HOW POPE

FRANCIS PLANS
TO RESTRUCTURE
THE VATICANS
SCANDAL-PLAGUED
FINANCES AND
GENERATE
MORE MONEY
FOR THE
CHURCH.

HOLY
REFORMER

By Shawn Tully

MEXICO
OPENS UP
ITS OIL
BUSINESS
By Jeffrey Ball

SECRETS
WINNEBAGO
FROM
RIDES AGAIN
GOOGLES
By Erika Fry
STEALTH
SKUNKWORKS

FORTUNES
100 FASTESTGROWING
COMPANIES

SHOULD YOU
BUY STOCK
IN PRIVATE
COMPANIES?
By Jen Wieczner

By Miguel Helft

DISPLAY UNTIL
SEPTEMBER 8, 2014
FORTUNE.COM

In U.S. cities, 30% of trafc is caused by drivers looking for parking. This
means increased CO2 emissions and less time spent at local businesses.
Streetline, Inc. is solving the problem with innovative technology and
a free app that helps people nd parking. Citi provides the company
with nancing that reduces up-front costs, making the technology
more practical for cities to adopt. Now, with Citis support, Streetline is
expanding globally.
For over 200 years, Citis job has been to believe in people and help make
their ideas a reality.

citi.com/progress

2014 Citibank, N.A. Member FDIC. Equal Opportunity Lender. Citi and Citi with Arc Design are registered service marks of Citigroup Inc.
The Worlds Citi is a service mark of Citigroup Inc.

September 1, 2014 Volume 170 Number 3

ON THE COV ER
p ho t o g r a p h b y

bob fergusonboeing/courtesy of irobot

STEFANO SPAZIANI

66
This Pope
Means Business

80
Google
Does DARPA

The wildly popular

Francis is more than a
pontiff of the people.
Hes an elite manager
whos reforming
the Vaticans troubled
nances.

The famously innovative

search company has
taken a page from the
Pentagons radical
ideas factory. Heres
whats brewing in
Silicon Valleys coolest
skunkworks.

By Shawn Tully

By Miguel Helft

90
The Drama
of Mexicos
(Black) Gold

103
Fortunes 100
Fastest-Growing
Companies

Seventy-six years
after nationalizing
its oil business, Mexico
invites foreign companies back to drill.
What will it mean for
mighty Pemexand for
the nations self-image?

The public companies

with the most stellar
three-year prot,
revenue, and stock
growth. Our 2014 list
begins on page 112.

By Jeffrey Ball

104
Winnebago
Rolls Again
The iconic maker of
motor homes is on
the rebound. Will
baby boomers restore
it to its full glory?
By Erika Fry

By Scott DeCarlo,
Douglas G. Elam, Vivian
Giang, Kathleen Smyth,
and Niamh Sweeney

FORTUNE.COM

September 1, 2014 Volume 170 Number 3

14 MACRO

20 MACRO

32 MACRO

37 VENTURE

45 TECH

Closer Look

Worlds Greatest
Leaders

Global Power
Prole

How We Got
Started

Cognitive
Computing

Cancer warrior
Kathy Giusti.

iRobot brought us
machines to clean
houses, defuse
bombs, and diagnose patients.
Interview by
Dinah Eng

Digital Reasoning
is using militarygrade tech to
help banks sense
trouble before it
happens.

Europes
separatist storm.

Brieng

22 MACRO

Turnaround pro
Dave Lewis is
Tescos new CEO.
Will he rethink the
sales game?

The NFL goes

longway long
on a digital app.

Pro-Files

By Mehboob Jeelani

By Vivienne Walt

By Geoff Colvin
18 MACRO

18 MACRO

Chicago Bears
legend Gary
Fencik now aims
high in the realm
of private equity.

Brieng

By Rich Cohen

Genetically
modied corns
swift dominance.

29 MACRO

By Daniel Roberts

By Robert Hackett

New Energy

New Yorks
$1billion bet on
clean energy.

INSIGHTS
57

Sheila Bair
Why getting rid of the
corporate income
tax makes sense.
58

Becky Quick

Dear Washington:
Heal thy tax system.

By Clay Dillow

34 MACRO

Road Warrior

42 VENTURE

51 IN VEST

Travel tips from

drummer Mark
Schulman, who
has toured with
Cher, Pink, and
Stevie Nicks.

Verne Harnish

Markets

60

Five ways to get

organized and
improve your
efciency.

Should you buy

stock in private
companies?

Nina Easton

By Robert Hackett

Electoral madness?
The GOP is driving
Hispanic voters out
of the party.

By Jen Wieczner
8 EDITORS DESK
12 LETTERS
120 BING!

By Brian Dumaine

FORTUNE.COM

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

An 86-mile
trip to watch
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A 123-mile trip
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Its not about how far you go. Its about how you go far.
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Actual range varies with conditions such as external elements, driving behaviors, vehicle maintenance and lithium-ion battery age.

September 1, 2014

' , * , 7$ /

Leave the page and head to the screen: Get more from Fortune on the web and tablet.

THIS DOES
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NEED FOR SPEED

OUR FASTEST-GROWING COMPANIES LIST
LETS YOU KNOW WHAT BUSINESSES ARE
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ONLINE, WELL HAVE EXTENDED PROFILES
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ALSO BE ABLE TO LOOK AT THE EVOLUTION
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SEE IT ALL AT FORTUNE.COM/FASTESTGROWING

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First came Term Sheet. Then

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TAKING A BITE
OUT OF APPLE
With Fortune.coms recent
redesign, we shufed a few
things around. Philip ElmerDeWitt is still covering the ins
and outs of Apple every day,
just no longer under the Apple
2.0 moniker. You can keep up
with Phils musings by heading
to fortune.com/ped. Follow
him on Twitter: @philiped.

Meet the flavors

of the world

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NV\YTL[J\PZPUL[OH[ZJHYLM\SS`JYLH[LK^P[OMYLZOSVJHSS`ZV\YJLK
PUNYLKPLU[Z9LSH_^P[OJVTWSPTLU[HY`^PULZZWPYP[ZHWLYP[PMZ
HUKZH]VY[OLH]VYZ[OH[NL[WLVWSL[HSRPUN
-S`,TPYH[LZ[V+\IHPHUKVU[VV]LYNSVIHSKLZ[PUH[PVUZ

emirates.com/us

September 1, 2014

(',7256 '(6.

FAREWELL, AND THANKS

THIS IS MY LAST ISSUE as the managing editor of Fortune. Alan Murray will be the
new editor. I congratulate him and wish him well.
My departure has made me sentimental: Ive been listening to the Carpenters
Yesterday Once More and some neoclassical Stravinsky, Symphony of Psalms.
(Who wouldnt?) But mostly, leaving has made me think about Fortune over the
years, my amazing colleagues, and the remarkable work they have done.
I have been editor since October 2006, for 162 issues including this one, but Ive
been at Fortune much longer than that, starting as an intern in December 1984.
Over that 29 years Ive worked on thousands of articlesincluding all those in
my daily blog, Streetlife, which I red up in 1997. Ive helped cover three recessions
(including the recent Great Recession), the roaring 80s, the roaring 90s, a number
of stock market dramas, 9/11, and seven presidential elections. Then there are the
people weve written about along the way: the raiders of the 1980s, the super-CEO
era of Jack Welch and Roberto Goizueta. Theres the great Warren Buffett, and indelible people like Steve Jobs, Bill Gates, Marissa Mayer, and on and on. Besides my
colleagues and bosses at Fortune and Time Inc., there were hundreds of incredible
characters and great talents. Theres so much, looking back, Im just beginning to
sort it all out at this chapter-ending moment in my life.
What will I take away? What did I learn? Here are a few things that have occurred to me already:

of journalists on the planet. And the

beneciary of all this has been you, O
reader. Our culture created the environment that allowed us to deliver all
that remarkable Fortune storytelling
and content to you. Im optimistic that
the digital revolution wont change any
of that. In fact, with all the clutter out
there, it only makes what Fortune stands
for more important.
Im sure more things will occur to
me at some point, but thats it for now.
Thanks to everyone who worked at Fortune during my tenure, and thanks to
all of you who have read our work.
Buena suerte, amigos!

That you have to balance the idea that nothing really changes with the notion that
everything is changing fastespecially the ever-evolving Internet of everything, the
biggest change-agent to hit the global economy in our lifetimes. While Facebook,
Spotify, Uber, Yelp, and the likewhich many of us use multiple times every week, if
not every dayare completely new, really cool, and producing all kinds of au courant
lessons and rules, it doesnt give anyone a license to engage in illegal, conicted, or
amoral behavior in the name of the revolution. If they do, journalists should call
them out on it.
That with so much information available so easily to so many, hard-nosed reporting and critical thinking become more important than ever.
That Watson, HAL, and all the articial intelligence in the world will never replicate the most important human decision-making, or if the computers ever do, we
will have already been taken over by machines, la some sort of Will Smith movie.
(By the way, Ive always loved the phrase articial intelligence. I know a few people Oh, never mind!)
That the only thing that makes any organization differentiated and thereby sustainable is a supertalented group of peoplewhich ultimately can be held together
only by culture. And Ive come to realize that thats what Fortune has: a passionate,
creative, collaborative, high-bar culture that nurtures one of the most singular groups

FORTUNE.COM

andy serwer
Managing Editor

p ho t o g r a p h b y RICHARD PHIBBS

My business card says Founder.

So everyone thinks all these folks
work for me. Everyone is wrong.
These people carry this business
on their shoulders. Every day.
Good times and bad. No matter
what they are up against.
These people dont work for me.

I work
for them.

2014 Sprint. All rights reserved.

September 1, 2014

FOUNDER Henry R. Luce, 18981967

CHIEF CONTENT OFFICER Norman Pearlstine
CHIEF EXECUTIVE OFFICER Joseph Ripp

FORTUNE EDITORIAL

MANAGING EDITOR Andy Serwer

DEPUT Y MANAGING EDITOR Clifton Leaf
SENIOR FEATURES EDITOR Timothy K. Smith
SENIOR EDITORS AT LARGE Geoff Colvin, Brian Dumaine, Nina Easton, Adam Lashinsky, Carol Junge Loomis, Patricia Sellers, Allan Sloan, Alex Taylor III
ASSISTANT MANAGING EDITORS Leigh Gallagher, Brian OKeefe (international editor), Nicholas Varchaver
CREATIVE DIRECTOR Brandon Kavulla DIRECTOR OF PHOTOGRAPHY Mia J. Diehl
EDITORS AT LARGE Peter Elkind, Shawn Tully
SENIOR EDITORS Scott DeCarlo (lists), Andrew Nusca,
Roger Parloff (legal affairs), Jennifer Reingold, Christopher Tkaczyk
SENIOR RESEARCH EDITOR Marty Jones
SENIOR WRITERS Miguel Helft, Jessi Hempel, Michal Lev-Ram
COLUMNISTS Sheila Bair, Stanley Bing, John Cassidy, Bethany McLean,
Dan Primack (fortune.com), Becky Quick
WRITERS Scott Cendrowski, Beth Kowitt, Tory Newmyer
WRITER-REPORTERS Daniel Roberts, Jen Wieczner
REPORTERS Douglas G. Elam (lists), Erika Fry, Colleen Leahey, Anne VanderMey
CONTRIBUTORS Jon Birger, Susan Z. Callaway, Katherine Eban, Dinah Eng, Kate Flaim,
Edith Fried, Scott Gummer, Marc Gunther, Verne Harnish, Paul Keegan, Elaine Pofeldt,
Janice Revell, David Sloan, Lawrence J. Shine, Richard K. Tucksmith, Vivienne Walt (Paris)
COPYROOM Carol Gwinn (copy chief), Ben Ake (deputy), Jonathan Brown,
Maria Carmicino, Judith Ferbel, Lauren Goldstein, Edward Karam, Kathleen Kent
EDITORIAL ASSISTANTS Nancy La Porte (assistant to the managing editor),
Kelly Champion, Zhang Dan (Beijing)
TECHNOLOGY SUPPORT Lamarr Tsufurra (associate director), Arthur Wilson Jr. (manager),
Ian Ahye, Kevin Kelly, Gary Lou, Alex Martinez, Aleksey Razhba, Armando Rivera
PRODUCTION Carrie Mallie (associate operations director), Gary Kelliher, Elizabeth Mata,
Mary Michael (managers), Nelson Luk (director, Asia)

INFORMATION GRAPHICS DIRECTOR Nicolas Rapp

ART STAFF Michael Solita (art director), Chad McCabe (tablet art director),

Rose DeMaria (associate art director)

PHOTOGRAPHY STAFF Alix Colow (deputy photo editor), Armin Harris,

Neil Harris (associate photo editors), Michele Taylor (photo assistant),

Hildegarde P. Vilmenay (ofce manager)
PREMEDIA Richard K. Prue (executive director), Angel Mass (manager)
F O R T U N E .C O M

MANAGING EDITOR Megan Barnett

DEPUT Y MANAGING EDITOR Megan McCarthy
SENIOR EDITORS Stephen Gandel, Roland Jones, Verne Kopytoff,

Heather Muse, Scott Olster, Geoffrey Smith

EDITOR Nin-Hai Tseng
SENIOR WRITER Philip Elmer-DeWitt
WRITERS Ben Geier, Erin Grifth, Tom Huddleston Jr., Laura Lorenzetti, JP Mangalindan,

Christopher Matthews, Claire Zillman, John Kell, Benjamin Snyder, Phil Wahba
INTERACTIVE DESIGNER Analee Kasudia
PHOTO EDITOR Jaclyn LoRaso
VIDEO Mason Cohn (senior producer), Sierra Jiminez (associate producer)

THE FORTUNE | MONE Y GROUP

GROUP PUBLISHER, NEWS AND BUSINESS Jed Hartman

PUBLISHER, FORTUNE Eric Danetz
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ASSOCIATE PUBLISHING DIRECTOR, ASIA Ang Khoon Fong
VICE PRESIDENT, CONFERENCES Peter Granath
ADVERTISING SALES
ATLANTA / WASHINGTON, D.C.: Greg Bowerman (executive director, multimedia),
Lisa Danielczyk (Washington sales director), Anna Ryder, Vornida Seng, Eric Shaver
BOSTON: AnneMette Bontaites, Melissa More (directors), Cailin Travers
CHICAGO: Jacie Brandes (executive director, multimedia),
Katie Groon, Sarah Matteson, Gina Milkovich, Laurie Minor, John Winterhalder
DALLAS: Jacquelyn Olson (August Media)
DETROIT/CANADA: Shauna Haras (executive director, multimedia),
John Wattles (sales manager), Amy Kirk
DSSELDORF: Thomas Stickelmaier (director), Christiane Ploog
GENEVA: Irina Hartmann (director)
JAPAN: Kotaro Aikawa (regional director)
LONDON: Tim Howat (director), Christian Cecchi, Kelly Goodwin
LOS ANGELES: Jack Vincent (multimedia director), Lexie Adams, Brad Souva
NEW YORK: Lindsey Kintner (multimedia director), Elsa Della Rocco, Mark Isik, Erik Kelliher,
Tim Mullaly, Matthew Ryter, Tess Skoller, Chris Wolfe, Steven Zampieri
HONG KONG: Judy Fong, Elizabeth Kwong
PARIS: Magali Bois-ONeill (director), Sandra Litas
SAN FRANCISCO: Rick Gruber (executive director, multimedia), Vicki Gomez,
Lindsey Lee, Monica Sembler
SINGAPORE: Linda Lim, Karen Mong
INTEGRATED MARKETING Dana Kelly, Hulya Niver (executive directors),
Christine Fulgieri, Giselle Aranda, Donatella Zamora (senior managers), Stephanie Andersen,
Michael Hayden, Alex King, Hermela Nadew
Asia: Audrey Yeong, Florence Thote, Rosa Chow (senior research manager)
Europe: Phil Cutts (brand development director), Daphne Vandeborre (creative director)
DIGITAL PLANNING AND CLIENT SERVICES Karen Szeto (director),
Fabian Fondriest, Colleen Tully

CREATIVE SERVICES Hollie Vose (executive group director), Maryellis Bunn, Jonah Copiaco,
Miika Grady, Clarice Lorenzo, Paton Roth, Natalie Ryan, Cindy Shieh
LIVE MEDIA Delwyn Gray (senior executive producer), Kristen Leoce (executive director),
Janine Lind, Katie OConnell, Allie Schnall, Virginia Slattery, Elisabet Torrents
CONSUMER MARKETING Eric Szegda (VP, retail), Adam Kushnick (nance director),
Jennifer Levin (director), Courtney Andrews, Laura Applestein, Berkeley Bethune, Eunice Chi,
Nancy DAuria, Nancy He, Alexandra Litvinovsky, Stephanie Moloney, Corey Schneider,
Michael Trobagis, Greg Wachtel
EUROPE: Harvey Gidley (associate circulation director)
HONG KONG: Rick Kam, Susie Pattison (directors)
CONSUMER INSIGHT Andrew Borinstein (executive director), Joel Kaji (senior director),
Mac Dixon (senior research manager), Brian Koenig (senior associate research manager),
Rachel Lazarus (associate research manager)
PUBLIC RELATIONS Kerri Chyka (executive director), Vidhya Murugesan (senior manager),
Daniel Leonard (manager), Kelsey Rohwer (junior publicist), Emmanuelle Saliba (coordinator)
FINANCE Wajeeha Ahmed (executive director), Parniyan Gutierrez (director), Arbena Bal,
Catherine Keenan, Kari Kus, Daniel Seon (managers), Jason Glassman, Michael Hymanson,
Jessica Pirro, Parth Vedawala
CONTENT MARKETING AND STRATEGIES Diallo Hall (director of content),
Lawrence A. Armour, Alec Morrison (editors), Peter Franco, Gregory Leeds,
Cindy Murphy (directors), Ron Moss (associate director), Joel Baboolal,
Jennifer Hwang, J. Thomas Lewis, Roger Greiner, Blair Stelle, C. Tasha Sterling
PRODUCT DEVELOPMENT Brett Krasnove
F O R T U N E .C O M

VP, GENERAL MANAGER Howard Manus

BUSINESS DEVELOPMENT Mark Beavers (director)
ADVERTISING OPERATIONS Donna L. Clarke (executive director)

GROUP PRESIDENT Todd Larsen GROUP PUBLISHER Jed Hartman

SENIOR VICE PRESIDENT, DIGITAL M. Scott Havens SENIOR VICE PRESIDENT, CONSUMER MARKETING Nate Simmons
SENIOR VICE PRESIDENT, FINANCE Elissa Fishman VICE PRESIDENT, COMMUNICATIONS Daniel Kile
VICE PRESIDENT, CONSUMER MARKETING Lydia Morris VICE PRESIDENT, LIVE MEDIA Lisa Cline VICE PRESIDENT, OPERATIONS Robert Kanell
VICE PRESIDENT, CONTENT MARKETING AND STRATEGIES Newell Thompson VICE PRESIDENT, HUMAN RESOURCES Roxanne Flores DEPUT Y GENERAL COUNSEL Amy Glickman

TIME INC.

EXECUTIVE VICE PRESIDENTS Jeff Bairstow, Lynne Biggar, Colin Bodell, Teri Everett, Greg Giangrande, Lawrence A. Jacobs, Todd Larsen, Evelyn Webster
EXECUTIVE VP, GLOBAL ADVERTISING SALES Mark Ford SENIOR VP, ADVERTISING SALES & MARKETING Andy Blau (nance), Priya Narang (marketing)
VP, SALES David Watt VP, DIGITAL Dan Realson VP, CREATIVE DIRECTOR Cara Deoul Perl VP, MARKETING AND SALES DEVELOPMENT Cheryl DiMartino
VP, DATABASE MARKETING Mary Wojciechowski VP, MARKETING AD SOLUTIONS Steve Cambron VP, FINANCE Lori Dente VP, VIDEO J.R. McCabe
VP, RESEARCH & INSIGHTS Caryn Klein VP, DIGITAL AD OPERATIONS Nancy Mynio VP, YIELD AND PROGRAMMATIC Kavata Mbondo
CONSUMER INSIGHT Barry Martin (VP)
INFORMATION TECHNOLOGY Colin Bodell (CTO and EVP), George Linardos, Erynn Petersen (SVPs), Linda Apsley, Neil Bailey, Jonathan Fein, Robert Ferreira,

Amanda Hanes, Leon Misiukiewicz, Ben Ramadan, Scott Smith, Jimmie Tomei (VPs)

FORTUNE.COM

10

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September 1, 2014

Needs to Raise Wages. Why? Its Good

for Business, July 21). Given the cover
story (Positively Un-American) in
the same issue about corporate tax
avoidance, the irony is that corporate
interests could easily be aligned with
those of employees if the government
lowered the corporate tax rate.
Conor Carlin
Plymouth, Mass.
It struck me that your publication has
an elegant solution if you are serious about this matter: Simply include
metrics on the Fortune 500 that list
the lowest hourly wage paid to any of
their employees and something that
ranks them in the quality of health care
benets offered. Bosses will fall over
themselves to not be at the bottom.
Paul Rotstein
New York City

ARTFUL DODGERS
Re Positively Un-American (July 21):
Is the problem with companies leaving
the U.S., or is the U.S. government
failing to provide a competitive and
advantageous marketplace? The government, like companies, has to adapt
to compete with low-tax countries such
as Ireland and England.
Matt Gerken
Coral Springs, Fla.

have served on the board of directors

for several corporations, and I have yet
to see any tax-centered moves make
real money for the companies. Not
only are these moves un-American,
but when all of the costs are considered, they are also frequently stupid.
Fred Zimmerman
Minnetonka, Minn.
I dont understand why writer Allan
Sloan and others believe that corporations should act altruistically, while
individuals can do whatever they want.
If you want to rail on someone for
not acting in the interests of America,
criticize the people who have driven
manufacturing out of America by insisting on buying foreign-made goods
because they are less expensive.
Randy Lowry
Lebanon, Tenn.

Thanks for continuing to keep the

spotlight on Medtronic and the other
tax evaders. If having your headquarters overseas is such a great move,
then why dont the executives of the
company move over there as well? Go
live in Ireland or wherever, but dont
be showing your face at the local coffee
shop here in the U.S., where the rest of
us are still paying our taxes.
Harley Reed
Plymouth, Minn.

CONSUMERS ARE HURTING

I am glad when moves like the Medtronic deal get some close attention. I

Thank you, Sheila Bair, for pointing out

what has been obvious to wage earners for decades (Corporate America

FORTUNE.COM

12

HES GOT IT RIGHT

How does Intuit stay successful (Brad
Smith: Getting Rid of Friction,
July 21)? I recently contacted customer support regarding an issue with
ViewMyPaycheck. An agent responded
on LiveChat within one minute and
quickly resolved the problem. And he
was pleasant to boot! Note to airlines:
If youre looking for best practices,
have your employees imitate customer
service reps at Intuit.
Ken Haseley

Rocky River, Ohio

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Its always the quiet ones

that surprise you.

Beneath the sculpted lines of the all-new 2015 Legacy lies the best-kept secret in the

business. Subaru Symmetrical All-Wheel Drive and an astonishing 36 mpg.* Combine that
capability with one of the most spacious interiors in its class,** and youve got something
you wont find in other sedans. Love. Its what makes a Subaru, a Subaru.

Legacy. Its not just a sedan. Its a Subaru. Well-equipped at $21,695

Subaru and Legacy are registered trademarks. *EPA-estimated hwy fuel economy for 2015 Subaru Legacy 2.5i models. Actual mileage may vary. MSRP excludes destination and delivery
charges, tax, title, and registration fees. Dealer sets actual price. 2015 Subaru Legacy 2.5i Limited pictured has an MSRP of $26,495. **Based on manufacturer-reported interior volumes
according to the EPAs Midsize Car class as of 7/1/14.

SCALE

The higher the number, the more realistic the chance of the region seceding
and gaining general recognition of independence, according to experts.

SCOTLAND

NORTH CYPRUS

MACRO

In 1983, the Turkish-speaking

population in the north
declared itself a separate nation
from the Greek-speaking south.
Only Turkey recognizes it.

Closer Look

The Disunited
States of
Europe

Independent before 1707, when the

United Kingdom of Great Britain was
formed, Scotland is putting the
question of whether it should separate
from Britain to a vote on Sept. 18.

CATALONIA
D

FLANDERS
B

Scottish voters decide this month

whether to split from Britain.
Catalans in Spain have called for
their own independence vote soon.
Can the continent weather the
separatist storm? BY VIVIENNE WALT
r eport i ng by PREETISHA SEN a nd ROBERT HACKETT

In the 12th century the county of

Barcelona and the Kingdom of Aragon
united and had political sovereignty
until the War of the Spanish Succession.
Catalan nationalists still mark the day of
defeat in 1714: Sept. 11.

In elections this spring, the nationalist

New Flemish Alliance Party gained a
number of seats in Belgiums federal
Parliament but have tabled (for now)
the idea of secession.

gr a phic by POP CHART LAB

IN THE MOVIE Braveheart, the 13th-century Scottish

warrior William Wallace (in the form of Mel Gibson)

gallops across the green Highlands exhorting people
to ght the English and shouting in Gaelic, Alba gu
brth! or Scotland forever! Seven hundred years
after that conict, passions are running high again,
as about 5.2 million Scots prepare to make their most
crucial political decision in memory on Sept. 18:
whether to declare their independence from Britain.
Its a vote that could rip apart Europes third-biggest
economy and jolt nations across the region. Much as
in Wallaces time, the issue pits the dreamers against
the doomsayers (minus the bloodshed) and threatens
to end an alliance that has lasted for centuries.
Scotland has been a nation for a very long time, says
Duncan Ross, a professor of economic history at the
University of Glasgow. We should have the right to
decide how to rule ourselves.

J
A

B
L
K
M

E
N
G
C

FORTUNE.COM

14

LEGEND

DISTINCT
LANGUAGE(S)

INDEPENDENCE VOTE
SCHEDULED OR HELD

INDEPENDENCE
TALKS UNDERWAY

HISTORY OF
VIOLENCE

HISTORY OF
INDEPENDENCE

SOME AUTONOMY
NOW

REPUBLIC OF SRPSKA

CORSICA

TRANSNISTRIA

Some predict that this Serbian entity

within Bosnia and Herzegovina
could be the next Eastern European
trouble spot after Crimea.

The Mediterranean island, controlled by

France, enjoyed a 14-year ash of
independencein the 18th century. This
year the main separatist group
announced a plan to demilitarize.

The region, on the border between

Moldova and Ukraine, which has a
sizable ethnic Russian minority,
declared independence in 1990.
The claim is not widely recognized.

GREENLAND
VENETO

BASQUE COUNTRY
M

Greenland residents voted for greater

self-governance in 2008. The
Greenlandic-speaking population seems
content with the status quo as a territory
of Denmark, which provides the
ice-covered island with nancial help.

Since 2010 cries for Venetian independence

have gotten louder. In March separatist
Venetists claimed a resounding victory in a
self-declared referendum.

FAROE ISLANDS
KURDISTAN

In July the separatist group ETA

completed the dismantling of its
military wing, following through on a
2011 pledge for a permanent cease-re
with the Spanish government. The
terror campaign had claimed at least
800 lives since 1968.

PADANIA

KOSOVO
N

In Italys 2013 general election, the

local pro-independence party in
this northern Italian region
garnered just 4% of the vote.
While they have some regional
governing authority, the Kurdish
peoplewho reside in a region
that spans parts of Syria, Iraq,
Iran, and Turkeyhave been
pushing hard for an independent
Kurdistan since World War I.

The most notorious outbreaks of

violence in this autonomous
territory of Denmark are the
annual dolphin grind, a mass
slaughter of pilot whales.

Kosovo, now recognized by the U.S.

and most European nations as a
legitimate nation, unilaterally declared
independence from Serbia in 2008.

September 1, 2014

MACRO
Perhaps so. Yet for Europe the question is, At what price? The intense
nervousness over how the Scots might
vote extends far beyond the territorys
rugged mountains. Many in Europe
fear that Scotlands independence fervor
could ripple across the continent, where
a number of separatist campaigns have
simmered for years. The hotspots range
from the mountainous Basque region
at the border of Spain and France to the
Mediterranean island of Corsica to the
lowlands of Belgium, where many in the
Flemish majority want to say tot ziens
to their French-speaking countrymen.
Some of these movements have a history
of violence; several more seem merely
rhetoricaland, well, quixotic (independent Venice?). But taken together,
the sovereignty pushes are yet another
reminder of how tenuous the notion of
one cohesive European Union truly is.
The sense of Europe splintering at
the edges has deepened with the soaring popularity of anti-EU parties like
Frances National Front and Britains
Independence Party, which want their
countries out of the Union. And even
if Scotlands independence vote fails,
Britain could be forced to offer Scots far
greater autonomy, including perhaps
more control over their budget

Scots who favor splitting off from Britain are

ghting for something they believe in, says one
professor. There is an asymmetry of passion.
something that could further complicate the EUs already plodding economic policymaking. With each new voice
at the table, says Steven Blockmans of
the Center for European Policy Studies
in Brussels, it becomes more and more
difficult to align everyones interests.
When British Prime Minister David
Cameron agreed in 2012 to a Scottish referendum on independence, the
odds seemed remote that voters would
choose to split from Britain after 300
years of albeit awkward union, abandoning the U.K.s modern military and
its permanent seat on the UN Security
Council. Yet as the vote has drawn
nearer, Scots increasingly seem eager
for far-reaching change, with recent
polls putting the ditch-Britain vote at
40%. People on the yes [for independence] side are ghting for something
they believe in passionately, while on
the no side, the feeling is, Why change
countries? says John Curtice, professor of politics at Strathclyde University.
There is an asymmetry of passion.

Former British cabinet minister Alistair Darling (right) took on pro-independence leader Alex
Salmond in a blistering TV debate on Aug. 5. If we decide to leave, there is no going back,
said Darling. There is no second chance.

FORTUNE.COM

16

jeff j. mitchellgett y im ages

For updates on the Scottish referendum and other EU news, check out

Those in favor of independence say

that Scotland should commit a portion
of its North Sea oil earnings to funding
public health, pensions, and educationas oil-rich Norway doesrather
than let British lawmakers divvy it up.
Supporters also say theyd evict the
Trident nuclear submarines stationed on
the Clyde River should there be a split.
Sure, a new Scotland would be small.
But it would still dwarf several other EU
countries, including Malta, Cyprus, and
wealthy Luxembourg (pop. 530,000).
This notion that you have to be part of
a big country is just not true in the EU,
Ross says. Some of the most successful
EU countries are small, like Denmark.
And if some of our decisions turn out not
to be right, well deal with it.
Whatever the outcome of Scotlands
vote, few places will feel its impact as
strongly as Spains autonomous Catalonia region 1,000 miles away. With
7.5 million Catalans speaking their own
language and running a large economy
in northeastern Spain, the separatist politicians in Barcelona command
huge support. Spanish Prime Minister
Mariano Rajoy has vowed to block Catalan plans for a Nov. 11 independence
referendum and to ignore the results.
So far, Rajoys tough talk has helped
stoke separatist feelings in Barcelona,
with pro-independence parties arguing that recession-hit Spain sucks away
Catalan resources. Catalonia suffers
scal drainage of 8 billion to 11 billion
a year, if not more, from Spain, says
Manuel Manonelles, director general
for European and Multilateral Affairs in
Catalonias government. Like other Catalans, Manonelles sees answers to their
political frustrations in one far-off place:
Scotland. The British people are giving
a good example of democratic spirit in
allowing Scotlands vote, he says. Were
watching the referendum closely. So,
too, is the rest of Europe.

AT&T is the
nations most reliable
4G LTE network.
So you can stream the action from virtually anywhere.

Building you a better network.

SM

Visit a Store

ATT.COM/network

1.866.MOBILITY

Based on 3d party data re nationwide carriers 4G LTE. LTE is a trademark of ETSI. 4G LTE not avail. everywhere. Screen images simulated. 2014 AT&T Intellectual Property. All rights reserved. All other marks used herein are
the property of their respective owners.

September 1, 2014

Macro
br iefi ng
The New England Patriots work out at their practice eld next to Gillette Stadium.

ARE YOU
READY FOR
SOME
24/7
FOOTBALL?
THE 1)/ GOES
LONGWAY LONG
ON A DIGITAL APP.
By Daniel Roberts

Now the biggest cash cow in American sports is betting that the broadcast
bunch isnt nearly big enoughthat
fans want football content nonstop. And
thats what they get with the leagues ambitious new video offering, NFL Now.
Launched in August, the platform
runs on a wide range of devices and offers quick-burst news segments, practice
footage, game recaps, and even old Super
Bowl highlightseverything, that is, ex-

cept the thing fans have most clamored

for: a live stream of current games. The
main app is free, but a $1.99-per-month
premium version promises bonus goodies like the entire vault of Hard Knocks,
the HBO/NFL Films reality series.
Theres plenty of competition for
online sports video already. Last fall
Major League Baseball rolled out fancy
new video-tracking technology to cater
to statheads. (Fortunes parent company,
Time Inc., also launched an app for
sports clips, 120 Sports.) But the NFLs
effort stands out for two reasons. First
is that the league is truly going all in:
Each of the 32 teams has committed to
sending 150 minutes of video footage per

week to the platforma deal largely put

in place by Brian Rolapp, EVP of media
for the NFL, and New England Patriots
president Jonathan Kraft, who co-chairs
the leagues digital-media committee.
Second is that the NFL is actually
trying to t its digital buffet to its users
taste buds. Taking a page from the
recommendation engines of Pandora,
Netix, and Amazon, NFL Now claims it
can learn what type of video content you
like best. Such technology is tricky to get
right, of course. If it works, it may well be
the secret sauce that entices viewers. If
it doesnt, count on seeing so much Tom
Brady training-camp footage that you get
that not-so-great buffet feeling.

john tlu m ack ithe boston globe v i a gett y im ages

There was a time when football was

on Sundays, and only Sundays. Then,
in 1970, the National Football League
began putting games on Monday nights.
By 2006 it had games on Thursdays and
Saturdays too, because, heck, why not?

GMO CORN: HIGH AS AN ELEPHANTS EYE

100%

93%

U.S. GMO
corn adoption

80
60

Herbicide-tolerant

20

Insectresistant

Both

0
2000

2005

FORTUNE.COM

18

2010

2014

ch a rt source: usda

40

Its harvest time: the moment to reap what gene engineers have sown.
This year genetically modied corn will account for 93% of the crops
acreage in the U.S., up from 25% in 2000. Some added genes enable the
corn to produce pest-killing proteins; others shield it against herbicides.
Most of the nations corn is stacked with both types of modication.
Its like bundling TV, phone, and Internet, says Jorge FernandezCornejo, a USDA economist. The stacked corn offers better yields (171
bushels per acre, vs. 134 bushels for conventional corn), according to
USDA data. But the war is hardly over. There are indications that pests
are evolving resistance to these tactics already. Whod have guessed it?
Nature has that whole adaptation thing down cold. Robert Hackett

WORK DOESNT STOP

JUST BECAUSE THE
BATTERY DOES.
Just because you remembered to bring your phone doesnt mean you
remembered to charge it. Thats why weve put a USB port at every
seat on every long-haul international ight, so it can stay powered for
the whole trip. Because when it comes to power, why let a little thing
like 30,000 feet stand in the way?

DELTA .COM

USB cords not included. FORTUNE and The Worlds Most Admired Companies 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, Delta Air Lines.

September 1, 2014

MACRO
wor l ds gr e at est l e a der s

Kathy Giusti:
Cancer
Warrior
How one former pharmaceutical exec
changed the way that patients and drug
companies work together. By Geoff Colvin

Giusti at her
Connecticut
home in August

When Kathy Giusti learned in 1996 that she had multiple myeloma,
a rare blood cancer, she was told she couldnt expect to live much
more than three or four years. Two years later Giusti, a pharmaceutical executive with Searle at the time of her diagnosis, started
the Multiple Myeloma Research Foundation. Now six new drugs
are approved for treatment of the disease, and the MMRF played
a role in advancing all of them, with more in the pipeline. Life
expectancy for many patients has doubled. Giusti, who has been
in remission since a 2006 stem cell transplant from her twin sister,
talked recently with Fortune about xing the cancer research
system, lessons for leaders, and more. Edited excerpts:

See the full interview on our tablet edition. And

view this and other great leadership videos on

FORTUNE.COM

20

Sponsored by

Why has your foundation

been so much more
effective than most
other disease-focused
charities?
Because we run it like a business. I took all the business
practices I learned at Merck,
Gillette, and Searle and
brought them to this nonprot entity. I knew we had
to establish a vision. We had
to write a strong strategic
business plan, and we were
very disciplined about that. I
had to nd the absolute best
partners and team to work
with us and then execute
not only awlessly but also
urgently for the patients
we were representing. The
cancer research system was
broken, and somebody had
to x it.
What was wrong with it?
It was built ages and ages ago.
Back in the day, it was ne
to say all our scientists are
going to work in their single
areas, and were going to ask
them to continually publish
to get promoted and to ll
out cumbersome grants to get
funding. Those things are not
exactly nimble, and research
is changing so quickly now.
We were creating all these
islands, and in a very uncommon cancer we needed collaboration in a desperate way.
Every medical center would
see a handful of myeloma
patients, so youd never have
one center doing enough to
make a big difference. We
had to bring them together.
And you found a way to
do that?
We did. We started by building the rst centralized tissue

bank in multiple myeloma,

and today that tissue bank
houses 4,000 samples for all
of our scientists to use. Once
we had this high-quality
tissue, which is the name of
the game in cancer research,
we called the Broad Institute
and TGen [Translational
Genomics Research Institute] and said, We want to
sequence our genome. We
were the rst to sequence our
own genome in myeloma.
What are the lessons for
leadership?
The most important thing a
leader can do is set the vision
and dont stray. We said, We
are a research foundation.
Our mission is to accelerate
cures. Many times people
came in and said, Why
dont you try this on the advocacy side, or Do this on
the policy side. Every time,
we came back to, We are a
research foundation focused
on new treatments and
cures. That tunnel vision
helped us tremendously.
Any lessons for thinking
about ones own life?
Every time I go back to the
Dana-Farber Cancer Institute
to wait for my test results,
and I wonder if Ive relapsed
or if Im doing okay, I dont
think about my company. Im
proud of everything weve
done, but at the end of the
day it comes back to family.
Im still a wife, a mom, a sisterall of those things. If Ive
learned anything, its to live in
the moment, and the gift that
cancer gives you is, you just
assume Im only here today,
and I am going to seize that
moment and cherish it.

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

Your to-do list is bigger, bolder, and more complex than ever. Thats why we work 24x7 to help
ensure the security and availability of the information and systems you rely on to achieve your goals.
When you can do it simply, safely, and quickly, you can do it all.

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symantec.com/doitall

Copyright 2014 Symantec Corporation. All rights reserved. Symantec, the Symantec Logo, and the Checkmark Logo are trademarks or registered trademarks of Symantec
Corporation or its affiliates in the U.S. and other countries.

MACRO

a new series
from the
editors of

Pro-Files

and

A HIT MAN AIMS HIGH

LEGENDARY CHICAGO BEARS SAFETY *$5< )(1&,. IS STILL KNOCKING
EM DEADTHESE DAYS IN THE REALM OF PRIVATE EQUITY. By Rich Cohen

Transitionsthats all life is: story time to blocks, school

to work, retirement to dead. For many former pro athletes,
though, theres one transition thats about as disorienting as
they come: the seismic shift from the last season of play to
the rst year of real job. Its like a mobster giving up the life.

Just ask one of Chicagos famed Hit Men, Gary Fencik,

who spent 12 seasons roaming the secondary as an All-Pro
safety for the Bears. I still have fun, but nothing will ever
replace the excitement of football, says Fencik, now 60. You
always miss the immediacy and clarity of the game. You go

For more great business stories in our Pro-Files series,

check out both Fortune.com and SI.com.

FORTUNE.COM

22

The interception king at

Chicagos Soldier Field in July

to work on Sunday, and

three hours later someone
has won and someone has
lost. There are no postponed
meetings, no wait-and-sees.
Its happened, and either you
were good enough or not.
Fencik, the Bears all-time
interception leader, proved
to be plenty good enough

and the feat is somewhat

more remarkable given that
his NFL career almost didnt
happen. Coming out of Yale
in 1976, he was taken in
the 10th round of the draft
by the Dolphins and then
cut that August. Fencik
was all set to go with his
backup plan, enrolling in a
junior banking program at
Citibank in New York. But
before heading to Manhat-

p ho t o g r a p h b y MEGAN BEARDER

September 1, 2014

tan, Fencik, who grew up in the Chicago

suburb of Barrington, ew home to see
his folks. While there, the 22-year-old
Ivy Leaguer got a call from Jim Finks,
then the Bears general manager, who
invited him to stop by Lake Forest for a
tryout. (He made quite the impression:
The rookie played in 13 games that same
season.) Yet even after signing with his
beloved hometown team, Fencik continued to plan for that other life, the one
hed begin after hanging up his cleats.
One of the benets of going to Yale is I
had roommates, classmates, even teammates who were going to med school,
law school, business school, he says, so
I never stopped thinking about what I
was gonna do after football.
The planning took on more urgency
in 1979, when he suffered a series of
minor calamities: breaking his arm
opening day, shredding a knee, busting
up an ankle. He found himself in an
operating room, staring at the ceiling,
acutely aware of his football mortality. Around that time an old friend and
mentor called and said, Gary, you need
to start thinking about what happens
later. Fencik enrolled at Northwesterns
Kellogg School of Management soon
after. In 1985, as the Bears made their
run, he was spending two nights a week
studying nance: 85 was good, he
says. I completed my MBA, we won the
Super Bowl, and I met my wife.
Two seasons later his gridiron days
were done, and it was time to start that
other life. Even with the MBA, and the
Yale pedigree, and all that mental preparation, however, it was hard to make
the transition. He did some work as a
football analysta season doing color
commentary alongside James Brown on
CBS, then three more years on Chicago
radioand tried selling commercial real
estate too. Then, in the summer of 1992,
Wells Fargo recruited him to run its
new investment-management office in
Chicago, the latest outpost in the banks
growing asset-management division.
The 38-year-old Fencik was suddenly
a VP at a major bank, and though he
wasnt tasked with actually managing

any customers moneyFenciks principal role was business developmenthe

was now responsible for a territory that
spanned 10 Midwestern states.
A few years later he jumped over to
a private equity rm, Brinson Partners,
then a unit of UBS Global Asset Management. There he met Bon French, a
former investment star at First Chicago
who was one of Brinsons top dealmakers. French saw in Fencik a very wellrounded guy who understood deeply
how the investment world works. Fen-

I go to meetings
where they talk about
goal orientation and
teamwork, he says.
And I laugh cause its
like, Well, yeah, Im
back in football.
cik had it all, French says: He knew to a
ne degree how various asset classes
stocks, xed-income investments, real
estate, hedge funds, private equity
meshed together. And he was a natural
at helping clients build portfolios with
the right asset allocations.
So when French became CEO at
Adams Street Partners, a rival private
equity rm, he didnt wait long before
recruiting the Bears power defender.
Fencik, who joined Adams Street in
2000, now heads global business development and marketing for the rm,
which has 130 employees and manages
more than $25 billion for institutional
clients. (He wont discuss specic clients
or nancial metrics, he says, because
of compliance issues. But in March
the rm pulled off a trifecta of sorts:
Three companies that it funded through
venture capital or private equity investments launched IPOs on successive
daysPaylocity and Borderfree on the
Nasdaq and Q2 Holdings on the NYSE.)
The 6-foot-1 safety, who played with
a famously concussive style, turns out to
have a soft touch with both clients and

co-workers. Gary is someone who can

ask probing questions without putting
the person on the receiving end on the
defensive, says French, who marvels at
how well the former pro managed the
transition from tackling to term sheets.
It is fascinating to me how he can move
seamlessly and easily from one world to
another, he says. Fencik, for his part, is
quick to credit his successful post-NFL
reinvention to lucky timing. I think it
would be harder today, he says. Unlike
when I was playing, footballs pretty
much a full-time job. I think it would
be even more difficult today to go to
business school while youre pursuing
an athletic career. I was very fortunate
that my dad was an assistant principal
when I was growing upeducation was
always important.
Fencik understands why so many
athletes have trouble making a similar
leap. I cant speak about every profession, but when it comes to nance,
there is a period of time when you are
supposed to be paying your dues, he
says. Most people do that in their
twenties. If youve played 10 seasons of
pro sports, youre going to be doing it in
your thirties or forties, which is tough
and lonely. That said, his own days on
Soldier Field helped prepare him for
business too. There are lots of clichs,
but some are true, he says. I go to
meetings where they talk about goal
orientation, teamwork, holding people
accountable, and I laugh cause its like,
Well, yeah, Im back in football.
The most important lesson he learned
during his pro career, notably, came not
from succeeding but rather from coming
up short. At one time or another, most
of us who played in the NFL were the
best player on a team, he says. Then,
one day, unless youre a freak of nature
like LeBron James or Walter Payton,
you are no longer the best. Part of the
answer, he says, is to study and work
and gure out how to play better than
you are. But perhaps a bigger part is rediscovery. As you get older, says Fencik,
you have to learn how to be yourself all
over again.

FORTUNE.COM

23

LETS FIND MORE WAYS

TO USE LESS FUEL.
Today, were not only working to nd more energy, we are helping inspire ways to use less. Thats why for over
25 years, the Shell Eco-marathon has been challenging schools and universities around the world to design, build
and test ultra-energy efcient vehicles. At this years event, Mater Dei High School achieved 2,471 miles per
gallon with their prototype vehicle, Supermileage 2. This spirit of innovation is spreading. In 2015, the Shell
Eco-marathon will move to Detroit, Michigan, a city with a history of mobility engineering and innovation, and an
ideal place to drive the world further toward a sustainable energy future. www.youtube.com/shellletsgo

LETS GO.

September 1, 2014

MACRO
new energy
As the rst-ever energy czar of New York State, exGoldman Sachs
banker Richard Kauffman has the clout to make major changes.

A $1 Billion Bet
on Clean Energy
WITH ITS NEW GREEN BANK,
NEW YORK AIMS TO BOOST
SOLAR, WIND, AND SMART-GRID
TECHNOLOGY. By Brian Dumaine
The solution to global warming is obviousreduce greenhouse gas emissions. Accomplishing that goal, however, requires radical action. Few understand that better than Richard
Kauffman, an exGoldman Sachs and Morgan Stanley banker
whom New York Gov. Andrew Cuomo appointed last year
as the states rst energy czar. Kauffman has visions of New
York as a 21st-century clean-tech powerhouse. But for now,
he admits, it remains more of a 20th-century energy dinosaur.

Were not on a sustainable path either environmentally or

economically, says Kauffman of his state. Were not installing enough renewables, and were not getting the economic-

p ho t o g r a p h b y REBECCA GREENFIELD

development boost that a

transition to a new-energy
economy can provide. We
need to rethink what we do.
To kick-start that process
of reinvention, Kauffman
has taken some radical
actions of his own: Earlier
this year he rolled out a
state-owned nancing
startup with $1 billion in
assets called N.Y. Green
Bank. The hope is that,
through strategic lending,
the state can give the private
sector the incentive to help
transform New York States
power system. If it works,
the project could provide
a template for other states
to follow. According to the
OECD, N.Y. Green Bank is
only the second state-run
institution of its kind in the
U.S. Connecticut launched
a green bank in 2011 but
on a smaller scale, with
$117 million in net assets.
New Yorks list of energy
challenges is long. It lags
behind California and other
big states in the adoption of
renewables. Last year, for
instance, the Golden State
installed 2,621 megawatts of
solar energy, compared with
New Yorks paltry 69 megawatts. New Yorkers pay some
of the highest electrical rates
in the nation. At the same
time, the states utilities are
struggling. Electricity demand is weak, and the cost
to maintain an aging grid is
rising. The price tag simply
to keep New Yorks antiquated grid running over the
next decade is an estimated
$30 billion.
Gov. Cuomo has given

Kauffman the clout to make

big changes. As New Yorks
chairman of energy and
nance, he has the sway
and the budget to push
for change in almost every
aspect of the states energy
system. He has already
launched a multifront offensive. Kauffman is pushing for regulatory reform
that would encourage the
states utilities to run more
energy-efficiency programs
and make smart-grid
investments to reduce load
and the need to maintain
expensive backup power
plants. Hes also pushing for
utilities to invest more in
clean, distributed energy.
Other states have tried
such measures with only
moderate success. Although
wind and solar power are
growing quickly, their share
of the nations total power
generation is only about
4%. Kauffman is hoping the
Green Bank can push New
York way past that level in
coming years. The bank,
funded by a surcharge paid
by utility customers, aims to
help nance clean-energy
projects throughout the
state. The Green Bank plans
to announce its rst investments this fall.
When he took the energy
czar job, Kauffman, 59,
brought with him a strong
belief that the government
was lousy at picking winners and losers. (Consider
the Energy Departments
disastrous $535 million
investment in solar-panel
maker Solyndra.) He began
searching for private sector

FORTUNE.COM

29

September 1, 2014

MACRO
new energy

We want to be on the frontier of new markets, providing the

necessary support to get the private sector fully engaged.
Richard Kauffman, New York States energy czar
solutions to the states energy problems. Its going to be
the markets that will give customers what they want, says
Kauffman. I have no idea what new energy systems are
best. Apple, for example, allows outside programmers to
make apps for its products because thats the way innovation
happensyou open up competition.
So the Green Bank will not dole out grants or fund risky
clean-tech startups. Rather, it will offer gap nancing. That
means providing loans, debt guarantees, and other nancial
products to help private sector bankers fund more cleantech dealswhether for solar, wind, smart-grid technology,
battery storage, or energy-efficient buildings. Says Douglas
Sims, the director of strategy and nance at the Natural
Resources Defense Council and an adviser on the project:
They will provide comfort to private lenders who want to
employ capital in this space. Theyre enablers. To me, thats
the most radical thing about it.
While large-scale wind and solar projects can typically
get nancing, Kauffman says that there are many smaller
clean-tech projects that are viable but just cant nd the
right debt structure. For example, universities, hospitals,
and municipalities that want to install solar systems or
energy-efficiency technology often have good credit ratings
but dont have the upfront capital. A bank might be willing
to offer a 10-year loan, but the organizations might need a
15-year loan to make the debt service more affordable. So
the Green Bank could step in and provide the nancing for
years 11 through 15. Another area where it could help is in
solar installation. Companies such as SolarCity, Sunrun, and
Sungevity have little trouble raising nancing for residential
customers who have top credit scores of around 700, but

they nd it much harder to

raise money for leases or
loans for those with scores
of 650even though these
customers are considered
creditworthy. The Green
Bank could guarantee the
nancing on those deals.
Perhaps the biggest impact the Green Bank could
make is in securitization.
(Think mortgage-backed
securities with better due
diligence.) So far the bond
market has been largely
absent when it comes to
nancing renewables.
Why? Big banks dont like
to dabble in small loans.
The Green Bank plans to
securitize clean-energy
projectsbundling 40 or
50 solar loans, each worth
about $1 million, into one
security and then selling
the $50 million bond to
institutional investors. That
would open an entirely
new source of capital for
the sector and spur growth,
Kauffman believes.

States with the largest growth in photovoltaic solar in 2013

CALIFORNIA

SOURCE: SOLAR ENERGY INDUSTRIES ASSOCIATION

MASSACHUSETTS
NEW
JERSEY

NEW
YORK

GEORGIA

335

TEXAS

236
146

69

FORTUNE.COM

30

NORTH
CAROLINA

HAWAII

COLORADO

56

ARIZONA

75

91

237

421

As promising as the Green

Bank sounds, some in the
environmental community
worry that even $1 billion
in capitalization wont be
enough to turn New York
green. After all, energy is an
extremely capital-intensive
industry.
But Kauffman believes
that the rst step is for the
Green Bank to show that
it can make money. If the
bank is protable, it will be
self-sustaining, he argues.
And it can leverage that
$1 billion in a way that
would have a signicant,
long-term impact on the
clean-tech industry. We
want to get a market rate
of return and then step out
of the way, says the energy
czar. We want to be on the
frontier of new markets,
providing the necessary
support to get the private
sector fully engaged. And
if that happens, Kauffmans
radical plan might make a
real impact.

2,621
MEGAWATTS
ADDED

LETS KEEP THE LIGHTS

ON WHEN SHES YOUR AGE.
What sort of world will this little girl grow up in? Many experts agree that it will be a considerably more
energy-hungry one. There are already seven billion people on our planet. And the forecast is that there
will be around two billion more by 2050. So if were going to keep the lights on for her, we will need to
look at every possible energy source. At Shell were exploring a broad mix of energies. Were making our
fuels and lubricants more advanced and more efcient than before. With our partner in Brazil, were also
producing ethanol, a biofuel made from renewable sugar cane. And were delivering natural gas to more
than 40 countries around the world. When used to generate electricity, natural gas emits around half the
CO2 of coal. Lets broaden the worlds energy mix. www.youtube.com/shellletsgo

LETS GO.

September 1, 2014

MACRO
gl ob a l pow er prof il e

Retails Newest Strategist

TESCOS BOARD PICKED TURNAROUND PRO DAVE LEWIS AS ITS NEXT
CEO. WILL HE RETHINK THE SALES GAME? By Mehboob Jeelani
Lewis is known for
his approachable
management style.
With $103 billion in revenue, Tesco, the worlds
second-largest general-merchandise retailer, behind Wal-Mart, and the biggest food producer and
retail brand in the U.K., earned the No. 63 spot on
this years Fortune Global 500 list. But lately the
company has been struggling to stay on top. For
the past two years the retailer has grappled with
falling prots, struggled to stabilize prices, and lost
market share to discounters and online grocers.

Founded in 1919, Tesco has grown to a behemoth of 6,784 stores in 12 countries. Its no
longer just a grocer, but a giant retailer, with gas
stations, an online marketplace, DVD rentals, and
nancial services. In recent years it has diversied
by veering into techrst with a tablet computer,
the Hudland in early 2014 revealed plans to
begin manufacturing a smartphone to compete
with Samsung.
Tescos new CEO, Dave Lewis, a 49-year-old
strategy expert who hails from Yorkshire, began
his career at Unilever in 1987. While at the consumer products giant he oversaw business segments in South America, Southeast Asia, and the
U.K. Most recently he was president of Unilevers
personal-care unit, which includes the Dove
and Vaseline brands and accounts for 40% of its
$66 billion in annual revenue.
When he starts next month, Lewis will be the
rst Tesco CEO to come from outside the company,
a surprise to industry watchdogs. He clearly
knows nothing about retailing, says Nick Bubb,
an analyst for London-based Retail Think Tank.
But he certainly knows how to win price wars.
Price warsone of the larger issues Tesco
hasnt solvedcontinue to plague the industry as
grocery discounters, such as Aldi and Lidl, have
usurped the low-priced market, and fewer shoppers return to bigger chains like Tesco.
In May, Tesco reported a 6% decline in annual
protits worst performance in the past 20 years

FORTUNE.COM

32

and the companys stock has

fallen 46% from a high of $702
in 2010. Lewis will have to rethink its identity since the brand
no longer caters to low-income
shoppers, nor falls in the highprice category shared by Marks
& Spencer. He must take some
extreme steps, says a former
Tesco exec.
While at Unilever, Lewis
made deep cuts to keep costs
low. As part of a restructuring
in 2007, he axed employees
and managed to slash 40% of
expenses, earning him the nickname Drastic Dave.
But Lewis has also garnered
praise for his creative approach.
While he was working in South
America, competitor Procter &
Gamble launched detergent brand
Ariel. Lewis mounted a radical
counterattack to lampoon P&G:

He found an outdated Unilever

product from the 1960sa toilet
seatthat happened to be named
Ariel del Plata, and began an aggressive ad campaign with posters
of toilet seats bearing the name
Ariel. P&G eventually pulled its
product from South America.
According to insiders, Lewis is
also known for successful team
building. He doesnt drive luxurious cars and is often seen in jeans
and casual shirts that make him
look like a local Yorkshire lad.
At Unilever he gave companybranded rugby shirts to employees and would host guest
speakers to counsel staff on team
spirit. No doubt there are strong
threads of creativity running
through his work, a Tesco executive told Fortune.
No word yet on any plans to resurrect the toilet seat strategy.

September 1, 2014

MACRO
r o a d wa r r i o r

Touring With Superstars

0$5. 6&+8/0$1 PROFESSIONAL DRUMMER AND
CORPORATE SPEAKER, HAS BEEN ON THE ROAD
WITH CHER, PINK, AND STEVIE NICKS. By Robert Hackett
Im on the road sometimes
80% of the year. A tour is
a very well-oiled machine.
My job is easyI just come
on and play my instrument.
That they can set up the
entire stage in eight hours,
rip it down in three, and do it
in another city back to back
is astounding.

Sometimes Ill wake up early

and sacrice my own sleep
so I can see my 4-year-old
daughter on Skype before
she goes to school. The good
thing about being on the

For travel tips from tour dancer and

choreographer Jamal Story, visit

FORTUNE.COM

34

Clem Burke, the drummer for

Blondie, did a study. He put
gadgetry on his body, and
researchers determined that
a drummer who plays two
hours of rock or pop music
can burn as many calories as
a professional soccer player.

I DRAW INSPIRATION
FROM EVERY MONUMENT AND EVERY
STARBUCKS. I REMEMBER BEING IN PARIS
WITH FOREIGNER AND
WANTING TO WRITE,
SO I TOOK MY IPAD,
LAY UNDER THE EIFFEL
TOWER, AND WROTE
FOR TWO HOURS. ILL
OFTEN POP DOWN TO
A STARBUCKS AND
WRITE SOME MUSIC.

SKYPE IS THE GREATEST THING. VIDEOCHAT IS A LIFESAVER.

I CANT IMAGINE WHAT
LIFE WOULD HAVE
BEEN LIKE 20 YEARS
AGOTO NOT SEE MY
KIDS. GOING THREE
MONTHS WITHOUT
SEEING MY FAMILY
WOULD BE REALLY
VERY CHALLENGING.

After the shows nish, we

usually get a bus that leaves
at about midnight. Depending
on how far it is from the next
city, I could get in anywhere
from three in the morning to
11 in the morning. Then Ill do
my best to get back to sleep.
Generally, my protocol is I
wake up, have some coffee,
then get to the gym and get
some exercise in.

a 20-megabyte download
speed than a perfectly warm
shower and a half-megabyte
download speed.

A 27-year-veteran touring drummer, Schulman, photographed in Los

Angeles, returns to the road with Cher in September.

East Coast is that theyre

on the West Coast, so I can
sleep later. Because, lets
face it, with my lifestyle, I do
have to stay up late.

take the molds and then go

to Jerry Harvey Audio, which
makes custom-molded inears. They sound better than
the top-of-the-line Beats.

If theres a screaming baby on

a plane, I put in my custommolded in-ears, turn on a
bit of music, and fall asleep.
Theyre molded for my ears,
so they sound fantastic. You
can get an audiologist to

A strong Wi-Fi signal can be

more important than a hot
shower because thats your
lifeline. I always pay to have
the most expensive Wi-Fi. If
they have a premium service,
I always pay for that. And if
its anything less than premium, I ask for my money
back, and they always give it
to me. I would rather have

Im developing a program
about taking the concept
of innovating as a creator
and using what I know as
a musician to get people
in the corporate world to
learn how to jam and get
into that transcendent innovative head space.

HOTELS SOMETIMES
HAVE HIDDEN WI-FI
THAT IS LESS POPULATED THAN THE ONE
EVERYONE ELSE IS ON.
ILL JUST CALL DOWN
AND SAY, DO YOU
HAVE ANOTHER WI-FI,
SOMETHING THAT
ISNT LISTED? OFTEN
THEY DOTHERE
WILL BE AN EMPLOYEE
WI-FI OR A BUSINESSWI-FI THAT YOU
CAN TAP INTO.

Schulman is the author of

Nerve Breakers: Conquering
Lifes Stage Fright.
p ho t o g r a p h b y KENDRICK BRINSON

making downtime
an action item.
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September 1, 2014

VENTURE
Aye, Robots
Robotics are
projected to
achieve record
sales this year.

$1.6

$1.5 billion
1.0
0.5

Annual robot orders

0
2000

2005

2010

2014*

From left: Brooks, Angle,

and Greiner with a robot
that can be thrown into an
inaccessible or perilous
location to send back
video or information.

*2014 projected.
ch a rt source: robotic
industr ies associ ation

How We Got Started

From R2-D2 to
Practical Robots

How iRobot brought us machines to clean houses, defuse

bombs, and diagnose patients. Interview by Dinah Eng
p ho t o g r a p h b y HARRY GOULD HARVEY IV

THE NOTION OF ROBOTS in

everyday life was long the stuff of
The Jetsons and Star Wars. But
Colin Angle, 47; Rodney Brooks, 59;
and Helen Greiner, 46, brought such
inventions into real life through
their company, iRobot. Its Roomba

FORTUNE.COM

37

September 1, 2014

VENTURE
310-SUGV This remotecontrolled machine
can be used for military
reconnaissance or to
remotely view a dangerous scene without
risking lives.

how w e g ot sta rted

0510-PACKBOT Used to
detect and defuse bombs,
it was also used to explore
the earthquake- and
tsunami-damaged Fukushima nuclear reactor.

vacuum cleaner is well known, but

other inventions have graver functions:
PackBot, a robot used by the military
to defuse bombs in Afghanistan, and
RP-VITA, used by doctors to remotely
diagnose and treat patients. Once funded
with credit cards and savings, iRobot is
now protable: It generated $487 million in revenue and $27 million in earnings last year. The founders story:
Rodney Brooks: I grew up in Adelaide, Australia. No one in my family
had nished high school, and I was
smart at mathematics, so I became an
academic and got my Ph.D. in computer science at Stanford. I didnt set
out to be a businessperson.
Colin Angle: I grew up mostly in
Schenectady, N.Y. From an early age,
building and creating things was a real
passion for me. I xed a toilet when I
was 3 years old. My mom was a single
parent, and when the toilet broke, Id
just read Richard Scarrys How Things
Work in Busytown, and said, Mom,
if you read me the words, Ill x the
toilet. Sure enough, I gured out what
was wrong. If I was told to go make the
bed, Id immediately think, How could
I build a robot to do it?
Helen Greiner: I was born in London and grew up on Long Island. My
dad brought a computer home in 1978,
when I was 10, and it became mine.
Then I saw Star Wars and fell in love
with R2-D2. He had such personality.
MIT was the only school I applied to,
and thats where I met Colin.

FORTUNE.COM

38

ROOMBA iRobots
best-known invention,
this circular vacuum
navigates a room on
its own. It also plays a
recurring, supporting
role in YouTube videos in which cats are
seen surng them.

Brooks: I moved to MIT from Stanford in 1984 to teach, and became the
founding director of MITs Computer
Science and Articial Intelligence Lab.
Angle: In 1988 a friend was going to
interview for a job building robots with
Rod, so I went too. We were asked to ll
out a form about electromechanical devices wed built. An hour later I had an
epiphany that this is what I love to do.
Brooks: Colin was one of three undergrads I hired, and the project I gave
him was to build a walking machine.
Angle: I built Genghis, a six-legged
walking robot. Rod did the high-level
intelligence, and I built the low-level
software, electronics, and sensing. It
helped earn Rod tenure, and I won the
Adler Prize for outstanding thesis in
electrical engineering. That was the beginning of a wonderful partnership that
led to building Attila, a prototype for a
rover that could explore another planet,
for NASAs Jet Propulsion Lab [JPL].
Greiner: During graduate school
Colin and I both worked at JPL one
summer. I had two internships there and
did my masters work at MIT and JPL.
Angle: One day Rod said, Im thinking of starting a robot company. I said,
Okay, Im in. So in 1990 we founded
IS Robotics Inc., focusing on building
practical robots. We needed more of a
team, so we brought Helen in.
Greiner: Id started another company to commercialize JPL technology.
I thought the opportunity to work with
Colin and Rod was an even better one,
so I jumped in. In academia robots are

RP-VITA Say
ahhh: This
device allows
doctors to
see (and be
seen) and treat
patients from a
distance.

built for demonstrations and to investigate new technologies. Starting the

company was a way to build robots that
would actually be used by people.
Brooks: We started with no clear
idea of who our customers would be.
We had no capital, so we did contract
research for people. The three of us
made a good team. Colin did the
electrical, Helen did the mechanical,
and I did the software. We had to move
quickly to come up with new solutions
for our clients. Projects ranged from
making toys for Hasbro to military
robots for the government.
Angle: The name iRobot comes from
Internet-connected robot. We felt that
would be the future of the business,
so we changed the company name to
iRobot in 2000. Its taken us a long time
to realize that dream. In the past year we
came out with RP-VITA, used by doctors
to remotely diagnose stroke patients and
treat those in the ICU and ER.
Greiner: Large companies may do
innovation and disruption in the labs,
but they have trouble pushing it out
into the real world, in part because
its potentially disruptive to their own
business. When youre a small company like iRobot, you really push on
one thing, and that helped us get from
research to mainstream products.
Brooks: At one point I spent a lot of
time in China, guring out how to do
low-cost manufacturing, which led to
being able to make our Roomba vacuum
cleaner cheaply. In 2001, Electrolux had
introduced the Trilobite, a robot vacuum

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September 1, 2014

VENTURE

how w e g ot sta rted

Angle, at age 8,
in a robot costume

cleaner in Europe, but theirs cost 2,000

euros, and ours sold for $200.
Angle: The rst two or three years,
it was just Rodney, Helen, and me. We
hired ve or six people and built slowly
after that. We went 6 years never
starting the month with enough money
in the bank to make payroll, but we always made it. There was nothing stable
about anything we were doing.
Greiner: Wed put our expenses on
credit cards and didnt pay a lot of bills.
Angle: We gured out which suppliers had not put us on a credit hold and
went to them for parts. We survived by
getting paid half upfront for building
robots wed sell to research labs. People
were rooting for us to succeed because
they want robots to live up to the
promise of The Jetsons. At the 12-year
mark, we made about $15 million.
Brooks: Thats when I knew we
were on to something that could be
sustainable. Its only fairly recently
that weve had lower-cost computer
components available. The cellphone
market has brought down the cost of
cameras and small computer systems.
The laptop industry helped with battery performance.
Greiner: The challenge in the early
years was that while Colin and I were
building robots, nobody was running
the company. We had to switch from
being the innovator in technology to
being an innovator in business practices. In 1998 our rst venture capital
of $2.5 million came from Acer, a large
computer company that was looking
for MIT startup companies, and First
Albany, which was investing in disruptive technologies. After that, I took
on the venture capital responsibility
before we went public.
Angle: The turning point was 2002.

For a gallery of past and current iRobot

products, go to

FORTUNE.COM

40

People were rooting for us to succeed

because they want robots to live up to
the promise of The Jetsons. Colin Angle

Our Advice
ANGLE, BROOKS, AND GREINER

Founders of iRobot
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We had our rst layoff, which was a

crushing blow, but one of our robots
explored the Great Pyramid of Giza in
Egypt with National Geographic, we
sent robots to Afghanistan to help clear
caves in the hunt for al Qaeda, and
we launched Roomba that fall. Our
revenue went from $15 million in 2002
to $95 million in 2004. We went from
being a cool company to a business.
Greiner: If you look at building a
company the way you look at building
a robot, its a systems challenge. You
have to build both so theyre efficient.
Angle: For a time the defense side of
the business was paying the bulk of the
bills. Helen took a lead role in establishing relationships with key decision-

makers in the Pentagon. She succeeded

in getting contracts that typically went
to companies larger than we were.
In 2003 we brought in Vice Admiral
[Ret.] Joseph Dyer, and Helen moved
to chairman, focusing on partnerships
and acquisitions.
Greiner: People remembered me
because Im female. I was the robot
lady. People have gured out that
women buy 80% of things in this country, and not having women involved in
developing and marketing products is
shooting yourself in the foot.
Brooks: In 2008, I decided I wanted to begin a new venture, so I started
Rethink Robotics. We build factory
robots that a person can learn to train
in just a few minutes. In May 2011, I
stepped off the iRobot board.
Greiner: After 18 years at iRobot,
I wanted to get back to pushing the
boundaries with innovative things, so
I founded CyPhy Works in 2008 and
stepped down as iRobot executive
chairman in 2011. At CyPhy Works,
were building UAVs [unmanned aerial
vehicles], which are ying robots. Most
people call them drones.
Angle: People are fascinated by robots because theyre machines that can
mimic life. Weve gotten the industry to
where its starting to fulll its promise.
Brooks: When I came to the U.S. in
1977, there were three operational research robots in the world. Now iRobot
has delivered millions of robots. Thats a
big change, and Im very proud of that.
Angle: Were facing an emerging
global crisis of caring for our aging
population, and we need new technology to help people continue to live
independently in their homes. I think
thats the true promise of robots.
Greiner: Im proudest of the lives
saved by our PackBots and getting robots into millions of homes. iRobot is
one of the biggest overnight successes
that was 12 years in the making.

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September 1, 2014

VENTURE

v er ne h a r nish

Five Ways to Get Organized

FALL IS COMING, AND WITH IT A RENEWED ONSLAUGHT OF WORK.
HERES HOW TO IMPROVE YOUR EFFICIENCY. By Verne Harnish

DITCH THE OPEN-DOOR POLICY

Youll never tackle the mission-critical work of growing your company
if you invite employees to plop down on your ofce sofa at any time. Set
aside one hour a day to meet with your teamand shut your door for the
rest. Youll be shocked by how much more you get done. Better yet, your
employees will learn to put out res and resolve conicts on their own.

2. AVOID DIGITAL
DISTRACTIONS

3. LIMIT MENTAL
FRICTION

4. STREAMLINE
SCHEDULING

5. PROTECT
YOUR SLEEP

Automate the small computerized tasks that break your

concentration. Use a service
like IFTTT or Zapier to, for
instance, send invoices or
create and post tweets for
your blog, suggests Ari Meisel,
author of Less Doing, More
Living. Avoid digging for lost
emails by using FollowUp.cc.
It lets you resend important
messages to yourself when you
have the bandwidth to handle
them. Its my No. 1 productivity
tool, Meisel says.

Batch similar activities and

tackle them at the same time
every week or month. One of our
clients account-management
teams kept getting derailed from
projects by customers frequent
questions. We suggested that
the group proactively schedule
a monthly call with each client
to plow through any concerns.
Doing that kept everyone on
taskand trained customers to
share all their concerns in one
call. The best part? Customers
saw it as extra TLC.

It can easily cost you or your

assistant seven emails (not
to mention a lot of time and
annoyance) to set up a meeting
or even a simple phone call.
Avoid the hassle by switching
to ScheduleOnce. The service
lets you share a public calendar
with your contacts so they can
select a time that works on the
rst go-round. It lets you set
ofce hours and put people on
your schedule, says Meisel.

Reading on digital devices at

night can disrupt your sleep
because of the blue light they
emit. This may sound ridiculous, but when you read on
your tablet or phone before
bed, consider wearing blue
blocker sunglasses that lter
out those rays. It may prompt
some ribbing from your family,
but it beats starting the next day
feeling groggy and unfocused.
Why bother using productivityenhancing tools if youre too
tired to think straight?

v e r n e h a r n i s h i s t h e c e o of g a z e l l e s
i n c . , a n e x e c u t i v e e duc a t io n f i r m .

FORTUNE.COM

42

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September 1, 2014

TECH
BIG SPENDER
Despite a shrinking
federal IT budget,
the Department of
Defense still garners
almost half.

2015 budgeted federal IT spending: $79.0 billion

$35.4 billion
Department of Defense

$43.7 billion
Non-Defense

gr a phic source: w hite house

Cognitive Computing

Nothing to Hide,
Everything to Fear

Digital Reasoning is using military-grade tech to help

banks sense trouble before it happens. By Clay Dillow
i l l u s t r a t io n b y VLADIMIR SHELEST

WHEN TIM ESTES founded Digital

Reasoning in 2000, he couldnt have

imagined that he would spend the
next decade using software to help
the U.S. Department of Defense track
suspected terrorists across the globe.
Its exactly what happened.

FORTUNE.COM

45

September 1, 2014

TECH VENTURE

FORTUNE.COM

46

The goal is
to analyze
every shred
of digital
trafc to
hunt down
and expose
potential
rogue
traders,
market
manipulators,
and SEC rule
violators.
Knoxville native Tim
Estes believes all software will one day have
the ability to learn.

$121
MILLION
Amount paid by
Goldman Sachs
and Bain Capital
to settle a 2007
lawsuit accusing
them of collusion

$1
BILLION
Amount by which
J.P. Morgan
increased spending
on internal
controls in 2013

Suisse, and J.P. Morgan, Estes decided it was time

to bring his companys technology to the private
sector. Digital Reasoning had spent a decade
behind the veil of government secrecy, he thought;
now it was time to expand into an industry with
an appetite for intelligence as voracious as any
militarys: Wall Street.
Over the past 18 months a handful of the worlds
largest nancial institutions, including Goldman
Sachs and Credit Suisse, have begun deploying the
very same advanced analytics tools that Digital
Reasoning rst developed for national security
purposes. Their goal, Estes says, is to analyze
every shred of digital traffic coursing through their
networks to hunt down and expose potential rogue
traders, market manipulators, and SEC rule violators within their own ranks.
Estes calls the practice proactive compliance. With smart software to maintain constant
vigilance over every email, instant message, media
report, and memo sent within a company, nancial
rms can pinpoint a persons intentions to engage
in prohibited or illegal activity before they develop
into infractions and the subpoenas start ying. In
military intelligence work, Youre basically trying
to gure out who talked to who, who else knew
about it, and did they act upon it, Estes says. That
kind of forensic stuff is very similar to the investigations you might have at a bank.
Today nancial rms manage compliance in a
number of ways. Some hire teams of analysts to

rory w hite

Estes started the company, which is headquartered in Franklin, Tenn., to make what is called
cognitive computing a commercial reality. If you
watched the star turn of IBMs Watson on Jeopardy! in 2011, youre already familiar with the
concept of a computer that can learn by experience
and respond to queries that dont neatly t its programming. With this kind of articial intelligence,
a computer can begin to understand intent, so that
when a terrorist sends a message to another that
says, The baby is in the carriage, a computer can
mark the seemingly benign exchange as suspicious. Estes started his company at the turn of the
millennium because he thought that all software
would eventually teach itself. Three years later the
Pentagon came knocking on his door with several
small projects in hand and the Sept. 11, 2001, terrorist attacks freshly seared into its institutional
memory.
September 11 showed us the consequences of
not being able to act on information, says Estes,
who serves as the companys chief executive. The
desire to make software that could learn was the
impetus for the company, but after 9/11 it became a
national impetus.
Digital Reasoning moved quickly to seize the opportunity. In 2004 it landed a prime contract with
the U.S. Armys National Ground Intelligence Center. In 2010 it received an injection of cash from
In-Q-Tel, the Central Intelligence Agencys venture
capital fund. Working for the U.S. national security
apparatusits sole customerallowed the company to turn its increasingly deep understanding of
cognitive computing into high-powered analytics
tools for the intelligence community. The Department of Defense deeply desired presciencea way
to hint at the course of global events before they
actually happen. Digital Reasoning delivered that
with software that could, in an instant, process
large volumes of disparate, disorganized, and
seemingly unrelated information and discern from
it intangible connections between people, places,
and events.
In 2012 the FinTech Innovation Lab, a mentorship program in New York City, invited the
company to meet and exchange ideas with people
in the nancial services industry. After talking
with representatives from Goldman Sachs, Credit

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September 1, 2014

TECH VENTURE

manually read through randomly selected emails,

an expensive proposition, even for a nancial institution. Some use sophisticated algorithms to scan
trading logs and other structured data to look for
suspicious trading patterns, yet with 70% to 80%
of an organizations data unstructured, a great deal
of potential evidence lies untouched. The largest
problem may be that both methods are fundamentally reactive: By the time analysts or algorithms
detect potential evidence of wrongdoing, it usually
has already happened.
Theres a realization that there has to be a more
efficient waynot just from a cost perspective, but
from a timing perspective and a quality perspectiveto handle compliance, says Brian Gudofsky,
a managing director in Credit Suisses technology
investment-banking group.
The solution is to detect intentions, not evidence, an approach that should give any management team pause. Conventional software methodically scans for specic keywordsleverage,
budget, broker, favorand offers up every
piece of correspondence that includes those
terms. Digital Reasonings system, which it calls
Synthesys, constantly weighs each piece of correspondence against the next to determine probable
context. It takes recent news headlines, such as
an erupting nancial scandal, into consideration.
It takes note of how personal relationships evolve
within the company and ags abnormalities, such
as if people in disparate parts of an organization
suddenly begin to email one another with alarming
frequency. All suspicious activity is collected for
review by human analysts, who are often employees of the company in question and therefore
subject to scans. As its used, the system renes its
results based on previous successes to better look
for telltale signs of collusion, unreasonable trading,
or information leaks from within.
Digital Reasonings early success in the private
sector marks a much larger attitudinal shift among
companies of all stripes that are looking at new
technologies to help them keep employees on the
right side of the law but, perhaps as important,
prove to customers, clients, and regulators that

If you liked this story, check out Big Datas

Dirty Problem by Verne Kopytoff on

FORTUNE.COM

48

cogn i ti v e compu t i ng

IF YOU
HIRE A
SINGLE
ONE OF
THESE
PEOPLE,
THAT
MEANS
WAR.
Apple CEO Steve
Jobs to Google
co-founder Sergey
Brin in 2005. The
companies settled
a lawsuit accusing
them of collusion
in April.

$14.4
BILLION
Worldwide spending on business
intelligence and
analytics software
in 2013

OUR
GOAL
IS TO
FORCE
AMAZON
TO
RETURN
TO
ACCEPTABLE
SALES
PRICES.
The CEO of a major
publishers parent
company to peers
in 2009. Apple
and ve publishers
agreed to settle a
lawsuit accusing
them of e-book
price-xing in July.

they are actively doing so. We see this enormous

demand for what we call policy analytics alongside
data analytics, says Danny Weitzner, a principal
research scientist at MITs Computer Science and
Articial Intelligence Laboratory. Organizations
need to be able to not only comply but to show the
public and regulators that theyre doing the right
thing with data.
Nine months ago, Weitzner co-launched
TrustLayers, a startup based in Cambridge, Mass.,
that also helps companies catch rule breakers
within their own organizations. The companys
technology focuses on preventing violations,
often accidental, of corporate data-use policies
a growing priority in industries such as health care
where access and use of certain types of data are
tightly governed by law.
The notion of demonstrating compliance, rather
than merely achieving it, has become increasingly important to companies, says Jim Hendler,
a professor in the computer science department
of Rensselaer Polytechnic Institute. Hendler, an
adviser to TrustLayers, works with IBM on commercial applications for Watson. We want to show
that were using data lawfully, he says, not just
show that weve locked it down the way regulators
want us to lock it down.
Digital Reasoning took on its rst Wall Street
customer in 2012. Today it counts a half-dozen
large nancial institutions as clients and has offices
in London and New York City. The companys next
challenge is to expand the scope of its technology
to develop analytics tools focused on market intelligence, says Marten den Haring, a senior executive. Such software would allow investment banks
and hedge funds to use the same data processed
for compliance purposes to map events that could
inuence trading decisions, giving them an edge
in the market. Digital Reasonings engineers are
also looking at applications in the health care and
energy industries, den Haring adds, though he is
reluctant to offer further detail.
Its a fun time to be in this space, he says. By
no means do I think well be the only company in
this space 24 months from now. When that competition arises, Digital Reasoning will undoubtedly
be the rst to detect it.

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September 1, 2014

INVEST
Partial to Privates
The market for
nonpublic shares
is growing as companies wait longer
to have IPOs.

$15 billion

$17.7

Secondary transactions
of private-company stock

10
5
0
2002

2005

2010

2014

gr a phic source: n y ppex

Markets

Should You Buy Stock

in Private Companies?

Purchasing shares of pre-IPO startups is all the rage. But

there are many reasons to be cautious. By Jen Wieczner
i l l u s t r a t io n b y DAN PAGE

NELSON GRIGGS used to have a

relatively straightforward job.

As a senior executive for Nasdaq
OMX, Griggss primary task was
to persuade companies that were
planning to go public to choose his
company over its archrival, the New

FORTUNE.COM

51

INVEST

September 1, 2014

p r i va t e - c o m pa n y s t o c k

Were seeing more and more opportunities

in private companies than we ever have.
Andy Boyd, head of global equity capital markets for Fidelity

FORTUNE.COM

52

The vogue for owning shares of

private companies can be traced to
the mania around Facebook. Demand
for its shares in the run-up to its 2012
IPO gave rise to frenetic trading on
the secondary marketon online
exchanges such as SecondMarket and
SharesPost, where vested employees
and original shareholders sold stock

between existing shareholders and

select investors.
One mutual fund manager who
has embraced private shares is Henry
Ellenbogen of the $16 billion T. Rowe
Price New Horizons Fund, which has
long specialized in early-stage growth
companies. It really doesnt matter if
our investments in those companies

T. Rowe Prices Henry Ellenbogen (left) has boosted his funds returns by buying shares of private
companies. But Kevin Landis of Firsthand Funds has had a less rewarding experience.

in order to cash in a portion of their

stakes. Many had assumed that such
trading would wane after Facebook
went public, but the opposite has
proved true. The practice got another
boost from the Jumpstart Our Business Startups (or JOBS) Act of 2012,
which allowed companies to take on
as many as 2,000 shareholders before
registering, up from 500. As the
business has grown, the transactions
have become more formal, resembling
mini-IPOs: SecondMarket as well
as Nasdaq Private Market, a joint
venture with SharesPost, now specialize in secondary transactions in which
the private companies themselves
organize sales, or liquidity programs,

happen to be public or private, he

says. Since joining the fund in 2009,
Ellenbogen has invested in about ve
to seven private companies each year.
Those investments, which currently
make up 3.6% of his portfolioplus
some, like Zulily, that are top holdings
since going publichave helped the
fund post the best ve-year performance among small-cap growth
funds, returning nearly 23% a year on
average. Although securities law and
the funds charter permit Ellenbogen
to invest as much as 15% of assets in
illiquid stock, we dont want to get
anywhere near that, he says. If a market correction came around and wiped
out his public holdings, the private in-

ellenbogen: melissa golden/r edu x

York Stock Exchange. But regulatory

changes in recent years have added to
the aggravation of being public while
making it easier for businesses to stay
private and still raise capital. As a
result, companies have been waiting
longer and longer to have an IPO. So
Nasdaq met them in the middle: In
March it launched Nasdaq Private
Market, a new exchange for companies
not traded publicly to offer their stock
to investors. Suddenly Nasdaq isnt
courting just rms on IPO road shows,
but also Silicon Valley startups and even
the most closely held, mature private
businesses across the country. Are
the lines blurred between public and
private? Yeah, they are, says Griggs.
Our view is that this is the future.
In fact, trading in private shares is
already one of the hottest trends in
investing. NYPPEX, a private equity
adviser and research rm, estimates that
there will be $17.7 billion in secondary
sales of private-company securities this
year, up 43% from the $12.4 billion in
sales last year and 5,800% from the
$300 million in 2002. Where private,
unregistered shares were once largely
the domain of venture capitalists and
private equity rms, they are increasingly attracting traditional money
managersand even individuals. The
ve mutual fund companies most active
in the private marketFidelity, T. Rowe
Price, BlackRock, Janus, and Wellington Managementhave in the rst half
of this year already participated in 24
private-company deals (including Uber,
Airbnb, and Dropbox), more than the 18
they did in all of 2013, according to CB
Insights. Mutual funds are even getting
into primary funding rounds to capture
more of companies early growth. Were
seeing more and more opportunities in
private companies than we ever have,
says Andy Boyd, head of global equity
capital markets for Fidelity.

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INVEST

September 1, 2014

p r i va t e - c o m pa n y s t o c k

Private investmentsthats a roach motel.

Dollars go in, and they never come out.
Kevin Landis, manager of the Firsthand Technology Value Fund
vestments would suddenly account for
a much larger chunk of the fund. And
his ability to sell private shares to raise
cash would be constrained. When private markets are hot, like they are now,
there is an illusion of liquidity in the
private market, but its something we
would say is a limited phenomenon,
says Ellenbogen.
Indeed, private shares come
with some giant asterisks: They are
restricted securities by denition,
meaning they are bound by all sorts of
limits governing when they can be sold
and to whom, and theyre considered
completely illiquid. Then theres the
inherent risk of edgling companies.
Like baby sea turtles to the ocean,
many venture-backed tech startups
will never make it to the public markets or reward their investors at all.
Kevin Landis has learned that
lesson the hard way. The manager of
the Firsthand Technology Value Fund
was a star of the late-90s tech boom.
In 1999 he had the best ve-year
record among all mutual funds. But
when the bubble burst, his returns
tanked. Landis soured on publicly
traded stocks. (Probably the last great
one for us was Netix, he says.) He
saw much more growth potential in
private shares. In 2011 he converted
his portfolio to a closed-end fund
so he could invest more in private
companies without compromising his
shareholders liquidity, and he managed to scoop up 600,000 Facebook
shares on SecondMarket for an average
cost of $31.50 apiece. He expected the
companys record IPO in 2012 to be a
major win for his fund. But because of
lockup restrictions, Landis couldnt sell
any Facebook shares for six months,
during which time the stock slid from
its opening price of $42 down to $19.
It was trading in the low 20s when
the lockup nally lifted. Imagine the

FORTUNE.COM

54

emotional roller coaster of that, says

Landis. He has held on to the Facebook shares, which recently traded at
$73. But thats not a put-me-in-thehall-of-fame type of thing, he grouses.
In the three years through July,
Landiss fund has returned about 11%
annualized, compared with 17% for
the S&P 500; since Facebooks IPO, it
has dropped more than 20%. It hasnt
helped that portions of the fund have
been frozen in illiquidity longer than
Landis expected: He owns Gilt Groupe,
which has been rumored to be going
public for several years yet remains
private. Now Landis has once again
come to appreciate the beauty of public companies. You can change your
mind! he says. Private investments
thats a roach motel. Dollars go in, and
they never come out.
For stock pickers, private companies take a great deal more work to
researchand, often, to woo. Hot tech
companies like Uber and Dropbox generally wont accept individual investors
after early funding rounds, no matter
how wealthy they are. (Under current
law, investors can buy private securities
as long as they are accreditedmeaning
they have a net worth of at least $1 million or have had an annual income of
$200,000 for the past two years. An
expected second round of JOBS Act
regulations would extend the right to
invest in private companies to the average person.) Even Fidelity and T. Rowe
Price report that startups have occasionally declined their offers to invest.
Once youre in, the investment
process is surprisingly low-tech and
old-fashioned. There are nondisclosure
agreements to sign. The companys nancial documents often cant be downloaded or even printed; sometimes they
may be viewed only in paper form, at
the companys office. And prices arent
driven by markets: Companies set the

price of the shares they sell on NPM and

SecondMarket and select the buyers,
so there are no bidding wars. Its a lot
more like a real estate transaction than
a stock trade, says Griggs. Plus, unlike
public companies, private companies
dont owe their shareholders regular
nancial updates and disclosures. So
savvy investors take pains to secure
additional contractual rights. Even with
Fidelitys 300-plus equity analysts and
investors at his back, Boyd says he negotiates for all sorts of protections in Fidelitys contracts with private companies
including preferred stock and frequent
audited nancial disclosure. Remember, these are private companies that
are keeping information private, and we
dont want to be surprised and nd out
that, oh, something blew up a month
ago, he says. Add it all up, and experts
advise against individuals buying into
private shares. Even SecondMarket, one
of the biggest proponents of liquidity
in private securities, doesnt think the
average nonaccredited investor belongs
in that market.
The safest way for retail investors to
participate is through mutual funds that
allocate a small portion of their assets to
private companies. Ellenbogen closed
his T. Rowe New Horizons Fund to new
investors in December in part because
he was concerned about high valuations
in both public and private stocks. But
there are other top-performing funds
that offer exposure to private shares.
The Fidelity New Millennium Fund,
for example, has invested about 1% of its
assets in a handful of private companies.
And the USAA Science and Technology Fund owns pre-IPO names such as
Pure Storage and Cloudera.
When might we expect a more open
market in private securities? Nasdaqs
Griggs says that day is still way, way
far away. Until then, the simplicity of
public markets is hard to beat.

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Why Getting Rid of

the Corporate Income
Tax Makes Sense

Allan Sloans recent cover story

on inversions helped set off a
restorm. He has testied before the Senate and appeared
on the Colbert Report. Now
Fortune columnists Sheila Bair
and Becky Quick tackle how
to x corporate taxes.
i nsigh ts

30%

U.S. corporate income tax

as a percentage of all taxes

20

2013: 9.9%
10
0
1945

1960

1980

2000

DISAPPEARING CORPORATE TAXES As U.S. companies get more adept at gaming the tax code, their tax
payments have shrunk to a small percentage of the whole.

IG BANKS CAN BREATHE a sigh of

gr a phic source: cen ter on budget a nd polic y pr ior ities

relief. The public has a new villaintax inverterscompanies

that renounce their U.S. citizenship to get better tax rates
overseas. And I say, Go get those traitors! Hey, my family
pays a marginal tax (federal and state) of 53%. And yet corporate America has warned us for years about our uncompetitive
tax code. Washington has done nothing, and foreign countries
keep cutting their rates. The tepid recovery has pressured CEOs
to generate earnings by slashing expenses. Telling them to ignore foreign tax dodges to save money is like telling a toddler to
keep his hands out of a cookie jar sitting in easy reach.
To be sure, we need a short-term x for inversions. But longer
term, we need to fundamentally rethink our corporate tax system.
Corporate taxes are a dwindling resource, threatening to become
as scarce as clean air in Beijing. Is it even practicable to have a
corporate income tax in a globalized and digitized economy? We
arent taxing something tangible, like a person or property, but
rather an extremely portable organizational structure.
Even if Washington nally gets around to reducing corporate
tax rates, whats to prevent other countries from lowering theirs
even more? Its just too tempting and easy for many American
businesses to move, particularly when they can realize other
savings, such as lower labor costs. What a game changer it would
be if instead we simply eliminated corporate income taxes altogether. We would dramatically decrease the cost of doing
business here, ease pressure on U.S. wages, bring back jobs,
and repatriate an estimated $2 trillion in corporate prots now
sitting overseas to avoid our top 35% tax rate.
Progressives mistakenly see corporate income taxes as a way
to tax the rich. But we arent taxing the rich; were taxing a corporate entity, and studies show that much of the tax is passed on to
employees and customers, not shareholders. The current system
actually favors wealthy shareholders because we impose a lower
tax on their capital gains and dividends to mitigate the impact
of double taxation. It would be smarter to tax corporate prots

By
Sheila Bair
letters@fortune.com

once, at the shareholder level, and apply the same, higher rates on
their capital gains and dividends that apply to us wage earners.
Conservatives, on the other hand, want to preserve the taxprivileged status of capital gains and dividends, arguing that it
encourages investment and creates jobs. But alignment between
real economic growth and investment returns is far from perfect.
These days, when the economy strengthens, the stock market
actually drops because investors fear that an improving economy
will cause the Fed to exit its easy-money policies. Corporations
game the system by issuing debt (whose interest is deductible) to
increase dividends. Those are not activities that reduce our unemployment rate. Workers returns on their laborwagesare just as
important as investors returns. With the elimination of corporate
taxes, there is no reason for the tax code to favor one over the other.
While stronger economic growth would add to our tax coffers,
we would also lose about $350 billion in corporate tax revenue.
Applying ordinary tax rates to realized investment income
would make up about $90 billion of the difference. Reforming
the individual tax code to cap the excessive use of tax breaks and
loopholesas Harvards Martin Feldstein has proposedcould
add another $220 billion. A nancial transaction tax of 3 on
every $100 traded could yield $35 billion annually.
One thing is sure: We are on an unsustainable path. Caught
between eroding corporate revenue on one side and low tax rates
for wealthy investors on the other, middle- and upper-income
wage earners are being squeezedand there are only so many of
us. At some point we might start thinking about moving too.
Fortune contributor Sheila Bair, former chair of the FDIC,
is an independent board member of global companies with
U.S. operations. The views expressed are her own.

FORTUNE.COM

57

Dear Washington:
Heal Thy Tax System

i nsigh ts

Corporation
income tax before
credits

$400 billion
300

$349
billion

200
Income tax after credits: $221 billion
100
2001

2011

MIND THE GAP Yes, corporations pay hundreds of

billions of dollars in taxes each year, but they also get
over a hundred billion in annual credits.

By
Becky Quick
letters@fortune.com

F YOURE LOOKING for the business bogeyman these days, look no further

than corporate inversions. Theyve been called economically unpatriotic by Treasury Secretary Jack Lew and at-out wrong by President Obama. And companies
that use inversions to shift their tax domicile and lower their tax bills have even been

FORTUNE.COM

58

Democrats and Republicans are on the record saying theyd like

to x the corporate tax code, the two sides each have a hefty
ideological price they want to extract in order to cooperate with
the other side of the aisle. The President has called for lowering
the corporate rate to 28% from 35%, but his plan also calls for a
temporary mechanism (read: tax) to raise more revenue from
companies to fund infrastructure projects. Republicans are looking for a rate well below 28% that would, at least for the short term,
bring less corporate revenue into the Treasurys coffers.
While the politicians bicker and drag their heels, American
business continues to lumber on, despite the competitive disadvantage vs. many foreign competitors that operate in countries
with lower tax rates. The gridlock has one longtime Washington
player exasperated. When I look at these inversions, they make
me very sad, says Erskine Bowles of Simpson-Bowles fame.
Bowles recalls in years past how his home state of North Carolina lost jobs when it failed to offer industrial revenue bonds or
tax incentives the way other states did. This, he says, is the same
thing playing out on a global scale. If we dont reform the tax code,
and soon, we as a nation will rue the day, warns Bowles. The
jobs of the future will remain offshore, and the money earned by
U.S. corporations in their plants overseas will stay there and be
reinvested there not here, he adds. Sad, very sad.
Im feeling another emotion: anger. Anger that common sense
cant nd a way to prevail on a topic where there is so much common ground. The real solution is simple: Lower the tax rate, strip
out loopholes, and make it all revenue-neutral to the Treasury.
Now lets see whether there are any politicians with the courage
to do something really brave: compromise.
Becky Quick is an anchor on CNBCs Squawk Box.

gr a phic source: in ter na l r ev enue serv ice

targeted as corporate deserters.

Inversions are just a symptom of a bloated, unwieldy corporate
tax code that is sorely in need of an overhaul. The tax code was last
updated in 1986, and ever since, lobbyists have been inserting
loads of exemptions, loopholes, and sweetheart deals. This town I
live in is full of lobbyists, and a lot of them [are] business lobbyists,
says Washington, D.C.based Will McBride, chief economist for
the Tax Foundation. Theres a lot of funny stuff in there.
Thats no joke. All told, corporate exemptions (a.k.a. loopholes) are expected to cost the U.S. $148 billion of revenue this
scal year, according to the Office of Management and Budget.
(The government collected only $221 billion from corporate
taxes in 2011.) Thats not to scoff at every tax break out there
targeted tax breaks can start out as reasonable incentives to
keep jobs here in America or promote research and development
or other laudable policies. But sooner or later those tax breaks
get exploited and abused by creative accountants seeking an
advantage. Take the deduction for manufacturing products in
America. It started out as a tax incentive to protect high-paying
jobs in heavy industry. But today it seems as if just about every
corporation is calling itself a manufacturer, at least as far as
the IRS is concerned. In fact, the industries that most heavily
rely on the made in America deductionrelative to industry
sizeinclude publishing, broadcasting, and motion pictures.
The big winners are big businesses, which can afford to employ legions of accountants and tax lawyers. The big losers: small
businesses, which cant afford to follow suit and so are trapped
in a lopsided system. As the head of one big business quipped to
me recently, Its the best tax code money can buy.
A tax overhaul designed to level the playing eld for small businesses would seem like a political slam dunk. But while both

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Electoral Madness? The

GOP Is Driving Hispanic
Voters Out of the Party

i nsigh ts

Hispanic vote for Republicans in presidential elections

2004

George W. Bush

2008

John McCain

2012

Mitt Romney

40%

31%

27%

SENDING THE WRONG MESSAGE If Republicans are

ever to recapture Hispanic voters, the party must ditch its
hard-line obstructionism to immigration reform.

By
Nina Easton
nina_easton@fortune.com

HE WHITE HOUSE deserves plenty of blame for the heart-

wrenching sight of Central American children flooding across the border. But
thats no excuse for Republican leaders to let the partys Pierre wing control the
conversation over the 12 millionplus illegal immigrants already living here.

FORTUNE.COM

60

cluded increased border patrols, employer verication systems,

a guest worker program, and a pathway to legal status.
Republicans overwhelmingly supported the planincluding (get this!) 75% of those who fall under the Tea Party
conservative-white-evangelical umbrella. The key was avoiding
the loaded word amnesty. Previous polling has shown similarly
high support for a legal pathway, especially if there are conditions attached, like punitive fees or paying back taxes. A Pew Research Center poll last year found that 69% of GOP voters agree
with the statement that undocumented immigrants are hard
workers who should have an opportunity to stay in the U.S.
So why do so many GOP lawmakers act as if immigration reform is a political hot potato? Because the Pierre wingand its
boisterous radio talk networkis adept at spooking pro-reform
Republicans. Florida senator and 2016 presidential prospect
Marco Rubio practically went into hiding on the issue after
touching off a vicious backlash from the rights commentators.
Last year only 14 Republicans, including Rubio, voted for a
comprehensive Senate immigration billbut it was enough to
pass that chamber and give business leaders hope that even with
a more obstinate House, Congress would adopt comprehensive
reform. Now, though, the White Houses hapless handling of
57,000 Central American children pouring into the country
enables the Pierre wing to argue that the border is out of control.
And the Presidents executive orders on this and Obamacare
give GOP lawmakers another excuse: We wont pass reform
because we cant trust the President to enforce the law.
Long term, all that tough talk is political suicide. Republican
Party leaders had the right idea after its resounding 2012 defeat.
The party needs to broaden its tent, not batten down the aps.
And nothing since then has changed.

gr a phic source: pew r ese a rch cen ter

Pierre stars in Maurice Sendaks tale of a bratty boy who

shouts I dont care! at every turneven when a lion is about to
eat him. I applied the Pierre label to the rightists who sent the
GOP lawmakers barreling into a government shutdown last
fallleaving the partys already troubled reputation in tatters.
That same Pierre-wing obstructionism now stands in the way
of immigration reform, threatening Republican prospects for
recapturing the White House in 2016 and beyond.
The nations fast-changing demographics pose a steep hurdle
to a party that has lost the popular vote in ve of the past six
presidential elections. Among Hispanicswhose share of the
vote is growingthe Democratic advantage grew from 22 points
in 2006 to 48 points in 2012. A quarter of Hispanics are rocksolid GOP voters, and half are solidly in the Democratic camp.
That leaves a quarter up for grabsbut not if the GOP blocks
immigration reform, which has become a high priority even
among Hispanics otherwise drawn to a free-market message
of opportunity, low taxes, and smaller government. The ip side
is also true: Fully three-quarters of Hispanic voters would be
more open to Republican candidates if they supported a legal
pathway for undocumented workers living here, according to a
poll released this summer by 10 prominent GOP pollsters under
the auspices of the Silicon Valley advocacy group Fwd.us.
The Pierre wings border-security-only position is a loser on
the national stage. Just listen to Grover Norquist, the GOP activist credited with making tax cuts the sine qua non of Republican
messaging: These dice are xed, guys. The pro-immigrant,
pro-comprehensive [reform] position keeps winning on this.
The Fwd.us poll results were especially striking because they
showed how out of touch the Pierre wing is with Republican
voters. Those surveyed were asked to respond to a plan that in-

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THIS POPE MEANS BUSINESS

The wildly popular Francis is more than a pontiff

of the people. Hes an elite manager whos reforming
the Vaticans troubled nances. B Y S H AW N T U L LY

he new pope wanted to talk about money. That was the message that went out
to a group of seven prominent nanciersmajor Catholics allfrom around the world in
the summer of 2013. Barely ve months after the shocking resignation of Pope Benedict
XVI, Pope Francis had summoned them to assemble at the seat of holy power, the Vatican.
They knew their general assignment: to create a plan to restructure the Vaticans scandalplagued nances. And like Catholics everywhere, they knew that Francis had already
signaled that he was a new kind of pontiff, a peoples pope who championed charity and

p ho t o g r a p h b y STEFANO SPAZIANI

FORTUNE.COM

67

p o p e f ra nci s

FORTUNE.COM

68

Francis declared that sound nancial management

was a pillar of his greatest mission: aiding the poor and
underprivileged. That mission was endangered by volatile, unpredictable budgets that careened from modest
surpluses to steep decits. The Vaticans inept practices
had inhibited giving, he explained, and had to stop.
When the administration is fat, its unhealthy, he said.
Francis wanted a leaner, more efficient Vatican administration that would be solidly self-sustaining. That, he
said, would free up more money for his charities. You are
the experts, the pope said, and I trust you. Now I want
solutions to these problems, and I want them as soon as

m assimo sestini/polizi a di stator eu ters

tolerance over dogma.

Still, they didnt know
what to expect when
ITALY
they arrived at the Vatican for a meeting with
the pope on the rst
Saturday in August.
Rome
How interested was he
in nance, really? And
how serious was he
about changing busi5 miles
ness as usual inside the
Vatican?
A major hint came
Vatican City
from a change in
tradition upon their
ROME
arrival: The visitors
didnt report to the
Apostolic Palace, the
Renaissance showplace
Ciampino
airport
where for centuries
past popes had received
visitors in high style. Instead they entered Vatican City on
the other side of the colonnade of St. Peters Square and
took a 150-yard stroll through the hilly enclave to the new
popes place of businessCasa Santa Marta, a ve-story
limestone guesthouse that could be mistaken for a newish
hotel. There they were ushered into a nondescript meeting
room on the rst oor with no paintings or religious ornaments and took their seats around a conference table. The
membersincluding Jean-Baptiste de Franssu, ex-chief of
asset-management giant Invesco in Europe; Jochen Messemer, a top executive at ERGO, a large German insurer;
and George Yeo, former foreign minister of Singapore
chatted nervously as they waited.
After 15 minutes, Pope Francis entered the roomand
got right down to business. Attired in a simple white cassock and plain metal cross, he took his place standing at
the head of the table. With little preamble, he began outlining his strategic vision, in an approach described by one
participant as highly managerial. Speaking in uent Italian and taking frequent pauses while a translator repeated
his words in English, the pope explained to the group
that for his spiritual message to be credible, the Vaticans
nances must be credible as well. After centuries of secrecy
and intrigue, it was time to open the books to the faithful.
Strict rules and protocols must be adopted to end the cycle
of scandals that had plagued the Vatican in recent years.

An aerial view of St. Peters Square in the Vatican, a sovereign nation

ruled by the pope and located on 110 acres in the heart of Rome

THE
VATICANS
ASSETS

The Vatican is often assumed to

possess great wealth, but if it were
a company, its revenues wouldnt
come close to making the Fortune
500. Its total operating budget
is about $700 million. In 2013 it
posted a small overall surplus of
$11.5 million. The Vaticans most
valuable assetssome of the
worlds great art treasuresare
virtually priceless and not for sale.
A breakdown of major holdings:
Investments: Portfolio of stocks,
bonds, and gold worth $920 million.

stefa no r ell a ndinir eu ters

Real estate: Holdings have an

estimated value of $1.35 billion,
including some 2,000 apartments,
mostly in Rome.

possible. With that, Francis left the group to gure out the details.
There was no ambiguity about the job ahead. The Holy Fathers
message was crystal clear: Let us make money to go to the poor,
recalls Joseph Zahra, chief of the panel, a pontical commission known
by its acronym, COSEA. Zahra, a former chairman of the Bank of
Valletta, Maltas largest bank, says of Francis: In nances, hes not a
micromanager but an inspirational leader.
As the spiritual shepherd of the worlds 1.2 billion Roman Catholics,
Pope Francis, 77, has already done more in 18 months to energize the
church and burnish its image than anyone has since the heyday of John
Paul II in the mid-1980s. Whats far less appreciated is his intense
engagementand astounding successin overhauling the Vaticans

Vatican bank:
Book value of $972 million.
Art collection: Worth untold billions. The Vaticans museum brings
in $130 million a year in revenue.
Treasures include the Sistine Chapel
frescoes by Michelangelo (above);
Saint Jerome in the Wilderness,
a painting by Leonardo da Vinci;
Deposition From the Cross, a
painting by Caravaggio; a letter
from Marie Antoinette en route
to the guillotine; and the papal bull
excommunicating Martin Luther.

September 1, 2014

Cardinal George Pell (below, center), with new Vatican bank

president Jean-Baptiste de Franssu (left) and outgoing president Ernst von Freyberg, is the popes chief of economic affairs.
Ren Brlhart (bottom) heads the Vatican equivalent of the SEC.
p o p e f ra nci s

FORTUNE.COM

70

rancis was elected with a mandate for

reform. After Pope Benedict, on Feb. 28,
2013, became the rst pontiff in six
centuries to resign, the 115 cardinals who
assembled to pick his successor held eight
days of meetings, or general congregations, to discuss the priorities for the next pontiff. Benedict
had been considered a brilliant theologian, but he was no
manager. Cardinal after cardinal expressed outrage over
reports of the overpriced, no-bid contracts handed to
officials friends in Italy and the criticism of the Vatican
banks disclosure policies by the Italian government. The
feeling was that the next pope should be someone with the
leadership skills to bring professional management to a
clubby bureaucracy that was expert in blocking change.
As an outsider who had expressed contempt for the Vaticans status as an insular royal court, Jorge Mario Cardinal
Bergoglio, then archbishop of Buenos Aires and a native of
Argentina, was the overwhelming choice. Pope Francisthe
rst pontiff to take the name of Saint Francis of Assisi, patron saint of the poorcame in with a plan. His central idea
was revolutionary: Money matters are not a core competency
of the clergy, as the record shows. So he began replacing the
old guard of cardinals and bishops with lay experts who are
now largely setting strategy, heading regulatory oversight,
and running day-to-day operations.
Indeed, Francis has brought in some of the biggest brand

top: ton y gen tiler eu ters; a lessa ndro bi a nchir eu ters

nances and pushing the adoption of modern practices it

had resisted for decades. The changes are massive, says
Ren Brlhart, chief of the AIF, the Vatican equivalent of the
Securities and Exchange Commission. Now a clear game
plan has been put in place, and were really part of the international community.
The past 15 years have been a time of turmoil and decline
for the church. It has suffered blow after blow to its image, from the pedophilia scandals that have plagued it for
over a decade to the recent Vatileaks affair, in which Pope
Benedicts butler smuggled letters to the press that warned
the pontiff of corruption and cronyism in the Vatican. The
church has often promoted issues that tended to divide
Catholics more than unite them. And the backlash made
Rome look defensive, as many bishops and cardinals viewed
their role as defending Catholic doctrines against a hostile
culture of secularism.
Before Franciss arrival, attendance at mass was declining and the recruitment of priests and nuns had plateaued.
The difficulties extended to fundraising. The church was
underperforming for years in raising money, and it started
with the pedophilia scandals, says Kerry Robinson, executive director of the National Leadership Roundtable on
Church Management, an organization that advises parishes
and dioceses on nancial management.
By contrast, Franciss upbeat, quotable approach and
emphasis on charity over doctrine have quickly made him
perhaps the most talked-about and admired person on the
planet. (Fortune named him No. 1 on its Worlds Greatest Leaders list earlier this year.) His famous Who am I to
judge? declaration on homosexuality distanced him from
Benedicts severe criticism of gays. Francis could be called
the rst modern pope. His Twitter account, @Pontifex,
boasts 4.3 million followers in nine languages. And his message is universally appealing: The paramount duty of the
church and its faithful is to aid those in need.
Although its too early to make a denitive judgment, the
Francis effect appears to be reversing the churchs fortunes.
Mass attendance is surging in Italy, for instance. The Jesuits,
Franciss religious order, are seeing more inquiries about
priestly vocations. And donations are on the rise at dioceses
around the world.
What has been less appreciated by outsiders until now
is the popes elite managerial skill set. Like a great CEO,
he has the ability to set a strategic vision, then choose
and motivate the right people to make it work. His rapid
overhaul of the Vaticans nances is both one of the most
unusual case studies in the annals of business and one of
the more instructive.

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p o p e f ra nci s

names in the world of business. KPMG is implementing

uniform, internationally accepted accounting standards to
replace the Vaticans previous crazy quilt of bookkeeping. EY
(the former Ernst & Young) is scrutinizing management of
the Vaticans stores, utilities, and other municipal services.
Deloitte & Touche now audits the accounts at the Vatican
bank. And Spencer Stuart has recruited top management
talent from around the globe. Heading the effort to restructure media operations, assisted by McKinsey & Co., is Lord
Christopher Patten, a former head of the BBC and the last
British governor of Hong Kong.
When Pope Francis puts a cardinal in charge of something, the choice is typically an outsider. His most important
appointment so far, either lay or religious, is Cardinal George
Pell, an Australian whom he recruited from the archdiocese
of Sydney. Pell now heads the newly formed Secretariat
for the Economy, and Pope Francis has granted Pell power
over nances that no official has remotely held before. Hes
responsible for setting and enforcing all budgets and managing all investments. The son of a heavyweight boxer, Pell, 73,
is an imposing gure who is short on niceties and brutally
frank about the necessity to radically pare costs.
Pope Francis has a complex but pragmatic view of money.
Money is useful to carry out many things, for works to
support humanity, he has said. But when your heart is
attached to it, it destroys you. His humble lifestyle follows
those precepts. He resides in a one-bedroom, second-oor
suite in Casa Santa Marta overlooking the entrance. (Benedict, the former pope, lives nearby in a converted monastery
called Mater Ecclesiae and occasionally sends Francis notes
with feedback on his interviews.) Visitors say the popes
lights go on at 4:30 a.m. Hes frequently spotted in the
buffet line, tray in hand, at the Santa Marta dining room,
where the cuisine isnt fancyit offers a choice of two main
courses for lunch and dinner, and features Italian specialties such as pasta con pomodoro and pollo arrosto. He takes
no holidays, explaining that if the poor cant take vacations,
why should he?
The pontiff does not talk about balance sheets and cash
ow. He leaves the numbers to the experts. His forte is
leadership. Like any good chief executive, he knows that the
culture of an organization is established at the top. And he is
always well prepared. He has ve or six sources of information on every subject, says Austen Ivereigh, author of a
forthcoming biography of Francis, The Great Reformer. Its
impossible to hoodwink him. By getting the views of many
participantsboth Vatican officials and lay advisersin all
of his reform initiatives, the pope quickly determines if his
instructions are being implemented or blocked by the old

FORTUNE.COM

72

guard. If he sees resistance from old-school directors, hell

quickly make changes, as when he replaced the entire board
of the AIF, the nancial regulator.
One of his rules is that big donors and companies that do
business with the church should get no special treatment.
Before he took charge in Buenos Aires, the archdiocese
was a large shareholder in Argentine banks, and the banks
regularly granted their ecclesiastical investor loans on easy
terms. As cardinal, Francis denounced the arrangement as a
blatant conict of interest and sold all the archdioceses bank
holdings. He also refused to attend fundraising dinners, usually regarded as one of a cardinals top jobs. His aversion to
catering to the wealthy didnt stop with his ascension to the
papacy. Its a Vatican tradition that the Secretariat of State,
which receives donations from the rich on the pontiff s behalf, would reward big donors by arranging special audiences
and masses with the pope. Pope Francis ended the practice.
Pope Francis is a strong believer in workers rights. But
that view is highly nuanced. He has famously denounced the
excesses of capitalism and rmly believes that the rich get
too much from the market economy while regular workers
often dont receive enough. In contrast to his readiness to ax
high-ranking officials who block his agenda, he doesnt believe in ring rank-and-le employees. But he despises waste
and inefficiency, and he thinks the Vatican can run better
with fewer employees.
he catholic church is highly decentralized nancially. In terms of money, the
Vatican basically stands on its own. Thats a
major reason its nances are far shakier and
its wealth is much more modest than its
image of sumptuous wealth. The church is
divided into three branches: the Vatican, the religious orders,
and the dioceses. Each maintains separate nances. In fact,
the Vatican has no official claim on or access to the wealth of
the two branches that it oversees. The members of the 296
religious orders and congregations are priests, nuns, and
brothers who specialize in education (the Jesuits), missionary
work (the Missionary Sisters of the Sacred Heart of Jesus),
and helping the poor (Franciscans). Frequently, regional units
within the orders control their own nances.
The dioceses are where the Catholic Church meets Main
Street. The more than 2,800 dioceses, each headed by a
bishop or an archbishop, supervise the networks of parishes
from Lagos to Manila to Detroit where Catholics attend
mass, get married, and send their children to the 95,000
elementary schools. Each diocese is a separate corporation with its own investments and budgets, including the
metropolitan archdioceses. The dioceses do send substantial
amounts of money to the Vatican each year, but most of it is
earmarked for either missionary work or the popes charitable giving. The funds sent to support the Vaticans operations
are important but account for around 4.5% of total revenues.
Since the church contributes only modestly to funding its
operations, the Vatican must generate substantial income on

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THE CHURCHS THREE PILLARS

p o p e f ranci s

$28.3 million donation

Through the pope

the Vatican establishes
and enforces doctrine
for all parts of the
Catholic Church. But
the other branches
the dioceses and
religious ordersare
nancially independent. Each contributes
money to the Vaticans
budget.

DIOCESES

Chosen by
the pope

74

$1.1 million donation

VATICAN

RELIGIOUS ORDERS/
CONGREGATIONS

21 CONGREGATIONS
AND COUNCILS

296 institutes

BISHOPS
2,846 dioceses

Churches

Aiding the
poor

Education

Parishes

Popes message
Schools

its own and supplement that income with a steady ow of

donations from the faithful. The Vatican serves two functions. First, it is a fully sovereign, independent nation with
its own laws, courts, stores, security force of gendarmes, and
an army of 110 ceremonial Swiss guards. Cloistered behind
40-foot stone walls in the heart of Rome, the Vatican is the
smallest nation on the planet. It occupies just 110 acresor
one-eighth the size of Manhattans Central Parkand is home
to just 837 citizens. The Vatican has no legislature; the pope,
the worlds last absolute monarch, can unilaterally announce
new laws, create or eliminate departments, and hire and re
as he pleases. Any money the Vatican generates in excess of its
expenses can be used at the discretion of its ruler, the pope.
The Vaticans second and principal function is its role as
the hierarchy of the church. The pope heads a large bureaucracy called the curia, which exercises a wide range of power
and provides advice and assistance to the church at large.
The curias most powerful bodies are nine congregations,
each headed by a cardinal, that resemble the U.S. governments cabinet departments. One congregation, for instance,
appoints the worlds almost 3,000 bishops. Another does the
detective work needed to name new saints.
For nancial purposes, the Vatican operates two quasiindependent entities, one for each of its two functions:
operating as a nation and serving as the sprawling staff that
supports the pope. The city state, or governorate, operates the
Vaticans commercial services. It resembles a medium-size
municipal government. The city state has excellent sources
of revenue. It garners about $130 million a year, and rising,
from the thriving Vatican museums, home of Michelangelos
Sistine Chapel. And each year tourists purchase around
2.2 million euro-denominated collector coins at its gift shops.
Last year the city state spent around $332 million and
collected $377 million, for a prot of $45 million. It posts
substantial surpluses most years. But that money usually

FORTUNE.COM

POPE

Missionary
work

isnt available to fund the struggling part of the Vatican. The

governorate frequently uses its excess cash to bolster the
underfunded pension plan and needs to accumulate reserves
to expand the museum and refurbish buildings.
The problem resides in the curia, officially known as the
Holy See. The Holy See consists of many sections that spend
heavily but offer little or no income. Vatican Radio, which
broadcasts the popes readings and masses, as well as the
Vaticans news, has 330 employees and spends $37 million a
year yet collects less than $1 million in advertising. Its decit
is so deep that the city state now covers half the shortfall.
Operating the embassies, called apostolic nunciatures, in 113
nations runs over $30 million.
Almost two-thirds of the Holy Sees budget goes to paying
salaries, benets, and pensions for its 2,886 employees. (Including the city state, the Vatican has a workforce of 4,822.)
The Vatican pays relatively low wages but offers generous
health and retirement benets. Cardinals and bishops at the
congregations and councils often toil for as little as $46,000
a year, though their housing is heavily subsidized. The rank
and le, including nuns and priests, are also paid below
market, but make it up in benets. The average salary for
lower- to mid-level workers is around $28,000 a year. Thats
about 25% less than the $37,800 average for Italian workers with similar private sector jobs. But keep in mind that
Vatican employees pay no income taxes. Today around threequarters of the Vaticans employees are lay workers, vs. less
than half 25 years ago. Vatican lay employees have jobs for
life, and virtually no one leaves before retirement age.
For 2013 the Holy See posted revenues of $315 million
and expenses of $348 million, for a $33 million decit.
Since 2007 the total shortfalls have totaled $56 million.
Those gures actually understate the size of the Holy Sees
nancial problems. The current spending number is due
to rise sharply for a pressing need: taming big pension
liabilities. Its a problem the Vatican shares with virtually
every Western economy. The Vatican inaugurated a generous

3G to 4G.
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Francis, kissing an ailing child during a church visit in Rome

in March, is seen as a peoples pope.
p o p e f ra nci s

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76

on its extensive holdings of real estate, valued on the books

at around $1.35 billion. Its principal holding consists of some
2,000 apartments, which are mostly in excellent locations in
Rome, including the historic districts surrounding the Vatican and the bohemian-chic neighborhood of Trastevere.
Most of the units, however, are rented to bishops, priests,
and lay employees who pay minimal rent. For example, a
prominent cardinal and other clergy pay token rent on a
building with some 20 apartments on the tony Via Carducci.
It would generate over $1 million a year on the open market.
Over the past several years the real estate portfolio has returned an average of about $33 million a year.
Catholic foundations around the world actually pay a larger
share of the Vaticans operating budget than do its investments in real estate and securities. This giving is a crucial,
unreported bulwark of the Vaticans nances. Last year, by
Fortunes estimate, foundations donated more than $85
million toward the Holy See. The bounty comes from dozens
upon dozens of charities, most of which pledge relatively small
amounts. For example, the Legatus organization, a group of
prominent Catholic business executives, pledges 10% of its
annual dues to the pope, amounting to $500,000 a year.
o turn the vatican into a consistent
protmaker, the new regime is counting on
two institutions with the potential for big
growth in earnings: the museums and the
Vatican bank. Those are the two main
income sources for the future, says Zahra,
the Maltese adviser to the Vatican.
The museums are the only branch of the Vatican run like
a true business. This year the museum is on track to host
5.5 million visitors, or three times the gure 30 years ago. It
now ranks as the worlds fth-most-visited museum, behind
only the likes of the Louvre and the British Museum. Trafc this year has risen by 1 million visitors from 2013, largely
because of the Francis effect. The Vatican museum famously
boasts one of the worlds greatest collections, from its frescoes
by Raphael to da Vincis painting Saint Jerome in the Wilderness to the ultimate trophy attraction, the Sistine Chapel.

stefa no r ell a ndinir eu ters

dened-benet pension plan in the early 1960s but didnt

have an actual pension fund until three decades later.
The popes strategy for addressing both spending and
pension issues is to gradually shrink the Vatican workforce
through attrition and raise more money to maintain the
benets. In February of 2014 he imposed a hiring freeze
and also stopped formerly generous overtime payments.
The plan is to move existing employees from overstaffed
congregations to growth areas, such as nancial management, without replacing those who depart.
The Vaticans pension plan guarantees retirees 80% of
their nal salaries after 40 years of service, and as noted, few
employees leave before retirement. Thats a big premium
over the replacement rate in Italy of around 72%. But Pope
Francis is explicit about providing better pensions than those
in Italy. The challenge is lling the huge shortfall in the pension fund. The Vatican is guaranteeing some 1,750 retirees
plus current workers who have paid into the xed-benet
plan for yearsbig pensions for decades to come. Right now
those future payments far exceed the amount the current
fund can possibly generate in income.
According to a Vatican insider, the pension fund is short by
a few hundred million dollars. The Vatican has been making
minimal contributions to the fund for years, and employees
kick in just 6% of their salaries. Cardinal Pell says that retirement benets are safe for now but that the Vatican needs to
heavily restock its pension reserves in the years to come. The
Vatican could be obligated to contribute another $30 million
or $40 million a year for a decade or more to build a fund large
enough to pay future pensions from its investment returns.
The other major problem facing the Holy See is that its
revenues from investmentsalmost half of its totalare
unpredictable, and returns are far lower than they should
be. The Holy See does own one reliable source of prots,
the Vatican bank, or IOR. The IOR (for, in Italian, Institute
for Religious Works) regularly provides around $70 million
toward operating revenues. Perhaps the most surprising
feature of the Vaticans nances is the extremely modest size
of its portfolio of stocks, bonds, and real estate. The seed
money for the Vaticans investments came from a $92 million settlement the Italian government provided in 1929, in
compensation for its conscation of the Papal States, covering much of central Italy, 60 years earlier.
Today the Vatican holds some $920 million in stocks,
bonds, and gold. Its gold reserves, on deposit at the U.S. Federal Reserve, now amount to just $50 million. The Vatican
usually earns between $15 million and $25 million on its
holdings, much of it stashed in money-market accounts and
short-term government bonds. It also generates low returns

p o p e f ra nci s

Cardinal Pell and the reformers want the Vatican to exploit

its hidden treasures for additional prot. The goal is to use
promotional campaigns and new exhibitions to push museum
revenues far above the current $130 million a year.
The Vatican bank is also a potential growth franchise. The
IOR resembles a holy savings and loan. The basic purpose of
the IOR is simple, and essential. The wealthy dioceses, religious orders, and Catholic charities collect huge sums each
year destined for the developing world and deposit the funds
in the Vatican bank. That money frequently comes in cash.
The Vatican bank wires the funds to all corners of the developing world to build churches and schools, run hospitals, and
pay priests and nuns. Its also the everyday bank for Vatican
employees. It has a single branch with eight teller desks, situated in a medieval Gothic prison built by Pope Nicholas V. Its
ATMs, all in Vatican City, provide instructions in Latin. The
banks basic business is highly protable. Last year the IOR
paid around 1% interest on its $3.1 billion in deposits and
invested that money in government bonds at over 3.3%. That
model generated spread income of over $70 million.
Despite its simple mission, the Vatican bank has in the past
found itself ensnared in scandal. Perhaps the most decisive
transformation under Pope Francis is the remaking of the
IOR from a near wreck to the useful institution it should be.
Today it is central to the Vaticans plans for nancial growth.
The Vatican banks recent troubles started in 2009. As an
offshore bank outside the European Union, the IOR had no
rules or protocols for combating money laundering. The Vatican was already using the euro but couldnt sell large quantities
of its own euro collectors coins, a potential source of revenue.
So that year the Vatican signed a special monetary agreement
with the EU that allowed it to offer those special coins in its
gift shops. In return the Vatican agreed to follow the EUs strict
policies on money laundering and nancing of terrorism.
But the Vatican bank management was unprepared and
unwilling to make the changes necessary to comply. Under
Italian law, the IOR was not required to notify authorities
of the identity of clients who transferred money to accounts
in Italy. The system was ripe for abuse, and abused it was.
When the authorities asked IOR officials to identify senders
of money, the typical response was, Our laws dont require
us to tell you. The old guard in the bank adamantly opposed
lifting the veil. But the Bank of Italy started pressuring correspondent banks in Italy to cease dealing with the IOR. In
March 2012, J.P. Morgan Chase cut off business with the
Vatican bank in Italy, and then worldwide. Nine months
later the Bank of Italy declared that the IOR was failing to
comply with international anti-money-laundering laws
and forced all banks in Italy to close their IOR accounts.

By early 2013 the IOR was on the verge of collapse.

Francis empowered two key officials to clean up the mess.
The rst was Brlhart, the head of the AIF. A Swiss lawyer
who had previously headed an anti-money-laundering initiative in Liechtenstein, Brlhart is an uncommonly glamorous
gure in the Vatican hierarchy. Nicknamed the Vaticans
James Bond, Brlhart, 42, sports a perfectly groomed blackstubble beard and beautifully tailored three-piece suits.
Brlharts group, the AIF, was charged with both monitoring
the IOR for suspicious transactions and making the Vatican
comply with all EU and other multinational regulations.
Brlhart at rst faced stiff resistance from the powerful
Secretariat of State. The secretariat had the authority to veto
any agreement for exchanging information with a foreign
government. Those covenants were crucial to Brlharts efforts. Last December, Francis canceled that authority, giving
Brlhart free rein. Then, in June, the pope red and replaced
the AIFs entire board.
The second key reformer was Ernst von Freyberg, who
was named head of the IOR in its darkest days in early 2013
by Pope Benedictand started the day the pope officially
resigned. Von Freyberg hired Promontory Financial Group,
a compliance and auditing rm based in Washington, D.C.,
to review every one of the banks then 19,000 accounts. He
ended up shuttering 755 accounts held by outsiders, containing over $250 million. He also published two extremely
thorough annual reports, the rst publicly released nancial statements in the IORs history. Von Freyberg resigned
in July to return to his family shipping business, but his
achievements are respected by bankers worldwide.
Cardinal Pell has original ideas on how the IOR can
generate more revenue. And get this: The Vatican is now in
the institutional money-management business. With the
popes blessing, Pell is gathering all Vatican investments into
a newly created unit called Vatican Asset Management, or
VAM. Its headed by de Franssu, the former mutual fund
executive whom Francis has named to head the IOR.
Pell and de Franssu gure that dioceses and religious orders,
especially in poor countries, sorely need professional money
management and will relish entrusting their nest eggs to VAM.
The plan is for VAM to distinguish itself as a specialist in
so-called ethical investing, which will align with the churchs
values and those of its clients. As VAM gathers in billions in
assets to manage, it should throw off millions in annual fees.
The future of the IOR is asset management, declares Pell.
Pell meets with Pope Francis once every two weeks at Casa
Santa Marta to brief him on the progress being made by
their handpicked team of nancial experts. He describes the
pope as a good example of the old-style Jesuit who knows
which way is up and asks the right questions. To serve his
higher calling as a pope of the people, Francis knows, he
must continue to keep one eye on the bottom line.
Additional reporting by Anna Artymiak
FEEDBACK stully@fortunemail.com

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78

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GOOGLE
DOES
DARPA
The famously innovative
search company has taken
a page from the Pentagons
radical ideas factory.
Heres whats brewing in
Silicon Valleys coolest skunkworks.
By MIGUEL HELFT
Photographs by CODY PICKENS
REGINA DUGAN LOVES to tell the story of how she got her current job. It was a little over two years ago, and

Dugan, a mechanical engineer by training and an expert in counterterrorism, was

nishing a three-year stint as director of DARPA, the Defense Departments prodigious technology research organization that gave birth to things like the global positioning system, the stealth ghter, and the Internet. During her tenure, she sharpened its focus in areas like cybersecurity and new forms of manufacturing and on
delivering tangible results. DARPA is a place of doing, she told Congress in 2011. Its
an attitude that earned her praise among the tech eliteincluding veteran venture
capitalist John Doerr, who sums her up in four words: Shes an impressive leader.

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WALL OF SECRETS
Regina Dugan keeps a close
watch on the progress of
ATAPs various projects.
(Her team insisted that all of
their scribbled sticky notes
be covered by blank ones.)

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GOOGLE

Among Dugans many fans was Eric Schmidt, Googles

chairman, who suggested she go on a two-day visit of the
Googleplex in Mountain View, Calif. The idea was to see if
there might be a t between Dugan and some project or other
at the sprawling search and advertising giant. After making
the rounds of various groups, Dugan sat down with Dennis
Woodside, then the CEO of Googles Motorola unit, who was
charged with turning around a brand that was once synonymous with cellphone innovation but that had lost its way in the
smartphone era. Woodside said that with a renewed focus on
innovation, Motorola could leapfrog rivals like Apple and Samsung. His plan was to hire a mobile-industry veteran to lead an
advanced-technology group that could deliver the inventions
that would restore Motorolas status as a pioneer.
What, he wondered, did Duganwhose job had been to
nurture DARPAs decades-long streak of breakthroughs
think? Its a great strategy for not losing and a lousy strategy
for winning, she answered. A week later the Motorola innovation gig was hers.
Today Dugan is leading a cadre of big-idea special forces
called Advanced Technology and Projects group, or ATAP for
shorton an even grander mission for parent Google, where
the unit is slated to remain after the sale of Motorola to Lenovo is completed later this year. (Woodside left the company to
become chief operating officer of Dropbox.) The challenge?
Bringing to fruition a slew of next-generation mobile wondersnot in a generations time, mind you, but in a handful of
years instead. And though the group is still in its early days, it
appears on track to deliver some jaw-dropping technological
leaps that would help cement the 51-year-old Dugans cachet in
Silicon Valley and beyond.
The rst woman to head DARPA, she is comfortably at
home in the top echelons of tech research, a eld overwhelmingly dominated by men. The New York Cityborn engineer,
who received both her undergrad and masters degree at
Virginia Tech before earning a Ph.D. at Caltech, is swaggering
and stylish, with a helmet of thick, dark hair, piercing eyes, and
a penchant for jeans, leather jackets, and scarves.
Bolstering that cool-geek cred is her mastery of the tech
talk. In June at Google I/O, the companys developer conference in San Francisco, for example, she lled her presentation
on her Motorola work with catchyand sometimes trite
one-liners that mixed showmanship and bravado. Here
we dont tinker, she said. We build new things, sometimes
seemingly impossible things. Moments later she mused that
her group innovates without compromising the tech, or the
beauty or a sense of soul. Her talk had the desired effect: The
hundreds of engineers in the audience hooted and hollered
throughout as if it had been a Steve Jobs keynote.
But by all evidence, it seems, Dugans style is backed by
substance. Since she joined Motorola, she has brought a radi-

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82

PROJECT TANG O

Technical lead Johnny Lee holds a

modied Android tablet equipped with
extra sensors and cameras that allow it
to see and map its surroundings.

cally different kind of disruptive innovation to Google. ATAP

has emerged as something of a counterpart to Google X, the
better-known moon-shot factory that is working on selfdriving cars, glucose-detecting contact lenses, and other wonders. ATAPs projects are more narrowly focused on mobile,
but they, too, could easily land a leading role in a sci- movie
script. Theres a digital tattoo that you can paste onto your
forearm and use to unlock your smartphone. Theres Ara, a
project to reinvent the smartphone so that it can be assembled
on the y to a customers specs. It would give users the ability
to choose hardware components to t their needsa camera,
sensor, battery, or, say, an oximeter that measures pulse rates
and blood oxygen levelsjust as they choose apps. Theres
Tango, a prototype tablet that can see the world around itself
in 3-D to map the inside of your home, for instance, or help
a blind person navigate. The most whimsicalor perhaps

The components for Googles fully

customizable phone are slick, contactless
plastic tiles that snap into place onto a
3-D-printed frame.

Hand-drawn animation meets the future

of digital storytelling for the mobile era:
above, a character in Duet, a new short
animation that unfolds in a 3-D world.

PROJECT ARA

GoogleyATAP project is Spotlight Stories, an exploration of

how smartphones can help rewrite the rules of animation and
storytelling. Staffed by a group of movie industry veterans that
includes the animator behind Disneys Aladdin and The Little
Mermaid and an Oscar-winning director of Pixars Ratatouille,
Spotlight Stories is creating a new form of immersive video
content that is controlled by the user and that is also pushing
the limits of a smartphones capabilities.
Dugan wont discuss ATAPs budget or, for now, its other
projects. There are 11 in all, and they were listed on a recent
presentation slide under names like auth, imaging, and
MB, which did little to shed light on their objectives.
(Before we could photograph one of ATAPs brainstorming rooms, the company insisted on covering the Post-its
on the walls with blank ones.) But Dugan presides over this
collection of public and secret endeavors with obvious pride.

PROJECT SPOTLIGHT STORIES

ATAP, she said at Google I/O, is a small band of pirates

trying to do epic shit. After a theatrical pause, she added, A
small band of pirates in a very fast boat.
Hyperbole aside, Googles mobile-innovation lab is fascinating not only for the ambition of its disparate projects but
also because of how it aims to innovate. Dugan brought from
DARPA, based in Arlington, Va., an unorthodox approach thats
never been tried at scale in the private sector. It seeks to get
around problems that have plagued other advanced-research
labs in the tech industry. Some are so focused on pure science
that their work, while academically interesting, only rarely
yields practical applications. Others who have tried to meld
breakthrough research with product innovations have had
mixed results. More often than not, product teams shy away
from science that is too risky, and scientists squirm at the
idea of being hemmed in by product specs and deadlines. The

September 1, 2014

GOOGLE

diverging priorities, Dugan says, lead to compromises, and soon

projects devolve from epic shit to shitty in an epic way. (The
sprinkled profanity seems to be part of Dugans pirate shtick.) A
rare exception to this skunkworks syndrome is DARPA, which
has consistently opened new scientic doors as it delivered
useful productsand thats exactly what ATAP is trying to do at
Google. The question is how you have an enclave that produces
a string of breakthrough advances time after time, Dugan says.
So whats the ATAP playbook? It starts with identifying
a project that demands a quantum leap in both scientic
understanding and engineering capability to pull off (more
on that soon). Once that is done, Dugan works to assemble
a core team of experts at Google. But that team quickly casts
a much wider net, tapping what are often a huge number
of outside collaborators from across a mix of disciplines in
industry and academia. That allows ATAP, with a staff of just
75 full-time members, to be far smaller and scrappier than
traditional research labs.
Together with its partners, ATAP forms what Dugan
calls special-forces research teams. For project Tango, for
example, the lab had to rally experts in computer vision and
robotics, as well as experts in lenses, cameras, manufacturing, and more. The core ATAP group involved just a dozen
scientists and engineers, who joined with some 40 outside
partners, including universities in the U.S. and Europe and
NASAs Jet Propulsion Laboratory.
In all, ATAP has worked with 326 partnersuniversities,
startups, large system integrators, government and nonprot
organizationsin 22 countries. (Dugan crafted a rare multiuniversity research agreement with more than two dozen
leading universities that allows ATAP to quickly contract
with researchers at places like Stanford, MIT, Caltech, and
the University of Michigan.) Today things are moving so fast

BAND OF PIRATES
Consider the skull and crossbones
ag an ATAP emblem: Dugan (center),
gathered with her team for a weekly
meeting, is in pursuit of epic
upheaval, not modest disruption.

FORTUNE.COM

84

that a diversity of skills and of points of view matters, says

John Sealy Brown, who once headed the Xerox Palo Alto
Research Center, one of the most prestigious and innovative
industry research organizations. Often you need to have a
multitude of disciplines brought together quickly.
Then theres the requirement that ATAP projects deliver
a nished product. That goal works to inspire ingenuity in
researchers and intensify their focus. Neil Gershenfeld, an
MIT professor who directs the universitys Center for Bits and
Atoms and who is collaborating with ATAP on its modular
phone, says the product focus helps ground his research.
Dugan points out that many technical challenges can only truly
be solved when a researcher builds not just a prototype but
also a product that can be made at scale. (Tango expects to ship
devices to developers soon. And Spotlight Stories has already
created two animated shorts, and a third one is on the way.)
The nal, but critical, piece of ATAPs formula is impatience. Projects are on a two-year deadline so that they dont
become open-ended research initiatives. If tangible results
arent achieved quickly, theyre shelved to make room for
new ones. DARPA emphasized this by printing employees
last day on their badges. At ATAP, techies are reminded periodically that, with every passing week, they are 1% closer to
their last day. There is a sense of urgency, Dugan says. You
dont come to build a career. You come to do a project, to do
something epic, and then you go.
RESEARCH GROUPS have a storied place in Americas technology industry. Over the years corporate giants have hired
armies of scientists to build labs whose research rivaled that
of prestigious academic institutions. AT&Ts Bell Labs, for
instance, is credited with developing the transistor and the laser, and work performed within its walls was recognized with
seven Nobel Prizes. IBM gave birth to Watson, the articialintelligence system. And not every engineering whiz thinks
the classic innovation model is broken. IBM is not an ivory-

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T H E R E I S A S E N S E OF
tower research enterprise, says Zachary Lemnios, a DARPA
veteran who oversaw the agency at the Defense Department
during Dugans tenure and who is now a top executive at IBM
Research, a massive organization of 3,000 researchers that
dwarfs ATAP. We have a balanced portfolio with near- and
long-term projects. Yet many tech giants have struggled
to capitalize on the breakthroughs of their own labs, either
because the research was too far removed from practical applications or because corporate parents didnt grasp the value
of their labs inventions. (Xerox PARC famously developed the
computer mouse and the graphical user interface, only to see
them commercialized by Apple and Microsoft.)
Google stands out for having largely shunned the approach. The company has long embedded its advanced
researchers within product groups, leading to breakthroughs
in areas like search (Google Now), speech recognition (dictation), and machine translation (Google Translate). Google X
was one of the companys rst formal efforts to cordon off a
research group, but it, too, is focusednot on basic scientic
research, but on specic projects (like autonomous vehicles)
that require technological leaps to achieve. Google X is going after the kind of big, audacious ideas that have been the
hallmark of CEO Larry Page and that may take years to bear
fruit. For breakthroughs in mobile computing, an industry
that was born in earnest only in 2007 when Apple introduced the iPhone, ATAPs shorter time frame makes more
sense. I dont even know what it means to imagine a 10-year
time horizon in mobile right now, says Dugan.
As it is with most research groups, the business case for
ATAP projectsor, for that matter, for Google Xsis not
always apparent. Googles philosophy is that huge conceptual
advances will pay off in some way, even if its not clear how
at rst. And in the process the research and development involved helps attract and retain some of the worlds top talent.
The buzz linking Google with the notion of bold innovation
doesnt hurt either.
Dugan aspires for her projects to be in what the political
scientist Donald Stokes dubbed Pasteurs quadrant. Stokes
categorized scientic research by whether it sought a fundamental understanding of nature (Bohrs quadrant, after the
physicist Niels Bohr) or whether it tried to solve immediate
problems (Edisons quadrant, after Thomas Edison). He dened the Pasteur quadrant as something of an intersection of
the two other quadrants: research that expands basic science
but that is driven by an immediate application. (Stokes left the
fourth quadrant empty, as it would refer to work that pursues
neither new science nor practical uses.) To nd projects that
t the bill, Dugans teams follow one of two approaches: They
make an observation as to where technology is heading and
nd an application to push it there faster, or they nd an application that needs a new type of technological solution.

FORTUNE.COM

86

urgency, says Dugan.

You dont come to build
a career. You come to do a
project, and then you go.

Project Ara ts that Pasteur rubric well, it would seem.

The idea for it came at a time when Motorola was releasing the
Moto X, which was the rst customizable smartphone on the
market, allowing users to choose the color for its back, buttons,
and bezel. Through sales data and its own research, Motorola
discovered that consumers put a premium on such customizationbut not just for the look of the device; they valued it
for function as well. Moreover, they felt a special affinity for
a product that they had a hand in creating. The obvious next
question for ATAP was this: How far should it take customization in the mobile space? To answer it, Dugan tapped Paul Eremenko, a former DARPA colleague. Eremenko knew nothing
about mobile phones, but he had worked on modular satellites.
When he proposed that ATAP pursue a fully modular
phone, whose components could be swapped in and out at
a users fancy, the overwhelming reaction in the tech press
was negative. The main criticism was that a modular phone
would, by necessity, be inferiorbulkier, slower, more powerhungry, uglierto one built entirely by Apple or Samsung.
Eremenko, for his part, doesnt dispute the claim at all. But
he considers the challenges of modularity to be merely overhead, and if that overhead can be brought down sharply, as
he thinks it can, the modular phone would be viable. Indeed,
its in such challenges that the ATAP model shines. The Ara
team is pushing engineering science forward in a variety of
elds, from building miniature electro-permanent magnets
that can latch components together to designing antennas
that can be moved and recongured.
With just ve staffers at ATAP, Ara has relied on its partners to make big strides toward its goal: a modular device
that can boot Android, Googles mobile operating system.
While the prototype looks like something out of a hobbyists
workshop, with wires sticking out of it, the nished phone
that Ara envisions is attractive and slickbuilt around a
3-D-printed core, where the modules are colorful square and
rectangular tiles with rounded corners that snap snugly into
place. If it is successful, the implications for the mobile industry could be huge. With just a few modules, for example,
a phonemaker could build an entry-level smartphone for the
developing world, where hundreds of millions of people still
use feature phones. Users could then upgrade gradually. A

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GOOGLE

modular phone could also lower the barriers to participating

in an industry thats controlled by a few giant manufacturers.
High-end audio companies like Bose and camera makers like
Leica could make premium sound or photography modules
that they could sell directly to consumers; Fitbit and other
makers of activity trackers could build modules for phones
rather than standalone wearable devices. And over time,
customization could be pushed further inside the modules
themselves, tackling new technical challenges along the way.
Ara is a rst step toward making the hardware as malleable
as the software, says Gershenfeld, the MIT scientist.
GLEN KEANE may be the last person youd expect to nd

toiling away in a cubicle at Google. Keane began drawing

as a child, starting with dinosaurs, so that he could imagine
himself living the worlds and characters he was creating.
Later, over four decades at Disney, Keane shared with millions of moviegoers the experience of living inside characters he animatedAladdin, The Little Mermaids Ariel, the
Beauty and the Beast. Now Keane sits in front of an easel, a
box of pencils at the ready, and draws frame after frame on
white sheets of paper inside ATAPs otherwise nondescript
temporary offices at the Googleplex. (The group just moved
from Motorola, in Sunnyvale, as it waits for its more permanent office.) Keane says hes never before felt so palpably
inside his illustrations as he does now. As an artist, I got to
live in the skin of those characters, Keane says. It was very
true to the experience I have in my imagination.
Keanes Google project is Duet, a whimsical and visually
stunning animated short that tells the story of a girl, Mia, and
a boy, Tosh, following them from birth to their falling in love
as young adults. Like the two other Spotlight Stories produced
so far, Duet, which has not yet been released, is meant to be
watched on a mobile device. The screen serves as a movable
window into a story thats unfolding in a three-dimensional
world that surrounds the viewer. Point the screen in one direction and youll see one part of the story; to see another part,
point up or down or around. In Duet, a viewer might choose to
follow Mia for a while, then Tosh, and then Mia again as the
two characters cross paths repeatedly. At every meeting point,
you can choose to follow one or the other, says Rachid El
Guerrab, the technical lead for Spotlight Stories. And as you
watch Duet again and again, you could choose to see different
things each time. If a traditional video is akin to looking at a
paintinga xed frame in which the story unfoldsDuet and
its ilk are more like exploring the inside of a cathedral.
Spotlight Stories grew out of Dugans observation that
while just about everyone uses smartphones and tablets for
entertainment, the typical experiences (traditional videos,
simple games) rarely take advantage of the devices power and
capabilities. El Guerrab, a veteran of the gaming world, and

FORTUNE.COM

88

DRAWING INSPIRATION
Rachid El Guerrab, technical lead for Spotlight Stories, works with one
of Glen Keanes illustrations for Duet, an animated short.

a handful of others began exploring how to turn the Moto Xs

graphics capabilities into a 3-D canvas. Soon after, they decided to bring in a team of Pixar veterans, led by Jan Pinkava,
who won Oscars for co-directing Ratatouille in 2007 and
directing an animated short a decade before. At ATAP, the
group produced two computer-generated shorts, Windy Day
and Buggy Night, which are available on Moto X phones. Duet
is the groups rst hand-drawn animated short.
Its something of a paradox that Spotlight Stories appears
to be the least techy of ATAPs projects and yet is also the one
that most resembles the kind of blue-sky exploration done at
research labs of yore. With its three-dimensional canvas, the
Spotlight Stories team creates what is arguably an entirely
new art form, one that future artists may explore in ways currently unknown. For Keane, someone who is used to controlling a storys viewpoint with cuts, close-ups, wide shots, and
cutaways, it has meant learning a whole other language. You
think more as a magician in some ways, he says. Instead of
forcing a viewpoint, you coax, you seduce somebody over.
Because of technical requirements having to do with video
compression and how video is rendered on mobile screens,
he had to learn to draw in 60 frames per second rather than
the typical 24. In the end, the result, while meant for a small
mobile device rather than a giant movie screen, was more
satisfying; it established a new, closer relationship between
artist and audience. Sitting in a big movie theatertheres
something cold about that, Keane says. When someone is
holding your art in their hand, its very personal.
This new art form may spread to Hollywood and beyond,
as Keane believes. Or it may not. And thats just ne for Dugan. Its a gift, she says of Duet and the other shorts. A gift
that combines beauty with a sense of soul.

+ FEEDBACK miguel_helft@fortune.com

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SEVENTY-SIX YEARS AFTER NATIONALIZING ITS OIL

BUSINESS, MEXICO INVITES FOREIGN COMPANIES BACK
TO DRILL. WHAT WILL IT MEAN FOR MIGHTY PEMEXAND
FOR THE NATIONS SELF-IMAGE? BY JEFFREY BALL
i l l u s t r a t io n b y BRIAN LEVY

Mother Nature long coddled Mexicos national oil company,

blessing it with fountains of homegrown black gold. But
in recent years she has gotten ornery, frustrating Petrleos
Mexicanos with juicy but recalcitrant elds of oil. One day this
spring she played a nasty joke. She unleashed a 6.4-magnitude
earthquake on Mexico that caused the 50-story headquarters

of the company known as Pemex to sway woozily, like an aging

prizeghter struggling not to fall. Inside the iconic but timeworn building, the second-tallest in Mexico City, doors rocked
on their hinges, metal blinds banged against windows, and
frightened workers braced themselves inside door frames, hoping to ride out a threat they all knew was beyond their control.

FORTUNE.COM

91

PEMEX REVENUE
$120 billion

90

60

30

0
1999

2013

NET INCOME
$3 billion

1999

2013

FORTUNE.COM

92

that ranks ninth or 10th in global oil production,

depending on whos counting, and that some geologists say contains the largest unexplored petroleum
area beyond the Arctic Circle, Pemex has presided
over a steep decline in Mexicos oil output.
That declineMexicos oil production has tanked
25% over the past decade, to 2 million barrels per
daythreatens the countrys ability to pay its bills.
Pemexs oil revenue is the single biggest contributor to the Mexican treasury, supplying roughly one
third of the national budget. Its doubly embarrassing for this proud country because it comes as an
oil boom is exploding next door in the U.S. Thats
why Mexico now is rolling out the red carpet for the
international oil rms it once threw out.
If it works, foreign players ranging from supermajors to wildcatters will pour into Mexico and
pull up the crude and natural gas that Pemex has
failed to tap from Mexicos increasingly technically challenging elds. Pemex will be guaranteed
favored-son status, granted an initial slate of elds
in a much-anticipated government decision known
as Round Zero that was to be unveiled as this
issue went to press. But unless Pemex can prove
itself competitive, it will be largely relegated to the
relatively simple elds it has learned to exploit well,
while foreign companies will dominate the vaster
troves of Mexicos harder-to-get hydrocarbons,
from the deep waters of the Gulf of Mexico to shale
plays near the U.S. border. The government hopes
this race will boost the amount of Mexican oil that
ows onto the marketraising the take for the
state, which will get a cut of every barrel. Equally
important, it hopes the surge in Mexican oil and
gas production will have a raft of spillover benets
for the country, slashing electricity prices, attracting
industry, and bankrolling services for the people.
But whether Mexico rocks the energy world
will depend on whether it can execute its pledge
to reform Pemex, a sprawling bureaucracy that for
generations has had its hands in every aspect of the
countrys oil sector. A few months in, the attempt
is hitting major roadblocks. The difficulty is partly
that Pemex is a poster child for corporate dysfunction. Its also that Pemex, however dysfunctional, is
seen by much of the Mexican public as the guardian
of the nations patrimony.
EVERYWHERE IT SITS, oil is big business. In
Mexico its a cultural keystone. Haydee Figueroa,
a dentist working one afternoon on her iPad at a
caf in Polanco, a tony district of the capital, serves
up a pithy summation: In Mexico, she says, oil
represents something similar to corn.
March 18, the day Mexicos revolutionary govern-

source: bloomberg

$12

Scant hours later, Pemexs 39-year-old chief

executive, Emilio Lozoya, sits at at the head of
the massive conference table in his cloud-level
office. The Pemex tower has stopped shaking,
but the Pemex corporation faces a foundational
challenge. In a move that has both shocked and
thrilled the global oil industry, Mexicos government is performing an about-face.
For the rst time in three-quarters of a century, it intends to invite international oil rms
into the country to sink their drills into its petroleum-rich earth. That decision has infuriated
many Mexicans, and it fundamentally threatens
Pemex, which has always been a monopoly.
As the oil giants prepare to pounce, Lozoya, a
Harvard-educated investment executive and an
oil industry newcomer, has the task of whipping
the bloated behemoth into competitive shape.
It is, by all means, the most important
transformation Pemex has suffered in our entire
76 years, says the fresh-faced CEO, who speaks
excellent English and chooses his words
including his verbsdeliberately. As he talks, he
jots talking points onto a small white notepad
that has been placed in front of his high-backed
chair. By his right hand sits a red phone, a
direct line to the office of Mexican President
Enrique Pea Nieto, the oil reforms architect
and Lozoyas friend and boss. Everything about
Mexicos energy opening is being carefully choreographed. But in Mexicos rough-and-tumble
energy business, even the most meticulous
plans have a way of getting blown up.
Ever since 1938, when Mexico expropriated
its gushing oilelds from foreign companies in a
burst of revolutionary nationalism, that bounty
has been off-limits to outside producers. The oil
has been the exclusive purview of Pemex. Favored by geology as well as by law, the company
has had the luxury of getting most of its oil from
a couple of huge, easy-to-tap underground formationsknown in the industry as elephants.
Indeed, Pemex has become legendary in the oil
world for its factory-like approach to pulling oil
from a particularly Mexican type of elephant:
elds in shallow water, just off the countrys Gulf
coast. But along the way, Pemex has become
notoriously inefficient. The company ranked
No. 36 among the Fortune Global 500 last year,
with revenue of $126 billion. But Pemex also
posted a $13 billion net loss. The company is
laden with bureaucracy, teeming with superuous workers, and, by its own executives admission, thwarted by corruption. The result is both
stunning and not very surprising: In a country

San Antonio

Laredo
Sabinas

AVERAGE DAILY
OIL PRODUCTION

PROVED RESERVES

3 million
barrels

60 billion barrels

40

20

Monterrey
Burgos
Ciudad Victoria

Perdido

0
2000

2014

2000

2014

Tampico

Chicontepec

Agua Fria

Cantarell

Ku-Maloob-Zaap

Mrida

Crudo Ligero Marino

Mexico City

Campeche
Puebla

Veracruz

Veracruz

Acapulco

Villahermosa

Macuspana

Oaxaca
Antonio J. Bermudez

sources: pemex; ei a; mexico nationa l h y droca r bons commission

OIL AND GAS IN MEXICO

OILFIELD

ment grabbed the countrys oilelds from the gringos in 1938,

is a national holiday. The event is a key element in Mexican
schoolbooks and part of the countrys stick-it-to-the-man folklore. Pemex is the most recognizable brand in the country; its
gas stations, painted in the national colors, green, white, and
red, are the only mainstream places in Mexico to ll up a tank,
and the government-subsidized prices dont vary from pump
to pump. The Pemex empire is by far the countrys biggest employer, providing paychecks to more than 150,000 Mexicans; it
operates a network of hospitals, recreation centers, and libraries; and it has made not a few inuential Mexicans very rich.
Adrian Lajous was Pemexs CEO in the late 1990s and
remains deeply involved in the countrys energy debate. One
recent afternoon, dressed in a tweed jacket and jeans in the
living room of his book-lined, modernist Mexico City house, he
delivered a lecture on Mexicos oil history. We copied the U.S.,
he says, but here, it was the wild, wild West.
Petroleum was discovered in Mexico in the late 1800s,
and production ramped up between 1900 and 1910. Almost
immediately, Lajous explains, you just had these elds
spurting oil. Oil companies, notably from the U.S. and
England, set up shop. In 1910 the Mexican Revolution broke
out, yet oil production kept rising. The oil companies simply
paid off all the factions in the civil war, Lajous says, and
they were protected.
After the Mexican Revolution ended in 1920, the trade

GAS FIELD

union movement in Mexico gathered steam. In 1937 oil

workers walked off the elds on strike, protesting their pay.
In March 1938, Mexicos supreme court sided with the workers; days later Mexican President Lzaro Crdenas declared
the countrys oil the property and business of the state. With
Crdenass declarationa moment known ever since in Mexico
simply as la expropiacin, or the expropriationPemex was
born. In the lobby of the Pemex tower today, 44 stories under
Emilio Lozoyas chair, stands a larger-than-life bronze statue of
a triumphant Crdenas, the populist who launched the rm.
ONE GOOD WAY TO UNDERSTAND the intensity of feeling
about oil in Mexico is to wander around the National Museum
of Anthropology, an architecturally stark building each of
whose rooms displays artifacts from a different Mesoamerican culture. A common narrative unites many of the displays:
A resource-rich Mexico is invaded and exploited by greedy
foreigners, and then its heroes rise up against the outsiders,
sometimes forcing them out and sometimes being martyred in
the attempt. In the Aztec room an exhibit explains that Hernn
Corts, the Spanish explorer who arrived in Mexico in 1519,
killed Moctezuma II, the Aztec leader, which ultimately led to
the ascension of Cuauhtmoc as the Aztecs head.
On a rainy Saturday morning, standing in the Aztec room
and speaking to a crowd of mostly European visitors, tour
guide Julieta Lpez distills the story to what she sees as its es-

FORTUNE.COM

93

sence: The Spanish invaders used knowledge to manipulate the people,

just as, today, we are manipulated. Later, asked about her view of the
energy reforms, she offers a similar critique. I am completely against
the reforms, she says. It took us a long time to get rid of the foreigners.
Now this President wants to open the doors to have them come again.
Its a consensus view on the Mexican left. Ursus Sartoris is a Mexico
City poet, editor of a literary magazine, and self-described leftist activist.
He has wild brown hair, sees the world through thick, black-rimmed
glasses, and wears suspenders over a belly that betrays his fondness for
good food. One evening in Mexico City, sipping red wine and munching a
corned-beef sandwich in a French caf, he spins a parable. It likens Pemex
not to an elephant but to another four-legged creature.
You have a cow, says the poet. For a long time this cow produced
a lot of milk. And then some guy comes and says, You have a very nice
cow. I want that. Sell it to me. And you say, No, this is for my small farm,
because from this cow all my family eats. And he says, No, please sell
me the cow. The cow is Pemex.
The cow may be past its prime, but it still belongs to the family. The
relationship between Pemex and the Mexican people is very complex,
says Fluvio Ruiz, an energy economist who had invited his friend Sar-

Pemex is a presence everywhere in the country,

from lling stations like this one (photographed in
1956) to a platform in the Bay of Campeche.

toris to dinner that evening. People say its dirty

and corrupt. But its our dirty and corrupt.
Ruizs own relationship to Pemex is a study in
those contradictions. He is, he notes, a nio Pemex, or child of Pemex. He grew up in the Pemex
petrochemical town of Coatzacoalcos, the son
of a lawyer and a teacher, both of whom worked
for Pemex. He spent his college days in the late
1980s in student protests, agitating for Mexican
political reform. Today, as a result of an earlier
attempt to reform Pemex that effectively set aside
four board seats for people picked by Mexicos
leading political parties, the bushy-haired agitator
has an unlikely job as a full-time, salaried Pemex
director. Posters of Che Guevara, Lenin, and Marx
cover the walls of his officea capacious suite
on the Pemex towers 14th oor. The intellectual,
who wears colorful rope bracelets on his wrist,
is ferried around Mexico City in a gray Nissan
Pathnder supplied by Pemex and driven by a
chauffeur. He sees reforming Pemex as necessary
to saving itand his mission as helping shape
the reforms so that they strengthen the company
rather than snuff it out. The main problem, the
base of it all, he says, is that Pemex is not a company. Pemex is a public organism.

FORTUNE.COM

94

station: roger v iolletgett y im ages; pl atfor m: v ictor ruiz ga rci ar eu ters

SERGIO GUASOS DAILY LIFE is a testament to the

frustrations of Pemexs position as an ossied arm
of the state. Guaso, a no-nonsense, ruddy-faced
man, wears monogrammed white shirts and works
at a desk with nothing on it but his laptop. He is
vice president of business development for Pemexs
exploration and production division, a job for
which he travels a lot. When he les his expenses he
often isnt paid for three months. Why? No other
reason than bureaucracy, he says in his barren
office. Many desks, many people, the same paper.
Mexican law imposes many restrictions on how,
when, and in what quantity Pemex can spend
money. The rationale is that Pemex is just another
government agency, competing with others for its
annual slice of the federal scal pie. But Pemex
doesnt just consume government money; it also
supplies a good chunk of it. If theres one common
refrain within Pemexs C-suite, its that this shortterm outlook by government bean counters all but
ensures that Pemex will stumble in the long-term
business of producing oil.
Guaso ticks off example after example of those
inefficiencies. Mexican law, for instance, limits the
amount of debt Pemex can incur. But it eases that
limit for debt that Pemex certies it can repay
within a year. So Pemex focuses on incremental
improvements to its existing elds rather than

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Pemex CEO Emilio Lozoya

less immediatebut necessarybets on new elds. In short, it keeps

riding its elephants until they drop.
all its shortcomings on a federal scal straitjacket.
Exhibit A of the companys own failures is a asco at one of Mexicos juiciest oil formations, an elephant called Chicontepec. Its enormous, and it
contains one-third of all the certied oil and gas reserves, or hydrocarbons
in the ground, that Mexico currently claims. Chicontepec was discovered
nearly a century ago but has remained largely undeveloped. At the most
basic level, thats because its oil, mostly heavy and lurking in countless tiny
pockets, is hard to reach.
Pemex began prioritizing Chicontepec in the early 2000s, roughly when
Mexicos most prolic eld, a legendary elephant called Cantarell, was
heading into decline. By 2005, Pemex had bored a few hundred wells.
Those results were encouraging, and over the next several years Pemex
announced inc00reasingly bullish plans to develop the formation. But it
soon ran into a buzz saw: Mexicos oil regulator, the National Hydrocarbons Commission, which the government created in 2008 largely out of
frustration with Pemexs declining output. The commissions mandate was
to get Pemexs production up again.
The new commission disputed the amount of oil reserves Pemex was
claiming from Chicontepec. Reserves are a crucial metric the market uses
to judge an oil companys health, and strict international rules govern
their tabulation. One rule is that, to be counted as reserves, an oil deposit
must be economic. That means the company asking to book the oil must
show that developing it would bring sufficient nancial returns to justify
the effort.
At Chicontepec we had doubts about this production being economic,
explains Edgar Rangel, a commission member. Like most employees of
the commissionindeed, like many of the top players in todays fastmoving Mexican oil scenehes young, well educated, convinced hes helping his country at a formative moment, and therefore brash. One reason
the commission started to be suspicious, he says one afternoon, sipping
lemonade at a Mexico City caf, is that although Pemex had hired third
parties to certify its reserves claims, Pemex would keep the reports of the
certifying companies in a drawer, locked up. When the commission got
hold of the reports, it found huge discrepancies between the numbers
the certiers gave and the numbers Pemex claimed, Rangel says. But
Pemex would hold to its numbers. They says, Were correct.
In 2010 the commission issued a public report that put an asterisk
by Pemexs reserves numbers. It counted only some Chicontepec oil as
economic, labeling the rest as technically but not necessarily economically possible. Pemex was, as you can imagine, extremely unhappy, says
Rangel, who once worked at the oil giant. I believe that I lost eight to 10
friends as a result of the dispute.
Reserves are only a theoretical measure of an oil companys prospects.
Whats incontrovertible is oil production. In early 2013, Pemex expected
to pull 94,000 barrels of oil a day out of Chicontepec by the end of that
year. Today its producing far less.
Part of the blame lies with the geologists Pemex relied on. Committing
an error of extrapolation, they gured the entire formation looked similar
to the area plumbed by the initial wells. Instead, Pemex later discovered,
the formation varies hugely from spot to spot, so it will require a variety
of sophisticated and costly techniques to get out the oil. From the limited
information we had at the time, says Gustavo Hernndez, Pemexs head

PEMEX CANT PIN

96

FOR MEXICO THAT FUTURE rests on bringing

in foreign oil companies with technical expertise.
Executives of several of those companiessome of
the biggest oil producers in the worlddeclined
to comment, fearful of offending the government
and imperiling their hopes of landing permission to
pull up and sell off some of Mexicos oil. Like a thick
steak, that prize is so big they can taste it.
One outside oilman who did agree to talk is
Harry Bockmeulen, at the time Mexico director for
Petrofac, a London-based rm that has operated
for several years as a Pemex contractor. It has been
paid a fee by the Mexican giant to help it squeeze
more oil from its aging elds. What Petrofac and

a lfr edo estr ell aa fp/gett y im ages

FORTUNE.COM

of exploration and development, we were expecting more production.

It wasnt just Pemex scientists who fumbled
Chicontepec. Pemex managers did too. In the past
few years Pemex has hired outside companies
to try different methods to get at Chicontepecs
oil. Pemex has spent about $3.5 billion on those
attempts, and thus far it has little to show for it.
The root of the problem, Hernndez says, is that
Pemexs Chicontepec managers outed Pemex
policy and paid the companies merely for drilling
wells, rather than predicating payment for the
drilling on nding oil. They didnt drill smart
holes, he says, because the incentive was just
well completion, not additional production.
As a result of the Chicontepec experience, heads
at Pemex have rolled. Lozoya, the CEO, describes
his response upon learning of the nancial blowout this way: Firing some people, moving some
people. But you know what? Very honestly, I cannot look to the past. I need to look to the future.

PROMOTION

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The Inaugural
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for battery technology; Stephanie Mehta, former Deputy Managing Editor, FORTUNE, Honoree Thomas Jaramillo, for renewable energy, Dr. Harry Atwater

FORTUNE and FORTUNE Brainstorm GREEN are trademarks of Time Inc. All other trademarks are the proper ty of their respective owners.

PEMEX IS NOT A
COMPANY. PEMEX IS A
PUBLIC ORGANISM.
the worlds biggest oil companies anticipate under Mexicos reforms is
something more protable: the freedom to bid on Mexican elds and sell
the oil they produce.
Bockmeulen has watched this movie before. He has spent much of
his career stationed in oil-rich Latin American countries, positioning
his employer to snag a piece of the local action at whatever moment it
opens up. All the big international oil rms will have a cut in the new
regime in Mexico, he predicts, chatting on a Sunday morning hours
after ying back to Mexico City from Europe. The resource is here, he
says, his cheeks ecked with a days gray stubble. And we always go to
where the resource is, dont we?
LOZOYA, THE YOUNG CEO, is moving to gird Pemex for battle. He is
attening the companys four main operating units into two, because
traditionally, he says, the heads of each unit dont care if another unit is
losing money, as long as their [own] numbers are ne. From there, he
wants to rationalize Pemexs renery business, which is bleeding billions.
More grandly, he wants to lay new oil and gas pipelines across his
country and beyond itpipes he asserts could modernize all of Central
America. He gets up from his conference table, walks over to his desk, and
grabs a not yet public map of his pipeline plans.
One priority, he says, is to use a north-south pipeline at the narrowest
point in the country between the Gulf of Mexico and the Pacic Ocean to
send increasing amounts of Mexicos oil west to China, other parts of Asia,
and California. Another is to build a pipeline ferrying Mexican oil and gas
down to Guatemala and beyond. Think about the impact this will have
on immigration, he says. It will create a much more competitive region.
But for Lozoya to construct Pemex 2.0, hell have to get his hands on a
lot more oil. That has set up a power play between Pemex and its owner,
the Mexican government. The governments priority is to boost Mexicos
oil and gas production, maximizing the national rent. Pemexs goal is to
raise its corporate take. That means Pemex is gunning for authority to
drill as many of Mexicos elds as it can. The ght is over whether Pemex
will be the most efficient producer.
The government was to announce in August which elds it would give
Pemex and which elds it would, over the next several years, open for
bidding to outside companies. Both sides have long agreed that Pemex
should get most of Mexicos shallow-water elds and conventional onshore eldsPemexs traditional bread and butter. But Pemex also asked
for sizeable chunks of the deepwater Gulf of Mexico, which it has begun
drilling, and of Mexicos extensive though undeveloped shale plays. My
concern is theyre asking for too much in areas where they dont have the
technical expertise, says Mara de Lourdes Melgar Palacios, undersecretary for hydrocarbons in Mexicos energy ministry.
ALL THIS TALK OF CLIPPING Pemexs wings is contemptible to the son of
the man who engineered la expropiacin in 1938. At age 80, Cuauhtmoc
Crdenas, son of the late Lzaro Crdenas and namesake of the Aztec
chief, is trying to engineer his own revolution: a plebiscite to roll back
what he sees as the auctioning of the nations wealth.

FORTUNE.COM

98

One evening Crdenas chats on a white couch in

his office, in the walled compound that once was
his parents house. His shelves hold books about
Simn Bolvar and other Latin American ghters,
and a huge oil painting of his father hangs on a
wall. Outside, under the porte-cochre, sits his fathers 1966 brown Oldsmobile, as if parked in time.
The son pronounces the current reforms both a
big mistake and a violation of the law.
Crdenas and his colleagues are working to
collect signatures to force a public vote to negate
the oil reforms at the countrys next election, to
be held next year. He says that as of last spring his
movement had collected 1.7 million signatures, and
that it was trying for 1.5 million more. That sets up
a race against the clock. While Crdenas and the
left try to roll back the reforms, which the Mexican
legislature approved in August, Pea Nietos government is scrambling to implement them. We are
in a hurry. We cannot delay, says Javier Trevio, a
Mexican congressman whos helping lead that push
on behalf of the president.
Trevio, speaking in the bar of Mexico Citys
Four Seasons hotel, brushes off the lefts opposition
as naive and outdated. They still want to have
Mexico as the vision of oil nationalism. They are
very parochial, he says, ngering his BlackBerry.
In particular, the Mexican left doesnt fully grasp
that oil companies have many spots around the
world where they can go to hunt for crude, Trevio
asserts. We are not the only dish at the table.
Hanging over the push to reform Mexicos oil
and gas sector like a storm cloud is fear about
the energy boom already exploding north of the
border. The U.S. long has been the biggest buyer
of Mexican oil exports, but lately its purchases
have fallen sharply, in part because private oil
companies have succeeded stupendously in
squeezing more oil from U.S. shale. And U.S.
imports probably will fall a good deal further if
Washington approves the Keystone XL Pipeline,
a controversial tube that would move Canadian
crude to many of the same U.S. Gulf Coast
reneries that now process tankersful of Mexican
oil. The world has shrunk, and the easy elephants
have been shot, in the nearly 80 years since an
ascendant, post-revolutionary Mexico had the
bravado to tell the foreign oilmen to go home.
Today, though it pains many in Mexico to admit it,
the country needs cutting-edge technical help to
convert its prolic fossil-fuel resources into cash.
The real question is whether Mexico has the muscle
to carry out its reforms so that this time the oil and
gas produced by the international drillers ends up,
for the long haul, enriching the country.

+ FEEDBACK letters@fortune.com

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The FedExCup Playoffs begin August 21.

The Barclays August 21-24, The Ridgewood Country Club, Paramus, NJ
Deutsche Bank Championship August 29 - September 1, TPC Boston, Norton, MA
BMW Championship September 4-7, Cherry Hills Country Club, Cherry Hills Village, CO
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Until one of
them is holding
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theres no
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The Guy.

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BY SCOTT DECARLO, DOUGLAS G. ELAM, VIVIAN GIANG, KATHLEEN SMYTH, AND NIAMH SWEENEY
Shale rules! Thats the lesson of the latest edition of our annual list of public companies with the most stellar
three-year prot, revenue, and stock growth. (For our methodology, see page 116.) The list, as always, provides a snapshot of the economys hottest areas in the recent past. Okay, its more than just a shale story (for
example, see Winnebago Rolls Again on the following page). But a quarter of the companies here make
money drilling, pumping, transporting, servicing, rening, or selling oil or natural gas. The more surprising results, perhaps, are found in the runner-up categories, which reveal a resurgence in two sectors that
seemed moribund a few years ago: nancial services and housing/real estate. Oil, Wall Street, houses, and
comebacks from disasterits the newest twist on some of the most eternal themes in American business.
i l l u s t r a t io n b y TAVIS COBURN

FORTUNE.COM

103

fortunes 100 fastest-growing companies

THE ICONIC MAKER OF MOTOR HOMES IS ON THE REBOUND. WILL

FORTUNE.COM

00

WINNEBAGO
ROLLS AGAIN

BABY BOOMERS RESTORE IT TO ITS FULL GLORY?

BY ERIKA FRY /// PHOTOGRAPH BY RYAN DONNELL

CONSIDER THE WINNEBAGO. Just ve years ago, the brontosaurus of consumer vehicles looked as if it
might be on the point of extinction. Sales had been sliding for several years before plunging off
a precipice as the nancial crisis deepened into a global recession in 2009. That year Winnebago
Industries tallied $211 million in sales, less than a fth of the 2004 gure. The whole recreational
vehicle (RV) industry appeared to be wheezing toward its demise. In what seemed like seconds, 20
players closed or were acquired. Thats why its so surprising to see Winnebago on Fortunes list of
Fastest-Growing Companiesits No. 56 in 2014for the second year in a row. (Or perhaps not so
surprising, as well see.) Sales have come roaring back with the recoveryto $803 million last year,
and $884 million in the most recent four quartersthough not yet to their peak a decade ago. The
CEO Randy Potts at the wheel of Winnebagos new Brave

FORTUNE.COM

105

fortunes 100 fastest-growing companies

companys market share has surged from 17.2% to 20.3% in

the 12 months that ended in May, according to data provider
Statistical Surveys. (Thor Industries is No. 1 with 24.6%.)
It would be easy to dismiss this as the latest boomlet in an
industry famous for its cycles, were it not for a demographic
tidal wavethe so-called silver tsunamithat has already
begun: The retirement of Americas 76 million baby boomers. The largest group of U.S. retirees in history has entered
its prime RV-buying years, and Winnebago thinks it has
precisely the right mix of nostalgia, adventure, and cushy
comfort theyre yearning for.
That thinking was visible in April at Winnebagos annual
Dealer Days, at which the company rolls out its newest
motor homes. The conventions most anticipated event
brought hundreds of RV dealers and a handful of nancial
analysts to a darkened hall in Las Vegass Mirage Hotel. By
its reserved standardsWinnebago is self-effacing in just
the way you might expect a small-town Iowa company to be
(and I say that as a native of Cedar Rapids)the company
lit up the joint. There were flashing lights, and The Age of
Aquarius, the Fifth Dimensions hit song from the musical Hair, exploded just as the drapes fell to reveal a pair of
boxy, upright RVs. To the untrained eye, they could have
passed for shiny bread trucks. But this was a knowledgeable audience: There were gasps, a few whistles, and the
roar of applause.
The crowd-pleasing vehicle was the 2015 Brave, a model
that harks back, in name and aesthetics, to the iconic motor
home of the companys heyday. Introduced in 1970, the
original Brave became the companys rst sensation, easily
recognized by its ying W logo and its bunk-over-the-cabin
eyebrow. (Until 1966, the company made only trailers.)
The modern Brave has all those retro trappings and then
some: It comes in three color schemes (Mello Yellow, Crimson n Clover, and Woodstock), with a choice of Cherry Cola
or Cream Soda cabinetry. If those arent enough historical
allusions for you, there are also psychedelic, Peter Maxlite
graphics on the website promoting the $95,000 vehicle.

HOW FAR TO THE PEAK?

Winnebagos annual revenues
$1.2 billion
1.0

$803
million

0.8
0.6
0.4
0.2
0

FY 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

FORTUNE.COM

106

Of course, the retro elements are limited to matters of

style. The Braves toys and accoutrements are very much of
the moment: a at-screen TV, a bunk with power lift, and a
Murphy-style sofa bed that can even convert to a dining table.
Do you like it? Did it make you smile? Winnebago CEO
Randy Potts asked me eagerly when I mentioned the Brave
on a recent visit to the companys headquarters in Forest
City, in the heart of north Iowa farmland. The vehicle is
something of a labor of love for the company, subject of a
two-year creative process in which plans were scrapped more
than once and its rollout delayed. Orders have poured in
for the Brave, and Potts talks about it like a pleased, if still
affirmation-seeking, parent. He says he told his team, We
only have one chance with this. This has to be something
that makes people happy because of the memories.
People with lots of memories (a.k.a. retirees) are the
companys sweet spot, and they make for a loyal and engaged
customer base. Witness the 11,500-strong members of the
companys Winnebago-Itasca Travelers Club, who socialize
at spirited rallies across the country. According to the club
web page, optional activities include cow-chip tossing, a
pastime that apparently predates even the Age of Aquarius.
The company says it is also encouraging bicycling events and
other more contemporary pursuits.
Company executives arent about to ballyhoo the kinds of
sales they think the Brave could deliver. Theyre too diffident
for that sort of boasting. About as much as theyre willing
to allow is that the company could benet from a favorable
demographic trend. But Winnebago thinks it could be a
hit. If so, the company just might be able to break out of the
boom-and-bust cycles that have trapped it for decades.
THE ERA OF THE ORIGINAL Brave was a heady one for Winnebago. In 1971, its rst full year as a public company, its
stock rose more than any other, by 470%, according to the
companys museum. For a time Forest City, whose population hovers near 4,000, claimed more millionaires per capita
than any other place in the U.S.
Winnebago owes its existence to John Hanson, a Forest
City mortician and camping enthusiast. Hanson was a
civic-minded fellow, and back in the 1950s he worried
that his hometown lacked industry and was losing young
people who no longer wanted to work on farms. Looking
to breathe life into the local economy, Hanson and others
coaxed a California travel-trailer company to set up a
factory in Forest City. It folded within a year, and in 1958,
Hanson took over. He named the company Winnebago for
Forest Citys river, which itself was named for the Native
Americans who originally inhabited the area.
Hanson also ran his familys furniture business, and he
saw synergies with Winnebago. He outtted the trailers
with ner furnishings and sturdier walls, building the reputation for quality products that the company still carries

 Siemens AG, 2014. All Rights Reserved.

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fortunes 100 fastest-growing companies

today. (Hanson died in 1996, after retiring and retaking the

reins several times.)
With the Brave, Winnebago took off, and motor homes
quickly became the companys mainstay. The industry
peaked in 1977, when U.S. shipments reached 160,200.
During that period, Winnebago introduced a nearly
identical second brand, Itasca, to maximize the companys
showroom space in independent dealerships.
Things have never again been so sweet. The energy crisis
gave way to an endless cycle of ups and downs, with sales
bottoming out anytime fuel prices soared or the economy
tanked. (So reliable is the pattern that RV sales are considered a leading economic indicator.) Winnebago learned to
adapt: To protect its low-volume business in lean times, the
company stopped carrying inventory and debt, the latter of
which sometimes irritated investors.
Then came 2009. Just 13,000 motor homes shipped

pies a windowless corner office on the second oorsits at the

center of campus, largely obscured by warehouses and rows of
motor homes in various stages of production. Big Bertha, the
largest production facility, where most of Winnebagos 2,500
Forest City employees (average tenure: 12 years overall, 17
years for management) work, looms especially large.
Many RV manufacturers assemble vehicles from parts made
by other companies. By contrast, Winnebago manufactures
almost everything itselffrom the aluminum extrusions and
plastic moldings used for parts to cabinetry and countertops
to the bedspreads and other soft goods that come out of the
stitch-craft factory. (The company doesnt make the chassis.)
Winnebagos facilities have a whimsical, Willy Wonka
quality to them; metal parts loop around one factory on
an elevated conveyor belt from which they are dunked
in paint, dried in an oven, then hand-delivered to their
eventual workstation. Meanwhile people, not machines,

WINNEBAGO HAS HIGH HOPES FOR THE

BRAVE, A REINVENTION OF ITS HIT EARLY
70S MOTOR HOME. ITS COLORSSUCH
AS MELLO YELLOWARE AIMED TO
APPEAL TO NOSTALGIC BOOMERS.
industrywide, less than a quarter of the 55,000 in 2007.
Winnebago was pounded. The company shuttered facilities
and laid off more than half its 4,000-plus workforce.
Potts, 55, an unassuming Iowa native and engineer,
became CEO in 2011, 28 years after he started as a
temporary tool designer at Winnebago. He saw in those
dark days a rare and valuable opportunity to reshape
the company. I would get on my soapbox, he says, and
preach to my top management group, This is probably
one chance youll have in your life to regrow a business in
your vision.
TO VISIT WINNEBAGO Industries is in some ways to enter a
time warp. Lets start in Forest City, where Winnebagos sizable campus makes up the southern part of town. Near one
of the factory gates is the intersection of Winnebago Way and
John K. Hanson Drive. Across the street is the Winnebago
Industries Visitors Center; nearby is Winnebagos Activity
Complex. Its not much of a stretch to say Winnebago is Forest
City: In town youll nd tiny Waldorf College and a business
district that has thinned down to a quilt store, gas stations, a
Dollar General, a Subway outlet, and not much more.
Winnebagos modest, low-slung headquartersPotts occu-

FORTUNE.COM

108

prepare 100-pound looms of wire, shave down RV doors,

affix Winnebago decals, and put furnishings in place. Every
motor home is made to order. (The company, which produces anywhere from 12 to 50 per day, offers 28 models and
88 oor plans.)
Part of Pottss role seems to be to apply some basic management initiatives to this (appealingly) anachronistic operation.
As Winnebago began to recover and ramp up after 2009, he
refrained from investing in new plants, even as the company
began to run out of room in Forest City. Instead, he struck a
deal with officials of Lake Mills, a neighboring town, to make
use of an abandoned city-owned building. Pledging to bring 50
jobs, Winnebago negotiated a ve-year lease for $1 a year.
Potts has begun considering more exceptions to Winnebagos long tradition of vertical integration. The company now
carefully analyzes whether it makes sense to make each part
itself. Winnebago has begun outsourcing smaller berglass
components, for example, to save money.
In other ways, Pottss post-recession leadership has been
focused on shaking things up. He rejiggered the companys
structure. Product managers rather than engineers now call
the shots on new vehicles, a move that Potts made to increase
responsiveness to consumers and to cut the blame game that

FEEDBACK erika_ fry@fortune.com

Siemens AG, 2013. All Rights Reserved.

American manufacturing
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Somewhere in America, a new era of manufacturing has

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to make more with less and to grow the economy. Because
its not just about making things right, its about making
things right for people, for business and for America.

Siemens technology
helped this brewery
double production.

siemens.com/answers

fortunes 100 fastest-growing companies

ensued when vehicles didnt sell. (Engineers would point to

bad sales tactics; salespeople would point to design aws.)
Winnebago is also moving away from the traditional concept
of model yearsif consumers have complaints or nd ways
to improve their vehicles, the company wont wait until the
next model comes out to x them.
Potts also hired outsiders, notably Scott Degnan, a veteran
of California RV manufacturer Fleetwood, who became the
companys VP of sales and product management in 2012.
Degnan says he arrived unafraid of ruffling feathers.
Feathers, it appears, are easily ruffled at Winnebago. The
new regime raised the hackles of some company veterans
and dealers by putting Winnebago branding on its Itasca
models. As Degnan puts it, that has pushed some people
into a very uncomfortable place. The day I visited, Degnan
noted that something as seemingly minor as the location
of a temporary sticker on the corner of the Braves windshieldthe wiper, when in use, touches its edgestruck
some longtime employees as a violation of a policy on preserving an unimpeded view. It aint easy being an icon.
Winnebago, known for its premium, big-ticket motor
homes (selling for well over $100,000), has been introducing
new products at lower price points, better suited to the postrecession marketplace. It branched into Class B motor homes
(also known as camper or conversion vans) in 2008 and
added smaller Class C models that go for as little as $60,000
each. The company also added a number of oor plans and
emphasized features, such as slide-out rooms and fold-up
beds, that appeal to the modern, more active RV-er.
Degnan says the goal is to rise above the sea of sameness among RVs with innovative, fuel-efficient chassis and
striking design. The Brave may not seem particularly bold to

the uninitiated. Yet it stands out in an industry where every

motor home looks as though its dressed for duck hunting: a
muted, earth-tone box with similar swirling motifs. By those
standards the goofy and colorful Brave has real personality. Its interiors challenge the drab RV color palettes with
bright accents, and the use of booth seating confers hints of
a diners atmosphere.
Winnebago already has one new-generation hit: the Travato, a camper van that comes in a sporty red or silver with bike
and kayak racks. It has become a top seller for the company,
and management hopes the Travato might lure some younger
customers. With that in mind, Winnebago has also gotten
back into trailersthey start at $15,000 and are both a larger
market and a gateway productby acquiring SunnyBrook in
2010. Potts doesnt have big ambitions for that competitive
market, and the business is only just beginning to pick up,
but he wants the brand to be there for the exposure.
Getting more mileage out of the companys iconic brand
is part of Pottss growth plan. The company is working on
licensing deals that will soon result in Winnebago-brand
camping and tailgating gear.
All of this gives classic old Winnebago a fresh (or in the
case of the Brave, retro) look, but the company is hardly
giving up its old tricks. The economy is looking sturdier, and
those favorable demographic tailwinds are picking up. That
same April at Dealer Days, Winnebago unveiled the 42-foot
long, $420,000 Grand Tour. With an electric replace, a
ceiling fan, and a bed festooned with a half-dozen throw pillows, its Winnebagos most luxuriously outtted motor home
yet. Potts certainly wants to avoid (or at least soften) the next
bust. But theres no reason not to enjoy the current boom as
much as he can.
Inside
Winnebagos
Big Bertha
factory in Forest
City, where
every vehicle is
assembled to
order, largely
from parts made
by the company

rya n don nell

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fortunes 100 fastest-growing companies

EARNINGS PER SHARE

RANK

2014

2013

FOR AN EXPLANATION OF
FORTUNES METHODOLOGY,
GO TO THE END OF THE LIST.

QUESTCOR PHARMACEUTICALS
Anaheim

115

13

13

HCI GROUP
Tampa

100

16

ON ASSIGNMENT

119

12

PATRICK INDUSTRIES

162

KODIAK OIL & GAS

Denver

164

UNITED RENTALS
Stamford, Conn.

146

AMERICAN RAILCAR INDUSTRIES

188

12

OCWEN FINANCIAL
Atlanta

79

29

VIRTUS INVESTMENT PARTNERS

Hartford

94

22

10

CALAMP

170

11

COLFAX

Fulton, Md.

56

50

GENTHERM

Northville, Mich.

68

34

13

LIGAND PHARMACEUTICALS

66

39

14

STURM RUGER

61

42

Elkhart, Ind.

St. Charles, Mo.

Oxnard, Calif.

23

La Jolla, Calif.

78

Santa Monica

99

17

16

CONTINENTAL RESOURCES

67

37

137

10

24

Oklahoma City

17

EAGLE MATERIALS

18

REX AMERICAN RESOURCES

Dayton

37

71

19

CVR ENERGY

Sugar Land, Texas

95

20

20

ALEXION PHARMACEUTICALS

46

56

21

CARRIZO OIL & GAS

108

14

22

SOUFUN HOLDINGS 2
Beijing

59

46

52

TRINITY INDUSTRIES
Dallas

79

28

14

LITHIA MOTORS

72

32

144

42

65

San Jose

285

BLUCORA

Bellevue, Wash.

64

41

29

LANNETT

Philadelphia

86

24

30

FLEETCOR TECHNOLOGIES
Norcross, Ga.

39

70

31

ARGAN

Rockville, Md.

94

21

32

ASPEN TECHNOLOGY
Burlington, Mass.

84

26

TARO PHARMACEUTICAL
INDUSTRIES Haifa Bay, Israel

60

44

34

EOG RESOURCES
Houston

77

30

35

LENNAR

82

27

Dallas

Cheshire, Conn.
Houston

26

Ewing, N.J.

20

33

i l l u s t r a t io n s b y TAVIS COBURN

ALTISOURCE PORTFOLIO
SOLUTIONS Luxembourg
PDF SOLUTIONS

27
28

Medford, Ore.

UNIVERSAL DISPLAY

25

112

Southport, Conn.

LIONS GATE ENTERTAINMENT

24

15

23

Rank

12

FORTUNE.COM

Calabasas, Calif.

Three-year
annual growth
rate (%)

72

61

Miami

Through the quarter ended April 30, 2014.

Incorporated in Canada. 2Incorporated in the Cayman Islands.

NET INCOME

REVENUE

REVENUE

TOTAL RETURN

Rank

Past four
quarters
($ millions)

Three-year
annual rate*

(%)

Rank

P/E, current
scal year
prots (est.)

97

891

59

15

12.7

62.8

58

13

247

91

8.8

73.8

63

1,692

54

17

18.5

24.9

32

39

623

181

19.4 A

151.1

207

997

36

44

20.1

426.0

35

33

5,033

60

13

16.9

89.7

37

31

738

45

26

15.4

324.8

81

2,183

43

30

10.6

83.2

39

27

411

52

19

19.6

11.8

26

71

236

93

21.4

197.8

120

4,314

44

27

29.7

41.7

73

708

37

42

29.7

12.0

33

38

53

73

46.4

111.9

42

24

702

48

24

12.7

152.0

27

62

2,630

63

12

22.6

849.8

68

3,725

35

47

21.4

124.2

26

70

898

51

20

24.7

53.3

47

18

644

64

11

13.7 A

332.4

32

40

9,081

37

41

12.1

330.0

43

23

1,779

49

22

36.9

23.5

61

12

565

18

76

35.4

311.7

35

34

668

43

29

15.2

522.8

31

44

4,893

37

40

12.0

108.7

25

73

4,181

70

18.4

82.8

63

10

170

97

31.0

142.1

35

32

859

50

21

14.5

22.5

21

99

104

53

18

25.3

26.8

47

19

625

27

60

9.2

37.1

22

95

233

115

16.0

294.9

30

47

955

64

10

27.8

37.2

22

92

232

60

14

13.9 A

79.5

26

69

373

39

34

46.8

360.4

24

81

759

89

17.8 A

2,363.3

29

50

15,214

32

51

20.7

500.3

28

60

6,308

33

48

15.2

Past four
quarters
($ millions)

Three-year
annual growth
rate (%)

327.9

At $28,000 a vial, the price of anti-inammatory drug Acthar causes controversy

but injects huge prots into this biopharma company.
Property and casualty insurer beneted from Floridas eight-year span without a
major hurricane and reforms stabilizing premiums in ood zones.
Have we got a job for you: Revenue improved 43% and the company became
the second-largest U.S. infotech stafng agency after buying Apex Systems.
Prefab ulous! Maker of building products for trailer homes and recreational
vehicles rolled on with acquisitions and a rise in consumer home spending.
Bakken Shale driller gushed such prots that in mid-July, Whiting Petroleum
announced plans to buy the company.
Pump it up: Provider of rental energy equipment (such as machinery that pushes
petroleum out of deep wells) cashed in on purchase of National Pump.
Theres oil. Theres equipment to extract oil. And there are tank cars to transport oil.
Orders for this companys freight cars accelerated, thanks to the U.S. shale boom.
Rising home prices and falling delinquencies helped this subprime-mortgage
servicer become the largest U.S. nonbank specializing in risky property loans.
Self-described partnership of boutique investment managers provides mutual
fund options from specialized in-house products to offerings from Wall Street rms.
Maker of equipment for wireless communications and satellites beamed revenue
up 31% last year on strong demand and the purchase of Wireless Matrix.
Riveting numbers: Acquisition of welding supplier Soldex helped this industrial
manufacturing and engineering rms revenue bolt up vefold from 2011 to 2013.
This maker of thermal comfort technologies is toasty right now, with sales of
climate-controlled car seats (and more) revving up globally.
This biotech rm bought a key pharmaceutical-enhancing product (yes, its a
compound that makes drugs work better) in 2011, breathing new life into sales.
No. 14 with a bullet: Gunmaker reports that unprecedented demand among
new shooters doubled annual sales to $688 million over the past two years.
The Hurt Locker was greatbut The Hunger Games movies grossed $1.5 billion
plus. Now the lm and TV company has bought the studio behind the Twilight series.
This oil and gas producer, focused on the massive Bakken Shale in the Dakotas
and Montana, is fracking its way through a ve-year plan to triple output by 2017.
Concrete results: Maker of building materials enjoys rising demand for cement
as the U.S. construction industry recovers.
Thanks, Congress! Federal mandate to mix ethanol into gasoline fuels intoxicating sales for this investor in corn distilleries and other alternative energy.
An increase in the amount of petroleum rened by CVR offset declining prot
margins caused by higher crude prices in 2013.
Sales of this companys wonder drug, Soliris (it ghts a rare disease that creates
dangerous blood clots), doubled to just over $1.5 billion in the past two years.
Wall Street loved the record oil production from this independent energy companys Eagle Ford Shale assets.
A robust housing market and partnerships with two home investment and consultancy agencies provided fertile terrain for Chinas top Internet portal for real estate.
Demand for oil tank cars spurred this maker of railcars, barges, energy equipment, and construction products to a 112% stock spike in the past 12 months.
This network of auto dealerships in 12 states has inhaled eight companies this
year (and just signed a deal with a ninth) as it spreads from the West to the East.
If you own a Samsung Galaxy smartphone or phablet (or many other products),
youre likely to be watching an organic LED screen made by this company.
Though it separated from Ocwen (No. 8) in 2009, this mortgage portfolio management concern thrives by handling the properties Ocwen forecloses on.
This leading provider of technologies that improve the lifespan of integrated
circuits beneted from an increase in multiyear contracts.
Owner of online search and consulting operation Infospace purchased e-retailer
Monoprice, tax-preparation website TaxACT, and HowStuffWorks.com.
Generic drugs save customers moneyand theyre a windfall for makers like
Lannett, which enjoyed blockbuster EPS growth of 229% in 2013.
Provider of corporate payment cards and productsto buy gas, food, and
lodgingnow operates in 43 countries. Its revenues climbed 27% last year.
Demand for renewable energy propels engineering rm that provides development and maintenance for renewable and nonrenewable power generation.
Shares of this provider of software and services for gas and chemical processing,
a spinoff of an MIT project, doubled in the past two years.
Who knew the ght against fungus could be so lucrative? Sales of antifungal
drug nystatin/triamcinolone mushroom for this Israeli generic-drug maker.
Since 2009 this Enron spinoff has drilled its way to 38% annual growth in crudeoil production. Result: The company expects a 32% earnings jump this year.
Sing after us: Shes a brick house. Industry rebound makes for mighty mighty $1.8
billion in second quarter 2014 revenue (up 28% year over year) for homebuilder.

Through June 30, 2014. The S&P 500 returned 16.6% annually over the same period. (Company returns lower than that of the S&P are bolded.)
P/E estimates for the current scal year are not available. The gure shown is the trailing-12-months P/E ratio.

FORTUNE.COM

113

fortunes 100 fastest-growing companies

EARNINGS PER SHARE

RANK

2014

2013

36

MULTIMEDIA GAMES

37

MELCO CROWN ENTERTAINMENT

38

ROADRUNNER TRANSPORTATION
SYSTEMS Cudahy, Wis.

Austin

Hong Kong

28

33

159

95

19

102

15

40

ULTIMATE SOFTWARE GROUP

136

11

41

ROSETTA RESOURCES

91

23

42

NOAH HOLDINGS

57

48

43

D.R. HORTON

144

NORTHERN OIL & GAS

Wayzata, Minn.

56

49

45

FORESTAR GROUP

59

45

46

BAIDU 2

45

57

Beijing

27

90

KEURIG GREEN MOUNTAIN

Waterbury, Vt.

66

38

SS&C TECHNOLOGIES HOLDINGS

Windsor, Conn.

41

67

HFF

Pittsburgh

36

73

51

IGATE

Bridgewater, N.J.

24

94

52

CAVCO INDUSTRIES
Phoenix

41

66

PRICELINE GROUP
Norwalk, Conn.

46

55

FLOTEK INDUSTRIES
Houston

20

100

Weston, Fla.

25

50

53

Houston

Shanghai

Fort Worth

17

Austin

26

Beijing

TAL EDUCATION GROUP

10

49
9

34

54

55

53

UNDER ARMOUR
Baltimore

29

84

56

65

WINNEBAGO INDUSTRIES
Forest City, Iowa

67

36

47

DXP ENTERPRISES

42

64

35

CATAMARAN

Schaumburg, Ill.

30

83

SILICOM

Kfar Sava, Israel

35

74

57
58
59

114

70

Horsham, Pa.

48

Rank

TOLL BROTHERS

47

Three-year
annual growth
rate (%)

39

44

FORTUNE.COM

FOR AN EXPLANATION OF
FORTUNES METHODOLOGY, GO
TO THE END OF THE LIST.

Houston

60

60

PRESTIGE BRANDS HOLDINGS

Tarrytown, N.Y.

40

69

61

83

HAIN CELESTIAL GROUP

Lake Success, N.Y.

43

62

62

ROCK-TENN

Norcross, Ga.

34

76

63

AMTRUST FINANCIAL SERVICES

New York

22

97

64

CABOT OIL & GAS

Houston

40

68

65

YANDEX

Schiphol, Netherlands

45

59

66

LANDEC

Menlo Park, Calif.

86

25

67

SYNCHRONOSS TECHNOLOGIES
Bridgewater, N.J.

97

18

68

NU SKIN ENTERPRISES
Provo, Utah

44

60

69

BOFI HOLDING
San Diego

22

98

70

CHICAGO BRIDGE & IRON

23

95

The Hague, Netherlands

Through the quarter ended April 30, 2014.

Incorporated in Canada. 2Incorporated in the Cayman Islands.

NET INCOME

REVENUE

REVENUE

TOTAL RETURN

Rank

Past four
quarters
($ millions)

Three-year
annual rate*

(%)

Rank

P/E, current
scal year
prots (est.)

21

96

216

87

23.4

823.2

20

100

5,300

42

32

19.1

48.8

29

49

1,444

23

71

19.4

252.3

28

55

3,238

21

73

20.4

27.9

22

91

434

36

43

114.5

181.1

38

29

850

94

15.4

58.7

52

15

182

86

12.8

539.6

23

88

6,958

30

54

13.9

50.7

92

350

10

98

18.6

33.7

52

16

318

90

25.4

1,791.3

61

11

5,786

10

85

37.7

60.6

38

28

314

39

35

31.5

543.5

34

35

4,504

12

83

32.2

122.9

34

36

725

31

53

19.7

52.8

29

52

377

42

31

21.0

126.6

54

14

1,178

31

52

20.2

16.2

39

26

533

24

68

41.9 A

1,979.6

28

58

7,133

33

49

24.8

40.4

30

46

395

56

16

32.4

168.0

29

54

2,502

45

25

65.2

39.0

22

90

884

38

39

15.7

58.6

25

74

1,300

44

28

19.5

274.2

91

16,475

14

80

20.3

18.0

32

41

77

30

55

10.6

72.6

27

65

602

38

37

18.0

130.1

25

75

2,033

39

36

23.7

509.1

44

22

9,690

18

77

13.3

308.7

38

30

3,148

33

50

9.1

344.0

29

53

1,883

27

59

29.8

419.6

41

25

1,271

96

25.1

19.1

23

87

463

24

69

16.4

30.5

25

72

369

92

27.8

374.9

26

66

3,306

28

58

10.7

51.1

24

80

185

72

13.2

509.5

45

21

11,771

21

74

13.8

Past four
quarters
($ millions)

Three-year
annual growth
rate (%)

39.0

Provider of slots and other gaming technology for casinos and lotteries planted
its ag in Nevada, the largest U.S. market, in 2013.
Chinese casino operator made a good bet on a Vegas-style resort in Macau,
generating billions in the booming Asian gambling industry.
Beep! Beep! Transportation and logistics outt uses acquisitions to boost
revenue from $844 million in 2011 to $1.4 billion in 2013.
Though the housing rebound leveled off in 2013, the luxury-home builder
enjoyed an order backlog of $2.7 billion as of its most recent quarter.
Shares soared 405% over ve years for seller of cloud-based software for
payroll, benets, and human resources.
Nine-year-old fracker expanded from its protable Eagle Ford Shale operation
into the Permian Basin last year.
Once an oxymoron, now a hit: Chinese private-wealth-management company
enjoys the blessings of a burgeoning afuent class.
The largest U.S. homebuilder by units sold recently bought the largest competitor in
Atlanta, Crown Communities, for $210 million.
Shale player jacks up oil and gas production in Bakken and Three Forks formations,
with rst-quarter revenue swelling by 21%.
Real estate, oil, and timber rm rides the housing and energy booms to nearly
double its prots over the past year.
Chinas equivalent of Google engineers major growth in mobile while
e-commerce in the Middle Kingdom surges six times faster than in the U.S.
Chinese tutoring service reaps riches in the worlds largest education system as
competition mounts to gain entry to the best schools.
This coffee purveyor may have lost patent protection on its K-Cup, but it is still brewing good results: a quintupled stock price and a $1.3 billion investment from Coke.
Global provider of software to nancial services rms and asset managers has
enjoyed nine straight quarters of record revenues.
Adviser, capital raiser, and dealmaker in commercial real estate worked on
$55 billion worth of transactions last year.
More than the sum of the parts: IT-services and outsourcing company bought rival
Patni in 2011, and combined revenue increased more than 40% over two years.
This builder of manufactured and modular houses and cabins broadened its
footprint by buying Fleetwood Homes and Palm Harbor Homes.
Online travel agent booked quadruple-digit stock gain in the 10 years ending
Dec. 31. Its not done: International expansion lifted sales by 26% in the rst quarter.
Maker of oileld equipment and eco-friendly chemicals bought citrus-oils processor Florida Chemical last year, infusing $50 million into revenue.
A kids line and high-tech activewear helped the sports clothier top $2 billion in
revenue in 2013 and power-lift its rst-quarter prots by 73%.
Road trip! Motor homes are so back. Revenue for the iconic maker rolled past
$800 million last year, up 38% from 2012.
Sales for technical and transportation service provider galloped 20% in the rst
quarter, largely thanks to oil and gas industry customers.
Pharmacy benets managers prescription: a steady dose of acquisitions. The
formula seems to be working, with prots vaulting 125% last year.
How do you get all those servers to work together in your data center? This
service provider can help, leading to a 50% revenue spike in 2013.
Owner of health care and cleaning brands such as Tagamet, Ludens, Comet,
Dramamine, and Murine continues to broaden its portfolio.
Packaged food, staples, and snacks rang up glowing sales as the trend to
organic and healthier eating spreads far beyond Whole Foods.
Sales for this venerable manufacturer of corrugated and cardboard packaging
materials skyrocketed after it purchased rival Smurt-Stone in 2011.
Insurance rm focused on small and medium-size businesses went on a
company-shopping spree, quadrupling revenue in as many years.
Shale-fellow-well-met: Cabot amped up gas production by 55% last year in the
Marcellus Shale, raising its prots by 112%.
People use the Internet in Russia too! Online ad sales grew by an average of
40% a year in 2012 and 2013 for the countrys most popular search engine.
Landec sells food packaging aimed at extending the shelf life of vegetables and
vegetables to go in it. Purchase of green-bean producer kept it well in the black.
Do you have cell service from AT&T or Verizon? If so, Synchronoss may have
activated your phone or let you back up your device through the cloud.
From emollients to emoluments: Multilevel marketers skin-care and nutrition
products sell like hotcakes, er, like cold cream (up 148%) in China.
This branchless online bankit operates Bank of Internet USA, Apartment Bank,
and Netbankcashed in by bulking up its loan portfolio.
Engineering, design, and construction rm specializing in energy infrastructure
scooped up a major rival in 2012, helping it lift revenue 100% in 2013.

Through June 30, 2014. The S&P 500 returned 16.6% annually over the same period. (Company returns lower than that of the S&P are bolded.)
P/E estimates for the current scal year are not available. The gure shown is the trailing-12-months P/E ratio.

FORTUNE.COM

115

fortunes 100 fastest-growing companies

EARNINGS PER SHARE

RANK

2014

2013

Rank

MIDDLEBY
Elgin, Ill.

28

86

72

EVERCORE PARTNERS
New York

67

35

73

TIVO

San Jose

65

40

74

EAGLE BANCORP
Bethesda, Md.

35

75

75

ARLINGTON ASSET INVESTMENT

Arlington, Va.

44

61

76

BBCN BANCORP
Los Angeles

30

80

77

WALKER & DUNLOP

Bethesda, Md.

30

81

78

HOLLYFRONTIER
Dallas

30

82

79

KINDER MORGAN
Houston

57

47

80

OMNICELL

Mountain View, Calif.

72

31

81

ENSCO

London

26

92

82

DYCOM INDUSTRIES

Palm Beach Gardens, Fla.

60

43

CHART INDUSTRIES

Gareld Heights, Ohio

45

58

MATRIX SERVICE
Tulsa

47

54

LAS VEGAS SANDS

Las Vegas

51

52

QUANTA SERVICES
Houston

55

51

68

84
85

36

86
87

30

ADAMS RESOURCES & ENERGY

Houston

27

88

88

38

APPLE

Cupertino, Calif.

26

91

89

98

PORTFOLIO RECOVERY
ASSOCIATES Norfolk

32

78

90

57

POLARIS INDUSTRIES
Medina, Minn.

32

77

91

18

GEOSPACE TECHNOLOGIES
Houston

42

63

92

RPX

San Francisco

37

72

93

AZZ

Fort Worth

27

89

SOLARWINDS
Austin

23

96

95

LKQ

21

99

96

IAC/INTERACTIVECORP

31

79

97

LULULEMON ATHLETICA

28

85

94

82

Chicago
New York

21

Vancouver

98

BANCORP

Wilmington, Del.

48

53

99

MERCADOLIBRE
Buenos Aires

27

87

KIRBY

25

93

100

Three-year
annual growth
rate (%)

71

83

FOR AN EXPLANATION OF
FORTUNES METHODOLOGY,
GO TO THE END OF THE LIST.

94

Houston

Through the quarter ended April 30, 2014.

Incorporated in the U.S.

2014 FASTEST-GROWING METHODOLOGY: To qualify, a companydomestic or foreign

must be trading on a major U.S. stock exchange; report data in U.S. dollars; le quarterly
reports with the SEC; have a minimum market capitalization of $250 million and a stock
price of at least $5 on June 30, 2014; and have been trading continuously since June 30,
2011. Companies must have revenue and net income for the four quarters ended on or
before April 30, 2014, of at least $50 million and $10 million, respectively, and have posted
an annualized growth in revenue and earnings per share of at least 20% annually over the

FORTUNE.COM

116

NET INCOME
Past four
quarters
($ millions)

REVENUE
Three-year
annual growth
rate (%)

REVENUE

TOTAL RETURN

Rank

Past four
quarters
($ millions)

Three-year
annual rate *

(%)

Rank

P/E, current
scal year
prots (est.)

161.5

26

67

1,474

38

38

23.5

57.8

23

86

776

23

70

22.1

290.3

27

64

431

87

48.6

47.5

23

84

183

41

33

17.2

53.3

29

48

93

10

84

8.3

86.5

29

51

334

27

64

13.0

40.9

46

20

315

95

10.0

554.2

33

37

20,244

17

78

12.4

1,188.0

26

68

15,057

13

82

30.1

26.8

22

94

395

23

72

29.8

1,393.6

47

17

4,957

89

9.9

38.2

23

89

1,808

24

66

25.9

79.6

27

61

1,170

15

79

26.4

35.6

21

98

1,154

35

46

17.4

2,510.2

23

83

14,478

26

65

19.6

384.2

24

78

6,700

20

75

19.0

19.0

21

97

3,943

48

23

16.2 A

37,707.0

28

56

176,035

27

63

15.0

177.6

25

76

759

28

57

15.6

382.7

22

93

3,920

35

45

22.2

65.7

28

59

316

93

10.7

35.9

31

43

238

14

100

20.5

59.6

24

77

752

28

56

18.3

84.4

31

45

358

14

81

29.9

331.7

27

63

5,492

27

62

18.6

268.0

24

79

3,021

24

67

19.8

251.2

31

42

1,630

10

99

21.6

18.0

23

85

199

91

26.5

130.3

28

57

485

88

40.0

258.7

24

82

2,273

27

61

23.8

Its not a novel by George Eliotits a maker of commercial kitchen equipment

with more than 40 brands (including Viking), which cooked up juicy earnings.
Boutique investment bank prospers as the return of M&Ait advised Shire in its
sale to AbbVie and helped AstraZeneca fend off Pzerprovided loads of deals.
Once-ailing pioneer of the digital video recorder revives as it licenses its technology to cable operators.
Prots rose 33% last year at this small bank focused on commercial real estate,
which has been augmenting its loan portfolio.
Investing rm, once part of Friedman Billings & Ramsey, deploys its own capital,
using leverage to buy mortgage-backed securities.
Korean-American bank that emphasizes small businesses and commercial real
estate broadens its reach from the West Coast to Chicago.
Loan originations rose at this commercial-real-estate-nancing outt, which
focuses on multifamily properties.
Oil rener, No. 2 on last years list, slipped as shrinking margins pinched annual
earnings by 57% from 2012 to 2013.
What a gas: This pipeline powerhouse (another Enron legacy) has been buying
up assets, fueling revenue growth of 40% last year.
A healthy, growing business: Revenue climbed 21% for provider of automated
dispensers and management systems for pharmacies and hospitals.
This offshore-drilling company boasts the worlds second-largest eet of rigs
and has seen revenue surge since a 2011 merger.
Dialing up expansion: Provider of engineering and construction services to
telecoms boosted revenue 34% last year after buying two rivals.
Maker of systems and storage for the natural- and industrial-gas supply chain
also contributes to biomedical products and even helps carbonate drinks.
This provider of engineering and construction services to heavy industry has
seen strong demand for its oil and gas storage tanks.
Another casino operator milking its cash Macau: One new Sands resort in the
gambling-friendly Chinese region added $1.65 billion to revenue in 2013.
Provider of heavy-duty infrastructure for electrical power transmission and oil
and gas pipelines has made out from, you guessed it, the shale boom.
Spouting black gold: Another crude-oil player taps a vein of deep prots in the
Eagle Ford and Bakken shales.
The law of (really, really, really) large numbers: Velocity of sales rise slows for
the maker of the iPhone and iPad.
Americans arent the only ones in the red: These debt collectors dunned their
way to a 39% prot gain last year as they entered new markets in Europe.
Blizzard of sales: This maker of off-road vehicles and snowmobiles boasted
record revenue last year, capping four years of 20%-plus earnings growth.
Another ancillary oil and gas business (exploration equipment), another great
year (57% sales gain; 100% prot surge).
Protection in the troll wars? Companies seek to shield their intellectual property
by subscribing to this rms defensive patent aggregation service.
Equipment maker and service provider to the power-generation industry made
two acquisitions that helped galvanize revenues.
Nope, its not an alternative-energy company; its a software developer whose
network and systems-management products paced a 25% revenue rise last year.
No junkyard dog: Seller of recycled car parts struck lucrative deals with auto
insurers and expanded aggressively into Europe and beyond.
Media and Internet company with brands including Ask.com and Match.com is
clicking because of rising advertising and subscription revenues.
A recall of too-sheer yoga pants and a CEO change challenged the workoutapparel maker last year, but it still muscled its revenues up 16%.
This issuers prepaid banking cards have taken off, but its stock slumped after it consented to an FDIC order requiring it to tighten protections against money laundering.
The eBay of Latin America is enjoying plain old organic growth: Revenue rose
27% last year as the number of conrmed users increased by 22%.
Tank barge operator (transporting petrochemicals, oil, and gas through U.S.
waterways) has had plenty of product to move in recent years.

Through June 30, 2014. The S&P 500 returned 16.6% annually over the same period. (Company returns lower than that of the S&P are bolded.)
P/E estimates for the current scal year are not available. The gure shown is the trailing-12-months P/E ratio.

three years ended on or before April 30, 2014. Companies that meet these criteria are ranked by revenue growth rate, EPS growth rate, and three-year annualized total return for the period ended June 30,
2014. (To compute revenue and EPS growth rates, Fortune uses a trailing-four-quarters log linear least square regression t.) The overall rank is based on the sum of the three ranks. Once the 100 companies are identied, they are then reranked within the 100, using the three equally weighted variables. If there is a tie, the company with the larger four-quarter revenue receives the higher rank. Excluded
are real estate investment trusts, limited liability companies, limited partnerships, business development companies, closed-end investment rms, and companies that lost money in the quarter ended on or
before April 30, 2014. In addition, Fortune excludes companies that have announced intentions to restate previously reported nancial data if these errors appear to have a signicant impact. Also, Fortune
excludes companies that lost money in the quarter ended May 31 or June 30 if the loss represents a deterioration in business conditions. The data are provided by Zacks Investment Research. The data
checking process was aided by information provided by S&P Capital IQ, Hoovers, Thomson Reuters, FactSet Research Systems, and Morningstar Document Research.

FORTUNE.COM

117

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September 1, 2014
while you were out
by stanley bing

THE CONSOLIDATORS
First theres one. Then two or three more. Then comes the big guy himself, with plenty of gunmen.

ITS A NICE LITTLE TOWN WE GOT HERE, way out in the middle

No, Bob, I replied. Aint no law if you dont enforce it.

Then I put my hat on and got out of there.
I went out to the middle of Main Street. Nobody was in
sight. Strange. Then I heard the singing, and I headed out to
the church. There they were, all my friends and neighbors,
huddled together. Prescott, the banker, was addressing them.
We cant ght these guys! he yelled. We got families and investments! There was some hubbub then, and when I looked
in their eyes, all I saw was fear. I left and went down to the
newspaper office. Nobody home there either. gone aggregatin said a sign on the door. At the corner of First and Market,
they were having a party, about a hundred guys in fancy suits.
welcome, consolidators! said a banner above them.
I stood out in the middle of Main, listening to the wind and
waiting. They got there soon enough, a whole army pulling up
in a cloud of dust, and in the middle was the big dude on the
tall black horse. He had a face like Death itself, but his voice
was soft and kind. This dont have to go bad, he said, slowly
coming down off the beast and standing about 10 paces in
front of me. Get out of town, I replied. I tasted gunmetal
and blood in the back of my throat.
There was a silence then, the longest of my life. I could see
his trigger nger twitching. Then he spoke. Okay, he said.
Theres more than one way to skin a cat. Then he got up on
his high horse again. This is a nice town, he said. Yep. A
real nice town. Then they rode off. And the sound of their
hooves was like thunder receding in the night.
The town came out then, circled me, patted me on the
back, bought me drinks. And that was ne. But Im not kidding myself. We have a lot of work to do, and wed better get
to it pretty damn quick. It wont be too long before theyre
back. And history is a mighty tough steer to ride.
Follow Stanley Bing at stanleybing.com and on Twitter
at @thebingblog.

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FORTUNE.COM

120

jason schneider

of the prairie. Maybe its not much, but we call it home. We

got a school and two barbers, a pretty fair diner, and a livery
stable out by the edge of town on the way to Boot Hill. I run
the dry-goods store. Somewhere along the line, some folks
decided I should be mayor. We do business. We raise our
kids. Its a quiet place, and thats the way we like it.
It was last Thursday we heard the consolidators were coming to town. There had been rumors for a while they were on
their way. And then one day there he was, one of their hands,
having a drink at the Blue Lady at 10:00 one Monday morning, just kind of taking a look around and surveying things. I
knew what he was up to. He was counting heads and looking
for potential synergies.
You got to understand the way they work. First theres
one, taking stock of things. Then theres two or three more.
Before you know it, here comes the big consolidator himself
surrounded by plenty of gunmen. He puts it to you, the way
they want things to go so that nobody will get hurt. And if
you know whats good for you, by sundown youre consolidated. Which sounds ne until they close all the businesses
in town and bring in their own operations. Then they start
killing any of the locals who get in their way. Before you can
say Jack Rabbit, what used to be your town, your home
well, the signage may be there, but for all intents and purposes its gone, and in its place is another consolidated town.
I didnt like that idea very much.
First off, I got on my horse and went to Bob. Hes been the
federal marshal around here since anybody can remember.
He was in a hurry, throwing his belongings in a big leather
satchel. Bob, I said, we got consolidators on the way. What
you plan to do about it?
Aint nothing I can do about it, Mayor, he replied. He
kept packing. He looked scared. Aint no law against consolidators, he added, kind of trembly.

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