The Secret Life of the CEO: Is the economy just built to flip?

During the go-go days of the late 1990s, when many business thinkers found themselves seduced by the idea that everything is new in the new economy, Jim Collins marched to a different drummer. Hiding away in "monk mode" at his management laboratory in Boulder, Colorado, he continued his lifelong quest to discover the timeless principles that make enduring great companies.

The former Stanford faculty member takes a data-driven, long-term view of the arc of business. His two best-selling books, Built to Last: Successful Habits of Visionary Companies (HarperBusiness, 1994) and Good to Great: Why Some Companies Make the Leap . . . and Others Don't (HarperBusiness, 2001), are both products of years of painstaking research. Collins insists that we need to look at performance over time in order to evaluate a leader's lasting contribution.

In a transcribed conversation, which Collins then edited, Fast Company asked the key questions about CEOs, companies, and our own work lives: How did we get into this mess in the first place? Are all CEOs crooks? What will it take to get business back on track? And what can each of us do to make a difference?

Jim Collins answers below.

The problem: the built-to-flip economy
Sitting in my rocking chair, reading in the New York Times and USA Today about the latest round of corporate scandals, I found myself confronted with a problem: Under what heading should I file all of the articles piling up on my floor? I'm an incorrigible clipper, with cabinets full of articles taken from papers dating back 100 years.

I had problems with my clippings. At first, I filed them under company names: Enron, WorldCom, Qwest. But then there were articles about the widespread abuse of executive compensation, failed acquisitions, deposed CEOs, and dotcom hangovers. Finally, I started labeling most articles under the simple word "Flip" -- a file I created after my "Built to Flip" article appeared in the March 2000 issue of Fast Company.

Here's what I realized: All of those stories were connected by one underlying theme: the built-to-flip ethos. I began to see that the dotcom IPO bubble was just one particular strain of a larger pattern, a reflection of a deeper trend in American corporate culture. We didn't just have a built-to-flip IPO bubble; our entire business culture had become a version of built to flip. We became a built-to-flip economy, perhaps even a built-to-flip society.

Consider Enron in this light. I view Enron as the blue-suit, corporate-America version of built to flip. Just like the dotcom excesses, Enron used the capital markets to increase the price of a share -- independent of the underlying value of that share -- so that a few people could cash out at that inflated price before the markets pounded the price back down to the true value of the share. It's essentially the same idea as starting a dotcom that has minimal current value, taking it public, and cashing out before the game is up -- albeit with more nefarious overtones.

The issue here isn't just one of fraud and corruption. The issue is an entire built-to-flip mind-set: opportunists who created a significant delta between short-term share price and long-term share value and then cashed out before the gap could close.

It was popular to speak about the 1990s as the greatest wealth-creation moment in history. In reality, it was just as much a period of wealth transference on a grand scale. One group of people simply transferred wealth to themselves at the expense of another group of people. A whole generation saw it as a once-in-a-lifetime opportunity to get in, get theirs, and get out before the bubble burst. They saw it not just as an opportunity, but also as an entitlement. And we are paying the price today.

The driver: a disproportionate number of conscious opportunists
A confluence of historical events made all of this possible. We had a 20-year bull market that moved huge amounts of capital into retirement accounts. Multiply that change by the baby boom, and you've got two big variables compounding each other. Now add in the vastly increased use of equity and stock options, and it all adds up to a bull-market bubble -- and a huge opportunity. But businesspeople responded to that opportunity in four different ways.

At one end of the continuum were the self-directed people. For them, none of this was important. They just went about the daily tasks of building a successful enterprise: trying to build sustainability, create innovations that make a contribution, and add value. They were out there in places like Minnetonka, Minnesota, quietly going about their work. These were also the people who, when confronted with an environment that asked them to breach their values, refused to participate (akin to those who refused to shock the "learner" with intense electrical jolts in the famous Stanley Milgram experiments, despite the fact that 65% of the test subjects did so).