The lessons of adversity

(Fortune Magazine) -- After 2008, it's understandable that the average American would be mad as hell at America's business leaders. Executives, even in a good year, tend to rank toward the bottom in credibility with the public, down around congressmen and journalists. The current economic crisis provides all the ammo for a populist backlash, as you - and your portfolio - know too well. The Fortune 500 portion of your 401(k) collapsed 37% last year (measured in total market value), while the earnings of the 500 were even more of a disaster, dropping 85%.

But given its monumental size, the 500 can hardly be summed up in one story. These companies employ 25.6 million people and account for $10.7 trillion of economic might, created both here and abroad. While it may be comforting to react to a messy year like 2008 with righteous anger, a more useful approach would be to look within the list for the clear truths we can find. So that's what we've done.

Let's think of 2008 as one hell of a school year. What have we learned?

1. Gorging on easy profits can be fatal. Wall Street and Detroit tumbled for a lot of reasons, but high on the list is the fact that they thought the free buffet would be open indefinitely.

On Wall Street myriad bets were made on the belief that somehow or other, accepting increasing risk would always pay off. Any reader of the account of the failure of Bear Stearns, House of Cards, by William Cohan (a Fortune contributor), will come away astonished at how little thought was given to the question, What if it doesn't last? The cabal of mega-losers on this list, led by AIG (AIG, Fortune 500) (No. 245), answers that question pretty clearly.

As for Detroit, the more the bailout process exposes its decision-making process, the more we realize that, at least at GM (GM, Fortune 500) (No. 6), the assumption was that consumer preferences would be slow to change. Well, guess what?

Highly disciplined companies can thrive in all seasons. That doesn't mean they didn't suffer. From Apple (AAPL, Fortune 500) (No. 71) to Berkshire Hathaway (BRKB) (No. 13), they did. But they didn't suffer nearly as much as others. In this issue we tell the stories of several companies that have navigated their way through the crisis by doing for the most part what they've always done. IBM (IBM, Fortune 500) (No. 14) has become the model for pushing itself up the technology learning curve, while Johnson & Johnson (JNJ, Fortune 500) (No. 29) has relentlessly taken the long view. The average annual return on its stock since it went public in 1944 is 17.1%.

The tech sector is now a pillar of stability. We're in one of those periods in which the tech world (aside from the astounding Apple) doesn't wow us but simply delivers numbers that tell the story of an industry whose strength keeps growing. Many of the tech companies that soared onto the list in the 1990s started as small, venture-capital-backed firms and have now become a mostly boring set of increasingly huge companies like Oracle (ORCL, Fortune 500) (No. 113) and Cisco (CSCO, Fortune 500) (No. 57). The next wave of venture-backed companies to ride onto the list was a group of Internet companies, including eBay (EBAY, Fortune 500) (No. 303), Google (GOOG, Fortune 500) (No. 117), and Yahoo (YHOO, Fortune 500) (No. 345), each of which moved up the list last year.

We don't know how Facebook or Twitter will come through in the long run, but it seems likely that Web 2.0 will produce a Fortune 500 company someday. Michael Moritz, a partner at Sequoia Capital, which helped bankroll Google and Yahoo, looks at the list this way: "I've always felt that if the venture business could add one name to the list every five or six years, that would be a massive achievement. No other sector of the economy does that."

The Fortune 500 is still an old-boys' club - but it's changing fast. When 485 of the 500 companies on the list are run by men, you can't point to it as a model of gender diversity. But the grand total of 15 women who now run Fortune 500 companies is an all-time high, up from seven in 2003. And many of those women are running businesses once considered bastions of manhood - last July, Lynn Elsenhans took over Sunoco (SUN, Fortune 500) (No. 41), marking the first time a woman has helmed an oil giant.

The next five years may redefine everything. Banking and automaking aren't the only industries that will be changed for good. Entertainment, publishing, and airlines face threats to their survival. And consider homebuilding: Five companies fell right off the list this year: Hovnanian, KB Home, Lennar, NVR, and Toll Brothers.

In retailing, department stores like Macy's (M, Fortune 500) (No. 96) got clobbered, while discounters from Wal-Mart (WMT, Fortune 500) (No. 2) to Dollar Tree (DLTR, Fortune 500) (No. 499) made new inroads. You won't find any $4.99 items for sale in Dollar Tree's stores - it only sells items for a buck, like tape and party supplies and writing utensils. Says CEO Bob Sasser: "We are positioned well for any economy. We sell things people need every day." The American consumer's focus on value vs. prestige may be changing in a lasting way.

American business - we hope - has been tempered by fire. If the next five years will be defining ones, they will also be years where we should see U.S. companies apply what they've learned from 2008. Robert Coury, CEO of Mylan (MYL, Fortune 500) (No. 462), a pharma maker new to the list, guided his company through two acquisitions in three years and increased his headcount from 3,500 to 15,000. "We've already gone through the most tumultuous change in the history of our company," he says. "We're tested warriors and tested leaders." Right now, the stock market agrees - Mylan's stock is up 143% since October.

Business will be more accountable. Anytime a business magazine writes something like this, it's worth noting the date, since these predictions are so often wishful thinking. But right now it's not such a reach. For starters, one result of the broad populist anger is that government is getting involved, with an eye toward restraining the worst corporate behavior. But even without federal involvement, businesses will have to answer to a higher authority.

According to Ram Charan, a consultant to CEOs of many Fortune 500 companies, the executives he works with "are very sensitive to the societal pressure, and you will see change." For starters, Charan foresees a shift in the composition of executive pay. Corporate boards will try to ease the grip of Wall Street by adopting pay structures that consider all stakeholders, including employees and customers. That would be a change we could all live with. And a sign that we actually learned something from the disaster.