing bell at the New York Stock Exchange.

This design-software firm sends its top salespeople (and guests) on all-expensepaid weeklong trips to places like Paris, Thailand, Hawaii, and Rome. A sabbatical program provides six weeks of paid time off every four years.

At this retailer of custommade shirts, workers who complete a semiannual health checklist pay just $59 a year for health insurance. It also offers no-interest loans in times of financial hardship or emergencies.




THE 100

bl a nk fein: courtesy of goldm a n sachs


Goldman Sachs

Novo Nordisk

Power Home Remodeling

HQ ............. NEW YORK CITY EMPLOYEES ............ 14,630 JOB OPENINGS ......... 2,000

HQ ......... PLAINSBORO, N.J. EMPLOYEES .............. 5,250 JOB OPENINGS .............274

H Q .................C H E S T E R , PA . EMPLOYEES .............. 1,515 JOB OPENINGS .............194

A perennial on this list every year since it began in 1998, the Wall Street firm has an on-site fitness center and a medical clinic staffed with doctors, nurses, dermatologists, gynecologists, and physical therapists.

The maker of drugs that treat diabetes and hemophilia inspires its U.S. employees with videos of patients who have benefited from its lifesaving products—from a NASCAR driver to villagers in Vietnam.

Employees are treated to an annual year-end trip to a tropical destination. Past trips have included a Caribbean cruise and an allinclusive resort in Mexico, with performances by LL Cool J and Sublime.





Hilton Worldwide

PCL Construction

HQ ....................... SAN JOSE EMPLOYEES .............. 2,643 JOB OPENINGS .............418

H Q . . . . . . . . . . . . . . . . . . M C L E A N , VA . EMPLOYEES ............ 58,880 JOB OPENINGS ......... 9,748

HQ .......................... DENVER EMPLOYEES .............. 1,668 JOB OPENINGS .............114

A maker of products for designing semiconductors, Cadence has a remarkably low turnover rate in the U.S. of about 6.5% a year, and about 45% of its U.S. workforce has been there for more than 10 years.

The global hotel chain debuts on the list this year as it surges ahead of the industry by ramping up paid leave to two weeks for dads and adoptive parents—and giving moms 10 weeks off following childbirth.

There’s a focus on safety at this employee-owned commercial construction firm: All meetings with five or more staffers begin with a discussion on safety to raise awareness about preventing injuries at home and at work.






O.C. Tanner

HQ ............. NEW YORK CITY EMPLOYEES ............ 41,531 JOB OPENINGS ......... 4,601

H Q . . . . . . M E N L O P A R K , C A L I F. EMPLOYEES .............. 2,048 JOB OPENINGS .............446

H Q . . . . . . . . . . . . . S A LT L A K E C I T Y EMPLOYEES .............. 1,389 JOB OPENINGS ............... 22

The firm challenges staff members in unique ways. It has encouraged them to think deeply about diversity, with training on topics like hidden biases, and tells them to get comfortable with being uncomfortable.

Many ascend the ranks quickly at this global consulting firm thanks to extensive on-site training, “learning maps” that identify next steps, and matching employees with opportunities.

This consulting firm helps HR professionals create recognition programs, and it practices what it preaches. On anniversaries, workers receive a customized yearbook with messages from co-workers and executives.

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“We’re looking for people with integrity and intellectual curiosity, who like to collaborate and who have a strong sense of client service. When we speak about diversity, we’re not only talking about race, nationality, and orientation— although diversity in these areas is vital—but we are also talking about diversity in the broadest sense, meaning of educational backgrounds and life experiences too. Attracting the most diverse talent allows us to mirror the diversity of our clients and the global marketplace in which we operate.”

WHAT’S NEXT With available technology like Toyota Safety Sense™ P1 and Intelligent Clearance Sonar,2 the 2016 Prius is designed to help keep you safe in an unpredictable world. Intelligent technology is what’s next. Prototype shown with options. Production model may vary. 1Drivers should always be responsible for their own safe driving. Please always pay attention to your surroundings and drive safely. Depending on the conditions of roads, vehicles, weather, etc., the system(s) may not work as intended. Please see your Owner’s Manual for further details. 2Intelligent Clearance Sonar (ICS) is designed to assist drivers in avoiding potential collisions at speeds of 9 mph or less. Certain vehicle and environmental conditions, including an object’s shape and composition, may affect the ability of the ICS to detect it. Always look around outside the vehicle and use mirrors to confirm clearance. See Owner’s Manual for details. ©2015 Toyota Motor Sales, U.S.A., Inc.

66 62 THE 100


HQ ................. NAPLES, FLA. EMPLOYEES .............. 2,246 JOB OPENINGS .............230


HQ .............................. D E E R F I E L D B E AC H , F L A . E M P L O Y E E S . . . . . . . 4,005 J O B O P E N I N G S . . . . 100+

All at this medical device maker enjoy a daily free catered lunch and on-site medical care, as well as a year-end profit-sharing bonus. Employees and their families are invited to events throughout the year.

JM Family Enterprises


IKEA Holding U.S.


H Q .....C O N S H O H O C K E N , PA . EMPLOYEES ............ 14,224 JOB OPENINGS .............164

Everyone receives the “Little Ikea Dictionary” to remind employees of values like humbleness, willpower, simplicity, togetherness, and enthusiasm. The egalitarian culture provides all part-time workers with full benefits.

“A healthy culture is about taking care of one another, sharing in successes, and building trusting relationships. Leadership plays a vital role in championing these efforts throughout the organization, and we do all we can to make sure our leaders cast a shadow that reflects our values. Achieving business results and preserving the organization’s culture are not mutually exclusive objectives, and we focus on seamlessly integrating the two in everything we do.”


American Fidelity Assurance

HQ ............. OKLAHOMA CITY EMPLOYEES .............. 1,666 JOB OPENINGS ............... 60

This family-owned insurer has undergone a mini cultural revival. It handed out a wallet-size pamphlet called the AFA Hymnal to make sure that everyone knows the company’s purpose, strategy, values, and goals.



HQ ...........................DALLAS EMPLOYEES .............. 2,030 JOB OPENINGS ............... 73

Rules of this employeeowned construction company include “No rank in the room,” “Everyone participates—no one dominates,” and “Listen as an ally.” Everyone is on a first-name basis.

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Publix Super Markets

HQ ............. LAKELAND, FLA. EMPLOYEES .......... 175,208 JOB OPENINGS ......... 4,523

The world’s largest employeeowned company offers health care for part-timers and tuition reimbursement. It also automatically plunks shares into stock accounts at the end of each year (see “Inside Publix” in this issue).



HQ ..................... COLUMBUS EMPLOYEES ............ 19,152 JOB OPENINGS ......... 1,033

To celebrate employees’ contributions, this massive hospital system foots the bill for workers to receive a new pair of athletic shoes from Zappos. Nearly 18,000 workers took advantage of the offer last year.

a ll photogr a phs courtesy of jm fa mily en ter pr ises


A TRADITION OF CARING is strong at this auto distributor. (These dealers sell nearly 20% of all Toyotas sold in the U.S.) Founder Jim Moran began a tradition of free haircuts for associates during his early days as a car dealer in Chicago. Haircuts and manicures today are provided in a 1,500-square-foot salon at the Florida headquarters. That is only one of many perks offered there: on-site childcare, 11 fitness centers with a lap pool, and nine health centers with physicians, nurses, and physical therapists.


“It’s not just security. It’s defense.” Cyber threats have changed, and the solutions need to change too. The sophisticated techniques BAE Systems uses to protect government and military assets are now helping to defend businesses around the world. Learn more at Copyright © 2016 BAE Systems plc. All rights reserved.


Encompass Home Health and Hospice


Roche Diagnostics


Activision Blizzard

HQ ...........................DALLAS EMPLOYEES .............. 8,140 JOB OPENINGS ......... 1,418

H Q ................I N D I A N A P O L I S EMPLOYEES .............. 4,335 JOB OPENINGS .............181

H Q . . . . . . . . . . . . . . . S A N TA M O N I C A EMPLOYEES .............. 4,773 JOB OPENINGS .............217

One of the nation’s largest home health care organizations, Encompass makes its first appearance on our list. Its foundation has taken employees on medical mission trips to Honduras, Haiti, Uganda, and Kenya.

Last summer Camp Roche hosted more than 270 kids who met for a free hot breakfast before heading to its 45-acre campus with a fishing pond, a gazebo, a mega pavilion, garden plots, and sports facilities.

This videogame designer encourages employees to “embrace their inner geek.” On the day of the release of Call of Duty Manhunt, workers from all levels donned costumes and participated in a squirt-gun battle.



h y l a nd: courtesy of childr en’s he a lthca r e of atl a n ta


Four Seasons Hotels and Resorts




Children’s Healthcare of Atlanta

HQ ........................ TORONTO EMPLOYEES ............ 13,648 JOB OPENINGS .............969

HQ ............... HANOVER, MD. EMPLOYEES .............. 4,571 JOB OPENINGS ......... 3,974

H Q . . . . . . . . . . . . . . . . . . . . . . . . . AT L A N TA EMPLOYEES .............. 8,058 JOB OPENINGS .............530

All jobs at the departmenthead level and below are posted internally for a minimum of five days, and all interested applicants have to be interviewed before an offer can be made to an outside candidate.

Executives at this IT recruiting company go the extra mile to keep folks in the loop. During the annual road show last year, 18 top leaders visited all of their more than 100 local offices over the course of a month.

More than half of senior managers and eight out of 12 members of the senior leadership team are women. They can enjoy backup childcare, on-site massages, concierge services, and expectant-parent support.




Nationwide Mutual Insurance

Whole Foods Market

Atlantic Health System

HQ ..................... COLUMBUS EMPLOYEES ............ 33,903 JOB OPENINGS .............431

HQ ........................... AUSTIN E M P L O Y E E S . . . . . . . . . . . . 8 7, 4 5 0 JOB OPENINGS ......... 1,800

HQ ........ MORRISTOWN, N.J. EMPLOYEES ............ 10,801 JOB OPENINGS .............679

The insurer increased adoption assistance to $6,000, added seven paid “baby bonding” days to maternity leave, and increased paid time off for new dads and domestic partners from two to seven days.

The retailer strives for an egalitarian culture and caps its executive salaries at no more than 19 times that of the average worker. The company’s unique gainsharing plan rewards teams for coming in under budget.

Unlimited fertility coverage is a popular and widely used benefit at this hospital system. AHS covers the cost of all fertility drugs and unlimited in-vitro fertilization procedures for both employees and their dependents.




80 Allianz Life Insurance of North America

H Q . . . . . . . . . . . TA R R Y T O W N , N .Y. EMPLOYEES .............. 3,836 JOB OPENINGS .............540

HQ .............................TULSA EMPLOYEES ............ 20,342 JOB OPENINGS .............500

H Q .................MINNEAPOLIS EMPLOYEES .............. 1,699 JOB OPENINGS ............... 73

Rapid growth at this biotech company, thanks to the launch of the Regeneron Genetics Center and the establishment of two Irish offices, has created many new job opportunities in the U.S. and abroad.

In an industry with an average turnover of 80%, this convenience-store operator boasts a rate of 29%. Managers and trainers of new hires are incentivized with bonuses when employees stay with the company.

Marking its fifth straight year on this list, the U.S. division of the global insurance firm matches employees’ 401(k) contributions dollar for dollar up to 7.5% of salary and provides on-site childcare.


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“If you focus on engagement, productivity is one of the many fruits that will come, including better quality, better financial management, and other business goals. At Children’s, we believe that people have chosen professions they enjoy and desire to be great at them. Our job is to get out of the way and let them focus on the work they love.”

81 THE 100

Arnold & Porter





H Q ........ WAS H I N G TO N , D. C . EMPLOYEES .............. 1,275 JOB OPENINGS ............... 27

HQ ..................... RICHMOND EMPLOYEES ............ 22,287 JOB OPENINGS ......... 1,146

HQ ....................... SAN JOSE EMPLOYEES .............. 6,302 JOB OPENINGS .............226

Stellar career development at this law firm includes writing coaches for new associates, meals with mentors, a seven-day intensive with mock trials, and rotation programs with outside organizations.

The nation’s largest retailer of used vehicles recognizes strong performance with a steak cookout. CEO Tom Folliard and other leaders turn on the grill and serve store associates to thank them for their hard work.

This software developer knows the value of giving workers time away from the office: Employees can take a paid sabbatical of six weeks every four years, and there are weeklong shutdowns twice a year.



Cisco Systems


HQ ....................... SAN JOSE EMPLOYEES ............ 35,549 JOB OPENINGS ......... 2,483

“We use a team-based engagement model in which staff from diverse roles come together to make improvements in safety, quality, and cost management within their work units. These efforts add up to better care for our patients—and higher levels of staff engagement.”


Marriott International

HQ ..............BETHESDA, MD. EMPLOYEES .......... 102,301 JOB OPENINGS ......... 5,412

The acquisition of Starwood later this year will introduce nearly 200,000 new employees to its long-standing culture. New talent will see a company that has a strong promote-from-within tradition and a diverse team.



HQ ............. NEW YORK CITY EMPLOYEES ............ 48,000 JOB OPENINGS ......... 1,100

This consulting firm has announced plans to hire 5,000 U.S. veterans and military spouses by 2020. The company will waive its collegedegree requirement and has set up training courses for some military candidates.


86 Mayo

Clinic H Q . . . ROCHESTER, MINN. E M P L O Y E E S . . . . . . 44,609 J O B O P E N I N G S . . . 2,160

THIS LEADING health care

organization cares for its caregivers: A Burnout Strategy Taskforce prevents and tackles exhaustion in departments where burnout is frequent, and 475 employee “wellness champions” are scattered throughout larger locations. Wellness programs include exercise facilities and discounted memberships to health clubs, group classes, individual sessions with fitness coaches, lunch and learns, and meals to go.

Capital One Financial

H Q . . . . . . . . . . . . . . . . . . M C L E A N , VA . EMPLOYEES ............ 41,560 JOB OPENINGS ......... 3,300

Capital One labs boast mini startup environments, host hackathons, and provide funding for a range of dreams and ideas. One lab recently partnered with Kiva, a nonprofit microfinancing platform.


FactSet Research Systems

H Q ...........N O RWA L K , C O N N . EMPLOYEES .............. 2,200 JOB OPENINGS .............258

Workers at this supplier of data for investment professionals are given training, mentorship, and a lot of responsibility. They also get 100% coverage of health insurance premiums, on-site yoga, and mani-pedis.

noseworth y: da niel ack er—gett y im ages; m ayo clinic: courtesy of m ayo clinic

Maker of network products has achieved recognition as a leader in work-life programs. More than 3,000 employees now work from home. Headquarters has a state-of-the-art childcare center for 600 kids.




WellStar Health System



HQ ............. NEW YORK CITY EMPLOYEES ............ 49,181 JOB OPENINGS ......... 2,882

H Q . . . . . . . . . . . . . . . M A R I E T TA , G A . EMPLOYEES ............ 12,320 JOB OPENINGS .............992

H Q . . . . . . . . . . . . . . . . . A LT O O N A , P A . EMPLOYEES ............ 15,044 JOB OPENINGS ....... 1,000+

The consulting firm focuses on education with $10,000 in tuition reimbursement and $25,000 for Ph.D. students. MBA candidates who return after B-school can qualify for a reimbursement on graduate school tuition.

Nearly half the jobs at this hospital are filled internally and more than 70% of all promotions into leadership roles go to women. Says an employee: “They saw my potential and allowed me to take on more responsibility.”

This Pennsylvania-based convenience-store chain that operates in six states offers a generous dental insurance plan and provides up to $2,000 to cover extra dental work for store-level supervisors and managers.




Orrick Herrington & Sutcliffe

First American

The Cheesecake Factory

HQ ............. SAN FRANCISCO EMPLOYEES .............. 1,460 JOB OPENINGS ............... 42

H Q . . . . . . . . . . . . . . . . . . . . . S A N TA A N A EMPLOYEES ............ 11,241 JOB OPENINGS .............495

H Q . . . CALABASAS HILLS, CALIF. EMPLOYEES ............ 35,664 JOB OPENINGS ......... 2,200

Attorneys and staff at Orrick get plenty of guidance and support from mentors and coaches, who give tips on careers, writing, MBA courses, and what it’s like to be a new parent. Partners also receive $3,500 for health coaching.

A newcomer to our list, the insurer, with 777 offices across the U.S., sponsors “Team Build” events, which give employees a paid day off to participate in Habitat for Humanity and other housing-related charities.

The restaurant chain has a long history of promoting from within: 100% of general managers, executive kitchen managers, and area field leaders were hired internally and started in hourly entry-level jobs.




courtesy of nor dstrom





HQ .................. SCOTTSDALE EMPLOYEES .............. 4,397 JOB OPENINGS .............400

H Q . . . . . . . . . . . . . . . . . . M C L E A N , VA . EMPLOYEES ............ 12,568 JOB OPENINGS .............443

When the web host went public last year, every employee—regardless of tenure or role—received stock options beforehand, and they cheered as they watched the stock climb 31% on the day of its IPO.

The benefits are sweet at the maker of M&M’s, Snickers, IAMs, and Whiskas: a pension plan plus a hefty 401(k) match, 30 days of paternity leave, and 16 hours of paid time off to volunteer.



American Express


H Q . . . . . . . . . . . . . . . . . . . . . . . . . S E AT T L E E M P L O Y E E S . . . . . . . . . . . . 6 7, 6 1 4 JOB OPENINGS ......... 1,512

HQ ............. NEW YORK CITY EMPLOYEES ............ 20,620 JOB OPENINGS .............734

H Q . . . . . . . . . . . . . . . . . . . . . . . . . S E AT T L E EMPLOYEES .............. 3,388 JOB OPENINGS .............283

The high-end retailer is still run by the Nordstroms, who treat their workers like family. Erik Nordstrom, who runs, invites new hires of the online arm into his office for coffee and a get-to-know-you session.

The financial services giant, a 16-year veteran of this list, is going through a rough spell and expects to have layoffs this year as a result of cutting $1 billion in costs by 2018. AmEx says less than 20% of staff will be affected.

Imagine a management consulting firm with a “No unwanted travel” policy. To avoid grueling travel schedules, Slalom consultants work with local clients backed by national teams in 17 offices across the U.S.

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METHODOLOGY · SEE HOW COMPANIES MADE THE LIST —AND HOW YOU CAN APPLY To identify the 100 Best Companies to Work For, each year Fortune partners with Great Place to Work to conduct the most extensive employee survey in corporate America. Two-thirds of a company’s survey score is based on the results of the Trust Index Employee Survey, which is sent to a random sample of employees from each company. This survey asks questions related to employees’ attitudes about management’s credibility, overall job satisfaction, and camaraderie. The other third is based on responses to the Culture Audit, which includes detailed questions about pay and benefit programs and a series of openended questions about hiring practices, methods of internal communication, training, recognition programs, and diversity efforts. To register for the 100 Best Companies to Work For list, which allows participation in all our Best Workplaces lists, including Millennials, Women, Diversity, and over a dozen additional lists, go to greatplacetowork .com/100Best.

m e l i s s a a l c a i d i n h o P ro du ce cle rk, 2 5

a n g e l g o n z a l e z Bakery a ssoc i ate, 1 9

s h a u n a l a w l e s s C a k e deco rat o r, 1 9

c h r i s t o p h e r t k a c z y k Embedded j ournal i st, 3 8




My Five Days of ‘Bleeding Green’ By Christopher Tkaczyk

O YOU CALL this a hard

crust?” says the elderly woman glaring at me across the counter and brandishing a substandard loaf. Her thick Brooklyn accent informs me right away that she’s not a native Floridian. “You never have any bread with a thick crust like they do back in New York.” It’s just after 3 p.m. on a Tuesday, and it’s my third day on the job as a temporary employee at a Publix grocery store in Lake Nona, Fla., a suburb of Orlando. I’ve been getting


p ho t o g r a p h s b y PATRICK JAMES MILLER



a crash course in world-class service the Publix way—an approach that over the past two decades has made the chain an annual fixture near the top of the supermarket rankings compiled by the American Customer Satisfaction Index. (Last year it tied for No. 3.) Now I’m facing my first major test: I need to “create a happy ever after.” My training kicks in, and I quickly “engage the customer” to keep her from walking away. “What area of Brooklyn are you from?” I ask while gently testing loaves for firmness. She looks at me suspiciously. “How


The employeeowned grocery chain breeds loyalty. Many lifelong “associates” started at Publix as teenagers.

HQ ....................... LAKELAND, FLA.


EMPLOYEES .................... 175,208 2015 REVENUE ...... $32.4 BILLION


F U L L-T I M E J O B S ADDED IN LAST YEAR .......... 2,393 VA C AT I O N D AY S AFTER ONE YEAR ...................... 10 JOB SHARING ......................... YES

Ma rc h 15 , 2 016 / F O R T U N E . C O M



did you know I’m from Brooklyn?” Without blowing my cover I explain that I live in New York but I’m in Florida to work in the store for a week. She tells me she grew up in Bensonhurst, which, coincidentally, is the same neighborhood where my late grandmother was born. As we chat, her annoyance visibly melts away. When I suggest a bag of dinner rolls that I’ve found to have the hardest crust of any baked good in the store, she’s satisfied. Mission accomplished. “Thanks for shopping at Publix,” I say brightly. She smiles. And before she leaves I remember to add, “Come back and see us again soon!” The chain’s relentless focus on pleasing its customers goes a long way toward explaining why Publix continues to be a growth story in the beleaguered grocery business. The largest employee-owned company in the world, Publix Super Markets, based in Lakeland, Fla., has a workforce of more than 175,000 and 1,110 store locations across six states in the southeastern U.S. Last year it ranked No. 101 on the Fortune 500, with $30.6 billion in 2014 revenue—



25 20 15 10 5 0 1 YR.

3 YR.

5 YR.




a healthy gain from its $24.5 billion in sales five years earlier. (Publix is one of the few private companies on the Fortune 500, by virtue of the fact that it files verifiable financial statements with a government agency.) Between 2005 and 2014, Publix steadily opened an average of 24 new stores per year. Whereas other supermarket chains, such as Whole Foods (No. 75 on the Best Companies list), Safeway, and Haggen, have announced layofs in recent months, Publix has never laid of an employee in its 86-year history. Another core piece of the Publix formula: happy employees. Or more accurately: pleased-as-punch, overthe-moon, ridiculously contented “associates,” as Publix likes to call them. The grocer has been ranked on Fortune’s 100 Best Companies to Work For list every year since it was first published in 1998. This year Publix is No. 67. But the ranking alone doesn’t tell the full story. The extreme loyalty of Publix’s workers is a phenomenon the company calls “bleeding green,” after its trademark color. Year after year the chain’s employees respond to our survey with superlatives. (A typical response: “I love working for Publix!!!”) And they stay at the company—and stay and stay. The average store manager has been with the company for 25.1 years. And 2,428 associates have been with the company for more than 30 years, 205 have worked there more than 40 years, and 13 have been at Publix for more than 45 years. Here’s perhaps the most astounding stat of all: Publix’s annual voluntary turnover rate is a minuscule 5%—which makes a mockery of the retail industry average of 65%. All that success has earned Publix at least one extremely high-

F O R T U N E . C O M / Ma rc h 15 , 2 016

profile admirer. “It’s the kind of company I’d like to buy,” Warren Bufett recently told Fortune. “It has a terrific record in a very, very, very tough industry. There’s a certain amount of magic down there in terms of running the place.” To better understand that magic, I spent five days in early February working at a Publix store in a variety of jobs. I did so with the company’s full cooperation and without being paid by Publix. My co-workers for the week knew I was a journalist, but our customers didn’t. Here’s what I learned about how Publix motivates employees—from millennials to octogenarians—in one of the country’s happiest workplaces. SUNDAY, 9 A.M.

FIRST DAY ON THE JOB Alan Veith is looking at my face appraisingly. “You’re going to have to shave,” he says. Veith, 59, is the manager of Publix store No. 1430 and my boss for the week. He’s also the first to inform me of Publix’s cleancut personal-appearance policy— which specifies no piercings, no unnatural hair color, and no facial hair. (Short mustaches are okay if they’re groomed.) So my mustache and scruf will have to go. When I tell him that I want to meet as many Publix employees as possible, he breaks in. “Associates,” he reminds me. “They’re not employees. They’re co-owners.” It quickly becomes clear why the company might have wanted to place me in Veith’s store. He embraces the history of Publix and is a true believer in the company’s deeply ingrained culture. Publix was founded in 1930—the same year Fortune began publishing—by George W. Jenkins with one store in Winter Garden, Fla. He had two lofty goals: To create the world’s


Publix president Todd Jones, 52, started out bagging groceries at the company 36 years ago and never went to college. He will become CEO on May 1. “I went to the college of Publix,” he says.

most pleasurable shopping experience and to create its best workplace. “The reason Publix is such a great place to work is that nothing has changed in 86 years,” says Veith. Like most associates, he refers to the company’s founder as “Mr. George” and mentions him multiple times every day, usually when reminding his staf of the company’s core values. (In its reverence for its founder, Publix is a lot like Walmart, where founder Sam Walton, a.k.a. “Mr. Sam,” is still very much part of

the daily conversation.) Veith has been a Publix associate for 26 years. Never having attended college, he worked construction jobs in New Jersey before moving to Florida at the age of 33. He began working for Publix as a bagger, and within three years was an entry-level manager. Last year the average total compensation for a Publix store manager was $118,000 (not including stock dividends). As a manager Veith is charged with identifying potential in young

associates and helping them find a career path. This is an essential part of Publix’s promote-fromwithin policy, which it refers to as “succession planning.” The company uses that phrase—typically associated with lining up future CEO candidates—because “no associate is better or more important than the others,” says Veith. “The CEO is just as important as our front service clerks,” he says, using Publix’s term for cashiers and baggers. The first step for new associates

Ma rc h 15 , 2 016 / F O R T U N E . C O M



Store manager Alan Veith (center with tie) leading a cheer at the end of his daily managers’ huddle. In addition to motivating, he is charged with scouting the rank and file for promising talent.

looking to get ahead at Publix is to achieve full-time status. Of the company’s 175,000-plus workers, 56% are part-timers. The next step to career advancement is to submit an ROI, or “registration of interest.” They can do so by logging in to the Publix Portal from home or at work. Computers are located in every department, the front office, and the break room to make it easy for associates to take computerbased training courses and to access their benefits information. The ROI is a key part of the succession planning process—helping management identify ambitious associates and match their talents with available jobs. If, for example, a cashier wants to move up to an assistant manager job in the deli department, he or she must submit


an ROI explaining his or her goals. That message is sent to Publix’s human resources department, and the associate’s name is kept on a list for six months to be considered for open positions matching the request. My first job of the day is to shadow Adam Gutman, a 23-year-old, bow-tie-wearing full-time produce clerk. He shows me how to stack and level fresh fruits and vegetables. These are tasks that I haven’t performed in more than 20 years, since I spent my teens toiling as a parttime stock boy at a family-owned supermarket in Allen Park, Mich., but the art of it comes back to me all too easily. Gutman tells me how he dropped out of college briefly after a few bad semesters so that he could reassess his life. Now, he says, he’d like to stay with Publix for as long

F O R T U N E . C O M / Ma rc h 15 , 2 016

as possible and hopes to get on the management track while earning a degree. He has already submitted an ROI stating his goal. What about his snazzy neckwear? “I want to be taken seriously,” says Gutman. “I want to become a manager and be seen as a professional.” It’s also a way to add a bit of flair to the Publix uniform. A few of his colleagues have joined him, and other associates have taken to calling them the “bro-tie” gang. By the end of the day my back is aching from all of the bending over and lifting. MONDAY, 9:59 A.M.

“A LOT OF VERY HAPPY FACE S TODAY” It’s time for the daily managers’ huddle. Every day around 10 a.m.,


Veith and his assistant store manager Ron McCartney assemble the team of department managers at the front of the store to review news and events that might afect their respective departments. Today, for instance, there were no tomatoes on the delivery truck. But there’s really one thing on everyone’s mind: It’s quarterly dividend day, when all associates who have stock in the company receive their dividend checks. As Veith told me earlier, “You’re going to see a lot of very happy faces today.” The company’s formal employee stock-ownership plan (ESOP) was created in 1974 by Mr. George and awards free shares of stock to associates. Anyone who stays for at least a year and accrues more than 1,000 hours is granted shares of compa-

ny stock that are initially valued between 8% and 12% of the employee’s annual compensation. If associates stay with the company, they continue to receive an annual grant. Plus, once in the program, associates have the option of buying additional stock; they can set up their accounts to automatically purchase shares with a deduction from every paycheck. The stock is priced once a year with input from outside auditors. In early March, it was set at $45.20—a new record high. The stock plan has served as a powerful wealth creator for loyal employees, boosted by Publix’s steady growth. From the program’s inception on Oct. 1, 1974, through Nov. 1, 2015, shares of Publix delivered an average annual return, including dividends, of 16.9%. At the current stock price, a veteran store manager who has accrued 20,000 shares (not unusual) would have holdings worth $904,000. At the end of each daily huddle, everyone puts his or her hands into the center of the circle. “Today we’re going to celebrate Mr. George,” Veith states. “He gave us the gift that keeps on giving.” The huddle breaks and I head to my assigned job in the grocery department. For the next few hours I’m refilling shelves alongside Brian Wilbur, a 31-year-old stock replenishment specialist who is doing his second tour with Publix. He started as a stock clerk at age 16 and stayed for 13 years, then left, he says, because he was looking for consistency: “The changing weekly schedule and long hours were making it hard on my family.” Wilbur then joined Frito-Lay, the snack food division of PepsiCo, as a delivery truck driver. After a year and a half he came back to

Publix at Veith’s invitation. When I ask him why he didn’t want to stay with Frito-Lay, he says, “Because I didn’t see a future there.” Wilbur says that he now hopes to emulate the success of his wife, who’s a Publix store manager. As the week went on it quickly became apparent to me that, at least


THREE WAYS THAT PUBLIX EMPOWERS EMPLOYEES THE SUPERMARKET CHAIN HAS A LUDICROUSLY LOW TURNOVER RATE. HERE ARE A FEW REASONS WHY. 1 ¬ EMPLOYEE OWNERSHIP Publix is the world’s largest employee-owned company. After one year on the job, associates who work 1,000 or more hours are awarded stock valued at an average of 10% of their compensation and receive annual allotments after that. They have the option to buy even more shares.

2 ¬ REGULAR REVIEWS AND FREQUENT RAISES The grocery chain showers its workers with feedback. New employees have 30-day, 60day, and 90-day “check-in” meetings with their managers. At six months they can qualify for their first raise, and they’re eligible for salary increases every six months afterward.

3 ¬ PROMOTEFROM-WITHIN CULTURE The company’s “succession planning” process helps part-timers go full-time, pairs workers with open positions that match their goals, and encourages associates to pursue a lifelong career track. Close to 100% of its retail management team started as entrylevel associates.

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Members of store No. 1430’s unofficial “bro-tie” gang, led by Adam Gutman (second from left). Fostering camaraderie is a big part of the grocery chain’s formula.

in central Florida, working at Publix is a family afair. As I met more associates, I asked everyone the same question: “How many family members do you have working at Publix?” Within a day I count at least 20 associates who have at least one relative at Publix and eventually meet a 17-year-old working in the produce department who says he has eight relatives working for the company, including two grandparents. Publix, alas, doesn’t track what percentage of employees have relatives working at the company, but the examples are endless. Consider Elba Aviles, a 46-yearold grocery clerk whose two kids both work in the store in diferent departments. Her 20-yearold son works as a deli clerk and her 18-year-old daughter is an office associate. Aviles says she asked Veith to hire her kids because “if he sees that you’re a good person, he will push you to go up.” A former schoolteacher, Aviles began working for Publix in 1997


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and now oversees the health and beauty aisles in Veith’s store. When I ask Aviles what she loves most about Publix, she says it’s her paid time of for vacation, which, after 19 years of service, has maxed out at four weeks per year. She uses the time to visit family in Puerto Rico. TUESDAY, 4:45 A.M.

IT’S TIME TO MAKE THE DOUGHNUTS Sunrise isn’t even a rumor yet when I report for work in the bakery. Publix is one of the last chain supermarkets that make their own bread on-site every day. Clirvaens Pressooir, 45, a bakery clerk, sets to work scoring loaves of Cuban, Italian, French, and Chicago-style bread. Meanwhile he has a special assignment for me. A local middle school has placed a special order for 200 glazed doughnuts. My job is to glaze and frost them all. I like to eat doughnuts, but I quickly realize that making them is gross. Cutting open the plastic one-

gallon pouches of premixed glaze and dumping them into the glazing tub has to be the stickiest job in the grocery business. Soon the air is sufused with a sickly sweet aroma. Later I move into the cake decorating area, and I’m immediately entranced by the outsize personality of Shauna Lawless. The 19-year-old bears a resemblance to Princess Elsa in Disney’s Frozen, but her voice reminds me a bit of The Nanny’s Fran Drescher. She’s the comic relief in the bakery department. (“Are you going to put me on the cover?” she asks, striking a pose.) Veith says he sees great potential in her; he expects she’ll become a bakery manager at another store in a few years and a store manager someday. I ask Lawless about those goals, and she says, “When I tell people I want to work at Publix for the rest of my life, they think I’m crazy.” Lawless and her colleagues teach me how to ice a cake. I have a difficult time learning how to control the icing bag but eventually get the hang of it—sort of. The cake I decorate does not meet Publix’s standards for the sales floor. When I press the women about what they like about Publix, Kyndal Taylor, a 22-year-old cake decorator, tells me Publix paid for her associate’s degree. She’s currently studying business part-time at the University of Florida, and Publix is again footing much of the cost. The Publix tuition reimbursement program is open to any associate with six months of service who works an average of at least 10 hours per week, and it provides up to $3,200 per year and a total of $12,800 total per worker. Last year the company paid out a total of $5 million in reimbursements.




IS IT A STRONG CULTURE, OR A CULT? Today I’m scheduled to close the deli, which everyone tells me is the hardest, dirtiest, grossest job in the store. When I arrive wearing the pumpkin-orange polo shirt issued to deli workers, I’m instantly thrown into a whirlwind assembly line remaking two “pinwheel platters” for an order that was lost and needs to be delivered to a wake ASAP. Next, Ashley Taveras, a 23-yearold deli counter clerk, shows me how to prepare a proper Publixstyle made-to-order sub sandwich. I step up to the counter and wait on my first customer. Everyone seems to want the weekly special: a whole chicken tender sub for $6.99. Over the course of four hours I make roughly 20 of them— slicing the bread, chopping the tenders, toasting it. Two hours before the store closes we begin the messy work of breaking down one of the two sandwich stations. As we clean, I learn that not everyone is sold on the idea of staying at Publix forever. When I ask Taveras if she wants a career with the chain, she says, “I love Publix, but I want to be an architect. If I can be an architect for Publix, I would stay here forever.” What does she think about the intense corporate culture, I wonder. “The culture is drilled into you,” she says. “It can be a bit of a cult.” A cult? “Well, there’s just a lot more that I want to do with my life than work for a supermarket. Some people want to be store managers. Not me.” It’s not the first time I’ve heard an associate describe Publix’s intense culture that way. “Are we a cult?” ponders Veith. “In the most

Working at Publix is often a family affair. Here, 41-year-old loading dock receiver Lizbeth Dargenio (right) poses with her daughter Andrea Mendez, 23, who is an assistant bakery manager at a different Publix nearby.

positive way you can imagine, we kind of are.” There are certainly plenty of true believers, and it’s bolstered by Publix’s commitment to promoting from within. According to the company, last year more than 450,000 candidates applied for 60,870 job openings at Publix, of which 26,256 were filled internally; the rest were entry-level new hires for part-time positions. And some 30% of those hired from the outside were the result of employee referrals. “You can do whatever you want in this company, including becoming CEO,” says president Todd Jones, 52, who is living those exact words. On May 1, the 36-year Publix veteran, who started out bagging groceries, will take over as CEO. Though Jones never went to college, he jokes, “I like to say that I went to the College of Publix.” He is replacing Ed Crenshaw, 65, a grandson of Mr. George who has been in the job for the past eight years and will stay on as chairman. To help prepare Jones for his leadership role, the company sent him

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to an executive education course at Harvard Business School. When he takes the reins, Jones will become the first nonfamily member to run the company. One issue Jones will face as CEO is how Publix should address the current push to raise the minimum wage for retail workers. He points out that “minimum is not the same as starting wage. Our starting wage of $8 per hour is higher than the industry norm, and we provide plenty of growth opportunities, including a raise within six months.” I asked both Jones and Crenshaw about Walmart’s decision, announced last year, to raise its starting wage to $10 per hour. Would they consider matching it? “We always remain competitive with pay,” Crenshaw says. “People want to be paid more. I understand that. They want to be able to provide for their families. It gives me an opportunity to remind associates that working at Publix is about more than just a paycheck.” Both of them mention the host of benefits they ofer to part-timers and full-timers,



as well as the stock plan. Being employee-owned, they argue, is Publix’s secret weapon. “I’m amazed that more companies don’t ofer ownership in the company in order to get better performance,” Crenshaw adds. “Being a privately held company gives us the freedom to take a longer view of the business, and it makes a huge diference in how you can allocate and spend capital. We’re very fortunate to be able to do that.” THURSDAY, 7 A.M.


ing. It was always my least favorite part of the grocery job I had as a teen. Luckily I partner with Isora Lopez, a cashier who’s been with the company since 1985. She sends the items down in a nice, easy flow. Bagging them isn’t stressful, just a tad boring. My shift finally ends, but not before I meet Stephanie Veron, a 22-year-old customer service team leader who is about to leave the store for another location because she received a promotion. Company policy dictates that an associate must move to a diferent store when he or she becomes a manager. “It helps to start fresh, with no historical baggage to tie you down,” Veith explains. It also allows the company to spread talent across its network and force stronger bonds among associates.

Bakery manager Kelly Wolf (left) and decorator Shauna Lawless look on as Fortune’s reporter attempts to master the icing bag. He had better luck making sub sandwiches.

On my last day as a Publix employee I’m finally forced to do the one thing that I’ve been dreading all week: bagging groceries. Or in Publix-speak, work as a front service clerk. The job can be surprisingly stressful if you’re working with a particularly speedy cashier and there’s a cart full of groceries rushing down the conveyor belt with an impatient customer wait-


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NEAR THE END of my week at Publix, Veith invites me to sit in on a 30-day check-in, which every new hire must have with his or her store

manager. Part pep talk, part sales pitch, it’s a conversation in which a store manager explains the company culture, discusses the many benefits ofered to part-time and full-time associates, and gives them an explanation of the employee stock-ownership program. “We want you to learn what your opportunities are,” he tells the two young associates in the room. “We also want you to feel like you’re part of the family.” He explains that there will be an opportunity for a raise after six months, depending on a performance review. They can qualify for a raise again every six months thereafter. Veith uses a parable about Mr. George’s founding of the company to introduce Publix’s open-door policy, which is printed on cards that he hands to each of them. Veith then asks them to memorize a slogan inspired by Mr. George: “Make every customer’s day a little bit better because they met you.” He then asks both associates in the room what they think about working for Publix so far. They both say they like it. Then he turns to me, smiling, and asks the same question. “What do you think about working at Publix so far, young man?” he asks. Put on the spot, I’m not sure how I should answer. But after a brief moment, I know. “I love it,” I say. The reason is simple: From what I’ve seen, the passion isn’t fake. Almost universally, the employees I’ve met share a sincere desire to make everyone—customers and associates alike—happy. I then ask Veith what he thinks about working there. “I can’t imagine a life better than the one I’m living, thanks to Publix,” he says. That’s the magic.





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o put Accenture’s recent hiring blitz in context, if you crammed all the young workers it on-boarded last year into Anaheim’s Angel Stadium, the new employees would fill every seat two times over. In 2015 the 27-year-old professional-services firm brought on 90,000 millennials—the group loosely defined as any adult born after 1980—representing 90% of its global hires for the year. Accenture’s CEO, Pierre Nanterme, is a bespectacled Frenchman based in Paris (the company is incorporated in Ireland with sprawling global operations), and has worked at Accenture and its earlier incarnations since 1983. As a result he’s seen it transition from primarily an IT consultancy to a $31 billion professional-services powerhouse with increasingly digital aspirations. The generational churn over the decades has also helped him spearhead this next change, he says, which will see the millennial portion of the company’s workforce grow to 80% in the next 18 months. The primary driver of the talent acquisition spree is clients’ demand for higher technical skills, which has prompted the creation of business units like Accenture Digital, whose workforce specializes in areas like analytics and mobility services. It prompted a “pivot” in Accenture’s hiring strategy, says Ellyn Shook, the company’s chief leadership and human resources oicer. The challenges set before the company were threefold: find people with specialized skill sets, hire a ton of them,

courtesy of accen tur e


Accenture’s Millennial Hiring Spree



and do so from a generation that has proved diicult to understand. But Accenture’s greatest test may come after last year’s 100,000 total new hires—up from 60,000 two years ago—settle in. “Human capital businesses often get in trouble,” Cantor Fitzgerald’s Joe Foresi said during an investor conference with the company. “They have a lot of people, and then if business starts to slow, it can create a huge issue.” Nanterme is undeterred. “We know how to make flexibility when needed,” he told Foresi. It’s “baked into where and how we hire.” He also downplayed the diference between millennials and everyone else in a conversation with Fortune. “Do you want an interesting job? Yes. Do you want a balanced life? Yes. And to make a contribution as well?” He asks. “Of course.” So does everyone. Before too long, corporate handwringing about millennials may even seem quaint. Accenture’s interns this year? They’re from Generation Z.


Accenture leaders and job candidates mingle at a workshop during its Women’s Career Consortium in Washington, D.C.

Accenture U.S. HEADQUARTERS ... NEW YORK CITY U.S.-BASED EMPLOYEES . . . . . . 4 2 , 6 5 0 AV E R A G E N U M B E R O F APPLICANTS PER JOB ............... 58

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84 181


Five Things You Can Do to Attract Millennial Talent THE NEW WORKFORCE


By Claire Groden NNE DONOVAN, PwC’s human-capital transformation leader, says she started noticing something diferent around eight years ago. New employees would stay only a year or two before quitting, no longer receptive to the old deal that the longer they stayed, the more marketable they would be. “Our first reaction was to question ourselves,” she says. “We thought we must be hiring the wrong peo-



ple.” But when PwC commissioned a study of its millennial workers, the results were clear, Donovan says: This new generation of workers wanted to work diferently, and they weren’t planning to wait around for things to change. Millennials might be the largest generation in the workforce, but their talents aren’t distributed evenly throughout corporate America. They have flocked to Silicon Valley in such a mass migration that the average age

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at some companies headquartered there is under 30, according to PayScale. These companies are famously millennial-friendly, with casual dress codes and perks galore. But other industries have been hard-pressed to attract young talent: According to a 2015 survey, the federal government, for instance, is only 11% millennial— more than four in every five workers are older than 35. The uneven distribution has caused plenty of corporate hand-wringing, as human resources departments compete to attract elite talent who will stick around. Here are five tips from companies that are finding ways to keep up with the evolving workplace landscape.

i l l u s t r a t io n b y ALEKSANDAR SAVIC





Forget the 9-to-5 schedule.

If you want them to stay, offer training resources.

Don’t wait for the next annual review for feedback.

DONOVAN SAYS that out of all of PwC’s millennial-minded initiatives, creating flexibility within the workplace has been the most important. In a 2011 firmwide survey of millennial workers, 95% of respondents said that worklife balance was important to them, and more than a quarter of young workers said they were disappointed by the amount of balance they were able to maintain. In response, PwC began asking managers how, exactly, they would help their team members work the hours that suit them—a top-down decision that, paired with a firmwide contest to submit flexibility plans for the busy season, reformed the company’s culture. Employees are now encouraged to individualize their schedules, like working from home if they don’t have client meetings or slipping out for an hour of Zumba during the workday.

YOUNG EMPLOYEES are itching to leave sooner. According to a 2016 Deloitte survey, two-thirds of millennials expect to have left their current employers by 2020. But the survey also points to a clear reason: Of the workers who want to leave their jobs within the next two years, more than 70% cite a lack of leadership development. To keep Deloitte’s youngest employees satisfied, chief talent officer Mike Preston says he has focused on creating a “development culture.” Millennials are “not afraid to disrupt themselves to get that growth and development” they need for their careers. “And by that, I mean leaving and working for someone else. As an organization, you had better create opportunities.” Deloitte doubled down on sending employees to training programs, and managers are expected to have frequent check-in conversations.

ONCE UPON A TIME, employees could look forward to a review once or twice each year—a calendar that’s sometimes out of touch with their cycle of projects. Until this year, that’s how IBM gave feedback to its workers. Employees would set goals in January, check in with supervisors midway through the year, and be assigned a performance score and ranking at the end of the year. But working with IBM’s Millennial Corps, a community of young employees from around the firm’s global offices, the company rolled out a new system called Checkpoint earlier this year. Now employees set short-term goals that are anchored by quarterly check-ins. The single year-end performance measure was abolished, as were relative rankings. And it’s not just IBM: General Electric, Accenture, and Adobe are also revolutionizing their performance review policies.

Give them purpose beyond the bottom line. FOR SIX IN 10 MILLENNIALS, “a sense of purpose” was part of their calculation in accepting their current jobs; almost half have declined to perform assignments at work that contradict their values, Deloitte surveys have found. Millennial workers thrive in environments in which their work has clear purpose for both the organization and society at large. This is one area where the federal government successfully hooks young workers: 80% of millennial employees say they can see how their work contributes to their agencies’ goals, and 86% say the work they do is important. But companies without an inherently inspiring mission can give millennials a sense of control and purpose by increasing transparency and demystifying bureaucracy. At inbound marketing product firm HubSpot, for example, the company designated every employee an “insider”—a privilege usually reserved for directors, officers, and significant shareholders—in order to give them all access to the publicly traded company’s detailed financial information.


5 The perks matter too. SILICON VALLEY’S WEALTH of perks, like nap rooms, free food,

and pet-friendly policies, has raised the bar for many companies. But these luxuries are often just the obvious benefits of a general culture of care that appeals to millennials. While members of Generation X value control and compensation, “millennials are driven by how well their team works together, how supported and appreciated they feel, and how much possibility they have,” PwC’s Donovan says. “They’re all about how it feels.” Salesforce has cultivated a people-driven culture that global head of recruiting Ana Recio calls a key attraction for millennial workers. “We define our culture as ohana, the Hawaiian word for family, and it is the idea that families—blood-related, adopted, or intentional—are bound together and responsible for one another,” she says. Recio credits that tight-knit culture for persuading more than 80% of interns to come on as full-time employees.

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“At WellStar, we create an environment where team members can succeed and grow in their careers.” — Candice Saunders President & CEO WellStar Health System

Only the Best for a Best Place to Work Having joined WellStar in 2007, I knew then that this was a healthcare organization destined for greatness. Being named a FORTUNE “100 Best Companies to Work For” validates the immense efforts made over the past decade to give our physicians, nurses, advanced practice professionals and team members an environment worthy of national recognition. With our main focus remaining on delivering world-class healthcare to the more than one million residents in our primary communities, we consistently look for ways to ensure that our workforce remains engaged, connected, and ready for growth. I am extremely proud of all that WellStar has achieved and of our future growth plans. Our success comes from the work of our 14,000 team members who I am proud to call my co-workers.

The vision of WellStar Health System is to deliver world-class healthcare through our hospitals, physicians and services. Our not-for-profit health system includes WellStar Kennestone Regional Medical Center (anchored by WellStar Kennestone Hospital), WellStar Cobb, Douglas, Paulding and Windy Hill hospitals; WellStar Medical Group; Health Parks; Pediatric Center; Urgent Care Centers; Health Place; Homecare; Hospice; Atherton Place; Paulding Nursing and Rehabilitation Center; and WellStar Foundation.

770-956-STAR (7827) |

From FORTUNE Magazine, March 15, 2016 ©2016 Time Inc. FORTUNE and FORTUNE 100 Best Companies to Work For are registered trademarks of Time Inc. and are used under license. FORTUNE and Time Inc. are not affiliated with, and do not endorse products or services of, WellStar Health System.





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AST YEAR Tracey Flaherty, senior vice president of retirement strategies at Natixis Global Asset Management, was conducting yearly research on participation in retirement plans when a statistic caught her attention. Her research showed that one in four Americans— and one in three millennials—were not contributing to their companysponsored retirement fund. The reason? They were using that money to pay down their student loans instead. “That was one wake-up call,” Flaherty says. “We as a company


i l l u s t r a t io n b y ALEKSANDAR SAVIC




believe strongly in starting to save for retirement early. If you don’t save in your twenties through forties, you’ll never catch up.” Natixis was determined, Flaherty says, to find a way to defray the cost of its employees’ debt burden. In December the company introduced a program in which it pays $5,000 toward employees’ student loans once they work at the company for five years. They can receive an additional $1,000 annually for up to five years. According to a survey last year by the Society for Human Resource Management, only 3% of employers helped workers with their student loans, but that figure could be growing as more and more companies introduce the benefit. In September, PwC (No. 53 on this year’s 100 Best Companies to Work For list) announced that it will begin contributing $1,200 a year to its associates’ student loans. The benefit was implemented on a platform developed by Gradifi, a Boston startup launched by entrepreneur Tim DeMello. PwC was the first client Gradifi publicly announced, and DeMello says he has another 100 signed up. In December the software company Kronos said it would start paying $500 a year toward employees’ student loans. It has partnered with Student Loan Genius, which advises borrowers on repayment plans and helps workers automatically contribute via the company’s payroll system. The Austin-based company says it has about 50 clients—90% of which have signed on in the past 12 months.

DeMello says loan payment is catching on because companies see it as an innovative way to help solve the nation’s $1.2 trillion student-loan problem, plus it’s a powerful recruiting and retention tool. When PwC visits college campuses to recruit new hires, the fact that it pays employees’ student loans “is a tremendous diferentiator,” he says, in helping attract great millennial talent. But for all the popularity the student-loan benefit is gaining, there’s still a big hurdle keeping it from mass adoption: Employees are taxed on the employer payments as if the money were cash income. That dilutes the impact of the employer contributions, since the money employees spend on those taxes could—in theory—be used to pay down their student loans even further. “It’s a big problem,” says Flaherty of Natixis. That’s why Natixis was so public in announcing its benefit. It hoped other employers would follow suit and help change the law. That could happen if Congress passes the Employer Participation in Student Loan Assistance Act. Rep. Rodney Davis (R-Ill.) introduced the bill in the House in October, and Sen. Mark Warner (D-Va.) introduced its companion in the Senate. The House bill seeks to extend the tax exclusion that currently applies to employer-provided tuition assistance—up to $5,250 per year—to include employer contributions to employees’ student loans. It also provides incentives to employers to subsidize student-

loan repayments. “It’s a win-win all around,” Davis tells Fortune. And it seems as though members of both parties feel that way. The legislation, which is now in committee, has 20 co-sponsors—nine Democrats and 11 Republicans. Davis said the eight four-year colleges and universities in his district motivated him to introduce the measures, as did his daughter, who attends Illinois State University. She’s facing the same questions as so many other college students, Davis says—how much is college going to cost, and how are you going to pay for it?

NATIONAL STUDENT-LOAN DEBT IS AT AN ALL-TIME HIGH—AND IS EXPECTED TO DOUBLE IN 10 YEARS. Projections by the Congressional Budget Office put total outstanding federal student-loan debt at $2.4 trillion by 2025.





$1.2 1.0


0 2007





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A Millennial Favorite—at 94 THE NEW WORKFORCE


Edward Jones RANK:


w eddle: courtesy of edwa r d jones

JIM WEDDLE IS a 40-year veteran of the fourth-largest financial advisory firm in North America, with 12,000 branches across the U.S. and three home offices in St. Louis; Tempe, Ariz.; and Mississauga, Ontario. He recently spoke to Fortune about investment advising, the surge of “fintech” (financial technology startups), and millennials.

According to Great Place to Work’s survey, young people love working at Edward Jones—their feedback helped put the company at No. 10 on our list of the 100 Best Workplaces for Millennials. What’s your secret? That was terrific news. Millennials are finding Edward Jones to be a great place to build their careers. What makes us a little diferent: People are proud of the work that we do. We help investors achieve


NEARLY A CENTURY AFTER ITS FOUNDING IN 1922, EDWARD JONES IS STILL A HOT PLACE TO WORK. THE FIRM’S CHIEF TELLS FORTUNE WHAT IT TAKES TO LURE YOUNG HIRES (AND CLIENTS). By Christopher Tkaczyk very important life goals, such as sending the kids to college and preparing for retirement. It’s extraordinarily important. People feel good about their part in helping our clients accomplish those goals. How does being organized as a partnership benefit your workers? We have 38,000 associates across our network, and 20,000 of those associates are limited partners. At Edward Jones everybody has the opportunity to become a limited partner and owner of the firm. I think owners act diferently than employees. They bring their A game every day. There’s a sense of pride. Every day? How do you help 38,000 people stay focused and deliver? You have to constantly work on engaging the entire organization. We are geographically dispersed. There’s definite potential for people to not know the direction, the goals of the firm, and so forth. We work really hard on sharing the business plan, the objectives. On a monthly basis we update the entire firm through video and of course electronic communications. We make extensive use of video—we even have a studio in our headquarters and sometimes do live broadcasts. So that helps to keep people pulling in the same direction.

Mobile banking and startups are presenting even more challenges. How are you responding to the rise of fintech? I think it’s going to make us all better. We have a mobile app where I can scan a check and upload it, but that’s not whiz-bang stuf. We are one of the only firms that has figured out how to provide texting from our branches to our clients. The online providers are developing new technology, new functionality that we’re studying very, very carefully. However, having access to the Internet does not make people DIY investors. I can look up a lot of information on health online, but I still go to a doctor. I can look up a lot of information on taxes, but I still go to a CPA because I appreciate the expertise. Are you seeing new competitors as younger users demand digital tools? There’s competition everywhere. That’s why the website is so important. We love the face-to-face model, but we’ve also got WebEx technology in our branches that allows our financial advisers and clients to look at each other’s computers. It’s very cool stuf. Ten years ago it didn’t exist, and 10 years from now we’ll look back and think, “Gee, wasn’t that cute?” because something better will have replaced it.

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“Having access to the Internet does not make people DIY investors. I can look up a lot of information on health online, but I still go to a doctor. I can look up a lot of information on taxes, but I still go to a CPA because I appreciate the expertise.”




“Know the irm and the office in which you are interviewing. Identify what draws you most to the irm and be prepared to talk about your interests with your interviewers. Request a copy of your schedule the day before the interview and research your interviewers by looking them up on the website or on LinkedIn.” CA R R I E WAG N E R , D I R E C T O R O F L E G A L TA L E N T, C O O L E Y ( N O. 2 8 )

“Focus on your craft. I enjoy meeting people who demonstrate how they are continuing to improve in their chosen field. This denotes passion and initiative for me. Musicians who make it into the orchestra spend hours each day practicing—we look for the same commitment. How are you continuing to sharpen your skills? Are you continuing to practice?” NICK MAILEY, VP OF TALENT RECRUITMENT, INTUIT (NO. 34)

“We seek candidates with an entrepreneurial mindset who have the courage to challenge the status quo and help us reimagine money for our customers and inspire life. We know we have found a good candidate when we see a deep intellectual curiosity, a passion for our mission and to drive positive change, and an inclination to lead with heart and humanity.” JENNIFER ANDERSON, V P O F TA L E N T A C Q U I S I T I O N , CAPITAL ONE (NO. 88)

“The secret to getting hired into a restaurant position is knowing that we look for people who genuinely ooze hospitality and radiate positivity. What does that look like? For service positions, we want to see candidates with warm smiles and infectious energy who are also caring and compassionate. For kitchen roles we look for candidates who are passionate about making memorable food from scratch, want to learn and take on new challenges, and enjoy working with a fun team. In all positions, both in our restaurants and corporate support center, we look for those special people who aspire to achieve and inspire excellence in those around them.” CL AIRE PRAGER, VP OF TALENT SELECTION, THE CHEESECAKE FACTORY (NO. 98)


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i l l u s t r a t io n s b y ALEKSANDAR SAVIC




CHICAGO 32,400






ROCHESTER, N.Y. 12,200



PHOENIX 26,800



DALLAS 21,600









“What really impresses me in a candidate is when they’ve done their research on ARI. We’re a unique industry with a special history, and it’s great when the applicant knows that coming into the conversation.” JESSICA CARLETON, CAMPUS AND EXECUTIVE RECRUITER, ARI (NO. 24)

“It’s not about what a candidate wears to an interview or if they have all the right formula answers when we talk. It’s about understanding our mission to help people succeed online, working passionately and as a team. It’s about getting creative. It’s as much about the how as the what.” ANDREW CARGES, VP OF TALENT, GODADDY (NO. 95)

“We’re looking for people of all backgrounds and experiences who aren’t afraid to bring the hard questions and roll up their sleeves to build the answers. Here at Google we move at an incredibly fast pace—at Internet speed!—so we ind that our most successful Googlers are those who can navigate ambiguity and are comfortable taking big risks toward innovation.” KY L E E W I N G , D I R E C T O R , G L O B A L S TA F F I N G P R O G R A M S , G O O G L E ( N O. 1 )

“Exhibit a personal commitment to giving back to the community through volunteerism and philanthropy. Demonstrate characteristics that are in line with our core values, including being respectful of others, demonstrating strong communication skills, taking pride in everything you do, and exhibiting a strong work ethic.”

“One of the best ways to get our attention is to demonstrate that you’re thinking about how your skills and contributions enhance value or propel an organization forward toward its goals or vision. A good elevator pitch that incorporates these ideas, articulates your strengths, and highlights your leadership attributes— business acumen, building relationships, etc.—will give us insight into your personal brand, which is what we find most helpful when comparing candidates.”



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The Health Care Hiring Boom HOW TO GET HIRED


Proficient registered nurses at Baptist Health South Florida average total compensation of $70,000 a year, including bonuses. HE HEALTH CARE INDUSTRY


with changing care methods focused on quality over quantity, also means that there will be demand for new types of workers, from case managers to data analysts. As demand for these workers—and traditional doctors and nurses—increases, health systems and hospitals are competing to attract the best employees with a mix of great benefits, stable career paths, and supportive cultures. Here are some tips on how to get hired.

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Southern Ohio Medical Center (no. 29) THE HOSPITAL has a promote-from-

within policy and perks like tuition reimbursement and a bonus pay program, so it’s not surprising that 95% of employees say their company offers great rewards. “Applicants must have strong customer service skills and a caring heart. We love those applicants who challenge us and are engaged in the interview process,” says recruiter Dallas Czerwieniec.

courtesy of ba ptist he a lth sou th flor ida


has been growing rapidly, adding nearly half a million new employees in 2015 alone. The sector is now responsible for one in nine jobs in the U.S.—and its share is only going to grow. Health care is expected to add the most jobs of any industry over the next decade, according to the Labor Department. The employment boom, combined


Scripps Health

Children’s Healthcare of Atlanta (no. 78)

(no. 42) AT SCRIPPS, 92% of employees say

their work has special meaning—it’s not just a job. “We look for exceptional talent and provide multiple opportunities for the cream to rise to the top—with culture assessments and patient care simulations being part of the application process to give the brightest the chance to shine,” says talent adviser Lee Pinn.

A NATIONAL LEADER in pediatric health care, Children’s is looking for workers who exhibit and live its mission and values: “care about people, be passionate about kids and dedicated to being better.” Recruiter Melissa Madden says, “We seek individuals who strive for excellence and truly understand the difference and impact they make every day in our patients’ lives.”

Texas Health Resources

Atlantic Health System

(no. 46)

(no. 79)

NINETY-SIX PERCENT of employees say they feel a sense of pride in their work. The health system offers low medical premiums tied to salary and tuition reimbursement. “Candidates who invest in themselves tend to stand apart from the pack,” says recruiter Jacqueline Small. “Those who take time to really develop their résumé are a breath of fresh air.”

ATLANTIC offers a unique Talent Advisor program that provides tuition reimbursement as well as personalized financial advising. “During the interview process, candidates who speak and dress professionally and provide answers directly related to my specific questions without going off topic will always impress me,” says recruiter Amy Tedesco.


Mayo Clinic

(no. 68)

(no. 86)

THE HEALTH SYSTEM believes strongly

“MANY CANDIDATES—even those who

in ongoing education, offering employees hands-on training at its OhioHealth University and rotational program. “When you share a personal story, it strays from the traditional interview structure and allows the candidate to be vulnerable and illustrate why they went into the health care field,” says recruiter Melissa Miller.

are highly qualified—don’t capitalize on the opportunity to demonstrate cultural fit in their applications. Take the time to illustrate how certain skills and achievements show cultural competencies such as collaboration, continuous learning, mutual respect, resourcefulness, and empathy,” says recruitment director Brent Bultema.

St. Jude Children’s Research Hospital (No. 35)

Encompass Home Health and Hospice (no. 69)

WellStar Health System

NINETY-NINE PERCENT of workers at this


hospital take great pride in what they do. The health system, which seeks to find cures for pediatric cancer, among other diseases, also offers benefits like a free on-campus gym and tuition reimbursement. “Successful candidates will be able to offer specific examples [of their accomplishments] from their work and personal life,” says John Leech, director of talent acquisition.

days off a year, and an Encompass Scholars Program help explain why 96% of employees say this health provider has a great work atmosphere. “The secret that impresses us the most is when a candidate comes to us not just for a job, but comes to us because of a passion and a calling,”says Mike Verner, VP of human resources.

DURING A BUSY WEEK, employees can take advantage of WellStar’s free onsite concierge services to run errands, pick up groceries, or buy a gift. “Let your talent shine in the interview process by providing examples of how you demonstrate key characteristics: pride in your work, ability to influence others, team orientation, and compassion,” says recruitment director Natalie Jones.

Baptist Health South Florida (No. 25)

NEARLY 92% of employees

say the health system is a great place to work and plan to stay for a long time. Baptist Health, which has been on Fortune’s Best Companies to Work For list for 16 straight years, offers perks like a $10,000 adoption benefit, 24 holidays and vacation days, and a 401(k) matching program. “Individuals who deliver results and make career moves of greater scope and responsibility exemplify the talent we strive to bring here,” says one recruiter. “Prepare by learning about our organization and developing questions to ensure you are making an educated decision. Make sure the culture of our organization is aligned to your personal views and beliefs.”


(No. 93)

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The Garden of Eden



By Michal Lev-Ram

Palo Alto’s rolling foothills on a 105-acre parcel of tree-lined land, VMware’s campus feels more Zen retreat than corporate HQ. The company’s ecofriendly grounds are home to 75 palm trees, three nature trails, and a pond where 15 small turtles reside. A rectangular, 600-foot-long water fountain and an adjacent walkway connects two of the campus’s three clusters of buildings, giving the site’s 4,000 employees plenty of opportunities for outdoor time. There is also a soccer field, a recreational park with horseshoe pits, and two fitness centers. “It’s not just about enticing folks with elaborate perks,” says



VMware RANK:


H E A D Q U A R T E R S . . . . . . . . . . . P A L O A LT O EMPLOYEES .......................19,000 F U L L-T I M E J O B S A D D E D I N PAS T Y E A R .......... 2 , 9 0 0 P A I D S A B B AT I C A L S . . . . . . . . . . . . . . . . . Y E S ON-SITE FITNESS CENTER ..... YES VA C AT I O N T I M E . . . . . . . . . . . . U N L I M I T E D


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Pat Gelsinger, the company’s chief executive. “It’s about creating a healthy, sustainable environment.” VMware’s oices don’t have many of the trappings of the Disneyland-like campuses of nearby Facebook and Google, which sport perks like brightly colored bikes, food trucks, and plenty of beanbags. But the Palo Alto company, which makes software that enables computers to be more efficient by running more than one operating system simultaneously, is making a much more understated mark on the Silicon Valley landscape—even as it faces headwinds to its business. Many technology companies


courtesy of v m wa r e

A recent “camaraderie building” event held at the original part of VMware’s Palo Alto’s offices, known as the Promontory Campus

boast solar panels and reclaimedwood floors in their corporate office buildings. But sustainability has deep roots at VMware, No. 40 on this year’s Best Companies to Work For list, up from its No. 65 spot in 2015. About a decade ago co-founder and then-CEO Diane Greene enlisted architect Wil-

liam McDonough, a leader in sustainable design, to construct the “campus in a forest.” (VMware was founded by five technologists in 1998. After spending six weeks in a Menlo Park apartment, the company began renting oice space above a cheese shop in Palo Alto. VMware moved into its current location in 2008 and expanded significantly in 2011.) Greene left the company in 2008; she now serves as senior vice

president of Google’s cloud business. But her mission to create a bucolic, eco-friendly environment at VMware lives on. “We enable companies to take waste out of their systems,” says Nicola Acutt, VMware’s vice president of sustainability, “so it makes sense that sustainability thinking has been woven into our campus.” VMware is so green that it has been forced to become less so in the wake of severe drought in California. The company stopped watering its lush lawns last year, and though the type of grass it planted is supposed to be droughttolerant, the grass has browned in some areas. The rectangular water fountain has been turned of. It’s not the only thing that’s drying up at the $6 billion technology company. VMware, long seen as the crown jewel in majority-owner EMC’s portfolio (the data storage maker acquired the virtualization company in 2004 and then spun it out in an IPO in 2007), is facing uncertainty. Its headquarters paint a picture of serenity, but the company announced weakerthan-expected financial guidance for 2016, sending its stock down 11%, to $44.44, on one day in late January. (It has since recouped the losses and now trades above $50.) At that time the company also confirmed that it had laid of 800 employees, or more than 4% of VMware’s global headcount of 19,000, in restructuring. Gelsinger won’t share specifics on the packages ofered to the workers who were let go, but a VMware

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1 ¬ A PLACE IN THE SUN Photovoltaic (PV) panels installed throughout the campus divert more than 600 metric tons of carbon each year, equivalent to removing 125 cars from the road annually. 2 ¬ ONE MAN’S TRASH … VMware recycled 520,000 tons of trash in 2014, sparing it from becoming landfill. 3 ¬ THE FOREST FOR THE TREES VMware’s campus has 1,500 trees, including an oasis of 75 palm trees and a fruit orchard with 90 flowering trees. 4 ¬ COOL, CLEAR WATER The company conserved 10 million gallons of water last year, mostly through strict landscape management. 5 ¬ FROM SOUP TO (PEA)NUTS Almost 16,000 pounds of peanut M&M’s were consumed on campus in 2014.










Google Orrick Herrington & Sutcliffe


Autodesk Adobe



FREMONT 22,870


SAN MATEO Cisco 13,960


PALO ALTO VMware’s headquarters are located just a few miles from the Googleplex, but the company chose more than 100 acres of green, open space over its neighbor’s famous perks.


Cadence Adobe Stryker


spokesperson says that their severance included an undisclosed period of full pay and benefits, a lump sum payment based on years of employment, and outplacement services. “The VMware culture breeds adaptive and resilient employees, having been at the forefront of disrupting the IT industry throughout the last 18 years,” Gelsinger says. The key, says chief people officer Betsy Sutter, is in the messaging. “Employees can send



questions via email or social collaboration tools,” she says. “We overprepared on communicating when it comes to the layofs.” Strategic realignment isn’t the only uncertainty on VMware’s horizon. The ramifications of the $67 billion Dell-EMC merger, up for approval in the coming weeks, remain to be seen. To assuage any anxiety over how that would affect VMware’s workforce, CEO Michael Dell made an appearance at the virtualization company’s recent senior leadership ofsite

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in Huntington Beach, Calif. According to Sutter, Dell assured the team that VMware is both a jewel in EMC’s crown and a valuable asset in the impending purchase. “He was very interested in our culture,” Sutter says. “We have the heart of a startup but the mind of an enterprise software company.” Changes will keep unfolding in the cloud-computing market in which VMware competes. The potential turbulence makes VMware’s serene digs in Silicon Valley more important than ever.


ing diversity problem last year, lawyer Joelle Emerson founded Paradigm, a consulting shop that has become a go-to adviser for tech unicorns including Airbnb, Pinterest, Slack, and online ed startup Udacity. She’s also working with Intuit and Opower. Silicon Valley’s need for a diversity consultant was long overdue. After a few sexual-harassment lawsuits, tech companies have woken up and are starting to improve the representation of female and minority employees. Many tech heavyweights, including Google, Yahoo, and Facebook, have published diversity numbers, and their data have exposed a huge problem. On average, women account for only 30% of the entire industry, and stats on race are more disappointing: 23% Asian, 8% Latino, and 7% African-American. The numbers don’t lie, says Emerson. While Paradigm isn’t the only diversity coach in Silicon Valley, Emerson’s approach is grounded in what all of these companies value most: data. For each client, Emerson says she spends about three months gathering information and observing recruiting practices. Key to Paradigm’s process is proprietary software that analyzes a company’s HR data and uses algorithms to determine where it has missed opportunities to add more female, African-American, and Latino employees. Emerson and her team also embed themselves in the recruiting process to evaluate the colleges their clients target and even review the wording of job postings.

sa n jose mercury news


Tech’s Diversity Fixer “It’s been game changing,” says Abby Maldonado, head of diversity programs at Pinterest, referring to Paradigm’s work. One change instructed by Paradigm was simply asking employees to refer potential hires from underrepresented demographics. After this, Pinterest saw a dramatic increase in the number of black and Hispanic engineer applicants. Emerson also advised Pinterest through changes to the company’s campus recruitment. As a result, the company expanded its reach to additional colleges and universities, as well as partnership-led events with industry groups, such as the National Society of Black Engineers. Recruiters and employees were also instructed to introduce candidates by their major instead of where they went to college, which might create an automatic bias. Pinterest’s intern hires for 2016 now have a greater representation of women—increasing in one year from 32% to 53%. Both Airbnb and Pinterest have engaged Emerson and her team indefinitely to consult on diversity challenges as they arise. Mike


Joelle Emerson is working to balance the talent distribution in America’s innovation capital. By Leena Rao

Curtis, head of engineering at Airbnb, spends one hour every week with Paradigm. The company has changed many of its job descriptions, which Emerson says had included wording, such as graduating from a “top-tier school,” that could potentially scare away excellent candidates. Curtis says that Emerson’s approach “doesn’t come from a place of judgment.” By using data analytics, he says, she has found a way to shift hiring practices.

Emerson, founder of diversity consultant Paradigm, has signed big-name tech startups Pinterest, Slack, and Airbnb as clients.

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DELAYS CHANGE EVERYTHING. Thatâ&#x20AC;&#x2122;s why Penske has truck leasing and logistics solutions to help put business problems behind you. So you can keep moving forward. Visit or call 844-868-0816 to learn more.




A “shopkeeper” in South Philadelphia loads boxes at an Ikea self-serve warehouse.


EMPLOYEES .......................14,224 F U L L-T I M E J O B S ADDED IN LAST YEAR ............. 493 TELECOMMUTING .................... YES COMPRESSED WORKWEEK...... YES JOB SHARING ......................... YES


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found one. The employee balked again—he didn’t know how to drive a forklift. So Petersson quickly arranged to get the worker trained in operating heavy machinery. “It turned out to be a superdetailed question,” Petersson says. And at Ikea, this is the sort of banal problem solving that falls to the company’s top executives. Yes, even the head of the U.S. business has to think about how to take out the trash. “Hierarchy is not a big Swedish

a ll photogr a phs courtesy of ik e a


H Q ............... C O N S H O H O C K E N , PA .

URING A VISIT in February to Ikea’s store in Miami, the company’s U.S. president, Lars Petersson, started talking trash. It began when a worker there told Petersson about the diiculty he had dragging the store’s garbage all the way through the warehouse to the dumpsters. Petersson suggested that a forklift could save a lot of time and efort, but no forklift was free in the warehouse. So Petersson went and


thing,” Petersson explains. His title, “country manager,” lacks so much conceit that it confuses Americans. Only a handful of executives even have business cards. Everyone is on a first-name basis and sits side by side at Ikea desks, naturally, in an open floor plan at the company’s U.S. “service oice” (Ikeaspeak for headquarters) in Conshohocken, Pa. Word to the wise: If you have an ego that needs stroking, Ikea is not the workplace for you. The furnishings giant, with $5 billion in U.S. sales (and some $36 billion globally), has become a living laboratory of what happens when you put a Swedish spin on notions like egalitarianism and work-life balance in an American workplace. At the most basic level, the company’s Scandinavian ideals have brought generous policies on wages and benefits compared with the rest of Ikea’s retail cohort. Last year it began basing its pay on the MIT Living Wage Calculator, with hourly employees receiving an average of $15.45 an hour; meanwhile, the lowest starting pay is now set at $11.87—or nearly five bucks above the federal minimum wage. Parttimers are ofered health benefits after just 20 hours of work per week. Ikea culture discourages workaholics—much like its home country. After a year on the job, full-time employees receive an essentially unheard-of 24 days of paid time of and five sick days—and the company has an aversion to anybody working long hours. “My boss would say, ‘Go home, you’ve been here too long,’ ” says Nabeela Ixtabalan, who is head of human resources for the U.S. business. “Here, if you can’t do your job successfully in a reason-


able amount of time, you’re doing something wrong.” Petersson, for his part, takes weekends of. (“All of them, basically,” he says.) Leaving work behind for a monthlong vacation requires a deep faith in your co-workers that they can do the job without you. “We actually work with trust rather than control,” Petersson says. “That’s rooted in simplicity and our leveling of society in Sweden.” Swedes rank as some of the most trusting people in the world. “We don’t talk about taking a risk on a person,” Ixtabalan explains. “We talk about trusting this person. That to me is not semantics. It’s a very meaningful diference.” Ixtabalan is a prime example. Last year she was a store manager in Houston, and today is U.S. head of human resources—making her part of the group of women that constitute more than half of all of Ikea’s senior managers and executives. Since coming to the U.S. in 1985, Ikea has been trying to sell a vision of inclusion along with its flatpacked furniture. It featured a gay couple in a mainstream commercial more than two decades ago, and in

1995, Ikea started ofering domestic partner benefits. In January the company’s benefits started covering gender reassignment surgery. These policies don’t always sit well in more conservative markets. In Italy, for example, a politician reportedly called for a boycott of the company after Ikea organized an event in support of gay marriage. Petersson is unfazed by the criticism. “We don’t make diferent considerations in diferent countries,” he says. “It’s not that we aren’t appreciative and interested in local culture. We are very much. But there are some fundamental things that we are not negotiating.”

Workers at a Colorado store celebrating the Mile High Sports Spring Games, which raises funds for activities teams at a Denver high school.

FOUR REASONS EMPLOYEES LOVE IKEA BENEFITS, BENEFITS, BENEFITS … AND A CULTURE OF INCLUSION 1 ¬ RETIREMENT BONUS Last fiscal year, all full-time U.S. employees, regardless of salary, got an extra $1,182 in their retirement plans, beyond the company’s 401(k) match. Ikea calls the program “Tack!”: Swedish for “thank you.”

2 ¬ A VOICE IN BENEFIT OPTIONS The company regularly surveys its employees to better understand what kinds of benefits they would like to have. That led to the addition of pet insurance as an option this year.

3 ¬ LOADS AND LOADS OF TIME OFF Full-time employees who have been with the company 10 years get 34 days of paid time off, plus five sick days.

4 ¬ AND NO GLASS CEILING Not only are about 50% of all Ikea employees in the U.S. women, but they also make up more than half of senior managers and executives.

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Sima Jeha, MD, and Angel Bolanos, acute lymphoblastic leukemia patient

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Tony Hsieh decided to turn Zappos upside down. His only regret? That he didnâ&#x20AC;&#x2122;t move faster.

the Zappos experiment



afternoon at Zappos headquarters—which is to say that it’s unlike any other Wednesday afternoon anywhere else in corporate America. The company’s “resident artist,” who started as a Zappos call-center worker, is painting an enormous chrysanthemum on a canvas near the entrance. Red lanterns festoon the lobby of the semicircular 1970s edifice, which once housed the Las Vegas city government, in honor of Chinese New Year. A few hours later, all 1,500 employees of the online shoe and clothing retailer gather in the nearby MGM Grand theater, home to the Cirque du Soleil show Kà, for Zappos’s quarterly All-Hands Meeting, an afternoon of progress reports, music, and fun. The young, diverse staf, heavy on neon-tinted hair and nose rings, cheers when Tony Hsieh, the company’s longtime CEO, announces that everyone will get a paid vacation day on Feb. 29 in honor of leap year. They give a standing ovation to a worker in shipping who raps passionately about the company, ofer a rousing send-of to a longtime “Zapponian” who’s leaving the March 15, 2016




company, and take in a surprise Cirque du Soleil performance, complete with a cameo appearance by Zappos’s signature box. This quirky mix of circus, therapy session, and revival meeting exemplifies what has made working at Zappos so special: an obsessive focus on creating a culture that embraces the idiosyncrasies of each individual. That, and top-of-the-line perks such as free health care. The emphasis on employees—to the near exclusion of the usual metrics used to evaluate business— has made Zappos, owned by Amazon since 2009, a stalwart on Fortune’s annual list of the 100 Best Companies to Work For. It has been so celebrated for its 10 core values—which include “Create fun and a little weirdness” and “Build open and honest relationships with communication”—that the company has its own consulting unit to help others emulate the Zappos way. But this year, nearing the third anniversary of a shift from a traditional management structure to “holacracy,” a system that replaces hierarchies and bosses with “self-management,” something is diferent. In between the rapping and the report on the company’s “Pawlidayz” initiative to support pet adoptions, Hsieh, 42, takes to the stage to report disappointing news. He announces that scores on Fortune’s Best Companies to Work For survey have tumbled on 48 of 58 questions. Indeed, Zappos has fallen of the overall list for the first time in eight years. Two questions that generated particularly dismal results: Do employees think management has “a clear view of where the organization is going and how to get there”? And do managers “avoid playing favorites”? Yet Hsieh didn’t seem particularly rattled. Over the past few months he’d moved beyond holacracy to an even more abstract system he calls “teal.” (We’ll explain.) “It’s just part of the journey,” he tells the troops. “I don’t think it’s going to be all roses. But whatever the top-of-mind things are right now, history has shown that we will get through them.” Still, there’s been a lot to get through lately. The shift to holacracy, combined with a wildly ambitious software project called Super Cloud—not to mention a reconceived business strategy—has left employees confused, demoralized, and whipsawed by the constant pace of change. Over the past year, in part owing to a buyout ofer, 29% of the staf has turned over. Holacracy is “a social experiment [that] created chaos and uncertainty,” says one Zapponian who left last year. A current employee, who filled out a survey (provided to Fortune by the company) following the all-hands meeting, praised Hsieh for openness about the negative feedback but added in a burst of frustration: “I would have liked to hear some actions that may be taken to address how drastically approval of managers and legacy leadership has fallen, and how strongly more and more employees are feeling like favoritism [and management issues



March 15, 2016

are] becoming a bigger problem … They aren’t remnants of legacy structure that have survived despite holacracy; they’re things that have somehow found power in it and worsened in the current system.” Zappos has always been a risk-taking enterprise. It was born from an experiment in 1999 (sell shoes via the Internet!) and has, under the deceptively anodyne leadership of Hsieh, embarked on one mold-shattering change after another. He made Zappos the first website to ofer free shipping both ways. He moved the company to the suburbs of Las Vegas to build a culture apart from Silicon Valley, then uprooted it again to a gritty area of downtown Vegas in hopes of creating a work-life paradise. In his mind, the move to holacracy, in which teams are replaced by “circles,” and managers by “lead links,” is his at-

Derek Noel, once a customer service rep, says Zappos’s new system has let his ideas be heard and allowed him to take on a more substantive role.


tempt to avoid the eventual fate of most large companies: death. “The one thing I’m absolutely sure of,” Hsieh says, “is that the future is about self-management.” The result has been an epic clash between a doctrinaire set of rules and a culture whose very essence has been a tolerance for the unruliness that comes with individual self-expression. Holacracy has empowered some people and hamstrung others. The company’s most utopian dreams, which include banishing internal politics, have not yet been realized. The remaining Zapponians insist the transition, painful as it has been, has turned the corner. They believe in the company, even as they wonder what it will stand for. But at times it feels as if Hsieh, to borrow an old phrase, may be destroying the village in order to save it.

March 15, 2016



“The structure of the meetings [in holacracy] forces each person to … say what they want,” says Zapponian Danielle Kelly.

cared deeply about the human side of work. He wrote a book called Delivering Happiness, which asserted that employee satisfaction is the key to business success. Indeed, in recent years workers seemed content, though sales growth had tapered. Turning the company upside down is the last thing most managers would have done. But Hsieh worried that Zappos was becoming more bureaucratic and losing some of its spark. In 2012, at the Conscious Capitalism conference in Austin, he attended a speech by a software company CEO named Brian Robertson. Robertson argued that it was the messiness of human interactions—the emotional discord, the power struggles—that prevent businesses from achieving their potential. What if, he asked, there’s another way to organize— one that doesn’t rely on bosses, politics, and power? Robertson found inspiration in sociocracy, a centuryold concept that relies on a sort of Quaker meetinghouse decision-making system. He devised a rule book—an operating system, as he likes to call it—for a bossless organization. The result was holacracy, in which traditional top-down reporting lines are replaced by work circles that operate next to, and on top of, each other. People don’t have jobs; they have “roles.” Lead links are the nominal managers—but they have ONY HSIEH HAS ALWAYS


little formal authority and can’t force employees to do anything they don’t want to do. All this egalitarianism comes larded with strictures and meetings, particularly in the implementation phase. There are “tactical” meetings, focused on moving the workflow forward, and “governance” ones, which hash out processes and roadblocks. “Holacracy does add structure and rigor and discipline,” Robertson says in an interview. “If you don’t have parents, you need self-discipline.” Hsieh contacted Robertson—who ofers a software system, GlassFrog, that aspiring holacrats may purchase—and signed on. In early 2013 the human resources department became the first group at the company to deploy holacracy. Employees were shocked and frustrated by the numerous mandates, the endless meetings, and the confusion about who did what. Says Christa Foley, an 11-year vet who was a senior HR manager and is now lead link for the Culture—Connecting the Dots circle and the Zappos Insights circle: “I hated all of it, in particular because it was of-the-shelf, so focused on the rules of the game, and it explicitly felt icky without a focus on the people.” Foley says she has come to like the system. Holacracy created new winners and losers—and it sparked



March 15, 2016


fresh ideas. With experience and expertise de-emphasized, less “typical” and more junior types have been able to succeed. Introverts have benefited from the expectation that everybody speak in meetings. Says Danielle Kelly, 25, lead link of the State of Mind circle, the Teal Mappers circle, and the Teal Kit circle: “The structure of the meetings forces each person to ... say what they want. Before I might’ve thought something and wouldn’t have jumped in. Now I have that time to myself.” Another beneficiary is Derek Noel, 30, a onetime customerservice employee. Noel had wanted to transfer to Zappos’s culture team but found himself blocked by his manager. “As soon as I found out about how holacracy worked,” he says, “I was like, ‘Actually, my boss can’t tell me that.’ ” Noel’s ideas, which included weekday events where employees watch a movie in the auditorium while working on their laptops, gained traction. Now he works in the Fungineering circle, a kind of events-planning/pep squad. “My worst day at Zappos is still better than my best day anywhere else,” he says. “I can’t imagine going back to traditional hierarchy anymore.” The biggest shock for Hollie Delaney, previously the head of people experiences at Zappos and now the lead link of the People Ops circle, among others, was that as a career manager, she no longer had the muscle to force anything to happen. Her longtime career goal, to become the VP of human resources, was no longer achievable at Zappos. As holacracy unfurled, Delaney realized her power was ebbing. “I said, ‘I literally have no job.’ I was freaking out. That got me to start thinking about why I didn’t have other roles. Yeah, I had the big title and the quote unquote power. But was that really fulfilling? The answer was no.” In the spirit of selfmanagement, Delaney found “roles” that appealed to her. An avid runner, she became lead link of the Healthy, Happy Zapponians circle, which is starting a race series for employees. But is having an experienced HR executive spend much of her time on a road race really the best use of Delaney—for her and for Zappos? To get a sense of how some of this works in person, Zappos— which is strikingly open—let me attend, via Skype, a regular meeting of the Pursue Growth and Learning circle. It’s the rough equivalent of an employee-training department. There were 10 participants, including one lead link, Chris Peake. It was a hybrid of a governance and tactical meeting. (I agreed not to reveal the topics of discussion.) The meeting began with “check-ins and checkouts,” in which each participant (including me) was expected to speak

about how they were feeling—about their work, their personal struggles. One woman talked about her love for her “annoying 13-year-old daughter.” It was an acknowledgement that everybody has issues besides work that afect his or her state of mind. After check-in, which took seven minutes, it was all business. A facilitator cut of digressions (known as “distractions”), and the pace accelerated. The agenda was “made up on the fly,” according to Peake. “Agenda items are typically referred to as ‘tensions.’ A tension is simply the diference between ‘what currently is and what it could potentially be.’ ” Tensions could be anything from practical obstacles to brainstorms, and they proliferated—but were mostly tabled for resolution at a later time. For all the odd lingo (“I’m making myself an action to send you feedback on that”), it wasn’t much diferent from a conventional meeting. The lead link did almost all the talking. He made requests rather than issued orders (though not without the occasional guilt trip) until someone agreed to take on a task. The meeting lasted over an hour and ended after everybody was asked to name their favorite current TV show. Holacracy is supposed to slay the demons of politics. It hasn’t yet. Some managers tried to consolidate their old power inside the new structure, says Nox Voortella, who came to Zappos in 2014 as a sales planner. “In the beginning I thought [holacracy] was great,” she says. “Then I saw the old managers around me grow more and more insecure and try to see how they would restructure management. The people who should’ve stayed and were leaders and could have rallied people left. And the managers that stayed were just the ones who had nothing else to ofer.” She recently chose to depart for a more traditional company. Holacracy also lacks some crucial elements, such as a compensation process. The system doesn’t value seniority or the size of your budget. There are no formal performance evaluations. How, then, do you calculate how much to a pay a person, and for that matter, who makes the decision? Zappos just launched its own method. It has nothing to do with achieving financial results; instead, people are paid according to skills they possess or earn, a system called “badging.” Just like Girl Scouts, people can earn, say, a Java Coding badge or a Merchandise Planning badge by fulfilling certain requirements. Zappos says it will pay at the market rate for each skill, but every job comprises many skills. To stave of the anxiety of not knowing what you’ll be paid, the company created a Grandfather badge that guaranteed pay wouldn’t fall in 2016. Another big issue is how to determine how much time





one spends in the various circles and whether they add up to something approximating a full-time job. Every circle has a certain number of “people points” that together approximate the scope of work. Zappos workers have 100 points each and must distribute them among their circles. If they don’t enjoy their circles or feel they aren’t doing a good job—or if, as some employees report, lead links don’t approve as many points as they need—they must find a new circle. If they don’t, they can end up on “the Beach,” a kind of purgatory. “You just sat … in a conference room and talked with the ‘why’ coaches about what your passions were,” says Voortella, who says she landed on the Beach after clashing with a lead link. Today the Beach has been renamed and the path split. You either enter “Hero’s Journey,” in which a team helps you find a new raison d’être. Or you enter “Transition Support” to help you join another circle. If that doesn’t happen in two weeks, you transition out of Zappos entirely. Meanwhile, holacracy hasn’t been the only disruption. In 2014, Zappos reconceived its sales strategy, from one that emphasized volume to one that targets a smaller number of “best customers” who pay full price. Almost simultaneously, the company embarked on a giant software migration—moving its e-commerce system onto Amazon’s—a still-ongoing project titled Super Cloud. One result: Zappos’s website has barely changed for two years—a lifetime in the world of the Internet. “I wish we had waited until Super Cloud was done,” says Manish Honnatti, who leads the Zappos Zero unit and has become an advocate for self-management. HAT WASN’T ALL. A year ago, as holacracy had finally become law throughout the company, Tony Hsieh issued another decree. It came in a 4,300word memo entitled “Reinventing Zappos: The Road to Teal.” Wrote Hsieh: “We are going to take a ‘rip the Band-Aid’ approach to accelerate progress towards becoming a Teal organization (as described in the book Reinventing Organizations).” Therefore, he explained, “as of 4/30/15, in order to eliminate the legacy management hierarchy, there will be efectively be no more people managers.” Hsieh was referring to a 2014 book by consultant Frederic Laloux, who argues that throughout history people have organized themselves in various ways. Laloux assigned a color to each type: orange for modern corporations such as Walmart, and green for what he views as more evolved operations, like Starbucks. Teal, he wrote, was the next stage of development, characterized by self-management, bringing one’s “whole” self to work, and having a purpose beyond making money. “There is something broken about management, something




March 15, 2016

exhausted,” Laloux tells me over the phone. For Hsieh, teal was the logical next step, the state that could be achieved only via a process like holacracy. “Teal is the goal; holacracy is the system,” says John Bunch, a former professional poker player and Zappos developer whom Hsieh tapped to lead the move to holacracy in 2013. Then the low-key CEO injected more drama. He asked everyone to commit to teal—or leave (with extremely generous severance). Hsieh knew he’d lose some good people, but he also thought the nonbelievers were impeding progress. The logic made sense. Still, the emotional side of it was devastating. Many people who had helped create Zappos and had risen to become leaders were being told they were no longer wanted. It felt like a purge. What unfolded next amounted to a collective wail: We’ve only just started holacracy. What the heck is teal? And, by far, the most common reaction: Will all this ever end? Hsieh says he didn’t know how many people would accept the ofer. “Whatever the number was was the right number,” he says today. In the end, 18% of the 1,500 employees took buyouts, and another 11% left without a package. TOMIC LIQUORS is

a rare vestige of an older Las Vegas. With its mid-century signage and history as the place on whose roof locals stood to observe nuclear tests, it has the sort of retro cachet Hsieh loves. Waiting for him are three glasses containing his regular beverages: from left, a Diet Coke, a shot of Fernet-Branca liqueur, and a White Russian. Hsieh has his eccentricities. He’s worth around half a billion dollars but lives in an Airstream trailer with two pet alpacas on-site. Unmarried and apparently unattached, he sees his company as his family. I drink a shot of the NyQuil-like Fernet with him, then order a beer. (I can’t abide White Russians.) Hsieh turns serious when I ask what he didn’t anticipate in the process of implementing holacracy. “I’ve been surprised,” he says, “at how hard it is to let go of the psychological baggage.” I ask if he regrets undertaking so much change at once. No, he says: “In retrospect, I would have probably ripped of the Band-Aid sooner.” For Hsieh, self-management is as much a societal strategy as a business one. Having spent much of the past few years building and personally funding—to the tune of $350 million—the Downtown Project, an attempt to build a work-life community in the heart of Las Vegas, Hsieh has ambitions beyond commerce. He likens self-management to the interactions that spring up organically in a city rather than the topdown bureaucracy of a typical company. Hsieh is thoughtful—a seeker. Yet it’s striking that neither he nor other Zapponians make more than perfunctory comments about the company’s business. (He did say Zappos has


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achieved its highest operating profits ever.) That’s a crucial point. If Zappos continues to make money, Amazon will leave it alone. If it doesn’t, Zappos could just as easily cease to exist. The company achieved its 2015 profit goals, but several employees say that it has lowered its 2016 targets. (Zappos declined to comment.) Whether that’s due to holacracy, growing competition in the online shoe category, or something else is impossible to tell. OLACRACY’S VALUE remains

far from proven. Its creator, Robertson, says the process takes five to 10 years to be fully integrated—an eon in business. He seems blasé when asked whether holacracy truly works. “Where I don’t measure success is by looking at the actual end results,” he says. “I don’t put much stock in it, because who knows? For me it’s about ease of use.” Some 300 companies use his system—Zappos is easily the largest—and there have been failures. In early March, content site Medium announced it was abandoning it. Bud Caddell, a consultant who has studied self-management systems, says his former firm, Undercurrent, tried it without success. “I found it extremely dogmatic and rigid and overly complex, and it took attention away from our customers,” Caddell says. Even Hsieh’s own Downtown Project tried holacracy but gave up on it in 2014. (“It was too early to adopt


Hollie Delaney (left) used self-management to find new roles for herself after her job was reconfigured. Christa Foley says she initially hated holacracy’s endless rules.



March 15, 2016

in Downtown Project’s time line,” says Hsieh.) When asked for an example of something that couldn’t have happened without holacracy, Jamie Naughton, Zappos’s chief of staf, cited this: Dogs are now allowed in the oice. If that had been proposed earlier, she says, anyone could have blocked it because of allergies, fear, etc. But under holacracy, one of the threshold questions is “Is it safe enough to try?” Now, even though Hsieh was opposed, dogs are welcome, as long as they pass a behavioral assessment. People afflicted by dander have declared “allergy zones” that dogs may not enter. “Self-organization,” she says, “allowed one employee to figure it out.” Last spring, while Zapponians were weighing whether to take the ofer, one of them invited Caddell to share his own experiences with holacracy in an open forum. He interviewed 15 to 20 employees beforehand, then spoke to a group of about 150. “It felt like a wake,” he says. “The people I did speak with expressed a general feeling of loss of control of their own working environment.” When Caddell emailed Hsieh suggestions on how to improve morale, he says, he was shut down: “He said I used the word ‘leadership’ too much, and that I was a biased actor.” (Hsieh says that’s not the type of phrase he would use.) there are signs of optimism at Zappos. Some referred to a book called The Dip, by Seth Godin, which argues that in times of great transition, things always get worse before they get better. Now that the employee buyouts are completed, few apostates remain to slow things down. “We grew up,” says Tyler Williams, who leads the Brand Aura circle (a.k.a. marketing). “Now we are getting back to that place where we are being kind and forgiving to people, and people that used holacracy as a weapon are finding themselves getting smaller and smaller islands to work from. We’re more policed now as a company based on peer pressure rather than on micromanagement.” Many are pushing to bring culture back to the forefront. One possibility: adding a Culture Check to the agenda at every governance meeting. A six-step conflict resolution process, developed in-house, may help soften holacracy’s rigidity. And Zappos is altering its recruiting process to ensure that new hires are wired for self-management. The day after the all-hands meeting, there were two parties going on at lunchtime: one for Chinese New Year, with women making dumplings, and a Valentine’s Day blowout featuring a cruise-themed costume contest and a cookiesand-tattoos setup. Holacracy hasn’t reduced the company’s social activities. Says Naughton: “We didn’t get ranked one of the best companies to work for in America this year, but we’re still really a great company. This is my family, and I hope that’s what people take away when they see Zappos.” Fair enough. Yet that may be true in spite of holacracy rather than because of it. OR ALL THE HAVOC,






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March 15, 2016

while you were out

AVisit From Wall Street The man in the pin-striped suit explained that the market situation was grave and that investors everywhere desperately needed my help. Could I perhaps do him a favor? By Stanley Bing

out of the market,” he said, his eyes boring into mine with a wretched intensity. The truth is, I was kind of expecting something like this. Even I, trying to give myself a break, could recognize the clear pattern: I’m a jinx. He phrased it more strongly. “You’re a poisonous vampire, sucking the life out of the equity market,” he said somewhat apologetically. He took out a cigar, thought better of it, and put it back in his breast pocket. “Let’s look at the record. In the mid-1980s you bought a bunch of General Electric. It was at $78. Last week it closed at $29. Why don’t you just take your losses so it can go up again?” Wall Street pulled himself together and continued. “Tesla has been a wonderful stock, and you tried to ruin it!” I was wondering when he would get to that. It was pretty shameful. “On Dec. 31 you bought 100 shares at $240 bucks each. Right away—bang! zoom!—into a giant slalom it went! By Feb. 10 it was below $144! Thank the gods you panicked and sold that day. It’s rallied a bit, so at least there’s hope.” He appeared to be either on the verge of tears or prepared to punch me in the face. Once again I held my tongue. What he was saying was patently the truth. “And look what you’re doing to oil!” he bleated. “When you bought Exxon Mobil in January 2014, its shares were trading at $100. Now look at it—down 20%. For God’s sake, man! You’ve brought down the entire energy sector! Get out! You’re Typhoid Mary! Get out! Get out now!” At this point he was frothing at the mouth. That’s when CaroleAnne stepped in. She’s good that way. Cordial but firm. I heard Wall Street’s anguished cries as she escorted him out. He may be gone, but his point is still valid. And he didn’t even mention what I’ve done to Apple and Disney. I’m not a monster, okay? I have a heart. I’m selling. Best of luck to the rest of you. Now you have a chance. Follow Stanley Bing at and on Twitter at @thebingblog.

Fortune (ISSN 0015-8259) is published monthly, with extra issues in March, June, September, and December, by Time Inc. Principal office: 225 Liberty St., New York, N.Y., 10281-1008. U.S. subscriptions: $22.00 for one year. Member, Alliance for Audited Media. POSTMASTER: Send all UAA to CFS (See DMM 507.1.5.2); Non-Postal and Military Facilities: Send address corrections to Fortune, P.O. Box 62120, Tampa, Fla. 33662-2120. Canada Post Publications Mail Agreement No. 40110178. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Return undeliverable Canada addresses to: Postal Stn A, P.O. Box 4321, Toronto, ON, M5W 3G8. GST #888381621RT0001. Customer Service and Subscriptions: For 24/7 service, please use our website: You can also call 1-800-621-8000 or write to Fortune at P.O. Box 62120, Tampa, Fla. 33662-2120. © 2016 Time Inc. All rights reserved. Fortune is a registered mark of Time Inc. PRINTED IN THE U.S.A. Subscribers: If the postal services alert us that your magazine is undeliverable, we have no further obligation unless we receive a corrected address within two years. Your bank may provide updates to the card information we have on file. You may opt-out of this service at any time. Mailing List: We make a portion of our mailing list available to reputable firms.



illustr ation by benedetto cr istofa ni

last week, minding my own business, when CaroleAnne popped up in my doorway with a perturbed expression. “You have a visitor,” she said. “Does he or she have an appointment?” I asked. “No,” she replied with a bit of crust. “But he is quite insistent that he must see you. He’s in the large conference room right now, waiting.” “Really?” This was unusual. People seldom appear unannounced, and never are they insistent enough to get past Charon in the lobby and make it all the way upstairs. Well, I thought, in any event it’s a nice respite from what I was doing at that precise moment—which was pretty much nothing. “Send him in,” I said. I slipped on my suit jacket and straightened my tie. I thought I might want to have my game face on. The costume helps with that. The gentleman who crossed my transom a moment later was an imposing sight. Large, very large. On the cusp of obese, but not quite there yet, because the vast tower of him under all that avoirdupois appeared to be solid muscle. Sandy hair. Some exploded veins in his nose that spoke of good times past and future. Pin-striped suit, with a gravy stain on the lapel. Three-hundred-dollar tie, badly knotted. “May I sit?” he asked. I motioned him to my guest chair, which he was almost too big to occupy with comfort. He wedged himself in. “I’m sorry to drop in on you like this,” he began. I said nothing. Sometimes that’s best. “But I’m being rude,” he continued. “I’m Wall Street.” He shoved a mighty paw out at me. I shook it. Of course I did. Where would we be without him? He got down to business: “I’ve come here today because the situation is grave, and we need your cooperation to set it right. The markets are roiled. Insanely volatile. Something must be done.” I was confused, I can tell you. Of course I’ve been bummed about the wild swings in stock prices lately. But what could I— one rather small investor in the vast ocean of money floating the indexes—do about it? I asked him just that. “You can get I WAS IN MY OFFICE

Enough about us. Let’s talk about you for a minute.

There is the relaxed you (hopefully we’ll

be seeing that you a little more often).

There is the sporty you (the you who can dodge and weave and go go go). And then there is the intelligent, dependable, everyday you. This is the one who knows that all of you need their vehicle to be versatile, responsive and smart enough to adapt to whichever one of you is behind the wheel. Three driving modes* that, all together, deliver the feeling of control, comfort and — wait for it — connection. It’s just one (well, three actually) of the impressive innovations you’ll find on the new Lincoln MKX. X.


*Available feature.

Fortune 15 Marzo 2016  

Fortune 15 Marzo 2016

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