http://geoffcolvin.com/fortune_articles/ Geoff Colvin's Fortune magazine articles en jon@complexny.com Copyright 2010 2010-08-31T15:19:37-05:00 http://geoffcolvin.com/site/the-staggering-pace-of-technology/ http://geoffcolvin.com/site/the-staggering-pace-of-technology/#When:14:19:37Z 10,000 transistors now cost less than a grain of rice. Here's why that matters.FORTUNE -- I have more transistors than neurons. So do you. That's something worth caring about, because it signals the advance of a weird new world that most of us aren't prepared for. Yet we'd better get ready, for the world of the Syfy channel is looking startlingly plausible. Remembering how proud I once was to own a transistor radio with five transistors, I wondered how many transistors I own today. (For those needing a refresher, a transistor is an electronic switch that's either on or off, a one or a zero in the digital world.) When I performed this exercise nine years ago, I was astonished to find that the total was 4 billion to 6 billion, counting every device in my office and in my family of four. Well, things have changed. At this moment I'm using a year-old laptop computer with more than 37 billion transistors. My desktop machine in the office has about the same number. My iPod has more than 256 billion transistors. My BlackBerry has maybe a billion. My Kindle has over 16 billion. Then there's my family's car, washing machine, TV, DVD player, microwave, coffeemaker, dishwasher, refrigerator, modem, wireless router, printers, security system, thermostat; they all contain transistors, at least tens of millions in each device. Even leaving aside shared family devices, my personal transistor count is in the hundreds of billions. For comparison, your brain and mine each contain about 100 billion neurons. By itself, that comparison doesn't mean much: A transistor has one connection leading in and out, while a neuron may have thousands or tens of thousands. But those devices are increasingly connected to one another via the Internet, which will soon be dominated by disparate devices increasingly working as one. Further, the transistors-to-neurons comparison helps us nongeeks grasp the simply staggering pervasiveness of technology. Consider: The world produced about 10 quintillion transistors in 2009, which is 250 times more than all the grains of rice consumed last year, according to Applied Materials (AMAT, Fortune 500), which makes the machines that produce all those transistors. At Best Buy, a 16GB flash drive (128 billion transistors) costs $32.95; at the supermarket across the street, a five-pound bag of rice (150,000 grains) costs $4.85. For the price of a single grain of rice, a retail shopper can buy about 125,000 transistors. The incredibly low and ever-falling price of transistors means they're everywhere, doing new kinds of jobs. They're in golf clubs (to analyze your swing), in golf balls (to help find lost ones), and in running shoes (to adjust cushioning at each stride). Mercedes-Benz engineers tell me that a new S550 uses 8 billion to 10 billion transistors. Floor it in a tight turn and the car may refuse to open the throttle fully. The accelerator isn't connected to the engine, but to a computer that wants to keep you from doing something stupid. Mainstream experts are now seriously considering the implications of machines far smarter and more capable than ourselves. The Association for the Advancement of Artificial Intelligence convened a group of leading computer scientists last year to study "the implications of systems that emote, that express mood and emotion (e.g., that appear to care and nurture), when such feelings do not exist in reality." The U.S. Navy's study of "autonomous military robotics" considers, for example, the possibility that "we ... may not be able to halt some (potentially fatal) chain of events caused by ... systems that process information and can act at speeds incomprehensible to us." Think the May 6 flash crash, but the computers have machine guns. We need to imagine this unimaginable future. An accessible way to follow developments is to keep an eye on Watson, the IBM computer system (named after company founder Thomas Watson) with the lofty goal of succeeding at a deeply human task: competing on Jeopardy. Bernard Meyerson, IBM's vice president for innovation, says the challenge isn't the amount of computing power but "writing the software that can understand the subtle cues of language." Watson is performing impressively and may compete against humans on the program this fall. As for my counting exercise, it may soon become impossible. I asked IBM's (IBM, Fortune 500) experts how many transistors Watson has. The system is so vast, complex, and ever-changing that they just don't know. First Published: Aug 31, 2010: 5:38 AM ET 2010-08-31T14:19:37-05:00 http://geoffcolvin.com/site/desperately-seeking-math-and-science-majors/ http://geoffcolvin.com/site/desperately-seeking-math-and-science-majors/#When:16:55:50Z The number of China's engineering grads are growing while Americans major in fitness. Why?FORTUNE -- Applied Materials had to fly in 100 interviewers just to screen all the job applicants for its new Solar Technology Center in Xi'an, China, last year. The company wanted to fill 260 high-tech jobs. It got 26,000 resumes. A fraction of those applicants were invited to interview. The final selectees, board member Andy Karsner tells me, "were top-of-their-class, English-speaking engineers. They're the best of the best." Now some of the most advanced research in this high-value, fast-growing field is being done in China -- instead of in the U.S. with American engineers. Why should we care? Because it's graduation season, when we see how starkly the direction of the American educational system differs from the way that faster-growing economies are headed. Those Chinese solar researchers are the cream of an engineering crop that included an estimated 10,000 Ph.D. graduates last year. This spring the U.S. will graduate about 8,000 Ph.D. engineers, an estimated two-thirds of whom are not U.S. citizens. About 150,000 students who majored in engineering, computer science, information technology, and math will collect bachelor's degrees. The Chinese government claims that in recent years the number in China has been well north of 500,000 and rising fast; even if overstated, as some believe, the real number is much larger than America's, and the quality of those graduates is improving. Americans should be alarmed, not because we have to beat the Chinese on every statistic, but because those facts threaten the heart of our great economic story. Until the past decade most Americans lived a little better every year. From the nation's beginnings, the engine of that improvement has been technology that makes millions of workers more productive. That's why you learned about Whitney's cotton gin and the McCormick reaper in elementary school. A stagnant living standard has terrible consequences, one of which is that the country eventually stops attracting and keeping the world's best and brightest, triggering a downward spiral that grows ever harder to break.The spiral may be well under way. Instead of staying in the U.S., our non-U.S. Ph.D. graduates increasingly judge home to be a more attractive option. Anand Pillai, a top talent executive at India's giant HCL Technologies, says that his best young recruits used to insist on being sent to the U.S. for a time, but now many of them resist going: "They see such great opportunities at home." Its next turn could be the worst. As math and science talent accumulates abroad, companies do more of their hiring there, reducing demand in the U.S. That's partly why undergraduate engineering majors are a shrinking proportion of the total, down from 6.8% to about 4.5% over the past 20 years. Employers then claim they can't find engineers in the U.S. -- so they have to hire abroad. The fastest-growing college majors in America as of 2007, says the U.S. Education Department, were parks, recreation, leisure, and fitness studies, as well as security and protective services. That's not a great omen for technology breakthroughs. If the next great technological advances in energy, the environment, medicine, and information are made elsewhere, American workers will have a much tougher time earning good pay in those key industries. When the National Academies (experts in the sciences, engineering, medicine, and research) raised this alarm in a landmark 2005 report, a chorus of quibblers sidetracked the discussion by arguing that China's engineering graduates weren't up to the same standard as America's, so the statistical comparisons weren't valid. Five years later it's clear that the National Academies were prophetic. For America's great economic story to continue, we need to reverse the downward spiral now, before it picks up speed. That means changing our culture -- hard but doable. As our graduates collect their diplomas this spring, we should send the next classes a message: that as an economy we want more science and math majors, and as a society we prize them.  First Published: Aug 12, 2010: 12:00 PM ET 2010-08-12T16:55:50-05:00 http://geoffcolvin.com/site/whos-to-blame-at-bp-the-board/ http://geoffcolvin.com/site/whos-to-blame-at-bp-the-board/#When:16:49:28Z BP's directors are all at the top of their careers, but despite their A-list credentials, you can hold them responsible for the disaster in the Gulf.FORTUNE -- BP's Gulf disaster is the board of directors' fault -- and not just in the sense that everything is ultimately the board's fault. This board has earned its blame in a very direct way. Yet you'd never suspect it from the directors' all-star credentials. If you're looking for doddering peers who prefer liquid lunches in the House of Lords dining room or earnest but clueless academics, you won't find them on this board. It's a knockout: Every member has reached the highest levels at famous, successful corporations. Governance wonks could fault the group for including too many BP execs (five of 14 directors), and it won't win any diversity awards. But if you want achievement and pedigree, look no further: They include the former CEOs of Ericsson (ERIC), Duke Energy (DUK, Fortune 500), and United Technologies (UTX, Fortune 500), the current CEO of Anglo American, and the former chairmen of Unilever (UL) and McKinsey. But wait, there's more. This board appears to have done everything right to make sure that BP was identifying and managing its risks and to ensure that a catastrophe like the Macondo well blowout, which caused the spill, didn't happen. A safety, ethics, and environment assurance board committee monitors nonfinancial risk. A group operations risk committee of executives reports to the CEO. A dense flow chart shows how all the pieces fit together to support BP's goal of "no accidents, no harm to people, and no damage to the environment." Obviously this elaborate structure failed, just like the well. But is it really fair to blame a terrible accident in the Gulf of Mexico on 14 people in a London boardroom above St. James's Square? It is, and here's why. The board had known for years that something was wrong with safety at BP (BP). An explosion and fire at BP's refinery in Texas City, Texas, in March 2005 killed 15 people and injured 170; it was America's worst industrial accident in almost 20 years. Just four months later a potentially deadly hydrogen fire broke out at the same refinery, and the following month community residents were ordered to stay indoors after another accident there. That's when BP assembled an independent panel, headed by former Secretary of State James Baker, to investigate safety at its U.S. refineries. While the panel worked, a BP pipeline in Alaska leaked more than 200,000 gallons of crude in March 2006. The panel's report, published in January 2007, is brutally direct. While its immediate focus is BP's five U.S. refineries, its findings go far beyond them. Calling for "leadership from the top of the company, starting with the Board and going down," the report found that "BP has not provided effective process safety leadership." Time and again the report notes that BP has the right standards and programs but cannot make them work. It cites specific areas in which the company failed to enforce standards, including "critical alarms and emergency shutdown devices." The report emphasizes that the many failures it cites were "not isolated." Repeatedly it notes that "the lack of effective leadership was systemic, touching all levels of BP's corporate management." While it is management's job to implement effective safety practices, the report says, "BP's Board did not ensure, as a best practice, that management did so." Remember, BP asked for this report. The directors wanted to know what was wrong with safety at BP and how to fix it, and the panel gave them a 347-page answer. Corporate-governance authority Robert A.G. Monks, who testified as an expert witness for a Texas City worker, says, "The BP board was on notice that the corporate culture of 'saving over safety' pervaded BP. They were on notice that the mechanisms for informing the board were dysfunctional. The board had an affirmative duty to understand the risks involved in the drilling of this well." BP declined to make any directors available for interviews, but a spokesman says "there are no grounds" for the allegation that the board bears particular responsibility for the gulf disaster. "Since Texas City in 2005, the company has turned around its process safety systems, which have been largely rolled out across the company," he says. It's worth remembering that after the Texas City explosion, BP announced it would "do everything possible to ensure nothing like it happens again." The board was told what needed doing. We've seen the result. First Published: Jul 28, 2010: 12:00 PM ET 2010-07-28T16:49:28-05:00 http://geoffcolvin.com/site/nielsens-78-million-ceo/ http://geoffcolvin.com/site/nielsens-78-million-ceo/#When:16:32:26Z David Calhoun left a big job at GE to run Nielsen in 2006. With an IPO on deck, now we know why.FORTUNE -- What was he thinking? That's what many wondered when David Calhoun left a vice chairman's job at General Electric to run the Nielsen TV ratings company in 2006.At GE, he managed businesses with revenue of $40 billion. Just months earlier, a Fortune cover story had declared him headhunters' "No. 1 draft pick in the game of grabbing top executive talent, the most lusted-after managerial star who isn't already a CEO." He was getting offers to lead giant corporations, including Boeing. Yet he turned them down and then left GE to head tiny Nielsen (revenue: $4 billion). What could possibly have enticed him?Now we know. Headhunters had presumed his Nielsen pay package must have been staggering and that the jump could have paid off hugely. But for now, the most audacious corporate job switch in years appears not to have done Calhoun a bit of good financially -- though he has done just fine, and the story could still take some sharp turns.The much-sought information on Calhoun's compensation is in Nielsen's recent prospectus for an initial public offering. The company has been owned since 2006 by a group of private equity firms, including the Blackstone Group (BX), the Carlyle Group, Kohlberg Kravis Roberts, and Thomas H. Lee Partners. They were determined to pry Calhoun loose from GE. Here's what it took:Start with a signing bonus of $10,613,699.Then, to make Calhoun whole for GE stock options and restricted stock that he forfeited upon leaving, add $20 million, which was to be reduced by his GE severance pay; the net was $18,840,627.On top of that, Calhoun is entitled to receive "deferred compensation" of $14.5 million after his employment contract expires at the end of next year, plus interest at 5.05% a year from his employment date in 2006, which totals about $18,881,000. This is to be reduced by any deferred compensation from GE, an amount that has not been publicly reported. It all comes down to the IPOHe was given six million stock options at a strike price of $10 a share, a price the firm deemed a share's "fair value" at the time, plus another million options at a strike price of $20. (Those share prices likely bear no relation to the eventual price of the IPO shares; Calhoun's shares and strike prices will have to be adjusted after the offering.) We can't use the usual Black-Scholes model to value his options because we have no market data on the stock, but a standard rule of thumb values them at about $20 million; they don't expire until 2016.That's what he got or was promised just for walking in the door, but as in many private equity employment deals, this one had another side: Calhoun invested $20 million of his own money in Nielsen, buying two million shares at that same $10.With Calhoun in his new office, it was time to start paying him for actual work. He was guaranteed a base salary of $1.5 million, which has since been increased to $1.6 million. He also gets an annual bonus, which last year was $2.5 million. He receives fairly standard perks, such as financial planning services, car and driver, tax gross-up, and others, which were worth about $135,000 last year.Let's add it up. That signing bonus is doled out in installments, of which a couple have yet to be paid, but since Calhoun needn't meet any performance targets in order to get the remainder, let's credit him with the whole amount. For the same reason let's also count the whole deferred comp, but we'll ignore the interest that will increase it, since the total will be offset by his GE severance pay, which we're forced to ignore because we don't know it. We have no market data for the value of his stock, but Nielsen figures its shares were worth $11.50 at year-end 2009, so Calhoun had a putative gain of $3 million on his personal investment. Some of his options apparently failed to vest because the company didn't meet performance targets in one year, but Calhoun could eventually earn them back, so let's count all of them.The total: $78,213,291 so far.That's a lot of money, but is it any more than he would have made if he'd stayed at GE (GE, Fortune 500)? He likely wouldn't have made much more or less than John Rice, the highest paid vice chairman since Calhoun left. (CEO Jeff Immelt has been receiving less pay than his top lieutenants during GE's difficult recent years.) Using the same methodology we applied to Calhoun's pay, Rice's total over the same period (mid-2006 through 2009) was about $55 million. A potentially lucrative futureBut remember, Calhoun's total includes $20 million to compensate him for stock and option awards he forfeited on leaving GE, while Rice still has his awards accumulated over a GE career of similar length. So it appears that Calhoun is financially almost exactly where he would have been had he stayed put.The big wild card is the eventual value of his options and stock -- they could be worth far more or far less than we've assumed. The omens are good. If Nielsen's value really has increased 15% during Calhoun's tenure through 2009, as the company's "fair value" estimate says, that's a terrific performance in a period when the S&P 500 dropped 14%. It suggests that Nielsen's private equity owners, who bought the company for $9.5 billion, got more than their money's worth by paying Calhoun as they did. But what really counts is the market's verdict, which the IPO will tell us.And if Calhoun expected to do much better for himself -- which he presumably did, since in mid-2006 almost no one suspected the worst recession in decades was just over the horizon -- well, he hasn't done badly so far.Nor is his story even close to finished. When his contractual term at Nielsen ends on December 31, 2011, he'll still be just 54 years old, with the opportunity of plenty more CEO work if he wants it. First Published: Jun 14, 2010: 12:00 PM ET 2010-06-14T16:32:26-05:00 http://geoffcolvin.com/site/my-own-private-goldman-testimony/ http://geoffcolvin.com/site/my-own-private-goldman-testimony/#When:16:05:19Z In a historic market dislocation, there were -- guess what -- winners and losers. Last time I checked, that was not a crime or even a scandal. It's the way economies work. (Fortune) -- I was not asked to testify at the recent hearings of the Senate Permanent Subcommittee on Investigations, probably because I've never worked at Goldman Sachs or anywhere else on Wall Street, or had any involvement whatsoever in the market for synthetic CDOs, all-natural CDOs, or subprime mortgages of any kind. Nonetheless, had I been invited, I would have been pleased to respond to some of the Senators' remarks as follows:Edward E. Kaufman Jr., D-Tenn.: The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people. They think you didn't just come out fine because it was luck. They think you guys just really gamed this thing really well. Forgive me, Senator, but have you been in a cave the past three years? You think Wall Street came out of this thing just fine? You might want to ask the thousands of unemployed workers from Bear Stearns and Lehman Brothers, and you might check in with the former shareholders of Merrill Lynch, or the current shareholders of Citigroup (C, Fortune 500). Those are four of the most storied names on Wall Street, and they did not come out just fine.The reality is that in a historic market dislocation, there were -- guess what -- winners and losers. Last time I checked, that was not a crime or even a scandal. It's the way economies work.Claire McCaskill, D-Mo.: Let me just explain in very simple terms what synthetic CDOs are. They are instruments that are created so that people can bet on them. It's the La La Land of ledger entries. It's not investment in a business that has a good idea. It's not assisting local government and building infrastructure. It's gambling, pure and simple, raw gambling. They're called synthetic because there's nothing there but the gamble, but the bet.Gee, Senator, your vitriolic scorn for gambling might surprise the hundreds of thousands of Missouri voters who love to play the Missouri Lottery, and it might really surprise the many Missouri farmers who are glad they can hedge their risks by buying crop and fuel derivatives, which are also "instruments that are created so that people can bet on them."But that's beside the point. Your description of synthetic CDOs, if stripped of the loaded language, is basically right. They're bets. That's important to remember when you look at the case the SEC just happened to bring against Goldman (GS, Fortune 500) last week. Since the synthetic CDO at the heart of the case was a bet, the two hedge funds that bought it were well aware that someone else was, by definition, betting the other way. The fact that it was John Paulson, which Goldman didn't tell the buyers, is irrelevant; he was just another hedge fund manager, and at the time no one knew whether he'd be right or wrong. The buyers were fully informed about the contents of the synthetic CDO, and they chose to bet as they did. Turns out they lost a billion and Paulson made a billion. That's what happens every day -- every minute -- in the financial markets.By the way, if it turned out that Warren Buffett had advised the hedge funds in the SEC case to buy the security that Goldman was selling, and the hedge funds didn't tell Goldman, would you urge the SEC to sue those hedge funds? Or if everything had happened just as it did except that Paulson had been wrong and had lost a billion, do you suppose the SEC would still have sued Goldman? Just asking. Byron Dorgan D-N.D.: If the disclosures at these hearings are not the final nail that persuades the American people to demand this [financial regulation overhaul] be done now, I don't know what would be. To bet against your clients, to bet against your country, all for the sake of big profits.Could we add some violin music please? Greedy Wall Street bankers! Picking America's pockets so they can bathe in Champagne! Look, Goldman was not betting against its clients and certainly not against its country, and you guys cannot be so dumb that you don't know that. But just in case, here's how it works, in terms even a Senator can understand.Goldman's clients want to put their money to work, so those clients buy and sell financial instruments. They do it all day, every day. Goldman serves them in part by putting buyers and sellers together, and sometimes by being the buyer or seller. Goldman and a given client could be betting the same way in the morning and the opposite way on a different transaction in the afternoon. And to repeat -- since you all seem to have a really hard time with this central idea -- no one at the time knows who's right. Do you honestly believe that Goldman was withholding its secret knowledge of where the markets were going? If so, you might want to join one of those Area 51 chat groups.Or think of it this way: If it were wrong to "bet against clients," as you mistakenly call it, then no investment bank could exist, because any position it took would oppose some position held by one of its hundreds of clients. And by the way, the clients know how this all works, and, believe it or not, it doesn't seem to bother them.As for betting against the country -- you can't be serious. If trading on the belief that securities are mispriced is seditious, then you'd better sponsor a bill to expand the federal prisons, because every investor in America is going to jail.Carl Levin D-Mich.: You are betting against the same security you're out selling. You've got a short bet against that security -- you don't think the client would care?No! Have you been hanging out with Dorgan? Of course the client wouldn't care. The client knows very well that someone else has an opposite view on that security -- after all, the client thinks it's worth buying, and somebody else obviously thinks it's worth selling. Otherwise there wouldn't be a transaction. Duh! And both Goldman and the client know exactly what's in the security. Nobody got hoodwinked.And despite the way that you and your colleagues are foaming at the mouth today, I suspect that all of you actually realize that. First Published: Apr 30, 2010: 12:00 PM ET 2010-04-30T16:05:19-05:00 http://geoffcolvin.com/site/the-real-outrage-is-how-ceos-are-paid-not-how-much/ http://geoffcolvin.com/site/the-real-outrage-is-how-ceos-are-paid-not-how-much/#When:16:02:07Z If you want to get mad at companies for screwing up executive pay, here are three good reasons.(Fortune) -- It's outrage season, formerly known as proxy season, when recession-shocked Americans get furious at the new list of insanely overpaid CEOs. The leader so far is Occidental Petroleum chief Ray Irani ($59 million), an excessive-pay hall-of-famer, but he may be overtaken by others as more proxies are filed. The bad-boy headlines will misleadingly suggest that CEO pay levels overall are a problem. They're not. For hundreds of big-company CEOs, pay came down in the 2001 recession, rose in the expansion, and has come down again in this recession, just as you'd hope, according to research by the University of Chicago's Steven Kaplan. The inflation-adjusted average is lower than in 1998, at just over $11 million. That's nothing to sneeze at, of course, but the real problem is the way in which CEOs are paid -- the incentives they're given. Despite new SEC disclosure rules and the painful recession, by some measures the situation is getting worse. If you want to get mad at companies for screwing up executive pay, here are three good reasons: They're incentivizing managers to do stupid thingsA large majority of companies base their long-term and short-term incentive payouts -- which often form the bulk of executive comp -- on the company's reported income, earnings per share, total shareholder return, and various other ratios, according to a new analysis by the James F. Reda compensation consulting firm. Sounds sensible, but it isn't. Research has long shown that reported earnings and EPS correlate poorly with what shareholders actually care about -- the value of their company. In addition, earnings, EPS, and return ratios are easy for managers to manipulate through all kinds of arbitrary decisions about reserves, write-offs, taxes, pension assumptions, and other factors. Even total shareholder return can be gamed by paying out a big dividend, potentially destroying value. Much better to incentivize managers with an economic profit target (operating profit minus a capital charge), as Best Buy (BBY, Fortune 500), Deere (DE, Fortune 500), and many other top performers do. Research shows it correlates far better with stock value, and as Best Buy chairman Richard Schulze says, it "focuses management to think like shareholders." They're paying based on irrelevant comparisons.Among the 200 biggest U.S. companies, 53% based their long-term incentives on comparisons with a peer group or index in last year's proxies, up from 44% the year before, according to Reda's analysis. But shareholders don't care how well a company performed relative to its industry; they care whether the company was a good place to park their capital. When managers focus on beating their industry peers, they forget that investors can put their money anywhere. Executives shouldn't be rewarded for performing a little less poorly than average in a lousy industry, because it does investors no good at all. If they're in a lousy industry, they should get out. They're not always telling us their real goals.SEC rules that took effect in the 2008 proxy season require companies to disclose the targets that executives must hit in order to earn incentives -- the percentage increase in profits, for example, or the specific return on invested capital -- and then report the company's performance vs. those targets. Yet many companies just aren't doing it, claiming they'd be giving away competitive information (the SEC sometimes grants exceptions on that basis). For example, the 2009 CVS Caremark (CVS, Fortune 500) proxy statement doesn't disclose the company's three-year EPS growth target for the period ending in 2010 because that "would result in competitive harm to the Company." Reda raises a more disturbing possibility for some nondisclosures: Companies may be offering their executives incentives for performance below publicly announced profit forecasts. As outrage season progresses, we'll hear plenty about this year's crop of egregiously overpaid CEOs. Let's just remember that far more hazardous to shareholders is the irrationally paid CEO. First Published: Apr 22, 2010: 12:00 PM ET 2010-04-22T16:02:07-05:00 http://geoffcolvin.com/site/stop-blaming-big-business/ http://geoffcolvin.com/site/stop-blaming-big-business/#When:15:54:58Z Punishing Wall Street for the recession won't solve the real problem - that most Americans still won't be better off.(Fortune Magazine) -- The top-grossing movie in the world, Avatar, is on screens now, and it clearly identifies the most evil force in the universe. It's business. "There's only one thing the shareholders hate more than bad publicity," says the smarmy manager of an unnamed company's mining operations on the planet Pandora in Avatar, "and that's a bad quarterly report." Slaughtering hundreds of peace-loving Pandorans may generate some nasty press, but he decides to do it anyway -- in the name of profit. That portrayal -- echoed in the Oscar contender Up in the Air -- may seem cartoonish, but it's in line with the popular mood, which is why President Obama knew he was on safe ground when he recently derided "fat-cat bankers." Polling shows that America and the developed world still loathe business two years after the U.S. recession began; a 2009 survey by the Edelman PR firm says that only 30% of Americans (and 13% of Brits) think the reputation of large global businesses is good. Now Congress is weighing a "Wall Street tax" meant to penalize the financial services industry for its transgressions, and Britain and France already have enacted high taxes on bonuses. None of those sanctions will achieve their goals, because the intended victims can evade them or pass along the costs; they'll just throw a bit of sand in the gears and impose a burden of inefficiency on everyone. Instead, these moves are all about payback: Voters love them because they punish the sector of society that so many blame for the recession and their own poor financial state. Unhappiness with the current state of affairs is entirely rational, but ... Blaming business is not only nuts, but also dangerous. It's nuts because if you really want to name those who caused the recent recession, the list is long: stupid and shortsighted companies for sure, but also a government that encouraged and mandated risky lending as well as millions of people who willingly took on mortgages they never should have. More important, it's dangerous because it's a delusional response to a far larger issue. As miserable as this recession has been, the hard reality is that even when it's over (and it may be over already), most Americans won't be any better off than they were a decade ago, nor will their prospects be bright. Hanging business from the rafters won't do a thing to help. The real problem for most Americans isn't the recession. It's the more ominous fact that average household income hasn't budged for the past 10 years. That's true in every income quintile of the population, even the top. And for the bottom 60%, that stagnation has lasted twice as long. Most of the country has just been treading water over a period that spans expansions and recessions, bull and bear markets, and Republicans and Democrats in charge. Just try finding the bad guy in our real-life movie. The advent of a large-scale global labor market means that millions of Americans are competing for jobs with Chinese, Indian, and other workers, pushing our high pay down. Social trends have led to more single-parent and typically lower-income households. Perhaps most important, America no longer boasts a world-beating education system that turns out masses of graduates who can support an ever-rising living standard. Who's the villain? It isn't a few evil people or any one sector. It isn't the rich; the gains of the top 1% needn't cause declines at the bottom. Our society isn't behaving villainously at all. It just isn't adapting to a changing world. Don't despair; we can return to a rising standard of living. We've done it before. But we'll never do it as long as we refuse to face the real reasons that so many Americans are in economic trouble. How to raise living standards1. Increase accountability and pay in public schools. We can turn out better graduates by realizing that principals and teachers respond to the same incentives as the rest of us.2. Embrace high-performing immigrants. They don't steal American jobs; they create them and make the U.S. more competitive.3. Lower the U.S. business tax rate and end corporate welfare. That will help make U.S. companies more globally competitive and aid American workers.  First Published: January 29, 2010: 9:12 AM ET 2010-01-29T15:54:58-05:00 http://geoffcolvin.com/site/a-new-financial-checkup/ http://geoffcolvin.com/site/a-new-financial-checkup/#When:19:52:26Z Forget the other performance ratios. A new metric has emerged that can't easily be gamed.(Fortune Magazine) -- In business as in life, be careful what you wish for. I know a company that wished for a better return on equity. What could be wrong with that? It paid its executives according to that measure, and man, did they deliver. In some years the firm had the best ROE in its industry. It was winning bigtime. The firm was Lehman Brothers, now dead because managing for ROE caused executives to overborrow; after all, debt is capital that earns a return (in good times). Yet it isn't equity, so extreme leverage simply juices ROE until bad times arrive. Wishing for the wrong thing -- managing for the wrong ratio -- killed the company. The larger, chilling reality is that every other ratio out there can lead to the same disaster. Gross margin? Earnings per share? It's easy to make any of them look better while damaging the business. Which is why a new ratio that you've never heard of, EVA momentum, is so intriguing. It has been developed by consultant Bennett Stewart, one of the creators (with Joel Stern) of the measure called economic value added, or EVA. Now used by myriad firms, including Siemens (SI), Best Buy (BBY, Fortune 500), and Herman Miller (MLHR), EVA is essentially profit after deducting an appropriate charge for all the capital in the business. Because it accounts for all capital costs, its proponents say, EVA is the best measure of value creation. Now Stewart is making a bold claim about his latest idea: EVA momentum, he says, is the one ratio that can't be manipulated. "It's the only percent metric where more is always better than less," he says. "It always increases when managers do things that make economic sense." If he's right, it is worth knowing about -- for managers at every level and for investors. EVA momentum is a simple concept.It's the change in a business's EVA divided by the prior period's sales. So if a company increases its EVA by $10 million and the prior period's sales were $1 billion, then its EVA momentum is 1%. That's not bad, considering that for most companies this figure is zero or negative, and the average for many companies is generally around zero. Stewart's firm, EVA Dimensions, has crunched the five-year data for firms with revenues of at least $1 billion. The three top performers by EVA momentum: Gilead Sciences (with an average annual EVA momentum of 24.3%), Google (22.7%), and Apple (12.1%). It's no surprise to see those names identified as excellent performers; what's interesting is the way they did it. The key insight is that achieving high EVA momentum requires a business to do two difficult things at once. It must grow while at the same time maintaining healthy EVA profit margins or improving poor ones. Apple (AAPL, Fortune 500) and Gilead (GILD, Fortune 500), a biopharmaceutical company, grew spectacularly while also increasing their EVA profit margins impressively; Google (GOOG, Fortune 500) simply maintained an excellent EVA profit margin while growing sales 760% during the five years. That combination of increasing sales and an excellent or improving EVA is the extremely rare basis of great financial performance. Can this ratio be gamed?It's hard to see how. A popular gambit of conniving managers is to shrink a ratio's denominator recklessly, which is what Lehman executives did when they cut the E in ROE dangerously low. But the denominator in EVA momentum is the last period's sales, so it's fixed going in. Relentlessly jacking up EVA -- the numerator -- is difficult; a proper calculation of EVA values spending on R&D and employee training, the kinds of long-term investments that help companies over time. EVA momentum is brand-new -- Fortune is the first to write about it -- and while Stewart has measured it in hundreds of companies, real businesses have yet to apply it. So we don't know what will happen when this ratio confronts actual managers trying to make actual profits. But when a big new idea comes along, adopting it first creates a major advantage. This could be one of those times. EVA momentum: How to get it right1. Don't obsess about sales. Managers fixate on how to increase their company's revenues, but if it doesn't boost EVA, it does nothing to create value.2. Bail out of EVA-negative businesses. Ford's sale of capital-intensive, EVA-sapping Jaguar and Land Rover shrank the company, but in the end increased its value.3. Annihilate wasted capital. Cutting working capital, as Wal-Mart (WMT, Fortune 500) did in 2009, and offloading unproductive assets are great opportunities to build EVA when growth is slow. First Published:January 11, 2010: 9:07 AM ET 2010-01-11T19:52:26-05:00 http://geoffcolvin.com/site/leading-during-a-downturn/ http://geoffcolvin.com/site/leading-during-a-downturn/#When:19:40:23Z Leadership problems come up again and again in a downturn. Solving them doesn't take fancy technology - just character and courage.(Fortune Magazine) -- Businesspeople love to tell me their problems, and in the waning days of this recession they keep describing three of them more than any others. They have to do with vanishing leadership, changing corporate culture, and talent. They're problems that grow particularly acute in a downturn -- which means every company needs to worry about them. Here's what they are and how to fix them. My leader won't lead.This is a classic recession problem: employees frustrated that just when they're most afraid, their leader seems to be disappearing rather than stepping forward. Have pity on such leaders before condemning them. In times of crisis leaders have to spend more hours on the phone and closeted in meetings, reducing their visibility, and they're particularly starved for the information they need to make high-stakes decisions. Every force is pushing them to "hunker in the bunker," as American Express CEO Ken Chenault expressed it to me. Morgan Stanley's (MS, Fortune 500) John Mack is one leader who fought that temptation in this crisis. When the meltdown struck, his firm wasn't strongly dominant like Goldman Sachs (GS, Fortune 500), nor was it a basket case like Lehman Brothers. It was in the middle, and everyone looked anxiously to Mack. He didn't have all the answers -- even the best leaders never do -- but he spoke often to customers, employees, and the public about what he knew and was thinking. He also answered critics by announcing a redesigned bonus plan before any other major Wall Street firm. That's textbook leadership. If your leader won't lead, try telling him or her not what you want but what you hear from the employees that they want; that's the tactic one executive at a Midwestern manufacturer uses. Our culture won't let me adapt.The economic recovery may be faint at the moment, but the best companies adapt to a changing world before the change is obvious. It isn't always easy. An HR manager at a metals company recently told me she was going nuts trying to change the criteria for promotion at her company to emphasize growth over cutting costs. The culture valued skinflint managers, and seemingly nothing could budge it. That manager was right to realize that a culture of adaptability is crucial. Look at Thomson, formerly one of the world's greatest newspaper publishers, which decided in 2000 -- the all-time best year for newspaper ad revenues -- to get out of papers entirely. The move looked insane, but Thomson (now Thomson Reuters (TRI)) was adapting to the world it saw coming. Its culture encouraged such radical thinking; in previous decades the company moved into and out of oil, airlines, and other businesses. Unfortunately, battling a calcified culture may be futile unless you're the boss. I told that HR manager that as soon as the economy turned up it might be time to move. We can't get rid of C-players.You'd think a recession would be an easy time to get rid of underperformers -- you can see clearly who they are, and you may have to cut headcount anyway. The problem is that some managers seem to think problems are caused by everything but people. When James Kilts took over at Gillette, sales and profits had been flat for years. Yet when he analyzed performance reviews, he found 74% of managers had been given the highest rating and only 3% had received the lowest. It's tough to eject poor performers when almost everyone's a genius. The solution? Honesty in evaluations: Encourage a culture where anyone at any level can tell the truth. It may not be popular, but explain you're facing reality. These problems are deep-seated. The good news: Solving them doesn't require new technology or complex analysis, just character and courage, which are available to us all -- and which a historic recession might help bring out. Recession checklist1. Stand up and be seen. It's a simple yet powerful way for leaders to be effective. Warren Buffett raised his profile in this recession, reassuring investors and even helping to calm markets.2. Steer the culture with stories. Southwest Airlines (LUV, Fortune 500) has always understood this, celebrating stories of employees who perform heroically for customers. Make sure the stories you repeat embody the culture you're aiming for as the economy recovers. 3. Upgrade your people standards. With high unemployment, you have an opportunity to raise the bar on whom you hire and promote, as McKinsey and other top leader factories are doing. First Published: November 10, 2009: 8:50 AM ET 2009-11-10T19:40:23-05:00 http://geoffcolvin.com/site/fewer-deaths-during-a-recession/ http://geoffcolvin.com/site/fewer-deaths-during-a-recession/#When:19:30:52Z The death rate went down as unemployment rose - a lesson for companies: overworked employees can be bad for business.(Fortune Magazine) -- Profits are down at Hillenbrand, America's largest maker of caskets. Admittedly, this fact sounds like the setup for a punch line, but the cause of the shortage in stiffs contains lessons for politicians and business leaders alike. Hillenbrand's CEO, Kenneth Camp, explained his company's main problem this way in a recent conference call with analysts: "Continuing lower death numbers." As we grind through the longest recession in 75 years, Americans across the land are not dropping like flies. In fact, there's a virtual epidemic of people not dying. This rise in the living was predictable. The truth, little known but well documented, is that death rates decline and healthy living habits improve in tough economic times. Extensive research by Christopher J. Ruhm, an economist at the University of North Carolina, shows that a one-percentage-point rise in the unemployment rate reduces the death rate by 0.5%. Those are U.S. results, but other studies show the same effect in Spain, Germany, and the 23 OECD countries in aggregate. People live longer in recessions mainly because they become healthier, not because they face fewer external causes of death, such as auto accidents, which decline because people drive less, for example.What's more, the evidence of improved health shows up in ways beyond lower death rates. As unemployment gets worse, general medical problems become less prevalent: When the economy gets sick, people get healthier. An important reason seems to be that people adopt smarter lifestyles in recessions, especially those people with the worst health habits. Chain smokers cut back. The indolent go to the gym. Even the severely obese start to lose weight. Combine those improvements and you get a healthier nation, even in the short period of a typical recession. The obvious question is why people improve their habits when times turn bad. Statistical analysis shows that lower incomes aren't the reason; strapped consumers apparently aren't getting fitter because they must bike to work and survive on oatmeal and turnips. Instead, one reason seems to be extra free time. Having no job means more time to hit the gym or just go for a walk. Exercise leads to weight loss, and research shows that it correlates with less smoking (though which causes which isn't clear). Being unemployed or underemployed also means more time for sleep, which improves health. Policymakers in Washington and CEOs can draw two important lessons from the recession's effect on health. Healthy living, not health care, is the issue.A lesson for health-care reformers is that their focus, our system of insurance and care, isn't the root cause of America's high medical costs. The recent downturn in dead people is a reminder that the No. 1 culprit for rising health-care costs is lifestyle. It's significant that recessions reduce smoking, inactivity, and obesity. "Those three things drive chronic conditions," says Cleveland Clinic CEO Dr. Delos Cosgrove, "and chronic conditions account for 75% of the cost of health care in the United States." If reformers haven't figured out how to alter U.S. lifestyles -- and they apparently haven't -- they shouldn't expect dramatic results by changing how those costs are paid for. Longer hours can lessen productivity.A lesson for companies is that it's possible to make employees work so hard that it's bad for the business. If employees can't find time for physical activity -- or are exhausted after grueling 60-hour workweeks -- the employer will pay a price in lost productivity and higher medical costs. As for Hillenbrand (HI), the recession may be thinning profits, but the company is adapting to the long-term trend. A few years ago it introduced its Dimensions line of caskets for the extra-wide loved one. Sales are brisk. How to run a healthy firm1. Make it easy to be fit.Not every company can afford a deluxe on-site gym like Google's (GOOG, Fortune 500), but subsidized gym memberships cost an employer almost nothing. More companies should offer them.2. Penalize vice.You can offer financial incentives to employees with healthy habits, as Aetna (AET, Fortune 500) does, and even fire those who don't stop smoking, a policy that CFI Westgate Resorts adopted six years ago. Yes, it's legal in most places.3. Lead by example.Employees focus on what matters to the boss. Everyone at Alcoa (AA, Fortune 500), for example, knows that CEO Klaus Kleinfeld, a marathoner, believes in healthy living. First Published: October 28, 2009: 9:03 AM ET 2009-10-28T19:30:52-05:00