The Man Who Sold Silicon Valley on Giving

by
Peter Elkind

@FortuneMagazine

August 24, 2016, 2:58 PM EDT

Editor’s Note: Peter Hero, the pioneering leader of the Silicon Valley Community Foundation, died Sunday from cancer. He was 73.

Hero was a transformative figure in the tech world, described by Fortune editor-at-large Peter Elkind in a 2000 profile as the man who taught Silicon Valley, “the land of the ‘cyber-stingy,’” to care about philanthropy. He did it, Elkind wrote, “by channeling the area’s distinctive culture into an unusual brand of charity: demanding, ambitious, self-conscious, creative, even risky—in short everything you’d expect from Silicon Valley.”

In an online posting, founding eBay president Jeff Skoll, whose own charitable foundation has become a powerful force for good, praised Hero as his “original philanthropic mentor” and “a leader in the Silicon Valley social change world for more than 30 years.” Between 1989 and 2006, under Hero’s leadership, the Community Foundation’s assets multiplied from $9 million to more than $1.2 billion.

We republish Elkind’s fascinating profile of Hero below, which chronicles how Hero worked “to create a culture where philanthropy becomes a way of life in Silicon Valley.”

Not long ago, Peter deCourcy Hero, the 57-year-old president of Community Foundation Silicon Valley, sat down with a young dot-com mogul who had resolved to direct some of his newly minted millions toward charitable causes. “What are you interested in?” Hero wondered. “Children? Education? The elderly?” The donor looked at Hero blankly. “Whaddya got?” he asked.

It is a remarkable fact about the new economy that so many of those so skilled at generating mind-boggling wealth are so utterly clueless about the art of giving it away. In the old economy, riches were accompanied by a powerful sense of noblesse oblige. Not so in Silicon Valley. Though now home to a reputed 75,000 millionaires, it has long been known as the land of the “cyber-stingy.” Indeed, a 1998 study showed that a quarter of the Silicon Valley households with incomes over $100,000 gave $500 or less a year to charity.

The reasons for this lack of generosity aren’t hard to figure out. Many tech tycoons have shallow roots in the boomtown community and are far too young to have thought much about leaving behind a lasting civic legacy—or to provide one by kicking the bucket. Then there is their world-view: Tech entrepreneurs tend to be narrowly focused apostles of self-reliance who think sharing the wealth with the less fortunate means issuing employees more stock options.

Yet more than a conspicuous few have begun to share their largesse—and it is Peter Hero, more than anyone else, who has shown Silicon Valley how to give. He has done it by channeling the area’s distinctive culture into an unusual brand of charity: demanding, ambitious, self-conscious, creative, even risky—in short, everything you’d expect from Silicon Valley. And it’s posting big returns. Eleven years ago, when Hero arrived in the area, the Community Foundation held just $9 million in assets. Today that figure is about $625 million. The foundation hands out an average of $1 million in grants a week—to neighborhood groups, education programs, social-service agencies, and cultural organizations. Philanthropy is becoming another Silicon Valley growth industry.

To get that industry off the ground, however, Hero had to figure out a new way to sell philanthropy. The assumption “that giving is a moral obligation—You’re rich, they’re poor; you have to give your money away—that doesn’t fly out here,” notes Hero.

We are talking in Hero’s office at the Community Foundation headquarters in downtown San Jose, where the cool lime-and-charcoal color scheme offers the flavor of a well-funded Internet startup. A scrawled phrase on the obligatory whiteboard—”$576,920/day”—breaks down the foundation’s record fundraising goal for the budget year: $150 million. Just five months along, it has already collected $100 million.

If Hero has had a transforming effect on Silicon Valley, it’s because he operates in terms that tech moguls understand. He may have the gravity of a former college president (which he is), but he also has a Stanford MBA under his belt, not to mention a career in corporate advertising and marketing. Hero left the business world after a four-year stint at Spice Islands, when, he says, “I just finally decided I didn’t care how many more jars of pepper I’d sold.” In 1989, after serving as president of the Maine College of Art, he took over what was then called the Community Foundation of Santa Clara County.

Hero is now Silicon Valley’s go-to guy in the realm of charitable giving—even when it doesn’t directly benefit his own foundation. He attained that status in 1991 by masterminding a collaborative $12 million capital campaign for 11 showcase Silicon Valley arts groups—including the ballet, symphony, art museums, and opera—that had historically battled one another for scarce funding. Last year, when the local United Way—ostensibly a competitor for charitable dollars—announced a shocking $11 million shortfall that left it unable to fund 108 local social-service agencies, it was, of course, Hero who presided over the bailout. “Very few people could have pulled it off,” says Leo Chavez, chancellor of the local community college district and a Community Foundation director. “In this valley, credibility is hard to come by.”

While it seems hard to fathom now, when Hero arrived in Silicon Valley his foundation was in desperate straits. Traditionally, community foundations—there are more than 500 of them in the U.S.—relied heavily on bequests and gifts from elderly, uninvolved donors. Says Hero: “The donors’ role was to give away their money to the community foundation—and then, preferably, to die. Donors were merely to be suffered as a temporary responsibility while they were living. The whole idea of serving donors in their lifetimes was not really on the radar screen.” In Silicon Valley, that approach simply wouldn’t work. “My problem was, we didn’t have any dead donors.”

With the obvious help of a staggering explosion in local wealth, Hero reinvented Silicon Valley philanthropy. He did it by turning his foundation into a one-stop service center for new donors—precisely what was needed to involve the area’s young tech tycoons. Community foundations exist partly to make philanthropy easy. Donors can set up a fund there, take their tax deduction, and avoid the administrative headaches of running their own foundation.

Hero goes to special lengths to make the process even easier. Each donor is assigned to a foundation staffer, something like a private banker. The foundation provides research on various nonprofits—much as brokerage analysts cover public companies. It regularly produces studies—on local philanthropy, on charities’ effectiveness, on corporate giving—offering the sort of benchmarks entrepreneurs crave. Hero also helps newbies develop a philanthropic “strategy.” He urges them to build a diverse giving “portfolio” by directing some of their money to well-established individual nonprofits, such as the Red Cross or the local food bank (the “individual stocks”); by socking some away in foundation-directed “field of interest” pools (the “mutual funds”); and by allocating a piece to “highfliers,” cutting-edge programs that might generate spectacular results. Offering the hardheaded appeal that sells in his market, Hero talks to CEOs about philanthropy’s tax advantages—and even how it can help employee recruitment and retention.

In 1997, Hero discarded the parochial Santa Clara County moniker in favor of the more clearly entrepreneurial Community Foundation Silicon Valley. Now, with the help of some high-profile evangelists, philanthropy has turned a corner. “There was all this wealth and not a lot of conscience,” says eBay ebay co-founder Jeff Skoll, a 35-year-old billionaire who has established a $70 million fund at the Community Foundation. “The fact is, the world needs our help now.” Skoll says he is thrilled at the idea that he can make a difference during his lifetime. “This,” he declares, “is a really cool thing.”

Raising lots of money, of course, is one thing. Tackling big social problems—and for all its riches, Silicon Valley has plenty of them—is quite another. And that’s Hero’s biggest challenge: making productive connections between the strong-willed new donors he is managing to attract and what really needs to be done.

What will be the fate of Silicon Valley?” intones a voice-over from the big screen in front of us. “Will we join the pantheon of cities that history has judged as creating true belles époques of human enterprise”—cities like Paris and Constantinople—or, the voice asks, will Silicon Valley become “just another boomtown that went bust?”

I am seated at a large U-shaped conference table at the McKinsey & Co. offices in Palo Alto, along with two dozen members of a civic group called Cultural Initiatives Silicon Valley. Sleek black laptops, loaded and fired up, sit in front of us. We are here to be introduced to the group’s new plan for convincing area leaders that culture is important. It is..a CD-ROM game.

The game—catchily titled “is.C³: Creating a Great Region Through Commerce, Culture & Community”—is a simulation. It goes like this: Bruce Largecap, a major Silicon Valley tycoon, has been run over by a Mercedes SUV at the tender age of 44, leaving behind a $500 million endowment to support the arts. How you spend it will determine whether Silicon Valley can attain “the sustained cultural heights of Renaissance Florence.”

The product of seven months’ labor—and $250,000 worth of foundation grants and donated services from the likes of Apple aapl , Adobe, and the games division of Lucas Arts—the game is aimed, says John Kreidler, the group’s executive director, at getting some 1,000 area leaders “engaged in the idea that culture is important.” In some places this sort of persuasion might seem unnecessary—perhaps even self-indulgent. But Kreidler says it’s needed here. “We could have created a PowerPoint show. But interactive media is the vernacular of Silicon Valley. A lot of the people we’re trying to reach play games—computer games. It’s part of their culture.” Kreidler goes on to make the sort of good-for-bidness culture pitch that was familiar to residents of Texas in the oil-boom days—evidence that arts are a hard sell here.

Just ask Sally Osberg. As executive director of the Children’s Discovery Museum in San Jose, housed in a bright, engaging building on the edge of downtown, she runs a $4.5 million enterprise, with 70 employees and a $9.5 million endowment. Yet when budding tech philanthropists arrive to visit with her, they often ask whether she is a volunteer. “They can’t believe this is a bona fide business,” she chuckles. “Their bandwidth is widening—but they have a ways to go.”

Early on, high-tech philanthropy reflected the narrow interests of the givers more than the needs of the community. Even now, tech companies provide half of their corporate giving in the form of computers and software. While nonprofits are glad to have computers, many—in the overheated job market for trained techs—can’t hire IT staff to keep them running. To deal with that problem, the foundation is trying to set up a network of IT “circuit riders” who would service the equipment at various area nonprofits. “There’s not a lot of understanding,” says Hero, “of where the needs are.” Even Bill Gates—who donated hundreds of millions to wire libraries and schools—has become scornful of tech philanthropy’s obsession with the global “digital divide.” At a recent conference in Seattle, he pointedly noted that technology isn’t high on the priority list for people who don’t have enough to eat.

High on the list for Hero is preventing high costs from pushing out so many middle-class people that Silicon Valley becomes, essentially, a gated community for the absurdly wealthy. Already government agencies are having to subsidize housing costs for police officers and public school teachers. Nonprofits face the same challenge. A recent Community Foundation grant will pay apartment deposits for dancers with a local ballet company. “We’re in danger,” Hero warns, “of becoming a community of rich people and their servants.”

Nowhere will Hero’s particular brand of community-building be put to the test more than in the Mayfair neighborhood of East San Jose. It is there, in a low-income, mostly Hispanic community of 6,500—the birthplace of farm worker organizer César Chávez—that the foundation is presiding over its most complex and ambitious project.

This is one of Hero’s highfliers—risky, but with the potential for big returns. Hatched in 1997, the “Mayfair Improvement Initiative” is aimed at permanently upgrading the prospects for an entire neighborhood—its streets, its homes, its schools, and its residents. Projected to involve more than $15 million in public and private funding (including $5 million from the Hewlett Foundation), it involves a breathtaking array of 76 separate improvement projects. To name a sampling: boosting literacy, adding streetlights, hiring crossing guards, renovating a neglected community garden, establishing home day-care centers, conducting health screenings, offering family financial counseling, painting murals, providing high-tech job training, building residents’ leadership skills. All of that will be meticulously monitored, with regular assessment of progress toward meeting hundreds of carefully established quantitative benchmarks.

The Community Foundation is serving, in essence, as general contractor—managing funds, finding donors for additional “investment opportunities” (the proposed Cesar Chavez Sports Complex goes for $1.5 million), and overseeing it all. Hero sees Mayfair as a flagship project—”a microcosm of what we’re about.” The list of projects—and goals—was developed by the neighborhood, not handed down. Everything is aimed at building “connections”—between Hispanic and Vietnamese neighbors; with public agencies; with corporate job-training programs. The community garden, Hero says, has become “the neighborhood living room.” A weekly farmers’ market has drawn outsiders into the community. There’s even a program to teach fundraising skills—so Mayfair residents will learn how to get private-foundation millions on their own.

Upgrading a neighborhood is not easy: An improvement in residents’ economic prospects will encourage many to move out, unless Mayfair becomes a more attractive neighborhood. And simply making neighborhood improvements without increasing household income will invite gentrification. “The whole issue is sustainability,” says Leo Chavez, who has been heavily involved in the project. “We’re trying to fix the issues that sustain poverty.” The big question, he notes, is the exit strategy. “We’ll see what happens when the Hewlett money runs out and the Community Foundation staffers pull out.”

Down the hall from Hero’s office, Steve Kirsch, the 43-year-old founder and former chairman of Infoseek, has established the Steven and Michele Kirsch Foundation—affiliated with the Community Foundation. Kirsch is Silicon Valley philanthropy’s most fervent evangelist and one of Hero’s most passionate allies. He has set aside $75 million of his net worth for charity, which he has been parceling out to causes as diverse as the United Way (he wrote the first $1 million check for the bailout) to tracking asteroids threatening to strike planet Earth. In the San Jose offices of his new startup, Propel, Kirsch rants about tight-fisted billionaires, bemoaning the case of one dot-com CEO who ignored his pleas to put a chunk of stock into a charitable fund. For a time, he was worth $2 billion. “He could have given 1% and never even missed it!” Kirsch complains. He quickly rattles off the names of tech billionaires who need to follow his example. “I’m hardly the richest guy in Silicon Valley,” he notes. “Not by a long shot.”

While Kirsch plays the provocateur—the finger-pointing conscience on the shoulder of Silicon Valley—Hero looks for new ways to expand the donor ranks. After years of wrestling with how to bring busy new tech millionaires to his door, for example, he’s now hatching schemes to go to them. The foundation has placed a “giving counselor” on the sprawling corporate campus of Cisco Systems csco . It is indisputably fertile ground: Cisco has 18,000 employees in Silicon Valley, and its soaring stock has made even some secretaries millionaires. He’s also trying to tap the wealth of Silicon Valley’s 200,000-member Indian community, with an estimated combined net worth of more than $50 billion. Many immigrants want to support causes in their homeland, Hero says, but don’t have a vehicle for doing so. So while community foundations rarely initiate giving outside their own regions—and almost never operate overseas—Hero is exploring the idea of developing a fund through which Indian donors could support projects in blighted neighborhoods in both their homeland and Silicon Valley.

Finally, there is the foundation’s high-profile “venture philanthropy” group, aimed at young donors: the Silicon Valley Social Venture Fund, known as SV². Modeled after counterparts in Seattle and Austin, SV² has attracted 100 “partners” from the ranks of venture capitalists and entrepreneurs. Each contributes at least $2,500 a year. The money is pooled—and matched with Community Foundation funds—to provide grants. Under the “venture philanthropy” model, the donors subject nonprofits to the sort of scrutiny a venture capital firm would apply, then offer their expertise to maximize their “investment.” It insists on establishing “metrics” to measure returns and looks for “scalability” and “an exit strategy.”

The venture-philanthropy model—which has drawn plenty of buzz—has its skeptics. Bruce Sievers, executive director of the San Francisco-based Walter and Elise Haas Fund, a foundation with $240 million in assets, says thoughtful donors have been rigorously scrutinizing nonprofits they fund—and insisting on good results—for years. But he worries that it’s easy to go too far in trying to apply VC principles to nonprofits. “In the business world, there’s a simple test: Do you make money? There’s nothing equivalent in the social world.” Sievers also questions how much useful knowledge dot-commers bring to the table. “Because they’ve made a lot of money developing a software program doesn’t mean they know about developing education programs. They’re a potential bull in a china shop.” Sievers says he knows of one nonprofit executive who had a major business donor turn to her and ask, “Remind me: In this field, do we crush the competition?”

All those dangers, of course, remain theoretical—a question of not taking an approach too far. Hero, for his part, is a bit wary of some of venture philanthropy’s tenets—how can a museum’s “product” be measured?—but he’s delighted with the fresh recruits to charity’s cause. SV², after all, is at least as much about training new givers as it is about funding nonprofits. eBay’s Skoll, who’s a member, calls it “kind of like training wheels for young philanthropists.”

Already the invitation-only organization has generated scads of national press—in fact, it was getting media attention even before issuing its first grant (which turned out to be $225,000 to a local group that helps underperforming low-income elementary school students). Several money managers have tried to join to get access to the young millionaires. But no one wants to be hit on. “One thing we are providing to our members is a safe place to be,” says a member of the group. SV², urges another, needs to carefully target “the ideal people to become members of this group—the hot CEOs and the hot venture capitalists.”

“We had no history and no role models for doing philanthropic giving,” says SV² co-founder Kevin Fong, managing partner of the Mayfield Fund, a Menlo Park VC firm. “We want SV² to shortcut that learning process.”

Over time, says Hero, the venture philanthropy model embraced by SV² may well evolve. “As they get to know these charities, their charitable giving may become more traditional.” It’s all just one more way to harness the astounding wealth of Silicon Valley. And that’s what is truly urgent, Hero says—creating a community where the arts can flourish, middle-class people can afford a home, and the poor can live in dignity and better themselves. For all of that, says Hero, “we need to create a culture where philanthropy becomes a way of life in Silicon Valley. If we don’t do that, people will say, ‘I can’t believe these guys blew it.'”

Who Has the Time for Philanthropy in a Startup World?

At Fortune’s conference on New Economy Philanthropy in Austin, Texas, on Oct. 12, Fortune 500 bosses, tech entrepreneurs, and foundation heavyweights shared ideas about giving away their riches. But philanthropy also means giving of yourself. How does a busy entrepreneur find time to save the rain forest or wipe out disease? That was the subject of a panel moderated by Fortune’s Geoffrey Colvin. During the discussion, audience member Todd Wagner, co-founder of Broadcast.com (which was sold to Yahoo for about $5 billion), challenged panelist Steve Kirsch, the Infoseek founder who is now running a new startup, Propel.

Fortune: You’re running a company. How do you divide your time?

Steve Kirsch: It’s about trying to focus 100% on the business, 100% on the family, and 100% of philanthropy….You can integrate philanthropy into your personal life and your business life. When we have a company event, if we can use it as a team-building event for the company and also do something for the community at the same time–that’s great. One of the organizations my wife and I are involved in is the Tech Museum of San Jose, so we can attend activities with our kids and combine the time. You know, try and leverage those overlaps when you can.

Todd Wagner: I’ve listened to this 100%, 100%, 100%, and with all due respect, that means you’ll fail on all three fronts. If you’re answering to the shareholders and you’re answering to employees and all of a sudden you say, well, you know, I’ve got to go to this board meeting for this nonprofit institution—it’s a tough thing to sell. As businesses mature, sure, then I think it’s a different set of issues. They’re not as caught up in that day-to-day war. But I think that we are being a little unfair in what we expect out of people [on the philanthropic side] in the first three to five years of their business, when they’re trying to get that off the ground.

Kirsch: As far as the CEO time spent, well, hey, if I spend more than a minute a week on philanthropy, if my company is not doing well, it could be viewed as “the CEO is not focused on the business.” The thing is, if your company is doing well and you’re spending any percent of your time on philanthropy, or your family, or what have you, people aren’t going to question that. It’s only when the company is doing poorly they’re going to zero in on anything you’re doing outside the company, and that’s life.

A version of this article was originally published in the November 27, 2000 issue of Fortune.

Goldman Sachs’ House of Junk

by
Peter Elkind

@FortuneMagazine

April 12, 2016, 4:40 PM EDT

Editor’s Note: On April 11, Goldman Sachs agreed to a $5.1 billion fine with the Department of Justice for deceiving investors in mortgage bonds. In late 2007, Fortune published, “House of Junk” one of the first stories to document how Wall Street had packaged up risky mortgages into bonds and sold those bonds off as safe investments to an unsuspecting investing public. The story looked under the cover of one particularly rotten mortgage bond underwritten by Goldman. The story went on to win a number of awards including a Loeb Award, one of business journalism’s highest honors. According to the Loeb judges, “Of the countless stories about the subprime crisis, this piece stood out among the rest in depth of reporting and quality of writing.”

It’s getting hard to wrap your brain around subprime mortgages, Wall Street’s fancy name for junk home loans. There’s so much subprime stuff floating around—more than $1.5 trillion of loans, maybe $200 billion of losses, thousands of families facing foreclosure, umpteen politicians yapping—that it’s like the federal budget: It’s just too big to be understandable.

So let’s reduce this macro story to human scale. Meet GSAMP Trust 2006-S3, a $494 million drop in the junk-mortgage bucket, part of the more than half-a-trillion dollars of mortgage-backed securities issued last year. We found this issue by asking mortgage mavens to pick the worst deal they knew of that had been floated by a top-tier firm—and this one’s pretty bad.

It was sold by Goldman Sachs gs —GSAMP originally stood for Goldman Sachs Alternative Mortgage Products but now has become a name itself, like AT&T t and 3M mmm . This issue, which is backed by ultra-risky second-mortgage loans, contains all the elements that facilitated the housing bubble and bust. It’s got speculators searching for quick gains in hot housing markets; it’s got loans that seem to have been made with little or no serious analysis by lenders; and finally, it’s got Wall Street, which churned out mortgage “product” because buyers wanted it. As they say on the Street, “When the ducks quack, feed them.”

Alas, almost everyone involved in this duck-feeding deal has had a foul experience. Less than 18 months after the issue was floated, a sixth of the borrowers had already defaulted on their loans. Investors who paid face value for these securities—they were looking for slightly more interest than they’d get on equivalent bonds—have suffered heavy losses. That’s because their securities have either defaulted (for a 100% loss) or been downgraded by credit-rating agencies, which has depressed the securities’ market prices. (Check out one of these jewels on a Bloomberg machine, and the price chart looks like something falling off a cliff.)

Even Goldman may have lost money on GSAMP—but being Goldman, the firm has more than covered its losses by betting successfully that the price of junk mortgages would drop. Of course, Goldman knew a lot about this market: GSAMP was just one of 83 mortgage-backed issues totaling $44.5 billion that Goldman sold last year.

Now let’s take it from the top.

In the spring of 2006, Goldman assembled 8,274 second-mortgage loans originated by Fremont Investment & Loan, Long Beach Mortgage Co., and assorted other players. More than a third of the loans were in California, then a hot market. It was a run-of-the-mill deal, one of the 916 residential mortgage-backed issues totaling $592 billion that were sold last year.

The average equity that the second-mortgage borrowers had in their homes was 0.71%. (No, that’s not a misprint—the average loan-to-value of the issue’s borrowers was 99.29%.) It gets even hinkier. Some 58% of the loans were no-documentation or low-documentation. This means that although 98% of the borrowers said they were occupying the homes they were borrowing on—“owner-occupied” loans are considered less risky than loans to speculators—no one knows if that was true. And no one knows whether borrowers’ incomes or assets bore any serious relationship to what they told the mortgage lenders.

(For more on Wall Street and the financial crisis: Robert Rubin Was Targeted By Financial Crisis Commission)

You can see why borrowers lined up for the loans, even though they carried high interest rates. If you took out one of these second mortgages and a typical 80% first mortgage, you got to buy a house with essentially none of your own money at risk. If house prices rose, you’d have a profit. If house prices fell and you couldn’t make your mortgage payments, you’d get to walk away with nothing (or almost nothing) out of pocket. It was go-go finance, very 21st century.

For more on Goldman Sachs, watch this Fortune video:

Goldman acquired these second-mortgage loans and put them together as GSAMP Trust 2006-S3. To transform them into securities it could sell to investors, it divided them into tranches—which is French for “slices,” in case you’re interested.

There are trillions of dollars of mortgage-backed securities in the world for the same reason that Tyson Foods offers you chicken pieces rather than insisting you buy an entire bird. Tyson can slice a chicken into breasts, legs, thighs, giblets—and Lord knows what else—and get more for the pieces than it gets for a whole chicken. Customers are happy, because they get only the pieces they want.

Similarly, Wall Street carves mortgages into tranches because it can get more for the pieces than it would get for whole mortgages. Mortgages have maturities that are unpredictable, and they require all that messy maintenance like collecting the monthly payments, making sure real estate taxes are paid, chasing slow-pay and no-pay borrowers, and sending out annual statements of interest and taxes paid. Securities are simpler to deal with and can be customized.

Someone wants a safe, relatively low-interest, short-term security? Fine, we’ll give him a nice AAA-rated slice that gets repaid quickly and is very unlikely to default. Someone wants a risky piece with a potentially very rich yield, an indefinite maturity, and no credit rating at all? One unrated X tranche coming right up. Interested in legs, thighs, giblets, the heart? The butcher—excuse us, the investment banker—gives customers what they want.

In this case, Goldman sliced the $494 million of second mortgages into 13 separate tranches. The $336 million of top tranches—named cleverly A-1, A-2, and A-3—carried the lowest interest rates and the least risk. The $123 million of intermediate tranches—M (for mezzanine) 1 through 7—are next in line to get paid and carry progressively higher interest rates.

Finally, Goldman sold two non-investment-grade tranches. The first, B-1 ($13 million), went to the Luxembourg-based UBS Absolute Return fund, which is aimed at non-U.S. investors and thus spread GSAMP’s problems beyond our borders. The second, B-2 ($8 million), went to the Morgan Keegan Select High Income fund. (Like most of this article, this information is based on our reading of various public filings; UBS and Morgan Keegan both declined to comment.) Goldman wouldn’t say, but it appears to have kept the 13th piece, the X tranche, which had a face value of $14 million (and would have been worth much more had things gone as projected), as its fee for putting the deal together. Goldman may have had money at risk in some of the other tranches, but there’s no way to know without Goldman’s cooperation, which wasn’t forthcoming.

How is a buyer of securities like these supposed to know how safe they are? There are two options. The first is to do what we did: Read the 315-page prospectus, related documents, and other public records with a jaundiced eye and try to see how things can go wrong. The second is to rely on the underwriter and the credit-rating agencies—Moody’s and Standard & Poor’s. That, of course, is what nearly everyone does.

In any event, it’s impossible for investors to conduct an independent analysis of the borrowers’ credit quality even if they choose to invest the time, money, and effort to do so. That’s because Goldman, like other assemblers of mortgage-backed deals, doesn’t tell investors who the borrowers are. One Goldman filing lists more than 1,000 pages of individual loans—but they’re by code number and zip code, not name and address.

Even though the individual loans in GSAMP looked like financial toxic waste, 68% of the issue, or $336 million, was rated AAA by both agencies—as secure as U.S. Treasury bonds. Another $123 million, 25% of the issue, was rated investment grade, at levels from AA to BBB–. Thus, a total of 93% was rated investment grade. That’s despite the fact that this issue is backed by second mortgages of dubious quality on homes in which the borrowers (most of whose income and financial assertions weren’t vetted by anyone) had less than 1% equity and on which GSAMP couldn’t effectively foreclose.

How does toxic waste get distilled into spring water? Watch. It’s all in the math—and the assumptions about how borrowers will behave.

These loans, which are fixed-rate, carried an average interest rate of 10.51%. After paying the people who collected the payments and handled all the other paperwork, the GSAMP Trust had ten percentage points left. However, the interest on the securities that GSAMP issued ran to only about 7%. (We say “about” because some of the tranches are floating-rate rather than fixed-rate.) The difference between GSAMP’s interest income and interest expense was projected at 2.85% a year. That spread was supposed to provide a cushion to offset defaults by borrowers. In addition, the aforementioned X piece didn’t get fixed monthly payments and thus provided another bit of protection for the 12 tranches ranked above it.

Remember that we’re dealing with securities, not actual loans. Thus losses aren’t shared equally by all of GSAMP’s investors. Any loan losses would first hit the X tranche. Then, if X were wiped out, the losses would work their way up the food chain tranche by tranche: B-2, B-1, M-7, and so on.

The $241 million A-1 tranche, 60% of which has already been repaid, was designed to be supersafe and quick-paying. It gets first dibs on principal paydowns from regular monthly payments, refinancings, and borrowers paying off their loans because they’re selling their homes. Then, after A-1 is paid in full, it’s the turn of A-2 and A-3, and so on down the line.

Moody’s projected in a public analysis of the issue that less than 10% of the loans would ultimately default. S&P, which gave the securities the same ratings that Moody’s did, almost certainly reached a similar conclusion but hasn’t filed a public analysis and wouldn’t share its numbers with us. As long as housing prices kept rising, it all looked copacetic.

Goldman peddled the securities in late April 2006. In a matter of months the mathematical models used to assemble and market this issue—and the models that Moody’s and S&P used to rate it—proved to be horribly flawed. That’s because the models were based on recent performances ofjunk-mortgage borrowers, who hadn’t defaulted much until last year thanks to the housing bubble.

Through the end of 2005, if you couldn’t make your mortgage payments, you could generally get out from under by selling the house at a profit or refinancing it. But in 2006 we hit an inflection point. House prices began stagnating or falling in many markets. Instead of HPA—industry shorthand for house-price appreciation—we had HPD: house-price depreciation.

Interest rates on mortgages stopped falling. Way too late, as usual, regulators and lenders began imposing higher credit standards. If you had borrowed 99%-plus of the purchase price (as the average GSAMP borrower did) and couldn’t make your payments, couldn’t refinance, and couldn’t sell at a profit, it was over. Lights out.

As a second-mortgage holder, GSAMP couldn’t foreclose on deadbeats unless the first-mortgage holder also foreclosed. That’s because to foreclose on a second mortgage, you have to repay the first mortgage in full, and there was no money set aside to do that. So if a borrower decided to keep on paying the first mortgage but not the second, the holder of the second would get bagged.

If the holder of the first mortgage foreclosed, there was likely to be little or nothing left for GSAMP, the second-mortgage holder. Indeed, the monthly reports issued by Deutsche Bank, the issue’s trustee, indicate that GSAMP has recovered almost nothing on its foreclosed loans.

By February 2007, Moody’s and S&P began downgrading the issue (see chart). Both agencies dropped the top-rated tranches all the way to BBB from their original AAA, depressing the securities’ market price substantially.

In March, less than a year after the issue was sold, GSAMP began defaulting on its obligations. By the end of September, 18% of the loans had defaulted, according to Deutsche Bank. As a result, the X tranche, both B tranches, and the four bottom M tranches have been wiped out, and M-3 is being chewed up like a frame house with termites. At this point, there’s no way to know whether any of the A tranches will ultimately be impaired.

“[In hindsight,] I think we would not have rated it” had Moody’s realized what was going on in the junk-mortgage market, says Nicolas Weill, the firm’s chief credit officer for structured finance. Low credit scores and high loan-to-value ratios were taken into account in Moody’s original analysis, of course, but the firm now thinks there were things it didn’t know about. Weill doesn’t lay blame on any particular party, although in a Sept. 25 special report posted on Moody’s website, he called for “additional third-party oversight that reviews the accuracy of the information provided by borrowers, appraisers, and brokers to originators” when it comes to junk issues. Or, as he calls them, “non-prime.”

S&P, by contrast, says that it considers both its original rating and subsequent downward revisions correct. “We used the best information available at the time,” says Vickie Tillman, S&P’s chief rating officer.

If you read documents that Goldman filed with the SEC in connection with this offering, you discover that they warn about pretty much everything we’ve discussed so far and some things we haven’t: the impact of falling house prices, the difficulty of foreclosing, the possible changes in credit ratings, the fact that more than half the mortgages were in California, Florida, and New York, all of which were overheated markets. It’s all disclosed. In capital letters. So no buyer—and this is aimed at sophisticated investors—can say he wasn’t warned.

Goldman said it made money in the third quarter by shorting an index of mortgage-backed securities. That prompted Fortune to ask the firm to explain to us how it had managed to come out ahead while so many of its mortgage-backed customers were getting stomped.

Goldman’s profits came from hedging the mortgage securities it keeps in inventory in order to make trading markets. It said in a recent SEC filing, “Although we recognized significant losses on our non-prime mortgage loans and securities, those losses were more than offset by gains on short mortgage positions.”

As we interpret this—the firm declined to elaborate—Goldman made more on its hedges than it lost on its inventory because junk mortgages fell even more sharply than Goldman thought they would.

What is there to take away from our course in Junk Mortgages 101? Two things. First, you have to pay at least some attention to all those “risk factors” that issuers forever warn you about—especially when you’re dealing with a whole new thing like junk mortgages issued en masse instead of by specialists. Second, when you rely on the underwriter and the rating agencies to do all your homework for you, you don’t have safety. You have only the illusion of safety.

Reporter Associate: Doris Burke

A version of this article was originally published in the October 29, 2007 issue of Fortune.

Fortune Classic: The Education of Andy Grove

by
Peter Elkind

@FortuneMagazine

March 21, 2016, 9:59 PM EDT

Andy Grove, Intel’s legendary co-founder and former CEO, passed away at the age 79 on Monday, according to Intel. The following is a Fortune article from 2005 about how he turned the company into a huge global business and how his management style became a model for others to follow.

In 1991, an instructor at Stanford’s Graduate School of Business presented his class with a case study. It went like this: A CEO was scheduled to address a major industry gathering, and he could give one of three speeches. The first would publicly commit his company to incorporating a sexy, sophisticated new technology in its products. The second speech would reaffirm the company’s commitment to developing its existing technology. The third speech would do neither, leaving the decision to “the market.” The stakes were enormous: A wrong decision could well ruin the business. What should the CEO do? The question was more than academic, because the CEO described in the case was also the man at the front of the classroom. Dr. Andrew S. Grove, like professor Indiana Jones, was better known for his exploits as “Andy,” the famous leader of Intel Corp. But unlike Indy, Grove wasn’t simply biding time here between adventures. His question was meant not just to challenge students’ thinking but to advance his own. That big speech was three weeks away, and Grove had yet to make up his mind. He didn’t know the answer.

It’s not common for any CEO to stand before an audience and say, “I don’t know what to do. What do you think?” It’s even less common for that CEO to listen to the responses and take them seriously. But Grove, 69, has never lost track of the truth: that Intel has always been one wrong answer away from disaster–and that a closed mind is a trap door to the abyss.

Grove and Intel are now embedded so deeply Inside our minds, our computers, and our culture–the man has been on 77 magazine covers, by one count–that with hindsight, their success seems foreordained. But the opposite is the case: By all odds, Intel should have failed. It should have been destroyed by the same brutal international competition that has killed apparel companies, tire companies, and television companies, or fallen into obscurity like Zilog and other successful chipmakers. Intel, too, should have stumbled on the terrifying treadmill of Moore’s Law, which requires betting billions upon billions of dollars on ever more costly factories to make chips you’re still developing for customers who’ve yet to demand them. It should have been eclipsed by an upstart competitor with a better mousetrap. Intel’s success should never have happened–it was an anomaly, an outlier, a freak.

That’s why Grove had chosen himself as the day’s case study in the class he was teaching with professor Robert Burgelman, his longtime collaborator and the author of Strategy Is Destiny. In business you often don’t see the cliff until you’ve already walked over it. Visibility on the ground is bad, and the roadmap–well, that can’t be trusted either. To spot the next cliff, Andy Grove was willing to let go of his instincts–since they could be wrong–and view himself as a student might: from outside, peering down with the wide-angle, disinterested perspective of the observer. Did the man below seem aware of his surroundings? Was he choosing the correct path? Was there a 1,000-foot drop ahead?

Normally, our society observes a division of labor. Musicians don’t critique, and critics don’t compose. Quarterbacks decide on Sunday, and fans deride on Monday. It is the singular ability to inhabit both roles at once–subject and object, actor and audience, master and student–that sets Grove apart. And it’s why, for everything that has been written by and about him, we have yet to appreciate his biggest legacy. Andy Grove is America’s greatest student and teacher of business.

By analyzing the decisions he made on the road to becoming a great leader, you can learn to hone your own leadership skills. Because there’s no gain in being able to recruit great employees, handle a board, dazzle Wall Street, or rally your cavalry for a glorious charge at dawn’s early light if you haven’t figured out which way to point the horses.

Grove’s output as a teacher of management has been prodigious. He has taught from the lectern, in the op-ed pages, in his famous (sometimes feared) one-on-one sessions, and with his books, including 1983’s High Output Management and 1996’s Only the Paranoid Survive, whose title entered the lexicon along with its phrase “strategic inflection point,” which Grove defines as “a time in the life of a business when its fundamentals are about to change.” His teaching would have been an impressive career in itself. Yet it is one thing to search for truth in the ivory tower and quite another to take those lessons, however wrenching, and apply them to a living, breathing business like Intel. Grove’s most powerful lessons have been in the doing.

What can others learn from Grove’s odyssey? As we face a future where change is not only constant but accelerating, reality will transform itself more swiftly than most humans–or most companies–are hard-wired to handle. Even startups that overturn one reality are easily overturned by the next big change. Grove has escaped natural selection by doing the evolving himself. Forcibly adapting himself to a succession of new realities, he has left a trail of discarded assumptions in his wake. When reality has changed, he has found the will to let go and embrace the new.

It’s a performance as remarkable as his life story. There will not be another CEO who survived both the Nazis and the communists before becoming a naturalized capitalist. And yet Grove is the best model we’ve got for doing business in the 21st century. If you hope to thrive in an environment of rapid change, it is this outlier–his strengths forged in a distant and vanished world–that you should follow. Begin your lesson in leadership the same way Andy Grove attacks a problem: by setting aside everything you know.

As a historian whose subjects have been, until now, no longer living, I found it a jolt to face a very alive Andy Grove. When he gets to a particularly intense point in a conversation, Grove leans forward and fixes you directly with his eyes, which are a startling blue. “That is not the right question,” he will say, briefly taking over the duties of the interviewer. It’s not personal. It’s about an invisible third party: the truth. The truth is so precious and so hard to coax into view–surrounded by its bodyguard of politics and half-truths–that there is simply no time for fuzzy thinking. There are moments when you can almost experience firsthand the flow of self that went into Intel. And Grove’s state-of-the-art memory can transport you from the deck of his home–where a commanding view of Silicon Valley spreads out at his feet–to vivid places in time. Like the day not long after the Stanford case study when Intel executives Craig Kinnie and Dennis Carter arrived in his cubicle to confront him.

In the run-up to the speech about technology choices, Grove had uncharacteristically wavered. He’d told Stanford’s Burgelman that he was inclined to stick with Intel’s mainstay chip technology known as CISC (for complex instruction set computing–don’t ask). But when Intel published its annual report, the cover included a new, fashion-forward RISC chip (for reduced instruction set computing). Engineers across the industry were enamored of RISC because of its elegance: It required fewer transistors to accomplish most computing tasks. Grove had even appeared in an Intel rap video to promote RISC.

For more about Intel, watch:

But Kinnie and Carter had trained at the Grove school of management–Grove’s MO as a leader has always been to depend on “helpful Cassandras” to make sure that he doesn’t win an argument he ought to lose. The two were blunt. “Andy, you can’t do this,” Carter said. Abandoning CISC for RISC, they argued, would truncate one of the most profitable franchises in business history for … what? Leveling the playing field for Intel’s competition? When the discussion ended, Kinnie and Carter had achieved a feat of monumental difficulty. They’d won an argument with Andy Grove.

Grove has been grateful to them ever since. He looks back at this episode with anger–at himself. “We almost wrecked the company,” he told me. “We had established our technology as the industry standard. This franchise was worth millions, billions. We … I … almost walked away from it because the elegance of a new product seduced me into taking my eye off the market.” The sun is shining, the view is stunning, and Andy Grove is berating himself for a mistake he didn’t make a decade and a half ago. It’s a measure of the demanding life he has lived–a life that, at critical junctures, has hung on Grove’s ability to transform himself, to move from role to role as the moment required.

The Early Adapter

To be born a Hungarian Jew in 1936 was to be born on the wrong side of history. Grove was forced to adapt to a succession of threatening realities from the very beginning.

Transformations were the story of Grove’s young life. When the Nazis invaded Hungary in 1944, his mother changed his name from Andras Grof to the Slavic Andras Malesevics. When the communists arrived the following year, he once again became Andras Grof. As a young man, he switched from journalism to chemistry after publishers started rejecting his articles for political reasons.

Communism nauseated him. One of his most vivid recollections is the May Day parade of 1950. Cheering was broadcast from loudspeakers around Budapest. But when Andy and his schoolmates arrived at Heroes’ Square, they discovered there was no crowd at all: The cheering was recorded. Six years later, when the Hungarian Revolution caused the border with Austria to be open for a brief period, Grove faced an immediate and unanticipated decision. He had never been outside Hungary. An only child, he would be leaving parents he might never see again. He had little idea of what he’d be running to. If ever there was a plunge into the unknown, that was it.

He arrived in the U.S. on Jan. 7, 1957–the same day that Time’s “Man of the Year” issue featured THE HUNGARIAN FREEDOM FIGHTER on its cover. Soon he would change his name for a third and final time. At the City College of New York, where he enrolled, Andras Istvan Grof was struck from the transcript and above it was written Andrew Stephen Grove. He had left behind his home, and he needed a name people could pronounce.

The Self-Made Manager

By the late 1960s Grove had earned a Ph.D. in chemical engineering at the University of California at Berkeley and joined Fairchild Semiconductor, birthplace of the integrated circuit. When colleagues Robert Noyce and Gordon Moore quit to start Intel, Grove declared he was coming too. In 1968 they put their 32-year-old protégé in charge of operations. That forced Grove into an unfamiliar role: having to lead people.

Quite suddenly Grove found himself on the shop floor of a manufacturing startup. There the human dynamics proved far more complex than the fluid dynamics he’d studied at Berkeley. The job, he quickly recognized, required something he knew nothing about: It required management. What was that, anyway? Grove decided he had to figure it out.

On July 4, 1969, he opened a school notebook and pasted in a clipping from a story in Time magazine about movie directors. “Vision to Inspire,” it read. “Any director must master formidable complexity. He must be adept at sound and camera work, a soother of egos, a cajoler of the artistic talent. A great director has something more: the vision and force to make all these disparate elements fuse into an inspired whole.”Above the clipping, Grove wrote with a red pen: “My job description?”

So began the self-education of Andy Grove, manager. It was a quest in which he immersed himself. His classroom would be a remarkable set of journals that he kept for years –and that have never, until now, been revealed. They’re a window into the mind of an engineer grappling with the challenge of managing people. How did a company’s growth rate, for instance, relate to its employees’ ability to grow? In an entry from the early 1970s, Grove noted, “Three groups of people can be identified: (A) don’t belong in their jobs in the first place. These are “defective choices,” nothing to do with growth. (B) These are the previously discussed cases, people who can’t grow with their jobs. (C) This is everybody else, including those that have demonstrated all kinds of growth capability before.

“The point is, there is a growth rate at which everybody fails and the whole situation results in a chaos. I feel it is my most important function (as being the highest-level manager who still has a way to judge the impending failure) to identify the maximum growth rate at which this wholesale failure phenomenon begins.”

Grove succeeded where others didn’t, in part, by approaching management as a discipline unto itself. There’s real urgency in his efforts to school himself: He never lost his Hungarian refugee’s apprehension of the risk of imminent failure.

The Change Agent

By 1983, when Grove distilled much of his thinking in his book High Output Management (still a worthwhile read), he was president of a fast-growing $1.1-billion-a-year corporation, a leading maker of memory chips, whose CEO was Gordon Moore. Could Grove and Moore save the company from an industry that was filled with ferocious competitors?

In many ways change was in Intel’s DNA. It was Moore who had famously observed that the number of transistors you could cram onto a chip tended to double every couple of years (later refined to 18 months). What Moore’s Law did not and could not predict was that Japanese firms, too, might master this process and turn memory chips into a commodity. That was change of a different order, and not even Intel was prepared for it.

The company’s top executives simply could not believe the growing evidence that they were being outcompeted in a market they had created. Intel was the memory company, period. Its chips were in many of the best minicomputers and also in the new breed of machine that was then taking off, the personal computer. In the early 1980s profits from other products helped to sustain the delusion that memories were a viable future.

Intel kept denying the cliff ahead until its profits went over the edge, plummeting from $198 million in 1984 to less than $2 million in 1985. It was in the middle of this crisis, when many managers would have obsessed about specifics, that Grove stepped outside himself. He and Moore had been agonizing over their dilemma for weeks, he recounts in Only the Paranoid Survive, when something happened: “I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance when I turned back to Gordon, and I asked, ‘If we got kicked out and the board brought in a new CEO, what do you think he would do?’ Gordon answered without hesitation, ‘He would get us out of memories.’ I stared at him, numb, then said, ‘Why shouldn’t you and I walk out the door, come back, and do it ourselves?'”

The words “I stared at him, numb” suggest that in the crucial moment, Andy ceased to be Andy. Instead he was Dr. Grove the engineer, the teacher, looking down at his own case study. And from this realm of pure reason he could see that Intel’s present course had an obvious ending: disaster. It was a cognitive tour de force, yet within moments Andy Grove the executive returned–and was dismayed by what Andy Grove the teacher had concluded. Professors overturn ideas, but they don’t upend lives. “To be completely honest about it,” Grove wrote, “as I started to discuss the possibility of getting out of the memory chip business, I had a hard time getting the words out of my mouth without equivocation.” One of his managers even persuaded him “to continue R&D for a product that he and I both knew we had no plans to sell.” Grove’s devotion to reason did not mean that he was a machine. Far from it. What he found in the end was the will to do what was painful, the will to let go.

“Welcome to the new Intel,” Grove said in a speech not long afterward, to rally the troops behind the decision to exit memories. Intel the memory company was dead, he explained, but there was another product on which it could stake its future: the microprocessor. Invented at Intel in 1971, it had spent the 1970s timing traffic lights and helping bacon packers slice their bacon into even strips. Not all that exciting. continued

But once IBM chose Intel’s microprocessor to be the chip at the heart of its PCs, demand began to explode. Even so, the shift from memory chips was brutally hard–in 1986, Intel fired some 8,000 people and lost more than $180 million on $1.3 billion in sales–the only loss the company has ever posted since its early days as a startup.

The Reality Shifter

Grove and Moore had no way of knowing that Intel was on the verge of a remarkable ten-year run. They did know they were betting the company–and that to make the shift they had to risk angering IBM. The $60-billion-a-year giant was not only Intel’s biggest customer but also its biggest shareholder–it had bought a large stake in the company to shore up its shaky supplier.

Intel did not set out to dominate the computer industry any more than humans set out to dominate the planet. In both cases the main concern was survival. Humans were so vulnerable to being eaten by larger, faster creatures that their only hope of survival was to control their environment. The “new Intel,” too, was subject to forces beyond its control. Grove would later use a graphic that depicted Intel as a castle with the 386 chip in the center. The castle was under siege by rival chipmakers Sun Microsystems, Harris, Motorola, and NEC, not to mention RISC. But in the mid-1980s, before the graphic was ever made, Intel faced a more basic challenge: It was not so much a kingdom as a vassal state. Its dominant customer, IBM, had long insisted that Intel license its microprocessor designs to other chipmakers so that Big Blue could always be certain of a ready supply of chips at a pleasant price.

Grove decided that had to change. “Finally, we had a real winner of a device,” Grove says of the 386 chip. But if Intel wanted a more secure future, “we not only had to win; we had to win our way.” The 386 marked a genuine milestone of computer engineering. As Microsoft and other software developers figured out how to make full use of the new chip, Grove knew, the PC market would probably grow even hotter. Yet as long as Intel had to share its designs with other chipmakers, it would always face the anonymous and uncertain life of a parts supplier, subject to the whim of a customer 60 times its size.

To become its own kingdom, Grove realized, Intel had to make itself effectively the sole source of microprocessors. Getting IBM to buy the idea posed a challenge–he had no way of knowing how his giant partner would react–but he knew the status quo did not give Intel the freedom it needed to grow. So Intel moved unilaterally: In 1985, when it launched the 386, it declared the technology would not be licensed to other producers. IBM at first did not build 386s into its machines. But as archrival Compaq picked up the chip, IBM came around, cutting a deal with Intel to make some of the 386s it expected to use in its own chip factories. The gamble had paid off. “To insist on our way meant we might lose,” Grove says. “But to me, that is better than losing by compromising your advantages away.”

The Fallible Human

During Grove’s 11-year tenure as CEO, Intel intc grew at a compound annual growth rate of nearly 30%. Together with Microsoft, Intel supplanted IBM as the dominant standard in computing. In 1992, Intel’s profits topped $1 billion for the first time–on $5.8 billion of sales. What made such extraordinary growth possible under Grove’s leadership was his continuing ability to adapt to shifting realities–but even Mr. Strategic Inflection Point could stumble.

The 386 caught on, and sure enough, Microsoft used it to transform computing–its smash-hit Windows 3.0 operating system, which debuted in 1990, was designed to work on 386-based machines. Grove’s breakthrough about changing the rules of the game opened the door to an epiphany about branding and marketing. In 1990 marketing chief Dennis Carter–the same Dennis Carter who had badgered Grove on RISC–came to him with a scheme to launch a large-scale consumer marketing campaign around the slogan “Intel Inside.” It is hard to recapture how foreign the concept of branding was at an engineering company like Intel. According to Carter, when he pitched the idea to a roomful of Intel senior executives, “most of them thought it was nuts. But not Andy. He said, ‘It’s brilliant. Go make it happen.’ ” Improbably, it turned an internal component into one of the most recognized brands in the world. Grove so loved the idea of marketing to consumers that he selected the name Pentium himself.

There’s a rate of growth, though, at which everybody fails, including Andy Grove. His biggest tumble from the learning curve began in 1994. That fall Thomas Nicely, a mathematician at Lynchburg College in Virginia, spotted “inconsistencies” in the way Intel’s latest Pentium chip performed a rare, complex scientific calculation.

Intel engineers knew about the bug but deemed it too insignificant to report. By their calculations, a spreadsheet user would encounter it once every 27,000 years of spreadsheet use. But when Nicely’s findings were posted on an Internet newsgroup, the discussion became a tempest, then burst into public view. Soon IBM announced it was suspending shipments of its Pentium-based computers.

It was a moment when Grove should have switched into observer mode and asked, “What has changed here?” Instead, he kept thinking like an engineer and waded into the online mob himself, as though it were purely a technical debate. The uproar grew, though, until Grove was forced to adopt a no-questions-asked replacement policy and to apologize to customers. The apology was not very gracious. “What we view as a minor technical problem has taken on a life of its own,” he declared. “We apologize. We were motivated by a belief that replacement is simply unnecessary for most people. We still feel that way.” In effect he was telling consumers that they wanted something they did not need, but Intel had decided to indulge their irrationality.

A customer replied on the Internet with a poem:

When in the future we wish to deride A CEO whose disastrous pride Causes spokesmen to lie and sales streams to dry We’ll say he’s got Intel Inside™.

For a man who strives to grasp objective reality, Grove had missed a fundamental shift in the nature of his business. Intel had become a marketing company. And while a chip is built in a factory, a brand is co-created with the customer. This required a rethinking of the meaning of “objectivity.” In branding, a customer’s subjective reality, even if confused, becomes your objective reality. The learning experience was more expensive than most: The Pentium recall required a $475 million writedown that marred Intel’s year.

The Data-Driven Patient

A few months later Grove faced crisis again: He was diagnosed with prostate cancer. In the intense period that followed, he remained on the job for all but two-and-a-half days. He handled the decision about his treatment the same way he handled decision-making at Intel: as if life depended on it.

Grove had never been one to rely on others’ interpretations of reality. Hungary, in this regard, served as How-Not-To-Do-It University. Reality there was shaped by one’s position in the system. At Intel he fostered a culture in which “knowledge power” would trump “position power.” Anyone could challenge anyone else’s idea, so long as it was about the idea and not the person–and so long as you were ready for the demand “Prove it.” That required data. Without data, an idea was only a story–a representation of reality and thus subject to distortion. Hungary had been a grotesque funhouse mirror. The slim man looked fat, and the fat man slim. But when he was diagnosed with prostate cancer in 1995, Grove found himself in the position of most patients: frightened, disoriented, and entirely reliant on the advice of doctors. Their advice was straightforward: Surgery was the best option, and that was pretty much all there was to it.

Was it, though? It took very little to discover that there was much, much more to it. There were alternatives to surgery. No surgeon advised him to take them seriously. But the expert opinions, Grove soon determined, were just that–opinions, based on little if any hard data. Data did exist. What Grove found most shocking is that no one had done the hard work of pulling it together. Plainly, Grove would have to do it himself.

The patient, in effect, became his own doctor. It was a massive research undertaking whose details Grove chronicled in a 1996 story for FORTUNE. One is left with the image of Grove, awake late at night, plotting and cross-plotting the data in his own methodically constructed charts. What did the data tell him? That he would be better off with an alternative procedure known as radiation seeding. That was the treatment he selected.

What Grove found most appalling, in the end, was the utter fixity of belief among doctors who failed to separate knowledge from conventional wisdom. Even the doctor who carried out Grove’s procedure was captive to it. “If you had what I have, what would you do?” Grove asked him at one point. The doctor said he’d probably have surgery. Confounded, Grove later asked why. The doctor thought about it. “You know,” Grove remembers him saying, “all through medical training, they drummed into us that the gold standard for prostate cancer is surgery. I guess that still shapes my thinking.”

“Let’s Think for Ourselves”

Grove stepped down as CEO in spring 1998 to become Intel’s chairman. The betting at Intel was that he’d never really let go of the reins, but Andy surprised everyone. He dug into his new assignment as he has every other–setting out to examine and improve the way the board governed Intel and thereby to set an example for corporate boards everywhere (see “Inside Andy Grove’s Latest Crusade” on fortune.com).

Last May, when Paul Otellini succeeded Craig Barrett as CEO, Grove officially became “senior advisor” to the company. The title didn’t matter. Grove was still teaching.

On a Monday last month, Grove stood before 400 or so Intel employees, the advance troops of the company’s health-care initiative. (Intel wants to make its chips the basic building blocks of 21st-century health-care and medical technology.)

Many had never seen Grove in person before, and he got a standing ovation before he said a word. His speech was a strong statement about strategy. Understanding comes from action. So “be quick and dirty,” he said. “Engage and then plan. And get it better. Revolutions in our industry in our lifetime have taken place using exactly this formula. The best example is the IBM PC”–created on the fly by a team in Boca Raton.

Then he took questions. A European software engineer stood up with microphone in hand. He asked about handling health-care information. “How can we address the problem of privacy protection and data protection?”

“Stay with me for a minute,” Grove said quickly. “Can I ask you a question? Why do you care?”

“Because health-care information might find its way to insurance companies and might result in higher insurance rates,” the engineer replied.

“Explain to me why,” said Grove, almost before the engineer could finish speaking.

“Many people have said it would be a bad thing if insurers knew all about the health history of everyone in the population,” he replied.

Intel’s senior advisor sized up the engineer’s comments this way: “I think we have a tendency toward adding imaginary complexities to a problem which is already unimaginably complicated.” He added, “Let’s think for ourselves. Let’s not repeat mindlessly … excuse me, automatically … suppositions that are true merely because somebody else says they are.”

Did the engineer care about having been cross-examined and momentarily called mindless in the presence of 400 co-workers by his legendarily blunt leader? He smiled at Grove’s choice of words. “Go ahead,” he told Grove. “I was prepared.”

RICHARD S. TEDLOW is a historian at the Harvard Business School. His book, The American: The Life and Times of Andy Grove, will be published next fall. For this essay he has drawn on his research, which includes interviews with Grove and many other executives, unpublished documents, and published reports.

Melinda Gates Goes Public (Fortune, 2008)

by
Peter Elkind

@FortuneMagazine

March 16, 2016, 11:04 AM EDT

Editor’s Note: This Fortune classic, from our January 2008 issue, is the first solo profile that Melinda Gates ever agreed to do. The story covers the marvelous gamut of Melinda’s extraordinary life: meeting and marrying Bill Gates, becoming the essential half of what has turned out to be the world’s premier philanthropic partnership, and dramatically changing her husband’s ideas about what to do with his money. Another rich guy, Warren Buffett, tells Fortune that he sees himself and his late wife, Susie, in Bill and Melinda—and that is just one reason why Buffett calls the Gateses “the perfect solution” to manage and disperse his billions to philanthropy.

Years before Melinda French met and married Bill Gates, she had a love affair—with an Apple computer.

She was growing up in Dallas in a hard-working middle-class family. Ray French, Melinda‘s dad, stretched their budget to pay for all four children to go to college. An engineer, he started a family business on the side, operating rental properties. “That meant scrubbing floors and cleaning ovens and mowing the lawns,” Melinda recalls. The whole family pitched in every weekend. When Ray brought home an Apple III computer one day when she was 16, she was captivated. “We would help him run the business and keep the books,” she says. “We saw money coming in and money going out.”

Of all the tricks that life can play, it’s hard to imagine any stranger than what befell Melinda French. Today she is living in a gargantuan high-tech mansion on the shores of Lake Washington, married to the richest man in America—and giving billions of dollars away. When she married Bill Gates 14 years ago, she bought into a complex bargain. On the one hand, she became half of what has turned out to be the world’s premier philanthropic partnership. The Bill & Melinda Gates Foundation has assets of $37.6 billion, making it the world’s largest. In that total is $3.4 billion that Warren Buffett has already given, and still to come are nine million Berkshire Hathaway B shares, currently worth $41 billion, that he has pledged to contribute in coming years. Assuming that Berkshire shares continue to rise and that the Gateses continue to bestow their own wealth on their foundation, Melinda and Bill will very likely give away more than $100 billion in their lifetimes. Already the foundation has disbursed $14.4 billion—more than the Rockefeller Foundation has distributed since its creation in 1913 (even adjusted for inflation).

Along the way, Melinda has sacrificed privacy, security, simplicity, and normalcy. In the late 1990s, during the Microsoft msft antitrust trial, her husband was widely regarded as the biggest bully in business. And isn’t anyone married to Bill Gates susceptible to losing her identity—to being perceived as the ultimate accessory?

Forgive her if she overcompensates. One day this past fall she spent many hours at her children’s school (the Gateses have two daughters, ages 5 and 11, and a son, 8) and then hosted a dozen dinner guests, including four African health ministers who were in Seattle for the Bill & Melinda Gates Foundation Malaria Forum. By 10 P.M., after everyone had left, she was feeling frazzled and panicky about her speech the next morning. “Just go to bed!” Bill told her. “You know so much about malaria.” Melinda dreads the spotlight, but the following morning she faced more than 300 scientists, doctors, and health officials. She unveiled an audacious plan to eradicate malaria—a disease that kills more than one million people annually and has eluded a cure for centuries—and then answered questions with Bill. Afterward the crowd buzzed about this woman whom even they, recipients of the Gateses‘ billions, hardly know.

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Today, at 43, Melinda Gates is ready to reveal her full self—to go public, so to speak. “I had always thought that when my youngest child started full-day school I’d step up,” she says, sitting down with Fortune for her first-ever profile. Although she admits she would prefer to stay out of public view forever, her older daughter got her thinking. “I really want her to have a voice, whatever she chooses to do,” she says. “I need to role-model that for her.” She is spending more time on foundation work, up to 30 hours a week. “As I thought about strong women of history, I realized that they stepped out in some way.”

She is stepping up also because her husband is doing the same. Beginning in July, Bill, who is nine years older than Melinda, plans to spend more than 40 hours a week on philanthropy, leaving 15 or so for his duties as chairman of Microsoft. Friends of the couple say that he wouldn’t be shifting gears if it weren’t for Melinda. Moreover, they say, she has helped Bill become more open, patient, and compassionate. “Bullshit!” he bellows. Nicer, perhaps? “No way!” he shouts, grinning because he knows it’s true. One thing he admits readily: Thanks to Melinda, he is easing comfortably into his new role. About the philanthropic work he says, “I don’t think it would be fun to do on my own, and I don’t think I’d do as much of it.”

This is not exactly a marriage of equals. Melinda is better educated than Bill, having graduated from Duke University with a BA (a double major in computer science and economics) and an MBA. Harvard’s most celebrated dropout, Bill was awarded an honorary degree last June. Melinda also outperforms him athletically. She runs once a week with a few friends—seven miles in an hour, a brisk pace—and tries to exercise five days a week. She has completed the Seattle marathon and climbed, with ropes and crampons, to the peak of 14,410-foot Mount Rainier. As for Bill, Melinda says, “He’s finally started to run in the last year.” To give him credit, he is an aggressive tennis player and a decent golfer—sometimes playing with Melinda. Beyond that, though, running on the treadmill while watching DVDs three nights a week is all Bill can do to keep up with his fit wife.

Melinda also understands people better than he does, Bill admits. In fact, he uses her as a sounding board, sometimes for personnel matters at Microsoft. In 2000, when Steve Ballmer, with whom Bill has worked for 28 years, replaced him as CEO, Melinda helped ease the awkward transition. “Melinda and I would brainstorm about it,” Bill says. “You always benefit from your key confidante telling you, ‘You think so-and-so stepped on your toes? Well, maybe he didn’t mean to. Maybe you’re wrong.'” Says the couple’s close friend Warren Buffett, who has known them since 1991: “Bill really needs her.”

When it comes to investing their philanthropic assets, Melinda wields even greater influence. Early on she and Bill agreed to focus on a few areas of giving, choosing where to place their money by asking two questions: Which problems affect the most people? And which have been neglected in the past? While many philanthropists take the same tack, the Gateses, who love puzzles, apply particular rigor. “We literally go down the chart of the greatest inequities and give where we can effect the greatest change,” Melinda says. So while they don’t give to the American Cancer Society, they have pumped billions into the world’s deadliest diseases—most importantly AIDS, malaria, and tuberculosis—and failing public high schools in the U.S. And while Bill is drawn, naturally, to vaccine research and scientific solutions that may be decades away, Melinda is interested in alleviating suffering right now. “You can’t save kids just with vaccines,” she says. “I’d go into rural villages in India and think, ‘Okay, we saved this child. But the cows are defecating in the stream coming into the village. There are other things we need to be doing.'”

Those other things include funding insecticide-treated bed nets to ward off malaria-carrying mosquitoes, providing microbicides to prevent the transmission of AIDS, and offering microloans and insurance to help the poorest of the poor start businesses and farms. The Gateses‘ latest mission, which developed out of a trip Melinda took to Kenya two years ago, is to recreate for Africa a green revolution similar to the program that increased crop yields in Latin America and Asia beginning in the 1940s. In 2006 the Gates Foundation formed a $150 million alliance with the Rockefeller Foundation. “Melinda is a total-systems thinker,” says Rockefeller president Judith Rodin. “She and Bill dive into issues. They care deeply, deeply, deeply about making a difference, but they don’t get starry-eyed. They demand impact.”

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The impact comes from the combination of Melinda‘s holistic vision and Bill’s brainpower. Bono, the rock star-humanitarian who is both a friend of the Gateses and a grantee (through his One antipoverty campaign), calls their relationship “symbiotic.” Noting Bill’s fierceness, Bono says, “Sometimes I call him Kill Bill. Lots of people like him—and I include myself—are enraged, and we sweep ourselves into a fury at the wanton loss of lives. What we need is a much slower pulse to help us be rational. Melinda is that pulse.” Buffett also believes that Melinda makes Bill a better decision-maker. “He’s smart as hell, obviously,” Buffett says. “But in terms of seeing the whole picture, she’s smarter.” Would Buffett have given the Gates Foundation his fortune if Melindawere not in the picture? “That’s a great question,” he replies. “And the answer is, I’m not sure.”

A Goal a Day

If you are successful, it is because somewhere, sometime, someone gave you a life or an idea that started you in the right direction. Remember also that you are indebted to life until you help some less fortunate person, just as you were helped. —Melinda Gates, Valedictory speech, Ursuline Academy, 1982

Unlike William H. Gates III, whose parents, Bill and Mary, were civic leaders in Seattle, Melinda French grew up not knowing privilege or wealth. Her father worked on the space program at LTV. Her mother was a stay-at-home mom who didn’t go to college and regretted it. Says Melinda, who has one sister 14 months older and two younger brothers: “My parents told us, ‘No matter what college you get into, we will pay for it.'”

That Apple III was actually the family’s second computer; when Melinda was 14, her father brought home an Apple II, the first consumer computer on the market. “I finagled it to be in my bedroom so I could play games on it,” she says. She learned BASIC, the programming language, and taught it to other kids during summer vacations.

Life was a test, and Melinda believed she had to ace it. Susan Bauer, her math and computer science teacher at Ursuline Academy, an all-girls Catholic high school in Dallas, recalls, “Every day she had a goal.” Melinda laughs, a bit embarrassed at the mention: “The goals were run a mile, learn a new word, that sort of thing.” During her freshman year she looked up recent graduates’ college choices. She discovered that only Ursuline’s top two students had gotten into elite schools. “I realized that the only way to get into a good college was to be valedictorian or salutatorian. So that was my goal,” she explains. She hoped to go to Notre Dame.

Didn’t we all know this girl in high school? The star student, captain of the drill team, candy striper in the hospital, tutor at the public school on the other side of the tracks? Melinda was all that. At Ursuline, where the motto is Serviam (Latin for “I will serve”), volunteerism was a requirement. Her ambition, insists Bauer, “was never abrasive. Never. She was always lovely and charming, and she would win people over by being persuasive.”

She made valedictorian and got into Notre Dame. But Notre Dame did not get her. When she and her dad visited, she recalls, officials at the university told them that “computers are a fad” and that they were shrinking the computer science department. “I was crushed,” Melinda says. Duke, which was expanding in computer science, got her instead. She earned her BA and MBA in five years. Then a helpful recruiter from IBM, where Melinda had worked as a summer intern, directed her to Microsoft. “I told the recruiter that I had one more interview—at this young company, Microsoft,” she recalls. “She said to me, ‘If you get a job offer from them, take it, because the chance for advancement there is terrific.'”

Dating the Boss

Arriving in Seattle in 1987 as a marketing manager for a predecessor of Word, Melinda, 22, was naive about what Microsoft held for her. “There were a lot of idiosyncratic people. They were all so smart, and they were changing the world,” she says, unfazed that she was the youngest recruit and the only woman among ten MBAs. The culture, though, did faze her. “It was a very acerbic company,” she recalls. That culture trickled down from the top, where Gates and Ballmer badgered and harangued managers. Melinda thought about leaving Microsoft.

But four months after she started, during her first trip to New York City, for the PC Expo trade show, she went to a group dinner and sat next to the CEO. “He certainly was funnier than I expected him to be,” she recalls. What attracted Bill to Melinda? “I guess her looks,” he says.

Later that fall, on a Saturday afternoon (“Everybody worked on Saturday,” she says), Melinda and Bill ran into each other in a Microsoft parking lot. “We talked awhile, and then he said, ‘Will you go out with me two weeks from Friday night?’ I said, ‘Two weeks from Friday? That’s not nearly spontaneous enough for me. I don’t know. Call me up closer to the day.'” Bill called Melindalater that day, rattling off his lineup of meetings and commitments. “I promised I would meet him later that night,” she says.

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The scrawny brainiac had just become a billionaire from Microsoft’s 1986 IPO. Yet even that kind of money can’t buy you love. Asked if Melinda played hard to get, Bill replies, “She was hard to get!” Both Melinda and her mother decided that dating the CEO was not a good idea. But, says Bill, “we found ourselves deeply emotionally connected.” Melinda was adamant that their relationship would not affect her work. “I wanted no public exposure. And I drew this line in the sand that I would never, ever, ever go to him on anything related to work.” She explains, “It reached the point that Bill would say to me, ‘You never tell me what you’re doing.'”

The CEO’s attention notwithstanding, Melinda French was a hotshot. In nine years at Microsoft she rose to general manager of information products (Expedia, Encarta, Cinemania) and oversaw 300 employees. Her record wasn’t perfect. Remember Microsoft Bob, the version of Word for people afraid of computers? That was Melinda‘s baby. (“Too cute,” she says.) But even on troubled projects, Melinda was seen as a strong team builder. Says Patty Stonesifer, Melinda‘s former boss at Microsoft and now CEO of the Gates Foundation: “No question, if she had stayed, she would have been on the executive team at Microsoft.”

Melinda worried about marrying Bill. “Bill had money,” she says. “To me, it was like, Okay, Bill has money. Big deal.” She saw what success was doing to him—robbing him of his privacy and a normal life. Both Melinda and Bill, in fact, questioned whether his conquer-the-world capitalist nature could co-exist with a family. “I thought, ‘What would it be like to be married to someone who works that hard?'”

A friend from Omaha juiced the relationship. On Easter Sunday in 1993, Bill and Melinda were visiting his parents at their vacation home in Palm Springs when he announced that it was time to head back to Seattle. They returned to their private jet. The pilot announced the route. Bill drew the shades. To distract Melinda he pulled out a jigsaw puzzle. (“Bill’s very good at complicated jigsaw puzzles, but she’s unbelievable,” Buffett says.) When the plane touched down and the doors opened, “There’s Warren with a bugle,” Melinda recalls. (This isn’t Seattle, Melinda. It’s Omaha!) As Buffett drove them to Borsheim’s, a jewelry emporium owned by Berkshire Hathaway, he kept ribbing: “Bill, there’s a metric of love here. I spent 6% of my net worth on Susie’s ring. I don’t know how much you love Melinda, but 6% is the yardstick in Omaha.” Bill, worth $7.3 billion by this time, inquired about sales per square foot while Melinda checked out the goods. “I said an emerald. Bill said a diamond is more appropriate,” she recalls. She chose a diamond scandalously shy of Buffett’s price target.

Around that time Bill and Melinda started talking about giving his money away. They both figured they would wait until Bill was in his 60s, despite flak he was getting about his miserliness. “He had been advised by lawyers and accountants that he should have a foundation,” recalls his father, “but he refused. He said he didn’t need another entity.” Melinda‘s wedding shower in December 1993 shifted the thinking. Bill’s mother, Mary Gates, who was fighting breast cancer at the time, read a letter she had written to Melinda. “From those to whom much is given, much is expected” was its essence. Mary Gates passed away the following June. Her message spurred the creation of the first Gates charity, the William H. Gates III Foundation. Bill’s dad ran it out of cardboard boxes in his basement.

Initially, Melinda recalls, the idea was to put laptops in classrooms—which was derided by many as a self-serving gesture by a software tycoon. But at the time, she was volunteering in a couple of schools in Seattle, and she realized that “there’s a much bigger problem” than a technology divide. She and Bill decided to take on education reform broadly, focusing on secondary schools. “The piece that looked so intractable and no one was touching was high schools,” she says.

Soon after their wedding came the calling to global health. Melinda read a front-page New York Times story about children in developing countries dying of diseases that most Americans have never heard of—rotavirus, which kills more than 500,000 children every year—and others like malaria and tuberculosis that barely exist in the U.S. “I thought, ‘This can’t be happening,'”Melinda says, and she attached a note to Bill. (“This is how we work,” she says. “We constantly put stuff on each other’s desks.”) Reading the article, Bill learned about the World Bank’s 1993 Development Report, which calculated the cost of these diseases. He got the 344-page document and read it several times. “That is not something I will do,” notes Melinda. “I learn in a different way. I learn experientially.”

Buffett’s Gift

“Yes, we’re a couple that has fun discussing fertilizer while we walk on the beach,” says Bill proudly. We are sitting in the chairman’s office at Microsoft, and Bill, in an armchair, is rocking forward and back—an old habit that Melinda has not broken. “Melinda is more scientific and reads more than 99% of the people you’ll ever meet,” he says. When the couple reviews grants (of the 6,000 or so requests that the foundation receives annually, they personally evaluate only those asking for $40 million or more), they typically meet in a study or hash out their views during long walks. They discuss grant requests without notes in front of them because, as Melinda says, “You’d better have it in your head. That’s a good discipline.”

Former President Bill Clinton, who paid tribute to Melinda at a Save the Children dinner in New York City in September, said that two years ago, when he went to Africa with the Gateses, he and Bill “thought we were so smart. We showed how much we knew about all these issues, you know, and we asked all the right questions. Melinda just sat there patiently. And then when we shut up, she bored in and said, ‘What are you doing in education? What are you doing on prevention? How many people are using condoms?'” The two Bills wilted. “Melinda showed that in the end, women are stronger than men when it counts,” Clinton said.

As Melinda has handed him AIDS babies with dirty pants, her husband has developed a noticeable compassion. But hers seems natural. Her close friend Charlotte Guyman, a retired Hewlett-Packard and Microsoft executive who is now on Buffett’s Berkshire Hathaway board, recalls a trip to Calcutta in 2004. One day, when Melinda had foundation meetings to attend, Guyman and a few in their group spent a half-day at Mother Teresa’s Home for the Dying. There, they were captivated by one young woman suffering from AIDS and tuberculosis who was “just bones,” Guyman says. No one could break the woman’s zombie-like stare. The next day Melinda visited. “Melinda walks in, pauses, and goes right over to this young woman,” Guyman recalls. “She pulls up a chair, puts the woman’s hand in her hands. The woman won’t look at her. Then Melinda says, ‘You have AIDS. It’s not your fault.’ She says it again: ‘It’s not your fault.’ Tears stream down the woman’s face, and she looks at Melinda.” Guyman can’t forget the connection. “Melinda sat with her. It seemed like forever.”

Seeing such suffering up close has led the Gateses to direct more money to what they call intervention: those bed nets, condoms, microbicides (clear, odorless gels that women apply vaginally) that help ward off illness and death until the magic bullet, vaccines, arrives. As AIDS among women has exploded in the developing world, Melinda, who goes to church regularly, feels no guilt about funding programs that more conservative Roman Catholics question. “Condoms save lives,” she says.

As mighty as the Gates Foundation is, Melinda insists that it needs partners. Relatively speaking, she says, “our pocket of money is quite small. The NIH budget is $29 billion. The state of California spends $60 billion in one year. If we spent that, our entire foundation would be out of business.” So the Gates Foundation has allied with other charities—Rockefeller, Michael and Susan Dell, Hewlett—and with companies such as GlaxoSmithKline and Procter & Gamble on various projects. The most successful joint venture is the GAVI Alliance, formerly called the Global Alliance for Vaccines and Immunization, which the Gateses helped start with donations of $1.5 billion. With 17 donor governments and the European Union in the fold, GAVI has distributed vaccines (including tetanus, hepatitis B, and yellow fever) to 138 million children in 70 of the world’s poorest countries. Thanks largely to this alliance, immunization rates are at all-time highs in the developing world, and more than two million premature deaths have been prevented.

Closer to home, where just 70% of American ninth-graders graduate on time from high school, reforming education has been a slog. Melinda admits that she and Bill were initially naive. “I thought that if we got enough schools started, people would say, ‘Let me build schools just like that.’ Just the opposite is true. You could get 1,000 schools up and running, and the system would pull them down.” In Denver and even in Seattle, the Gateses‘ backyard, some of their education efforts have failed for want of community engagement or the right leadership. So now theGateses are working with 1,800 high schools and aligning with superintendents, mayors, and governors wherever they can. “It’s always been one step forward and one step back,” Melindasays.

New York City, though, shows what Gates money can do. At 43 new small high schools funded by the Gates Foundation, graduation rates are 73%, compared with 35% for the schools they replaced. The Gateses‘ partner here happens to be Joel Klein, who led the government’s antitrust case against Microsoft a decade ago and now runs New York City’s public schools. Klein appreciates the irony of their alliance, calling the progress “a tribute to Bill.” For his part, Bill claims that it was no big deal to give his money to his former nemesis. And Melinda won’t say a word about the tension that stemmed from that period. “That’s part of our relationship that I need to keep private,” she says. But clearly she helped her husband get his head around the notion of working with Klein. “This is one of the great things about Bill,” she says. “Bill looks forward.” Buffett observes, “When Bill gave $50 million to New York City schools with Joel Klein in charge, I thought, ‘This guy can rise to the occasion.'”

Now, with another key partnership—the one with Buffett—the Gateses have more to spend and do than ever. Buffett had planned to hold onto his money until his death, but he changed his mind after his wife, Susie, died in 2004. In the spring of 2006, after lots of hinting, he broke the news to Bill. When Bill went home and told Melinda, they went on a long walk, and both cried. Melinda recalls, “We said to each other, ‘Oh, my gosh, do you know how responsible we’re going to feel giving someone else’s money away?'”

Buffett, who requires that the Gateses spend his annual contributions in full the following year, has given them just one piece of advice: “Stay focused.” He considers the Gateses “the perfect solution,” he says, because they are experts in philanthropy and also because he sees himself in Bill and his late wife in Melinda. “Bill is an awkward guy. He’s lopsided, but less lopsided since he’s with Melinda,” he says. “Susie made me less lopsided too.” Perhaps proving the point, Bill is quite touching when he explains his delight in disbursing Buffett’s billions. “Warren knows how lucky I am to have Melinda. It makes him look back at his time with Susie and wonder what it would have been like to be doing the giving with Susie.”

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Bill and Melinda are only now figuring out their new division of duties—crucial in a 500-person outfit that will probably double in size in two years. Bill, no organization geek (that would be Ballmer), intends to spend more time with scientists and academics, explore technology in education, and egg on the pharmaceutical companies that are not working on vaccines for the developing world. “Nobody gives them a hard time,” he complains. “That job is natural for me to do.” Melinda, meanwhile, intends to focus on personnel and culture. Some critics of the foundation contend that only managers who are close to the Gateses have the clout to get things done. Melinda says she wants to push decision-making further down the organization. Asked whether criticism about the Gates Foundation’s bureaucracy is valid, she replies, “You bet, some of it is.” Still, she says, “years ago we got compliments about how fast we reviewed grants. Those grants were swift, but they were not all as effective as they could have been. I’d rather be a bit more methodical and effective.” She also believes that the foundation must respond better to charges that its assets are invested in companies, including BP and Exxon Mobil, whose business interests can conflict with its altruistic goals. In May, Melinda and Bill directed endowment managers to divest stocks of companies invested in Sudan.

Housing Crisis

Melinda and Bill married on Jan. 1, 1994, in a small ceremony on the Hawaiian island of Lanai, with Willie Nelson, one of her favorite singers, performing—a surprise arranged by Bill. Afterward, Melinda says, she had “a mini sort of personal crisis.” This crisis was over the house Bill was building on Lake Washington outside Seattle. It was a bachelor’s dream and a bride’s nightmare: 40,000 square feet with several garages, a trampoline room, an indoor pool, a theater with a popcorn machine, and enough software and high-tech displays to make a newlywed feel as though she were living inside a videogame. “If I do move in,” she recalls telling Bill, “it’s going to be like I want it to be—our house where we have our family life.” After six months of discussions about shuttering the project, Melinda hired a new architect to redesign the place. They worked together to create intimate spaces, an office for her, and staff quarters out of sight and on the periphery.

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The couple moved in before construction was finished, which might have been a mistake. “Having a hundred workmen there gave her the message, ‘This is what your life is going to be like,'” Bill says. He used to tell Melinda: “Every day I want to hear one thing you like about this house.” She recalls: “I’d say, ‘Okay, I like the laundry chute.’ Or ‘Okay, here’s what I like and ten things I don’t like.'”

The house is, of course, a metaphor for Melinda‘s desire for normalcy. Her foremost concern is that the kids lead lives as normal as possible. She insisted on booting all hired help on weekends except for the security people and a sitter who arrives late in the day in case she and Bill want to exercise or go to dinner or a movie. Wednesday night is family swimming night. Friday night is family movie night. Bono, who has stayed with the Gateses several times, says, “That home has a stillness to it. It’s got a sort of Zen-like quality. Melinda has created that.” When they congregate in the light-filled kitchen overlooking the lake, Bono says, “they’re fun to hang out with. And they’re funny. She plays the straight man to his dark humor.”

Melinda appreciates Bono’s description. But does she like the house? “Now I like it,” she says, smiling. “I still wouldn’t build it. But I like it.”

The Gates children are reaching the age where they want to understand their parents’ passions. In 2006, Melinda and Bill took the two oldest children to South Africa, showing them slums and an orphanage in Cape Town. But the value of their work is often difficult to translate. A few years ago when they showed a documentary about polio, the kids asked about a crippled boy featured in the film: “Did you help that kid? Do you know the name of that kid? Well, why not?” On and on. “We don’t know that boy,” Melinda told the children, “but we’re trying to help lots of kids like him.” Bill’s explanation: “I’m in wholesale. I’m not in retail!”

As Bill says about their children, “They know the money is overwhelming.” And of course the kids have asked whether their parents will provide for them as generously as they do for those poor people who receive their billions. “We say, ‘You’ll be fine. You’ll still be very well-off,'” Bill says. While he and Melinda plan to give away 95% of their wealth in their lifetimes, they have not yet decided how much of what’s left will go to the children. Melinda says they will follow Warren Buffett’s philosophy: “A very rich person should leave his kids enough to do anything, but not enough to do nothing.”

“My fatal flaw?” Melinda says, laughing, during our third and final interview. She sometimes wishes for a simpler life, she admits. “It depends when you catch me. Most days, no. But if you’d asked me yesterday if I would like a much simpler life, I would have told you yes.” Yesterday was that night before the Malaria Forum, when she went to bed feeling unprepared. This morning, as she sat onstage and scrutinized the audience of renowned doctors and health experts, she says, “I was telling myself, ‘I know that person … I know his work … I know her work.'” She was giving herself a pep talk. “I told myself, ‘But I do know enough.'” She completed her goal for the day: calling for the eradication of one of the worst diseases the world has ever known. Tomorrow, another goal. Maybe it will be even bigger.

This article was originally published in the January 21, 2008 issue of Fortune.

Confessions of a CEO (Fortune, 2007)

by
Peter Elkind

@FortuneMagazine

March 14, 2016, 11:09 AM EDT

On a spring morning in 1998, Dominic Orr woke up as he did every day, in the dark. While his children slept, he showered, checked his phone and e-mail messages, and drove from his Saratoga, Calif., home to a breakfast meeting nearby. When he emerged an hour or so later, he stopped cold. In the early-morning light, he saw his dark-green Infiniti J30 covered with deep dents. The taillights were smashed, and the body was riddled with chips and scratches. Orr could hardly believe his eyes. When had this happened? Who could possibly have done it? His stress level was already higher than it had ever been. As the CEO of Alteon WebSystems, a Silicon Valley data-networking company that was poised to go public, he spent months on the road meeting with business partners and wooing clients. The few hours he had at home were spent answering e-mails, phoning potential hires, or reviewing marketing plans. Eighteen- and 20-hour days had often been the norm when he worked at Hewlett-Packard hpe , but now his responsibilities were far greater. He couldn’t afford to screw anything up.

His home life had become equally stressful; lately the only thing his family did together was argue. The night before, Orr had made a rare appearance for family dinner but was irritated to find his 15-year-old son, Alvin, chatting on the phone, no doubt racking up another $200 long-distance bill. Orr shouted at his son for keeping him, his wife, Teresa, and their 11-year-old daughter, Adria, waiting to eat, and threatened to take away Alvin’s computer.

Now, standing in front of his wrecked car, on the phone with Teresa, it dawned on him that the damage hadn’t occurred while he was at breakfast, it had happened the night before, and he had been so wrapped up in work that he simply hadn’t noticed till the sun came out. Later that day Alvin confessed to having attacked the car in a fit of rage. “I tried to destroy something that mattered to him,” Alvin recalled recently.

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For two decades talk in the American workplace has centered on “balance.” Institutes and think tanks study it. Forward-thinking bosses are supposed to encourage it. Policies like telecommuting and flextime and sabbaticals are designed to foster it. Even so, “the fact of the matter is that in today’s job market there are only two tracks—the fast track and the slow track,” says Robert Reich, former Labor Secretary and the author of a new book called Super-capitalism. “The only track that leads to better jobs is the fast track. That means working all hours, it means giving up time with family, it means very large sacrifices.” Orr made those sacrifices willingly. But climbing the corporate ladder hadn’t just stretched his time, it had changed his temperament. He prided himself on being “ruthlessly aggressive” at work. How could he come home and just turn that off? Now, he realized, the grotesque result of those choices was parked in front of him.

Several months after his son’s outburst, Orr found himself in a therapist’s office in Menlo Park, Calif. There was no doubt in Orr’s mind that his obsession with his job had alienated him from his family. “I was astounded to find out how he felt,” Orr would later say, describing his relationship with Alvin. “I discovered I had no relationship with my son.” And he was starting to realize that his lack of a personal life made him an unappealing boss—and, to his dismay, perhaps a poor leader. Then the therapist, John Cayton, asked him a simple question: “What is your goal?” There were a million possible answers: Get his son back. Cope with the stress of working constantly. Feel less regret. Be a better executive. In an unexpected moment of clarity, Orr blurted out, “I want to die a complete man.”

He didn’t exactly know what that meant at the time. But in that moment Orr opened the door to a nine-year struggle during which his marriage would end, he would take a company public and then sell it, plunge into depression, drop out of the workforce, and take another company public, all while searching for a way to be a good boss and a good person.

Nine years after that counseling session Orr, 56, arranged to meet me, saying he wanted to talk about his “journey.” I had heard of him—I knew he was the CEO of a publicly held wireless-equipment company called Aruba Networks—but we had never spoken. “I’ve repeated patterns in my life,” he said cryptically as we settled into a small conference room for the first in a series of long conversations. He stopped, then looked up. “Let me tell you my story.”

If there was one quality Dominic Orr always possessed in abundance, it was endurance. Selina Lo, who worked with Orr at HP and Alteon, says she used to marvel at his ability to work straight through international flights; he would turn to his expense reports if he ran out of other projects in midair. (A fellow passenger who was trying to sleep once scolded Orr for his intensity in shuffling receipts.) While running Alteon, he regularly would get off planes on a Saturday or Sunday and drive straight to the office for meetings.

Some executives might have considered the birth of a child a reason to slow down, but not Orr: The day after second child Adria was born in Hong Kong, Orr, then an executive at HP, was on a plane back to California to meet with the CEO. (“Adria’s mom still talk[s] bitterly about it,” he recalls in an e-mail.) The following year, Orr traveled to a sales conference the day after his mother’s death, holding up her funeral for three days.

It sounds extreme, but in many ways Orr was repeating the patterns of his own father. Raised on the island of Macau, Orr, who has four older sisters and one younger brother, rarely saw his father. His family was prominent and wealthy: Orr’s great-grandfather owned gambling houses, the relatively modest precursors to the mega-casinos that now blanket Macau. Orr’s father had a number of business interests, including an antique shop, an import-export business, and a film-financing operation. He spent most of his time in Hong Kong, where the film and import-export businesses were based. When he would return to Macau—roughly once a month, for a weekend—the household would buzz as maids cleaned and cooks prepared extra food. Orr thought it all perfectly normal. “I didn’t see anything wrong with getting married, having kids, and focusing on my career,” he says. “That’s the value system I grew up with.”

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Years later Orr’s father was diagnosed with cancer. The family’s income stream dried up as the businesses were downsized, and Orr’s parents and younger brother decamped to an apartment in Hong Kong, where the older man could get medical treatment. The family’s change of fortune stuck with Orr. “I guess I always, subconsciously and consciously, wanted to recreate the environment I grew up in,” he says.

In 1969, at age 18, Orr left for the U.S. to pursue a degree in physics from the City College of New York. He soon started corresponding with Teresa Wong, the 18-year-old sister of an acquaintance. “When he started writing me, I thought, ‘What is this boy trying to do?’ remembers Teresa. “My sister told me to write back, as a chance to practice my English.” The missives evolved into a long-distance courtship, and the two married ten years after Orr wrote his first letter. He completed a Ph.D. in neurobiology at Caltech, and Alvin was born three years later in Pasadena.

Teresa, now a full-time philanthropist, says she only fully realized the extent of Orr’s obsessive tendencies once they were married. “I was puzzled by Dom’s behavior,” she says during a telephone call from Beijing. “He could be so charming and affectionate, but he also had an explosive temper.”

Orr took a job in marketing at HP and soon became a rising star in the organization, winning promotions that required the family to move first to Hong Kong, then 2 1/2 years later to Singapore. Even while based abroad, Orr traveled for work constantly. Lo, then working at HP, says that after he transferred to Asia, she would see him in the halls of the California offices every three weeks or so. “It was like he never left.”

The long absences, however, were taking a toll on the Orr family. When Adria was 2 years old, Teresa says, she forgot what her father looked like. And the emotional separation between Orr and his family soon turned into a physical one. In 1991, Orr got a promotion to work with HP in Japan, and rather than move to yet another foreign city, Teresa decided to take the children back to California the following year.

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The Tokyo assignment was a tough one. Orr had to downsize HP’s Asian workforce through retirements and reassignments. Employees lost face with their families, and Orr says the wife of one displaced worker called him, begging him to rehire her spouse. For the first time in his skyrocketing career, Orr, who always thought of himself as a compassionate manager, began to wonder whether being a business success was compatible with being a good human being. “What right do I have” to mess with people’s lives? he asked his boss and mentor, Wim Roelandts, now CEO of chipmaker Xilinx. Roelandts lectured him about the greater good. “Look at the jobs you’re saving,” Roelandts, told him.

Orr hated the experience and longed to work for a company that was growing, not shrinking. In 1994 he accepted a job as vice president of product management with Synoptics, a midsized maker of data-networking equipment. He informed his family he’d be rejoining them in California via a one-page fax, a puzzle he’d made up that yielded the answer: “It is Synoptics.”

By 1996, two years into his tenure at Synoptics (which had merged with Wellfleet Communications and changed its name to Bay Networks), Orr was offered the CEO job at Alteon. Here was a chance to build a company and shape its culture from the ground up. Despite his hard-driving ways, Orr had no trouble assembling a team to jump to Alteon. “It is like a drug,” says Lo of working for Orr. She was trying to take a sabbatical when he lured her aboard. “He gives you all the support you need, but he stretches you beyond what you thought you were capable of.” Shirish Sathaye, Alteon’s head of engineering, remembers asking Orr to help him with recruitment. “If someone turned me down, I would tell him, ‘I understand, I just want you to meet with my CEO.’ He never failed to win someone over.”

The one place Orr didn’t seem capable of winning someone over was at home. By 1998 he and Alvin were fighting about grades, school, phone bills, and just about everything else. Adria says she hid out in her room a lot. Orr and Teresa battled too, about Orr’s long hours and lack of relationship with his children. Teresa says she also learned that Orr was in love with someone else—Orr acknowledges that but won’t elaborate.

Then came that night in 1998 when Alvin reached his breaking point. He was on the phone with a girl he’d met online. Orr had bought him the technology to make Internet calls on his computer, but Alvin had never installed the gear. Their argument escalated when Alvin refused to join the family for dinner; it turned out he and the girl were calling it quits. Later that night Alvin took a fireplace poker to his dad’s car. When the handle broke off, he picked up his skateboard, striking it, wheels down, into each panel of the car. “I was going for maximum cost of repair by damaging separate parts of the car,” he says.

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A few months later, Teresa moved out of the house. She also made a heartbreaking decision: She knew that if she took the kids—which she desperately wanted to do—they would grow up without a father. The only way to ensure that they saw their dad, she decided, was for the two children to stay with him in the house. So Teresa installed herself in a townhouse nearby and every day would come back to the house in the afternoon to see her kids and prepare meals before heading back to her flat in the evenings. “I cried driving home every night,” she remembers. The couple divorced in March 1999.

Meanwhile, the principal of Alvin’s school suggested that the father and son get professional help, and referred them to John Cayton, a counselor with the Mental Research Institute of Palo Alto, a family-therapy clinic that does a brisk business in absentee-parent cases. Orr, who says he had always considered therapy a “sissy thing,” found himself reluctantly meeting regularly with Alvin and Cayton, a psychotherapist. Cayton thinks he eventually won Orr over by speaking his language, suggesting, for example, that instead of acting like Alvin’s manager, Orr might try being his consultant. (Translation: Bossing Alvin around wouldn’t help; helping him reframe problems and find creative solutions might.)

Cayton helped Alvin, in turn, deal with his anger, and over a period of months the father and son were able to start having civil, if strained, conversations. Orr says he was so impressed that he decided to work with Cayton one-on-one in an effort to restore some balance to his life.

It was an extremely difficult time to embark on such a quest. Orr was hoping to take Alteon public; employees were working like crazy to develop and market products, and Orr had never been under more pressure. He had tried to foster a positive, creative vibe at Alteon and had adopted the phrase “brutal intellectual honesty” as a rallying cry for the corporate culture. (He borrowed the phrase from Tench Coxe, a venture investor in Alteon.) Orr says he had hoped people would be brutally honest with themselves: He didn’t want people championing their own inferior ideas, for example. Unfortunately, far too many people at the company were being brutal to others. Orr once delivered an expletive-filled speech to a group of employees, not even realizing he was using coarse language until marketing executive David Callisch brought it to his attention. It occurred to Orr that if Cayton could temper personal interactions, perhaps the therapist could help him improve the culture at Alteon.

So in the winter of 1999, Orr invited Cayton to the office. “He introduced me as his spiritual coach, and I just wanted to crawl under the table,” sighs Cayton, who goes by the nickname Karuna—a Buddhist term meaning “compassion.” Recalls Lo: “I really did not trust having a shrink in the company.” Cayton’s approach—he has lived in Nepal and melds Eastern and Western schools of thought—also rubbed her the wrong way. “I felt this guy had no professional business background—he went to Tibet and was a semi-monk or something.”

Cayton wasn’t able to change the Alteon culture—Orr says the executives were too accustomed to the fast-paced style of a startup. And Alteon was about to undergo a much more dramatic change: In 2000, Canadian telecom giant Nortel Networks bought the company for nearly $8 billion.

It should have been Orr’s crowning achievement as a CEO. Instead, he was savaged. Investors railed against him for selling cheap. He got a barrage of angry e-mails from employees and stockholders. Callisch, the marketing executive, remembers tucking into a bowl of ice cream and watching David Letterman on TV when the phone rang: Orr was on the line, apologizing profusely for not getting a better price for Alteon. “He was on the verge of tears—he was that distraught,” recalls Callisch. (In retrospect, Orr got a very good price for Alteon shareholders. Had he held out, the subsequent telecom collapse surely would have knocked billions off the company’s valuation.) It only got worse. Nortel required Orr to stay as a senior executive just as the tech bubble was deflating. Orr once again found himself downsizing. “I was in a crisis,” he remembers. “I wasn’t sleeping or eating. It was like my father died—it was that level of depression.” Once again he was questioning whether he could be both a good executive and a good person. Orr’s crisis proved to be another turning point. “Part of the problem with working with executives is that when they are at the peak of their success, they are too high to focus on real change,” says Cayton, who now has his own practice specializing in executive coaching. “Change usually doesn’t happen until they’re in a conflicted, difficult state of mind.”

In his conversations with Cayton in the summer of 2001, Orr happened upon the term hikari—Japanese for “light.” The word resonated on a deep level. Light is what had been missing from his life—and the word conveyed the urgency of Orr’s mission. He began to think of hikari as “speed to enlightenment.” But could he achieve hikari and thrive in the corporate world? “I made the resolution I would never work again if I could not find the answer to be yes,” he says. On Oct. 31, 2001, he left Nortel and devoted himself almost full-time to finding hikari.

Orr now had time on his hands, and so did Alvin. A smart young man but a lackluster student, Alvin started taking classes at a local community college while still in high school and opted to get a high school equivalency degree. A friend of Orr’s suggested he try to motivate Alvin with a long trip, and in early 2002 the two set off for Tokyo to study Japanese. They’d go to class, do homework, gossip about their classmates, and shop for their apartment. “It was definitely one of the happiest and most memorable times of my life,” Orr says. The getaway proved to be good for Alvin too. Teresa remembers visiting her son in Japan and seeing a changed young man, one who kept his room tidy and studied diligently. “I saw the boy I wanted to bring up,” she says.

When Orr got back from Japan, he found himself resisting offers to return to work. (His Alteon stock was worth hundreds of millions when the company was sold, and he didn’t need the money.) Particularly persistent was a startup called Aruba Networks, founded and funded by a few of his Alteon pals. Orr agreed to invest in the company and to serve as an advisor. But he declined to run the business. Hikari beckoned. He set about reconnecting with Adria. Throughout her middle-school years, he’d never seen her run track. Now she was in high school at a boarding school in Pebble Beach, Calif., a two-hour drive away, and suddenly he started showing up to watch her run. He learned to cook so that he could share meals with his kids and, in an attempt to develop a hobby, started doing his own landscaping. By the end of 2002, he finally felt ready to go back to work. He, Adria, and Alvin seemed to be getting along well. At age 52, “I was too young not to participate in business again,” he said. Vivace Networks, a company in which he’d invested his own money—and his siblings’—was struggling and in need of an interim CEO. Feeling guilty about putting family funds into the company, he agreed to step in. He also figured it was time to test his newfound sense of balance in the real world.

Instead of being Orr’s triumphant return, the experience was a personal disaster. Orr says the other financiers thought he was going to fix all the company’s problems. In a January 2003 e-mail to the Aruba founders (who were still trying to woo him), he described his state of mind: “Even though I felt we had made great progress on the business side at Vivace, I declared to my counsellor [sic] that I had failed—I had put in 14-hour days, I felt that I was losing my calm; I started to ignore/delay my personal responsibilities.” He helped the founders sell Vivace to another telecom-equipment maker in 2003, but he knew he wasn’t ready to take on another CEO job. Not yet.

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Orr retreated again, building a new house—he took pains to use the same floor plan as the family’s original home so as not to upset Adria—and participating in a philanthropy workshop sponsored by the Hewlett Foundation. For Orr, who had never been particularly civic-minded, the experience was formative. Until then he’d thought of “dying a complete man” only in terms of his own life. Now he realized there was another component. In March 2005, just a month after moving into his remodeled home, Orr went to West Africa and began working with Inveneo, a group that helps provide Internet connections in remote and poor areas.

Early last year, Aruba Networks came calling again. The company was getting ready for its IPO, and the board wanted a CEO with a track record taking companies public. One name kept coming up: Dominic Orr. It had been three years since the Vivace debacle, and Orr thought he might be ready. A talk with Adria, by then a freshman at Brown, helped convince him he was. “If it is what you love, then you should go back,” Adria recalls telling him. “You’re good at it, and you have changed.”

“I’d like to hijack the meeting to address some competitive issues,” Orr says. He is literally sitting on the edge of his seat in a conference room at Aruba’s Sunnyvale, Calif., headquarters. He may have mellowed, but he’s no pushover. Aruba, which sells wireless networking gear to corporations, competes with the likes of Cisco and Motorola in a brutally competitive field. (A sign on his office wall reads THE WEAK ARE KILLED, THE WOUNDED ARE EATEN.)

Yet there are visible signs he’s trying to temper the culture of “brutal honesty.” Early on, he brought in a consultant—not a spiritual coach—to help shape Aruba’s corporate culture through training and workshops. During the monthly management meeting I observed in July, the discussion was interrupted by a mariachi band, part of a monthly program to celebrate employees’ birthdays. Though it felt a bit like a scene out of The Office, it’s part of Orr’s bid to create a fun workplace. “Where’s the margarita machine?” one worker asks.

“I think he is free to be a good CEO without feeling a sense of desperation around the challenge,” says Geoffrey Moore, the Silicon Valley-based consultant and author. Moore has known Orr for more than a dozen years and considers him a top-tier leader. “Before, his identity was so deeply at stake. Now it is like, ‘I know how to do this.'” For Orr, the balancing act doesn’t necessarily mean working fewer hours (he typically gets about four hours of sleep a night), but working different hours. “If he’s in Boston for business, he’ll drive down to Providence to take Adria for dinner,” says Aaron Bean, Aruba’s head of human resources, who also worked for Orr at Alteon. “The old Dom would have immediately hopped on an airplane to Chicago for a sales call.”

Melding compassion and capitalism has been difficult as well. “This is definitely a work in progress,” he writes in an e-mail. Orr tries to heed the advice of Xilinx’s Roelandts, who reminded him that tough decisions benefit the overall enterprise. Cayton coaches him that “harsh actions do not equate to being wrong, and soft actions do not equate to being right.” Day to day, Orr simply tries to be an empathetic leader, taking workers’ and peers’ feelings into consideration before he acts. Still, his family’s feelings are now paramount. “I have been increasingly taking Alvin and Adria’s opinions … in my decisions on matters big or small,” he says. Dominic and Teresa speak periodically, mostly about the kids and their charity work. And Dominic’s relationship with Alvin is getting better—slowly.

One of my last meetings with Orr is over dinner at a Singaporean restaurant in the Bay Area. Cayton is there, and so is Alvin, now 25. We’ve been discussing the family dynamic circa 1992, and Orr is talking about all the transcontinental moves. He begins, “When we moved back to Palo Alto …” Alvin interrupts: “First of all, we didn’t move from Singapore to Palo Alto. Mom and I moved. You moved from Singapore to Japan.” Orr stares at his plate and nods. “That’s right,” he says quietly. Alvin turns to me and continues, “I understand why he loved work. It’s where he found his escape. But then he shouldn’t have gotten married and had kids.” A look of pain crosses Orr’s normally placid face.

But then, just as suddenly, there are moments that remind Orr why he did. Leaving the restaurant, Alvin casually slings his arm around his dad’s shoulder. Alvin plans to head out for a drink later that night with Callisch, now a marketing executive at Ruckus Wireless and Alvin’s current boss. He wants his dad to join them. “You should come,” Alvin says, with genuine feeling. Orr smiles and says he’ll think about it. In that moment of closeness with his son, he sees a glimmer of light.

This article was originally published in the November 12, 2007 issue of Fortune.

The Larger-Than-Life Life of Robert Rubin

by
Peter Elkind

@FortuneMagazine

March 13, 2016, 12:01 AM EDT

Editor’s Note: This story is originally from December 8, 2003.

Throughout his remarkable business and government career, Robert Rubin, now 65, has both worked exhaustively at reaching well-founded conclusions and rejected the idea that anything–and he means anything–can be a “provable certainty.” Federal Reserve chairman Alan Greenspan once joshed Rubin about that proposition, telling him that “all is uncertain” is inherently contradictory because it asserts that uncertainty itself is uncertain.

The joshing didn’t move the needle on Rubin’s opinion one iota, as proved by an exchange that took place in early November between him and Fortune. Being interviewed in his large Citigroup office, sitting in a red-leather chair in his usual somber suit, white shirt, and dark tie, Rubin grew momentarily confused as to what day of the week it was. This writer supplied an assist: “It’s Wednesday, and that’s a provable certainty.”

Rubin at first didn’t argue: “Even in an uncertain world, I’m prepared to stipulate that it’s Wednesday.” But then, retreating, he said he would so stipulate “except for the cognitive issues of whether anybody knows anything–except for that caveat.”

FORTUNE (a little slow on the uptake): So there actually is a provable certainty?

RUBIN (patiently): No, because then you get to the cognitive issue point, which is that in some sense you can’t be sure of any reality.

FORTUNE: Can’t be sure it’s Wednesday?

RUBIN: Not unless you stipulate as an assumption your own cognitive capabilities. When all is said and done, you cannot prove reality. You can say what you see, but you cannot prove your cognitive capabilities. You can only assume them, and therefore everything is ultimately based on assumption. But I’m still prepared to say this is Wednesday, just for the sake of this discussion.

FORTUNE: Okay, we will stipulate that.

RUBIN (this is a man who does not let go!): Yes, as long as you are willing to agree that it’s not inconsistent with my notion, which is that there’s no proof that it is.

Assuming that I was really interviewing Bob Rubin and that he really has had the career I was brash enough to mention at the beginning, here is the rest of the story. Look back at a particular four words of Rubin’s–“in an uncertain world”–and understand that they didn’t get there by accident. That is the name of the book that he and a co-author, Slate editor Jacob Weisberg, have just brought out. Rubin, who despite his obvious taste for verbal sparring is self-effacing to an extreme, once said he would never write a book. Later, having changed his mind, he said he didn’t want to write something as egocentric as a memoir. He wanted a “policy book” instead. What has finally emerged, says Weisberg, is a “policy book disguised as a memoir.” The book salaams quickly to Rubin’s boyhood and education and then gets to the grand chapters of his life: his work at Goldman Sachs, where he rose to be co-chairman; his years in the Clinton administration, first as head of the brand-new National Economic Council and then as Secretary of the Treasury; his return to private life and a move into Citi’s office of the chairman.

His history shows that he developed those unbudgable views about “certainties” early. Steven Umin, a classmate of Rubin’s at Yale Law School and now a partner at law firm Williams & Connolly, remembers the young Bob Rubin as being extremely “laid back,” uninterested in finance, and so unaggressive that the mere thought he might end up at hard-charging Goldman Sachs, much less become head of it, would have seemed demented. On the other hand, says Umin, Rubin was “very intellectual” and “very much the philosophical skeptic,” in the sense that he regarded everything, including opinions he might have just formed, as open to analysis. With Rubin, says Umin, there were no givens, “not even what you thought was given.” (Hello, Wednesday.)

A second pillar of Rubin’s life has been “probabilistic thinking,” a form of decision-making based on a disciplined weighing of odds and tradeoffs. Rubin played poker in high school–“I was reasonably good,” he told Fortune, in about as close as he gets to a boast–and then in 1966 he was hired by Goldman Sachs to do the hard-wired, Wall Street poker called arbitrage. The job, done expertly, requires the assembling of every available fact about proposed mergers, a cold-eyed assessment of risk, and an ultimate willingness to bet on the outcome with crates of money. Rubin, invincibly calm under pressure and a user of both real and mental yellow pads to size up chances, was an ace at the work. A 1977 Fortune article placed him among Wall Street’s “Four Horsemen” of arbitrage. (One of the other riders, as it happens, was Ivan Boesky, who in 1988 went to jail for filing false documents with the government, in a matter related to insider trading.)

Much later, as Secretary of the Treasury beginning in 1995, Rubin needed similarly to collect every salient fact about the financial disasters called Mexico and Asia and Russia, to assess which of various ameliorations might work, and then to lay U.S. dollars and the administration’s credibility on the table. Overall, he succeeded so well that Clinton counselor David Gergen voted him “the administration’s MVP.” Clinton himself, calling at the 11th hour of this story, told Fortune that Rubin’s Treasury performance was “matchless.” Rubin in fact emerged from Washington in 1999 with his reputation not only intact but also enhanced–and how extraordinarily rare is that?

After that, his mental yellow pad could have told him he neither needed more celebrity nor more money nor a job that could in any way diminish his reputation. Figuratively and literally, he could have gone fishing, which he loves to do. Heading there would have also distanced him from the metastasizing financial crises that at Treasury he came to believe were periodically inevitable, particularly given the unchecked growth of derivatives. One friend remembers, in fact, that the post-Washington, temporarily unemployed Rubin thought the odds so plainly tilted toward trouble that he vowed he wouldn’t dream of becoming a financial company CEO.

But he didn’t care to entirely opt out of executive life either–he wanted to stay “current,” he says–and in the end he carved out a sunny half-and-half deal at Citi. He accepted the risk of joining co-chairmen Sandy Weill and John Reed (the latter now gone, of course) at the top of a company almost certain to have its octopus arms in every crisis. Citi’s reach, in fact, got Rubin himself awkwardly entangled with Enron. But his contract, though splendidly lucrative, largely insulates him from executive peril by specifically sparing him line responsibilities. Instead, his beat is “strategic managerial and operational matters.” The risk assessment on all that: If the world blows up, and tries to take Citi with it, fixing the mess won’t be Rubin’s job.

If you want to know how Rubin got to be the introspective character he is, you might start with his rabbi. The man’s name was Leon Kronish, and he got to know Rubin as a boy, after young Bob’s father, a lawyer, had moved his family from New York City to Miami Beach. Kronish saw in Rubin an intellectual and questioning nature and encouraged it. Later, when Rubin was at Harvard, his mentor was philosophy professor Raphael Demos, from whom Rubin as a sophomore took a course that extolled the rigorous thinking of such icons as Plato and Aristotle and burned into Rubin the necessity of challenging assumptions and beliefs. Out of that laboratory came Rubin’s conviction that there are no provable absolutes.

In the meantime, as a kid in Miami Beach, Rubin had led a normal life, unless you maybe count his first day in a Florida school. That morning his fourth-grade teacher introduced him to the class: “Robbie Rubin has gone to private school in New York and has never learned script. So be nice to him.” On that very same day, when they probably wouldn’t even have recognized him in the hall, his new classmates elected him class president. He held class officerships off and on after that, and as a high school senior was again class president, a fact that helped him get into Harvard. On his less regal days, he fished in the Florida Keys with a pal, collected lead soldiers, delivered newspapers, and was a long-distance expert on the Brooklyn Dodgers.

Entering Harvard, Rubin initially agonized because he knew he was scholastically behind most of the other freshmen. But he eventually graduated summa cum laude and Phi Beta Kappa, with a degree in economics. Soon after came Yale Law. There, classmate Umin helpfully lent his car to his friend one day in 1963 so that Rubin and the former Judith Oxenberg, a French and music student at Yale, could go on a one-day honeymoon. They have two sons, James and Philip, both in their 30s. Judy Rubin once worked as commissioner of protocol for New York City Mayor David Dinkins and is today active in New York theater affairs. But by determined choice the Rubins lead a very private life, avoiding the social whirl and choosing instead to stay home in either their Park Avenue co-op or a summer house in suburban Westchester County.

After Yale, Rubin tried the law, spending two years at the New York City firm Cleary Gottlieb Steen & Hamilton. But a Wall Street case he worked on, and a growing interest in making money, primed him to seize the unexpected chance that came along in 1966 to join Goldman Sachs as an arbitrageur. The firm’s senior partner then was the fabled Sidney Weinberg, and his successor was the almost equally fabled Gus Levy, whose managerial style was yelling. Rubin got his share of abuse. Nonetheless, Larry Tisch, a friend of Levy’s, later told Rubin that the boss had early on spotted this young, levelheaded arbitrageur as someone who might eventually run the firm.

That’s not to say that Rubin’s early reputation at the firm was pristine. Goldman has always placed a high value on teamwork, and the young Rubin had a trader’s fault: a tendency to be brusque and short with other people. Ultimately an older partner–an ancestor of today’s executive coaches, no doubt–told Rubin that if he wanted to move ahead in the firm, he might want to soften his style and start thinking about the opinions and views of colleagues. This deficiency notice surprised Rubin, who hadn’t realized he needed it. But he promptly changed, as if remaking himself was the easiest thing in the world, and became very attuned to working with others. That still left him a long way from touchy-feely. Years later a Treasury staff member, Michael Froman (who is now at Citi, having been brought in by Rubin), teasingly captured the boss’s character by dismissing the very idea of what some viewed as a presidential dream ticket, Gore and Rubin. Scoffed Froman: “They’d be fighting over who had to kiss the babies.”

After Gus Levy died in 1976, the Goldman pair known as the “two Johns”–Weinberg and Whitehead–took over management of the firm. Then, in 1990, Rubin and Stephen Friedman rose to co-chairmen, assuming the reins of a firm that had burgeoned in size and geographical reach and would continue to do so.

Brainpower surely drove Rubin’s ascent. But there is a line in his book that is also revealing, in which Rubin describes himself as “not manifestly aggressive.” Quizzed about that stuck-in modifier, “manifestly,” Rubin laughs and concedes euphemistically that he is “proactive” when something needs to get done.

Two points about Rubin’s 26 years at Goldman stand out for how they relate to his later years at Citi. The first is that Rubin and Steve Friedman worked beautifully together as Goldman’s co–chief executives, managing to iron out their rare disagreements amiably. The experience, no doubt helped by Rubin’s great willingness to listen and entertain views contrary to his own, convinced Rubin that co-CEOs were a perfectly sound arrangement, and years later he joined Citi believing that.

But then things ruptured between Sandy Weill and John Reed. In a tense, fractious Sunday meeting of Citi’s board in February 2000, director Rubin was at one point asked whether he’d consider taking the CEO’s job himself–he said no, adamantly–and then was asked whom he would support as a single CEO, Weill or Reed. On the grounds that the company’s management was by that time almost entirely made up of executives whom Weill had brought with him from Travelers, and that the management team was very good, Rubin picked Weill–in effect, throwing him the victory. The total experience, says Rubin understatedly, “left me with the feeling that the odds of co-CEOs working together effectively in a corporate setting are actually very low.”

The second point is that in 1987, Goldman suffered a scandal in which one of its partners, arbitrageur Robert Freeman, was jailed for four months for insider trading. Subsequently Goldman’s management–very much including Rubin, who was then a co–chief operating officer–put in a “zero defects” policy aimed at ridding the firm of all possible sins. The policy obviously didn’t have permanent effects: A former Goldman economist recently pleaded guilty to insider trading, and the firm itself also is scheduled to pay fines in the “global settlement” concerning stock research and IPO allocations. As a slight mitigation, though, Goldman’s involvement in the big corporate blowups–Enron and the like–has been less than notorious.

But Citi, of course, has been mired in trouble, and Rubin himself has not entirely escaped. His problem was a call about Enron he made in November 2001 to undersecretary of the Treasury Peter Fisher. In the call Rubin asked whether Fisher might not want to ask the credit-rating agencies to hold off on any downgrading of Enron’s debt–Rubin’s point being that delay might allow the company’s bank creditors to scramble a rescue.

Rubin, who was phoning at the instigation of Citi’s banking head, later told a bipartisan congressional staff investigatory team that he prefaced his conversation with Fisher with a qualifier about this being “probably a bad idea.” He’d chosen to put it forth nonetheless, and he wasn’t just any caller; he was the former Secretary of the Treasury, weighing in from a company that had huge exposures to Enron. Even so, Fisher thought Rubin’s idea was bad, and the matter ended. Later the staff investigation concluded that nothing illegal had happened, leaving the question of impropriety hanging in the air. Rubin says today he can see why the call might be questioned, but that given the circumstances of the time and what he knew, he would make the call again. You have to wonder, though, whether he really would.

In another strike against him, Rubin did not urge Citi to put in something like a “zero defects” program when he arrived there in 1999. In fact, Rubin himself asks today the very large question of why he–along with many others, including the media–did not recognize earlier the investment-banking and research conflicts that have led to so many scandals. His answer, not too satisfying, is that perhaps the great bull market masked many sins or created “powerful incentives” not to dwell on problems when all seemed to be going so well. He calls that a “natural human inclination.”

As for Rubin, many of his human inclinations stem from his 26 years at Goldman, which he refers to as “the base for everything.” Indeed, many years later, when he was trying, post-Washington, to pick from a fistful of offers to join corporate boards, his single choice was Goldman’s longtime client Ford Motor. Today Ford’s chairman, William Ford Jr., has a strong sense of how lucky he was to get Rubin as a director and counselor–and indeed a mover of men, since Rubin was highly influential in 2001 when the Ford board ousted Jacques Nasser as CEO and installed Bill Ford in his place. Bill’s reading on Bob’s board style: “He’s amazingly humble, but he always nails the heart of a situation.” When Rubin winds up to talk, says Ford, “I go into red alert immediately.”

While he was climbing up Goldman Sachs, Rubin was also following the example of his maternal grandfather and involving himself in Democratic politics. Rubin considers himself a “centrist,” but the name fits only if you average out the polar opposites in his thinking: He is passionate about fiscal discipline, but he is also a social liberal in his beliefs that government should help the underadvantaged–the middle class and particularly the poor–whom the free markets that he admires do not, by his thinking, serve well. Out of those dissonant views, Rubin found his grandfather’s party a zone of comfort, and he began fundraising for the Democrats way back in 1972.

That led to lightning when he met Bill Clinton in 1991 and saw in him a deep grasp of issues, intellectual curiosity, and an ability to listen, all qualities that play back what Rubin is like himself. It was a short leap from there to Rubin’s accepting Clinton’s invitation to become head of the new National Economic Council and another short leap, upon Lloyd Bentsen’s leaving the job in early 1995, to Treasury head.

From the start, Rubin was intent on persuading Clinton to forgo some of the campaign promises he’d made about lowering taxes and to focus instead on reducing the huge budget deficits of the early 1990s. Politically difficult as it was to do so, Clinton accepted Rubin’s arguments, and during his administration the budget moved from deficit to the surplus that was handed over to George W. Bush. Waging the deficit battle, Rubin often encountered stiff opposition from tax-cutting proponents in Congress and spending enthusiasts in his own administration, among them Secretary of Labor Robert Reich. At one tense moment in 1995, Rubin appears to have done a little probabilistic thinking, found the odds not great for his side, and concluded he should be proactive. Making an SOS call to New York businessman and former cabinet officer Peter “Pete” Peterson, Rubin asked Peterson to help arrange a bipartisan display of support for fiscal discipline. Peterson engineered a double-truck newspaper ad that pleaded for balanced budgets and that was signed by 96 high-level businessmen (yes, they were all men). One of the six lead signers, along with Peterson, was CSX chairman John Snow, now Secretary of the Treasury and custodian of a 2004 budget deficit forecast to be $480 billion.

Working with Rubin in all his economic battles, including those that focused on the financial morasses of Mexico and Asia, was a team of people he drew deeply into his decision-making process and who came to be highly respected. Mark Malloch Brown, who worked with Treasury when he was at the World Bank in the 1990s and is now at the United Nations, calls this team “probably the most formidably excellent since Alexander Hamilton’s.” The names of Hamilton’s folk may not pop readily to all minds, but Rubin’s included Lawrence Summers, Rubin’s successor as Secretary of the Treasury and now president of Harvard, and Timothy Geithner, an undersecretary to Rubin who was just named to head the New York Fed. Both admire Rubin greatly, and that is probably not just because he helped each get his job. Summers, now 49, elegantly focuses on Rubin’s decision-making powers: “For some people, the defining act is a speech, for some an argument, for some an essay. For Bob, the balanced and nuanced decision is the defining act.” Geithner, who is 42, says that “while Rubin enjoys an amazing amount of public respect and credibility, people who have worked with him know that he’s substantially better than even that exalted perception.”

Part of Rubin’s approach to decisions at the Treasury was to put them off as long as possible. Some people might call that procrastination; Rubin called it getting that one last fact or well-judged opinion, from whoever at the table might offer it, that might make a decision the right one. Geithner says the young members of the Treasury staff would on occasion rush into Rubin’s office, imploring him for a decision about something consequential. Rubin’s first question would often be, “How much time do we have before we have to decide?” Summers tabs this Rubin’s habit of “preserving his optionality.”

He has less serious habits, of course, and the Treasury team got to know them all. Rubin quit wearing a watch about 20 years ago–he thought it made him too conscious of time–and he doesn’t carry a briefcase, instead toting what he needs in brown, expandable legal folders jammed under his arms. At the office he likes to work in stocking feet. For the 6 1/2 years he was in Washington–he tends to be very precise about that elapsed time–he lived like a bachelor at the Jefferson Hotel, flying to New York on weekends to rejoin his wife. He reads voraciously, keeping several pieces of fiction and nonfiction going at once. But he is largely oblivious to popular culture: His staff found that he hadn’t heard of Aretha Franklin or Eartha Kitt, and until corrected he thought that Jimmy Buffett was Warren’s son. He also once suggested to the board of the American Ballet Theatre, on which he sat, that it help along a cost-reduction drive by cutting 10% of the swans in Swan Lake. His advice, he says, was not well received.

When Rubin left Treasury, in 1999, he naturally did not leave his interest in politics behind. Today’s budget deficits appall him, because he is sure they will produce high interest rates and policy chaos down the road. Even so, he has up to now refrained from backing any one 2004 Democratic presidential candidate (though, interestingly, he did prep Wesley Clark for a debate). It’s a problem, he said recently, to choose among nine “squabbling” contenders–and then he promptly retracted that blunt description, no doubt thinking it less than Rubinesque. The one thing clear, he says, is that he himself will not be running.

Upon his return to New York after Treasury, Rubin had a range of job offers, including the opportunity that soon began to be relentlessly pressed on him by Sandy Weill. For Rubin, one attraction of Citi’s offer to join its office of the chairman was that it promised him–and later contractually assured him–that he could hold the post and still pursue his interest in public policy and charitable causes. He has in fact shoehorned those into his Citi life, hectic though that is. In one key post, he is chairman of Local Initiatives Support Corp. (LISC), which works with on-the-ground organizations that are sponsoring projects for the poor, such as playgrounds.

A second strong attraction of Citi clearly was money. Although Rubin’s Goldman days left him well-heeled, he remains, in his own words, a “reasonably commercial person,” and among his job requirements in 1999 was something that would be “financially rewarding.”

What he got at Citi was a rich three-year contract (since renewed twice for one year) that gives him at least $15 million a year in salary and incentive compensation; stock options; and Citi planes for his personal use. Through 2002 he actually beat the $15 million by upwards of $1 million. As for stock options, he was at that point up to a total of 4.6 million, some awarded when Citi stock was in the 30s, rather than the mid-40s of today. Rubin has never exercised any options.

There is an irony to Rubin’s pay. It is related to the fact that $14 million of his take is guaranteed incentive compensation–guaranteed, that is, unless there are, so his near-impenetrable, punctuation-challenged contract says, “extraordinary circumstances drastically negatively affecting Citigroup reported operating results.” Even in that disaster scenario, Rubin’s pay will not be taken down unless the other member of the office of the chairman–that would be Sandy Weill–has his pay docked too. So for all practical purposes, we are talking about circumstances that are just never going to occur, which means that Rubin’s incentive compensation really is guaranteed, just as we started off saying.

So what’s going on here? The plain answer is that these contract contortions are intended to let Citi get around the tax law clause called 162m, which prohibits the deduction of executive pay exceeding $1 million unless the excess is tied to performance. Citi is not alone in its acrobatics; all over America corporations are plotting to skirt 162m. But the special point here is that a National Economic Council chap named Bob Rubin helped shepherd 162m through Congress in 1993. “Life,” he agrees, not seeming wild about the whole subject, “is full of little ironies.”

Beyond that wrinkle, there is the overriding question of whether Rubin is worth his $15 million and more. That’s a matter of judgment, of course. But here’s a judgment that counts: Charles “Chuck” Prince, Citi’s new CEO, says unequivocally that Rubin has been worth “multiples” of what he gets.

One of Rubin’s jobs at Citi is occasionally to take his high-powered self on visits to customers. But the major part of his work goes on inside, in a role that sometimes gets called consigliere or minister without portfolio. Under any name, he makes himself available to Citi’s executives, CEO on down, as a sounding board, and he also attends many group meetings.

A new boy’s description of how Rubin operates is proffered by Stanley Fischer, who joined Citi in 2002 as president of Citigroup International, formerly having been at the IMF. Talking about Rubin’s “immensely influential” ways, Fischer refers to meetings held under Weill. “There was never any question at any point that Sandy was the CEO and that Sandy made the final decision. On the other hand, in every meeting Bob was listened to in a way that almost no one else would be. But because of the way he says things–‘Aw, shucks, I’m just another humble working peon around here who doesn’t know very much stuff, and you guys know more than I do, but don’t you think …’–it’s very disarming and effective. Bob did it all in a way that produced very little friction with anybody, and that’s a tough act to carry off.”

Fischer refers also to Rubin’s other role as a “trusted advisor” with whom people feel they can discuss issues–say, “Should we introduce this new product? Is there a better way to do this?” That description fit the Wednesday on which FORTUNE interviewed Rubin. He said in passing that he was lunching with Fischer “because Stan has an issue he wants to discuss.”

For both Sandy Weill and Chuck Prince, Rubin has been a true consigliere. Weill and Rubin are almost comical opposites, in that Weill is instinctive and quick in coming to decisions, even as Rubin is asking him for just a little more time–the weekend, say–to mull over a problem. But they seem to have a mutual regard. And Weill has picked up important management ideas from Rubin, including the institution of a weekly business-heads meeting that is now viewed around Citi as virtually indispensable. Or to use Rubin’s term, it has become an “organic part of the whole.” Another portion of the whole that Rubin can take credit for is Banamex, the big Mexican banking company that Citi acquired in 2001 and that today contributes significantly to Citi’s profits. Rubin got the call about that opportunity from Goldman, and then helped Weill make the deal. Weill says he doubts that Citi would have Banamex had it not been for Rubin.

Weill often drills into Rubin’s fund of knowledge personally: “I just love talking to him about the economy, interest rates, markets, countries, currencies.” He pauses, then adds “risk” and “the understanding of all those models and how much they should be relied on.” Weill could even have added the Internet to his list: After John Reed left in 2000, taking his Internet strategies and philosophies with him, Rubin stepped into the vacuum and put his weight behind the formation of a new Internet Operating Group. Rubin didn’t head the group; vice chairman Deryck Maughan did. But for Rubin it was not a casual matter. One technology expert who has left Citi remembers Rubin asking for a private tutorial: “I know absolutely nothing about technology,” Rubin said. “Take me through it, including how I turn on the computer.”

Chuck Prince has been CEO only since Oct. 1, so his requirements in that job for a consigliere have yet to fully unfold. But the value of Rubin’s wisdom had become eminently clear to him about a year earlier, when he moved from general counsel of the company to head of the scandal-torn Global Corporate & Investment Bank (GCIB). Devoid then of operating experience, Prince pulled Rubin into two months of meetings on restructuring. Prince says that Rubin’s enormous contribution was his steady insistence that the people meeting get beyond the nitty-gritty of the moment and instead be forward-looking in their thinking.

Those meetings and others have made Prince think that Rubin is a level up from the cerebral descriptions he usually draws, such as “thoughtful” and “reflective.” If you work with Rubin, says Prince, you get easily to the word “forceful.” Vice chairman Maughan ratchets the description still higher: “Behind that laconic exterior lurks a highly competitive man.”

The one-year contracts that Rubin is signing these days raise the question of whether this highly competitive, forceful, reflective, and thoughtful man is contemplating moving on from Citi. He says not. That certainly suits Prince, who says his favorite term of office for Rubin would be “forever.”

It is intriguing to consider whether there is any other career that parallels Rubin’s: business leader of note phasing to high-level and respected government official and then phasing again to business leader of note. FORTUNE asked Rubin whether he could think of others fitting this bill of particulars–and then realized this prompting would utterly fail. Answered Rubin: “One of the problems with trying to respond is that I don’t really think of myself that way.” Okay, so how does he think of himself? That’s simple: “I did what I did,” he says, “and then I went to government, and now I’ve done this.”

And that’s pretty much what you need to know about Robert Rubin, assuming there is a Robert Rubin.

Meet Mr. Gas: Aubrey McClendon (Fortune, 2008)

by
Peter Elkind

@FortuneMagazine

March 9, 2016, 9:20 AM EDT

Editor’s note: On March 2nd, natural-gas industry pioneer Aubrey McClendon, 56, was killed in a fiery, single-car crash in Oklahoma City, Okla., one day after being indicted by a federal grand jury on charges of conspiring to rig the price of oil and gas leases. McClendon rose to prominence as the outspoken cofounder and CEO of Chesapeake Energy. He was forced out of Chesapeake in 2013 and formed a new company called American Energy Partners. This 2008 profile of McClendon from Fortune‘s archives appeared just as the fracking boom was gaining momentum—along with the executive’s reputation as a provocateur.

That guy just called the governor of Connecticut a liar.

That guy at the podium. Everybody listening in the Blue Room today knows who he is—they work here, he’s the boss—but do you? He’s Aubrey McClendon. He’s worth more than $3 billion. He’s co-founder and CEO of Chesapeake Energy chk . It’s a natural-gas company, okay? Headquarters in Oklahoma City, $25 billion market cap, No. 324 on this year’s Fortune 500. Already the most active driller for gas in the U.S., by a factor of two, and soon to become the country’s biggest gas producer. Is any of this ringing a bell?

You can bet it is with Jodi Rell. Last fall the Connecticut governor sent an angry letter to the chairmen and ranking members of two congressional committees that included the phrase “unconscionable fleecing of U.S. citizens by natural-gas suppliers who ‘elect’ to reduce production in order to drive up prices paid by their captive customers.” She asked for an immediate investigation into possible price manipulation. The only company mentioned by name was Chesapeake Energy.

Turns out the governor was grandstanding. No investigation ever materialized. McClendon could have just let it drop. Probably should have. “Maybe that’s the way Exxon wants to run their business,” he says now, warming to the tale, feeding off the crowd as he relates the story in this corporate town hall meeting, “but you tell me—and when you tell me, you’re also saying to all our employees—that we did something wrong when we didn’t do anything wrong, I’m gonna come out swinging and fighting, and that’s what I did.”

McClendon fired off a five-page rebuttal, fairly dripping with sarcasm, that found its way into in-boxes all over the country. (David Crane, the outspoken CEO of NRG Energy in Princeton, N.J., remembers it well. “He doesn’t back down from a fight,” Crane says admiringly. “That went beyond anything even I would do.”) He concluded with an invitation, which read like a challenge, to Governor Rell to meet with him during his upcoming visit to “the Nutmeg State.” The governor declined. (She also declined to comment to Fortune.) “Her spokesman said they didn’t want to get into a war of words,” says McClendon, setting up his punch line. “That’s fine. I just told them I didn’t think liars ever wanted to get in a war of words.”

McClendon doesn’t seem like that guy when you get him one-on-one. At 48, he’s built like a runner, eats muesli with berries for breakfast, favors striped shirts with his blue pinstripe suits, wears his wavy hair casually long. He didn’t go to Oklahoma or Oklahoma State; he went to Duke. He studied history, not geology or business. He has a finely tuned aesthetic sense reflected in the stately red-brick Chesapeake corporate campus on the north side of Oklahoma City. (He personally oversaw the design.) A creek flows through it. “I’d rather look at flowers than red dirt,” he says.

That said, McClendon’s middle name is Kerr. He comes from a long line of Oklahoma oil and gas men, starting with his great-uncle Robert S. Kerr, who was born in a log house with no windows, made his fortune when he co-founded Kerr-McGee, and went on to serve Oklahoma as its first native-born governor and later in the Senate. Robert S. Kerr, of whom it was once said by the late House Speaker Sam Rayburn, he’s the kind of man who “would charge hell with a bucket of water and believe he could put it out.”

Now that sounds more like the guy at the podium, and not just when he’s going after Governor Rell. His flair for confrontation finds many outlets. A year ago McClendon jumped on Governor Joe Manchin of West Virginia, threatening to halt plans to build a new regional headquarters in Charleston after a county jury awarded plaintiffs $404 million in a case involving a Chesapeake subsidiary. When former Oklahoma Representative Brad Carson—a conservative Democrat, but a Democrat nonetheless—ran for the Senate in 2004, McClendon donated more than $1 million to a pair of right-wing 527s (tax-exempt, loosely regulated political groups) that spent part of the money on attack ads in Oklahoma. When McClendon discovered a pristine parcel of dunes and wetlands while jet-skiing on Lake Michigan, he snatched it away from local groups that had been trying to preserve it for decades (“completely dysfunctional” is how he dismisses those groups) and announced plans to develop it. And when he and a posse of sports-loving buddies decided it would be cool to bring the NBA to Oklahoma City, they bought the Seattle SuperSonics from Starbucks founder Howard Schultz and set about prying the team loose from the community where it’s been rooted for 41 years. Schultz is suing to stop the move, but he may be too late. On April 18 the NBA owners voted 28-2 to approve it.

Starbucks CEO Howard Schultz, left and Seattle Mayor Greg Nickels, who sold the Sonics, are suing to stop them.Photographs by AP

This is McClendon’s moment, and he’s not backing down. U.S. natural-gas prices are soaring, nearly doubling since last summer. Markets are expanding, thanks to surging economies in Asia and growing demand for relatively clean-burning gas from electricity producers at home. Evolving government policy with respect to global warming is turning the tables on his biggest competitor, coal.

Just nine years ago Chesapeake was worth all of $30 million, had $1 billion in debt, and couldn’t find a buyer at 75 cents a share. Today it’s a $50 stock—up more than 50% over the past year in a down market. And McClendon insists that its real value is closer to $100. Why? Simple. Not only does Chesapeake have 11 trillion cubic feet of proven reserves, but it’s sitting on the country’s largest stockpile of unproven reserves (100 trillion cubic feet) and the largest inventory of undrilled wells (some 35,000).

Then there’s Chesapeake’s latest find, just announced: the Haynesville Shale, a vast new play in northwestern Louisiana that all by itself could yield the company as much as 20 trillion cubic feet of natural gas. It might be one of the biggest domestic gas fields ever discovered. No wonder McClendon is buying Chesapeake stock every chance he gets. He’s invested $100 million of his own money in the past 12 months, upping his stake to 31 million shares.

Haynesville is a huge bet, for both McClendon and his company. Risky? Sure. Chesapeake just sold 20 million new shares to begin to cover the exploration expenses. And Gimme Credit high-yield analyst Carl Blake sees more heavy borrowing in Chesapeake’s future. “Unfortunately, it’s going to take a lot more capital to monetize those assets,” says Blake. If gas keeps trading above $10 per million British thermal units (BTUs) or, as many analysts expect, goes even higher, then McClendon should be covered. If not, well, we’ll see. In any case, he’s not backing off. That’s not how he got here.

“Have you ever heard of Amy Street?” McClendon wants to know. This interview began the wrong way, with McClendon asking all the questions. He knows how old I am, how many kids I have, where I went to college, what my major was. Amy Street, he says, is in Providence. It’s the inspiration for AmieStreet.com, a little company he’s backing with some of his VC money that “aspires to remake the indy music business.” (It was news to me. Then a couple of weeks later the site got a dash of unexpected publicity when the Eliot Spitzer sex scandal broke: AmieStreet.com is where escort Ashley Alexandra Dupré peddles her MP3s “What We Want” and “Move Ya Body.”)

But investments in edgy dot-coms don’t begin to explain what all McClendon does with his wealth. He owns half a vineyard in Bordeaux, a soda-pop stand and a tree farm on Route 66, stakes in ten restaurants, and 110,000 acres of ranch, timber, and farm land, which makes him one of Oklahoma’s biggest landowners. In the past few years he’s built a $3 million Olympics-worthy boathouse on the Oklahoma River, given $20 million to Duke, and contributed some $15 million to the University of Oklahoma. He gave $1 million to the Red Cross after Hurricane Katrina and handed out a fistful of $100 bills to the roughnecks he’s pictured with in the photograph that opens this story.

And it all comes from natural gas. In the beginning, back in the early 1980s, it was just McClendon and Tom Ward, a couple of self-employed land men in their early 20s (born three days apart) scouring courthouse records and real estate transactions, snapping up leaseholds wherever they could find them, sprinting to stay one step ahead of the majors. McClendon certainly had a cushion. (His wife, Katie, is a Whirlpool heiress.) But Ward says his partner always worked even harder than he did. They had a deal, sealed with a handshake (no lawyers, no paper), to cut each other in fifty-fifty on whatever either of them found. McClendon took the southern and eastern parts of the state; Ward, who came from tiny Seiling, Okla., took the western.

That arrangement lasted six happy years, until it dawned on them that they probably had enough experience by then to dig some of that good rock themselves rather than turn it all over to somebody else. They got a lawyer this time, one of McClendon’s high school buddies. Kicked in $50,000. Incorporated as Chesapeake Energy in 1989, with Aubrey as CEO, Tom as COO. (Ward left, amicably, in 2006 and is now CEO of SandRidge Energy.) The name choice was McClendon’s. He had an idea that big companies—ambitious companies—should never carry the founders’ names, the better to attract big, ambitious talents down the road. But why Chesapeake? Nice sound to it, that’s all.

MCCLENDON SCOTT — McClendon at a New Orleans Hornets game in Oklahoma City in 2005. McClendon and friends bought the Seattle Supersonics in 2006 and plan to move the team to Oklahoma.Photograph by AP

Quickly they were in over their heads. Drilling demands huge upfront investments—in land, equipment, and personnel. They went public to feed the beast. “We had to have investors,” says Ward. “We had to have capital.” If it wasn’t the worst IPO of 1993—well, that’s how they remember it. It went off at $1.33 a share and dipped below $1 (not for the last time), but then it recovered. For three tipsy years during the mid-1990s, Chesapeake was the top-performing stock in America—any sector, any exchange. McClendon says he never believed it. He felt captive to momentum investors, but what can a CEO do in a situation like that? Only one honorable choice: Don’t sell your shares to some sucker. So when some wells turned up dry in late ’96, prices plunged, and Chesapeake’s stock collapsed, McClendon and Ward went down with it. They were back where they started.

For a while it seemed that selling the company was the only way out. Chesapeake and rival Devon Energy, another Oklahoma City company, were at the top of every investment banker’s pitch list in those days. Chesapeake did get one nibble, from an Oklahoma utility looking to scoop up gas reserves on the cheap. The offer was for $2.25 a share, a 25-cent premium. Aubrey held out for $3. The offer went away. Nobody was going to save McClendon and Ward, it was becoming clear, except maybe themselves.

We come now to the money moment in the saga of Chesapeake Energy. Right around the turn of the century. Anybody who’s paying any attention to Chesapeake is saying these guys are toast. Gasprices are the pits. The stock is nearly worthless. The debt is frankly overwhelming—$1 billion. The thing about it, though, is that the notes aren’t due for seven years. So McClendon and Ward have time, and they have a plan: Natural gas is tremendously underpriced, they tell their board, and we’re going to do everything we possibly can to position ourselves for the inevitable recovery.

How do they know that? It’s 2000 now. McClendon is in San Jose visiting Calpine, one of the new breed of merchant electric-power companies to emerge from deregulation. Unlike Chesapeake, Calpine is soaring. It has big plans to build new plants. McClendon is taking it all in. “And I said, ‘Let me get it right,'” McClendon recalls. “‘If you guys build this many megawatts and your competitors build this many megawatts, and 90% of it comes from natural gas, remind me how natural-gas prices are going to stay low forever.’ And their response was, ‘They’ll stay low because they’ve always been low. And No. 2, it doesn’t matter because our plants are more efficient than our competitors’, so even as prices rise we’ll still make money.’ I went away from that meeting saying, ‘We got a chance.'”

Really all he had so far, though, was a customer. Potentially a very good customer, absolutely. Utilities are less price-sensitive than industrial consumers are, and the electricity market was growing. McClendon could see that. Not like a hockey stick. More like 2% a year, up from 1%. But it was meaningful, the steady growth driven by a timely cluster of long-term trends: The explosion of the Internet. The mad proliferation of music players and flat-screen TVs—all that stuff that gets plugged in. And the great unstoppable migration from the Northeast to the South and the Southwest, which matters because, as a rule of thumb, it takes three times as much energy to cool a room as to heat it. So now McClendon needed more reserves.

Everybody always knew there was a lot of gas locked up in shale. The question was how to get at it. McClendon and Ward’s genius—the insight that would not just rescue Chesapeake but would make them billionaires—was recognizing that higher prices would enable new technology, thereby opening up vast new plays that had been ignored. Gas at $2 per million BTUs, which is where it was eight years ago, is strictly a conventional-well proposition; nothing else makes economic sense. Gas at $6, $8, and even $10 per million BTUs, which is where Aubrey and Tom correctly saw the market moving, enables so-called horizontal drilling. You can bore two miles straight down into a bed of shale, hang a 90-degree turn, blast the rock at regular intervals with 10,000 pounds per square inch (psi) of hydraulic pressure to create fractures through which gas can flow, and still make money. “Nobody could imagine that from rock that has almost no permeability you could get gas to flow in commercial amounts,” says McClendon. “We weren’t the first to unlock those secrets, but we were among the first to recognize that if it works it changes everything.”

They bet big, “went long natural gas,” is how Ward puts it. Piled debt on debt, and okay, maybe they overspent on land. Thing is, says McClendon, there were “tens of millions of acres of opportunity that once you seized them, there wouldn’t be another opportunity.” They snapped up land in Texas, Oklahoma, West Virginia, and Louisiana. Established a huge presence around the gas-rich Barnett Shale near Fort Worth, drilling at Colonial Country Club, in the parking lot at the Texas Christian University football stadium, underneath runways and terminals at the Dallas-Fort Worth airport.

McClendon and Ward made it a pure play, kept the focus on gas. Nothing overseas. (“We don’t take foreign political risk,” says McClendon.) Nothing offshore. (“We don’t take hurricane risk.”) Everything well east of the Rocky Mountains. (“We’re not trying to pick fights with environmentalists.”) And while the big bet on rising prices drove strategy, they also became experts at hedging out weather-related volatility. “In the past this industry’s always been a price taker, Rockefeller aside,” says McClendon. “We believe that we are price makers. We need some cooperation from the market, but we don’t need much.”

A Chesapeake gas rig in Fort Worth, which sits on top of the giant barnett shale deposit.Courtesy of International Mapping

McClendon has been writing checks to politicians for nearly two decades, leaning right, heavily, but aiming to cover every base. (Clinton got a check last June; Obama got his in February.) His breakout year was 2004, when in a span of 56 days leading up to the November elections he made contributions totaling $2,125,000 to a clutch of right-wing 527s: Progress for America Voter Fund, Swift Boat Veterans for Truth, Republican State Leadership Committee, Club for Growth, and Americans United to Preserve Marriage.

Club for Growth and Americans United to Preserve Marriage went hard after Oklahoma Democrat Brad Carson. Picking a fight on same-sex marriage was Ward’s idea, McClendon says now, done at the urging of Ward’s friend and fellow Christian conservative Gary Bauer. McClendon kicked in $625,000; Ward, $525,000. A part of their treasure paid for a nasty TV spot in Oklahoma that suggested Carson was secretly in favor of same-sex marriage (even though he had voted against it in the House) and seemed also to imply that he was gay. “We never dreamed that it would become controversial,” McClendon says now, adding that he has a brother-in-law who is gay and that he’s campaign co-chair for corporation commissioner Jim Roth, the first openly gay elected official in Oklahoma. “We just thought we were doing what everybody else did when they gave money to … 427s? 527s? Whatever it is.” Whatever. The bottom line for McClendon is that Brad Carson got trounced.

Screen Shot 2016-03-08 at 4.02.10 PM — VInternational Mapping

Maybe none of this would have come back to bite McClendon so hard if two years later, in 2006, he and Ward had not pitched in with McClendon’s best friend, Clay Bennett, and five other Oklahomans to buy the Sonics. Hearing about their political shenanigans gave the good people of Seattle all the more reason not to trust them. Speaking in public, Bennett, the principal owner, was clear: He and his Oklahoma buddies would keep the Sonics in Seattle.

Of course nobody believed him. Still, it came as at least a mild shock last summer when McClendon told the Oklahoma Journal Record, “But we didn’t buy the team to keep it in Seattle; we hoped to come here.” Afterward McClendon backpedaled (“It was my fault for saying something that was not accurate,” he told me), but he still had to pay a $250,000 fine to the NBA. Then they all looked like idiots when this e-mail exchange from April 2007 surfaced recently in a suit brought by the City of Seattle to try to prevent the Sonics from breaking their lease:

Tom Ward: Is there any way to move here [Oklahoma City] for next season or are we doomed to have another lame-duck season in Seattle?

Clay Bennett: I am a man possessed! Will do everything we can. Thanks for hanging with me boys, the game is getting started!

Tom Ward: That’s the spirit!! I am willing to help any way I can to watch ball here [in Oklahoma City] next year.

Aubrey McClendon: Me too, thanks Clay!

McClendon’s latest obsession cuts a little closer to the heart of Chesapeake’s interests: He’s on a campaign to expand the market for natural gas. In February 2007 an organization calling itself the Texas Clean Skies Coalition placed ads in newspapers across the state to oppose utility giant TXU’s plan to build new coal-fired power plants. The ads featured pictures of sad-looking people with coal-like soot on their faces, as well as facts and analysis lifted from a website operated by the Environmental Defense Fund. “We don’t know who they are or where they’re from,” the Environmental Defense Fund said in a hastily issued press release the day the ads appeared. Turns out it was Chesapeake.

Since then McClendon has created the American Clean Skies Foundation in Washington, D.C. It puts out a glossy journal printed on biodegradable polypropylene. (“No trees were harmed in the production of this magazine.”) CleanSkies.tv, a web-based news channel (“Content will be fair and fact-based”), launched on Earth Day.

This new role for McClendon—as champion of the environment—is not obvious casting. He’s a huge supporter, after all, of Oklahoma Senator Jim Inhofe, who claims global warming is a “hoax.” But here he stands nonetheless, at what he acknowledges is “a nice intersection between my moral thoughts about the problem and my economic thoughts about the problem,” pushing a very big story. A story about a new era for the American economy, when natural gas is plentiful and cheap, American manufactured goods are more competitive in the global marketplace, our balance-of-payments deficit declines because we import less oil, our skies are cleaner because we burn less coal, global warming slows down, and ordinary Americans in out-of-the-way places get rich on royalty checks from gas companies. It assumes that gas prices will rise, but not as fast as oil prices. And that not just electricity producers (who today use more coal than gas) and homeowners (who use a lot of heating oil) but also cars and trucks will come to rely increasingly on natural gas. And it’s nothing if not audaciously ambitious. Just like McClendon himself.

“I think our community, our state, our country, and our world need us to be successful,” McClendon says, wrapping up his remarks to the Chesapeake employees gathered in the Blue Room. It’s cozy in here, and the décor lives up to the name. Blue carpet, blue vinyl upholstery, and glowing blue walls that suggest a gas oven on full broil. Packed from pit to rafters, everybody paying close attention to their leader. “We’re doing things that nobody else in the world is doing,” he continues. “Drilling wells that other people wouldn’t have. We’ve made discoveries that other people would never have found. When I wake up in the morning I’m ready to go because I get to work for a company that drilled more rock than anybody else on earth …” Wait, did that guy just say Chesapeake is the No. 1 driller on the planet? It’s just the U.S., actually, for now. The world will have to wait.

This article was originally published in the March 12, 2008 issue of Fortune.

Fortune Magazine Covers: 1930

by
Peter Elkind

@FortuneMagazine

February 14, 2016, 1:04 AM EDT

September 1929 (prototype)

February 1930

March 1930

April 1930

May 1930

June 1930

July 1930

August 1930

September 1930

October 1930

November 1930

December 1930

New Crack in the House of Redstone (Fortune, 2007)

by
Peter Elkind

@FortuneMagazine

February 4, 2016, 5:05 PM EDT

Editor’s note: On Thursday, Viacom announced that Philipe Dauman would be taking over the chairman role from the company’s long-time leader 92-year-old Sumner Redstone. This July 2007 article from Fortune’s archives details the origin of the succession battle of Viacom, when the feud between Redstone and his daughter and one-time assumed heir apparent Shari, who opposed Dauman being named chairman, first became public.

A fracture in the relationship between Sumner Redstone, the mercurial 84-year-old mogul who controls CBS and Viacom, and his daughter has become the latest drama within the House of Redstone, and how it plays out could decide the future control of one of the world’s great media fortunes.

Just months after settling litigation with his son Brent that resulted in Sumner buying out his son’s stake in the family business, he is now enmeshed in an ugly falling out with his other child, daughter Shari, and she is expected to leave Viacom’s board. The trigger for the latest Redstone family feud, according to several sources, was a dispute over corporate governance issues – such as Shari’s effort to more closely tie executive compensation to performance—at Viacom viab and CBS cbs , a media empire that encompasses MTV, the CBS broadcast network, the Paramount film studio and the pay-TV channel Showtime.

“Shari is a committed and involved board member and she has no intention of leaving the board,” said Nancy Sterling, a spokesperson for Shari Redstone.

Fortune has learned that Redstone and his representatives (including Viacom CEO Philippe Dauman, Sumner’s longtime personal attorney) have been in discussions with Shari, his one-time heir apparent, and her lawyers about reducing her influence in the affairs of CBS and Viacom, where she sits on both boards as non-executive vice chairman. This could include a deal in which Sumner acquires Shari’s voting stock in Viacom and CBS, according to multiple sources close to the matter, although it is far from clear that Shari will assent to such an agreement. Under one possible scenario, according to a source familiar with the matter, Shari would get control of the family movie theater business in exchange for her stock in Viacom and CBS.

While her father oversees his empire from his Beverly Hills mansion, Shari continues to run the Massachusetts-based movie theater chain National Amusements—which has been in the family since 1936 and was the embryo for Sumner’s global media conquest. Gaining Shari’s voting stock — which amounts to close to 16 percent of the votes in both Viacom and CBS and is held by National Amusements — would simply add to Sumner’s already ironclad control of both companies.

Brent, in his lawsuit, had sought to dissolve the family media empire and cash out his one-sixth stake in National Amusements. Details of the settlement were not disclosed, but Brent’s share had been valued at about $1.3 billion. Sumner also faces a lawsuit from his nephew, Michael Redstone, who claims he was cheated out of a chunk of the family business.

After Brent was shuffled aside, Sumner was left holding 80 percent of National Amusements and Shari the other 20 percent. National Amusements in turn controls about 79 percent of the voting stock in Viacom and 76 percent in CBS—and about 11 percent of the equity in each. National Amusements has been valued at about $8 billion, meaning Shari’s stake is worth close to $1.6 billion.

Through spokespeople, Sumner and Shari declined comment.

The latest behind-the-scenes maneuvering over control of the Redstone empire is striking, given that in recent years Shari had taken on a more prominent role at the companies, and often attended management meetings at the company’s headquarters in New York. Sumner even so much as designated her as his successor, saying in a Wall Street Journal story two years ago that she would likely take over as controlling shareholder “after I’m gone.”

But more recently, the personal animosity between the two has ratcheted up and Sumner has sought to undermine her ability to be an effective board member. Notably, mentioned one source, when Shari was honored by the USO of Metropolitan New York in April at the group’s annual woman of the year luncheon, Dauman and Shari’s mother — Sumner’s first wife — Phyllis were in attendance, but not Sumner.

If Shari were to relinquish her share of Viacom and CBS, it would add more urgency to the question already bandied about in media circles: Who would become the controlling shareholder after Sumner? People in the media industry like to speculate that one possibility is Paula, his wife, who some say has taken on an increasing interest in the business—although that idea was dismissed by sources familiar with the matter. (Sumner has admitted that last year he took Paula’s guidance when he made the now-infamous decision to fire Tom Cruise at Paramount.)

Shari’s role within Sumner’s media businesses began to be more prominent in 2005, when she was appointed vice chairman of Viacom, after serving since 1999 as president of National Amusements. That year, frustrated by Viacom’s stagnant share price, Sumner decided to split the conglomerate into two publicly traded companies: CBS, which includes the broadcast network, a radio unit and Showtime; and Viacom, which houses MTV and the Paramount movie studio. During the transition, Shari played a major role in constituting the two boards of directors and ensuring that each had an adequate number of independent voices.

And herein lies the genesis of the fallout between Sumner and Shari. According to these sources familiar with Shari’s contributions to Viacom and CBS, Sumner became upset over the configuration of the boards, particularly at CBS. Eventually, two members that Shari had recruited to CBS, Ann N. Reese, a former CFO of ITT Corporation, and Judith A. Sprieser, former CEO of software company Transora, left last year.

For a time CBS, which after the board resignations had four independent directors out of eight total, was not in compliance with New York Stock Exchange regulations that require a majority of independent board members. (Companies with controlling shareholders are not required to adhere to such rules. But if a company voluntarily decides to be held to those standards, as Viacom and CBS have, they then are legally required to abide by the regulations.) This year, CBS added five new board members, which a source said were largely chosen by Sumner, including producer Leonard Goldberg, a frequent dinner companion of Sumner’s.

“He clearly had encouraged Shari to put together new boards,” said one of these sources. “How their falling out took place, when it took place, I just have no clue.

“It is hard to know what motivates that man. The most difficult thing for anyone to understand is his motivation.”

Another source said that “Shari was quite supportive of her father, but that wasn’t returned. Shari was an advocate of more modern governance rules.”

In particular Sumner balked at Shari’s push for the use of more performance-based measures to set executive compensation, these sources said. Yet in March, CBS said Sumner, who is executive chairman, agreed to a revised compensation package that was tied to shareholder returns. He has a similar structure in his compensation agreement with Viacom. (Last year CBS paid Sumner about $12 million, and Viacom paid him a package worth about $16 million.)

Ever since Sumner re-asserted control last summer with the Labor Day ouster of one-time favorite Tom Freston as CEO of Viacom, Shari has largely receded from any visible role, instead focusing on operating the 120 movie theaters owned by National Amusements.

The two have disagreed publicly over the future of movie exhibition, with Sumner saying that he sees little growth in the theater business, and Shari taking the opposite view. He has said he wishes Shari would sell it. And in a tiff that was only covered by the Boston papers, in April Shari objected to Sumner’s plan to cash out some stock held by National Amusements to make a charitable donation in his own name. Shari had felt that she should also be allowed a stock distribution to make a donation, or that Sumner’s gift should have been made in the name of National Amusements.

Sumner has been notoriously flighty on the topic of succession, and a cavalcade of favored executives have come and gone, always leaving with hefty severance payouts. In 1996 Sumner’s right hand man Frank Biondi was pushed out. In 2000, Dauman and Tom Dooley exited Viacom with reported payouts of about $150 million each. Three years later, when Mel Karmazin left, Freston was Redstone’s first pick for CEO, but he split the job after Freston demurred and CBS boss Les Moonves resisted the idea of reporting to Freston. Lastly, Dauman and Dooley were ushered back in after Freston was ousted.

Post-breakup, the performance of the two companies has not been what Sumner had envisioned. Viacom was designated the growth company, but its share price has lagged that of CBS. Since the two stocks’ debut in January 2006, CBS is up about 35 percent, while Viacom has gained just 1.5 percent.

Meanwhile, a parsing of Sumner’s public comments these days suggest a vast chasm between him and his daughter. In an interview earlier this year on CNBC’s “Conversations with Michael Eisner,” he said he won’t give her the CEO job. “Now, you wanna give away what you have to your family be my guest,” he said. In the same interview, he said, “my wife is closer to me these days than my daughter.”

More recently Sumner, also on CNBC, said Shari is a “viable candidate” to succeed him, but added it would be up to the board. But that is an evasive maneuver: Be wary when a controlling shareholder puts distance between himself and the board when it comes to making tough decisions. These days, and for the foreseeable future, there’s only one person making the big decisions at CBS and Viacom: Sumner Redstone.

This article was originally published on July 19, 2007.

Sumner Redstone’s Anti-Aging Secret (Fortune, 2007)

by
Peter Elkind

@FortuneMagazine

February 4, 2016, 12:40 PM EDT

Editor’s note: On Thursday, Viacom announced that its long-time leader the ailing 92-year-old Sumner Redstone would give up the role of executive chairman of the company. In this September 2007 article from our Fortune archives, we wrote about a mysterious elixir that the then 84-year-old Redstone proclaimed made him “feel great,” and would help him live another 50 years. In 2014, the founders of MonaVie, the company that makes the elixir, left the company. Last year, MonaVie defaulted on $182 million in debt.

As the years tick by, Sumner Redstone just gets more optimistic. Earlier this year the 84-year-old said he planned to live another 50 years; two years ago he was predicting another 20. His age has been in the spotlight lately because of the recent public spat with his daughter over his succession plans, but the controller of Viacom viab and CBS cbs has lately been getting a bit of help in the form of a little-known superjuice called MonaVie. “It’s a miracle drug,” he told Fortune. “I feel great.”

A dark-purple elixir with a cult-like following, MonaVie is an antioxidant-rich concoction whose main ingredient is the Brazilian açai berry (pronounced ah-sigh-ee), long touted among health nuts for its anti-aging ingredients. Vitamin-water it’s not: MonaVie costs $40 a bottle, and you can’t get it in stores; it’s marketed only through the company’s network of thousands of individuals who sell it out of their homes (think Avon or Tupperware).

Redstone first heard of the juice from Viacom exec Bill Roedy on a trip to Germany in January. After learning that his butler’s sister-in-law was a devotee too, Redstone ordered some up and started drinking four ounces a day. “Since I’ve been on MonaVie I haven’t taken a sleeping pill,” he says.

Redstone says he hasn’t taken a sleeping pill in months.

He even considered investing in Utah-based MonaVie after its CEO, Dallin Larsen, came to visit him at his Beverly Hills mansion. Redstone decided against it—because it would present a conflict of interest to recommend it to friends—but Larsen, a veteran nutritional-products salesman who founded the company in 2005, has no better ambassador. At a recent party, Redstone gave bottles to Bill Clinton and celebrity chef Wolfgang Puck. “Just about every friend I have is on it,” Redstone says—a group he says includes Viacom and CBS board members as well as cancer survivor and former junk-bond king Michael Milken. (It can also be found in the clubhouse of the Boston Red Sox; pitcher Jonathan Papelbon is a fan.)

For more on CBS, watch this Fortune video:

So is it a fad, or is there something to it? Nothing proves that MonaVie cures any ailment, but in one of the first academic studies of açai’s benefits, University of Florida researcher Stephen Talcott found that the berry’s antioxidants destroyed leukemia cells in a laboratory. But Talcott has since distanced himself from MonaVie and its junkies.

Larsen is careful not to cross the line. “It’s not a drug,” he says. He touts the juice as a way to “increase energy in a natural way” and to alleviate “the everyday aches and pains from inflammation.”

Redstone says he’s never felt better. “I know I look a lot younger than I am,” he says. “I feel like I’m 40 years old.”

This article was originally published in the September 3, 2007 issue of Fortune with the headline “Sumner’s Superjuice.”

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