- I doubt the dean's power
to make the Chief Justice sit down,
so I'm just gonna think
he's gonna do it on his own.
(audience laughs)
Let me welcome everyone here
to the launch of our brand new
Institute for Corporate
Governance and Finance
here at NYU Law School.
We're really thrilled about this launch,
thrilled to be a place
that will bring together
institutional investors,
academics, judges, lawyers,
bankers, among others,
to debate and discuss, to
work across disciplines
and work on important
issues of common interest
both in the academic world
and the worlds of practice.
This institute would not be possible
without a number of people.
First, of course, Ed Rock,
our most recently arrived
new member of the faculty
after many years at Penn.
Just could not be happier
that he's joined us here.
As many of you know,
in addition to being a hugely
distinguished academic,
Ed is that rare person who also can bridge
the worlds of theory and practice,
of academia and practice,
did that to spectacular effect at Penn.
And so we really look
forward to taking things
to even greater heights here.
And Ed, all of your
colleagues on the faculty
are just thrilled,
thrilled that you're here.
It also couldn't have happened
without the founding vision
and support of the Wachtell, Lipton firm,
David Katz and Marty Lipton in particular.
I feel like ever since about
four seconds after I met him,
Marty Lipton has been telling me
that the law school needs
an institute like this.
So if only because Marty and I
can now talk about other things,
I'm really glad that we
have this institute as well.
We do wanna thank both
David and Kevin McCarthy
who've agreed to serve as co-chairs
of our board of advisors,
and again, great thanks to Marty Lipton.
It can never be said enough that really,
no one has done more for this law school
over 60-plus years than this man.
And his role in helping see to the launch
of this institute is
just one example of that,
but our gratitude only grows.
So Marty, thank you for that.
And advance apologies that I
need to run almost immediately
to a couple of other events,
but let me turn things over to David Katz.
- Thank you, Trevor.
And on behalf of my co-chair,
Kevin McCarthy and I,
we welcome you to our first real program
for the new institute.
The Institute of Corporate
Governance and Finance
is something that Marty has said
that law schools need for quite some time,
so we're very fortunate to have it here.
Being in New York,
having access to many of
the institutional investors,
many of the other types
of investors that we have,
as well as corporations,
academics, professionals,
there's really a unique
opportunity here to have forums,
have discussions, and to
have the type of dialogue
among investors and
those that are really key
to the corporate governance
debate in a forum
that allows them to be off the record
and really make progress in ways
that we haven't been able to in the past.
So we're really hopeful that,
Ed's gonna talk a little
bit about the institute,
but we're really hopeful
that this is a new beginning,
a new dynamic, a new place
for this dialogue to occur.
And we really, the law school
is gonna work very hard
to support that dynamic and
really provide an opportunity
both for students, academics,
professionals, investors
and corporations to come together
and discuss these important issues.
With that, let me introduce
Ed Rock who, as the dean said,
really is the mastermind
behind the institute,
and we're very pleased that
he's decided to bring it to NYU.
- Thank you, David.
Welcome, everybody.
This really is our first
public program for what I hope
will be a really, really
wonderful opportunity
to get people together.
The institute starts from the observation
that we've reached the point
where the de facto deciders
in corporate governance are the
big institutional investors,
that when there's any real controversy
between shareholders on one side
and boards on the other side,
that the ultimate decision
is made by the folks from
BlackRock, from BNY Mellon,
from State Street, from Vanguard,
and from a group of other
institutional investors.
And the thought in launching the institute
is to really come to terms with that
both on the law side, the
finance side and the policy side
as we try to work through
what that means for corporate
governance going forward.
And one of the things I learned early on
in my academic career is that finding,
and this was something I
learned from Bob Montheim,
is that bringing together
the top people in the field,
in practice, in academia,
from the business world
and getting them talking to each other
is absolutely the best way to
figure out what's going on,
and as an academic, absolutely
the best way to write papers
that are on, about real issues
as opposed to sort of
purely academic issues.
The insights that one gets from the people
who are working on the hard
issues on a day-to-day basis
are things that you can't,
as an academic, I can't
think of it myself.
And so much better to shut up and listen
and let other people explain
to me how things work.
And that's what I hope this
institute will do for me,
and I hope that what it does
for NYU and for everybody else
is bringing the right
people together in the room
to have really interesting conversations.
The institute could not
have been launched without,
as Trevor said, without
the very generous support
of Wachtell, Lipton, of Marty, of David.
The members of the board
of advisors who are here
are absolutely critical to
the success of the institute.
What the institute really,
we mean it when we say that
our people are our program
because the folks who get
involved are really the way
that we figure out what is going on
and learn the key issues.
One housekeeping matter,
we have gotten this program
approved for CLE credit.
So if you want CLE credit,
stop and see Stephanie on the way out.
She'll register whatever the
registration needs to be.
Let me turn now to introducing the program
on a New Paradigm for
corporate governance.
As I think about corporate
governance, it's a,
and what makes it so
interesting is that it exists
right at the intersection of
law, finance and politics,
that a governance system needs
to do basically three things,
it has to facilitate the
building of great firms
so that we can, as a society, get rich,
it has to provide for a reasonable degree
of accountability of managers
who manage billions of dollars
of other people's assets,
and finally, it has to share
the wealth sufficiently
that the system will be
politically sustainable.
One way to understand
what happened in November
and to understand Brexit is
that the old sort of consensus
that the goal of the corporation
should be to maximize shareholder value,
I don't know if that
was a consensus or not,
but the old vision of the
corporation having its prime duty
to maximize shareholder value,
what everyone one thinks
about it as a finance matter,
was not something that
the voters of the world
found particularly compelling.
And so when I think about
the current situation,
it seems to me that we have to come up
with a new way of conceptualizing
what corporate governance should be,
a New Paradigm, if you will,
and not how it compares
to some ideal vision,
what in Chicago, they used to refer to
as the Nirvana fallacy,
but how it compares to
politically plausible
alternative ways of organizing what we do.
And I think of Marty's New Paradigm,
which has been percolating
and circulating around
for the last year or
so, as an intervention
and as a contribution
to that public debate
of how we should think
about the corporation,
the governance of the corporation,
in this, in the current
political environment.
Marty needs no introduction,
but I'll give him a little
introduction anyway.
He came in the fall to talk
to my corporations class,
and he started off telling the story
of how he went from sitting
where you all are sitting,
well, we were in a different room,
but from sitting where you all are sitting
to doing what he's doing.
And it's a story of great
professional success,
but it's also a great story about NYU
and how NYU has changed over
the the preceding years.
And if there's one person
who is responsible,
more responsible for that
change, it's probably Marty.
And he has been, as an NYU graduate,
he has been unbelievably generous
with his time and with his efforts.
And so it is with great pleasure
that I turn the podium over to Marty
to present this New Paradigm
in corporate governance.
And let me turn off, I'm
gonna turn off the projector
so that it doesn't get into people's eyes.
- Let me start by first saying
that it's not my New Paradigm.
It's our New Paradigm.
And in large measure, it wouldn't exist
except for my colleagues, Steve Rosenblum,
and Karessa Cain, and
Sabastian Niles, who are here.
We all worked on this together.
And I'll tell you a little
about the antecedents of it
and then get into it.
But I do want to say and
thank, first, Bill Allen
who was, for many years,
the Chancellor in the
state of the Delaware,
Chancellor of the Court of Chancery,
and Bill Allen, who now
is the Chief Justice
of the Supreme Court of Delaware,
but for many years was the Chancellor.
Together, they are the true progenitors
of what we call corporate
governance today.
And in large measure,
it's Chief Justice Strine
and Chancellor Allen
who we look to for the learning
with respect to corporate
governance, and particularly,
the legal developmental
of corporate governance.
The New Paradigm is not that.
It's not a legalistic approach
to corporate governance.
It's a practical approach
to corporate governance.
And it came about,
it's not new.
It's been around for
a long time, actually.
I date it back to 1992 when Jay Lorsch,
a professor at the Harvard
Business School and I
were members of the Committee
on Corporate Governance
at the United States
Commission on Competitiveness.
And coming from sort of
the opposite sides of the
aisle on corporate governance,
we sat with each other for
I guess about two years,
talking about corporate governance.
And then one day, we were riding back.
All the meetings of the
committee were either
in Washington DC or in
cities around the country,
but we were riding to the national airport
back from the meeting, and Jay said to me,
"You know, we're not really
that far apart in governance.
"And I think go we ought to write
"a joint paper for the committee."
And we did.
We wrote a joint paper.
We negotiated it.
I took more of his stuff
that he took of mine,
but we ended up with a paper,
and then we turned that
paper into an article
that we published in The Business Lawyer
called A Modest Proposal for
Improved Corporate Governance.
And that modest proposal
contained the basic elements
of the New Paradigm.
It recognized that corporations
needed to improve their governance.
It dealt with independence.
It dealt with shareholder engagement.
It dealt with size of the board,
the annual agenda and so on.
It covered the field of what is today
generally accepted best practices.
We didn't have proxy access in there.
We weren't even aware that
that was going to be an
issue one of these days.
In any event, we also had in there
that companies had to recognize
that practical control was in the hands
of institutional investors
and the big asset managers.
And it said that if you're going to deal
with your shareholders, you're
gonna have to deal with them
in a fairly stylized way
so that they recognize
that what you're doing
is the best you can,
and that you're doing the right things,
and that you have independent directors
who are overseeing it.
And if you can convince them of that,
then they'll support you.
That was 1992.
And it sort of became a,
the article on the modest
proposal really became
a map for a lot of the
corporate governance
that followed it,
particularly the 2002
New York Stock Exchange
corporate governance rules.
So, I guess it was three years ago,
three and a half years ago,
Larry Fink of BlackRock took the lead.
And he sent a letter to the,
I think that first letter was actually to,
not to the S&P 500 but to the Fortune 500.
He sent a letter to the
major listed companies
saying that we're concerned
that you're paying
too much attention to
short-termism, and we're concerned
that you're not investing
for the long term,
and we want to encourage you
to invest for the long term.
And that sort of stimulated a new idea
that maybe there was a solution
to the problem of short-termism
and pressure on companies to
focus on short-term earnings
rather than on long-term growth.
And there's, I'm not gonna
try and resolve the dispute.
There's a lot of dispute today
as to whether short-termism is a problem
and what the economics are.
There's a professor at Harvard who thinks
there's nothing better in
the world for the economy
than activist hedge funds to attack
as many companies as they can
to force them to focus
on short-term earnings.
There are others who feel
that it's more important
that companies focus
on long-term earnings.
There are those who
think that the inequality
that has evolved over the last 30 years
is a product of short-termism and is
responsible for the populist revolts
in the US and in Western Europe.
There are those who dispute it.
Ed made reference to Milton
Friedman's 1970 dictum
that the sole social purpose
of a corporation, business corporation
is to produce profits
for the shareholders.
The New Paradigm give us a
little taste of all of that
but it's not predicated on it.
The New Paradigm starts with the premise
that its purpose is to
promote long-term investment,
investment to produce
growth over the long term
and to do it in a practical way,
to set parameters for the
two principal players,
principal player corporation,
the business corporation
and how it's going to function
to participate in the New Paradigm,
and the major institutional
investors and asset managers
and how they are going to function.
Basically, what we did is we looked at
what we thought was the best of the best
in the way of best practices
for corporate governance,
recognizing that one size doesn't fit all.
But we took not just what
we thought was the best
but what we viewed as generally thought of
as the best practices
of corporate governance
and said business corporations
will follow those practices.
And we looked at the investor side
and we said investors will
function in a way that's
called stewardship,
which is a phrase that's frequently used
more so in the UK than here,
but that investors would
exercise stewardship
with respect to the
companies that they invest in
in order to facilitate long-term growth.
And in order to effectuate
the relationship,
make it produce the support
for long-term growth,
corporations following their best practice
corporate governance and institutions
following stewardship guidelines
would engage with each other,
recognizing that ultimate
control was in the investors
and asset managers, but
would engage with each other
so that the investors, asset
managers would be satisfied
that the corporations were
following good practices,
performing reasonably well,
and investing for the long term.
And the institutions would
then support the corporations
as against the market
or as against activists
looking to force the company's
new short-term actions
that would run counter to the effective,
successful investment
for long-term growth.
And that's basically what the outline
of the New Paradigm is.
The New Paradigm should be viewed
as a substitute for
regulation and legislation.
And I'm sure that Chief Justice
Strine will speak to it.
He's written a fabulous article
with a great name,
When the wolf bites, who bleeds,
and Chief Justice Strine
has focused for a long time
on the true underlying
owners of the securities
that the institutions manage.
Basically, most of the
institutionally owned
and the major mutual funds
that asset managers manage,
the ultimate beneficiaries
of those securities
are people who are saving for retirement,
for education and so on.
So they're long-term investors.
They're not short-term investors.
And in his article,
Justice Strine sets forth
a number of changes, some
legislative, some regulatory,
that he would recommend
in order to impose on the investors
the obligation to fulfill a fiduciary duty
to the underlying investors,
a fiduciary duty that does not exist
in law or regulation
today, but a fiduciary duty
that could exist, in other words.
It would be perfectly reasonable,
if the majority view that
short-termism was a problem
and that it was socially
necessary to force institutions
to support long-term investment,
you could impose a fiduciary duty
on the managers of long-term funds
to actually vote those shares
in order to, and so on.
The idea was that that legislation
wasn't going to come along so quickly,
and it was difficult to get
any legislation or regulation.
We had tried for a number of years
to get a very simple change
that Congress authorized
in Dodd-Frank to shorten
the window period on 13D
from 10 days to one or two days.
SEC refused to even consider it.
So it was clear that
regulation and legislation
was not in the offering.
So again, one of the basic
tenets of the New Paradigm
was we're not going to have legislation.
So is there a way to get
the parties together?
In other words, satisfy the institutions
that they'll still have the
ability to force companies
to improve management,
improve governance and so on
if they're dissatisfied, but otherwise,
they would support long-term investment.
And it was that that we sought to achieve
by saying you don't have to sign anything.
You don't have to agree to anything.
This doesn't require Congressional action
or SEC action or anything else.
If the public companies
endorse this,
adhere to it,
and the institutions and asset managers
endorse it and adhere to it,
we will have achieved the purpose.
In the effort to develop it,
we contacted, when it was
in draft form, this started,
it really started in 2015
when I was asked by the
International Business Council
of the World Economic
Forum to talk to the group
about governance and
where things were going
and to basically sketch out
what the World Economic Forum could do
to promote long-term investment.
That ended up in a request in 2016
to come up with a proposal
that they could get behind
and try to accomplish
facilitating long-term investment
and to try and do it on
an international basis,
not on just a US basis.
But we found that there
really wasn't that much
in the way of stewardship in the US,
that most of the thinking
about stewardship
existed in the UK.
And so while the governance
aspects of the New Paradigm
are essentially US governance,
the stewardship aspects
of the New Paradigm
are principally UK stewardship
from the Financial Reporting Council
and from the UK Investment Association.
The Investment Association
group are the largest
investment organizations in the UK.
Just as we were completing
the New Paradigm,
they came out with their
stewardship proposals,
and in large measure,
we adapted the UK stewardship proposals.
And I still don't know
whether the US investors
will really accept
the stewardship provisions
of the New Paradigm.
The last 18 months,
there was more governance
stewardship activity
than had ever existed before.
And we had a group led by Jamie Dimon
to create the common sense principles
of corporate governance
with some adherence
by major corporations and
some institutional adherence.
We had the Business Roundtable come out
with a new, a revised set of
corporate governance proposals.
Just a few weeks ago, we had a group,
Institutional Stewardship
Group, ISG, which consists
of most of the passive,
major passive investors
and some of the the active investors here
and some from the UK and the Netherlands.
But while their corporate
governance provisions
basically mirror the New
Paradigm and the other US,
their stewardship does not
come up to the New Paradigm stewardship.
So the missing element in the New Paradigm
is the stewardship provisions,
cut through stewardship.
What's missing is a
commitment by the institutions
and asset managers to fully
support long-term investment.
They're obviously worried
about the problem of being sued
for having failed to
maximize value of portfolios
that they're managing by
supporting long-term strategies
as, again, short-term
strategies that might create
more immediate value in the portfolio.
So that concern obviously exists.
And I don't believe it's a real concern,
but there are those who do.
And the only way that
real concern can be met
is if there were to be
legislation that would
resolve it.
And in fact, there could
be such legislation.
It doesn't look like it's
going to be all encompassing.
But the day that Theresa
May knew that she was,
the morning of the day that she knew
she was going to be the Prime Minister,
she made a speech about
corporate governance,
and it was quite a speech.
It included such things
as control of executive compensation.
It included such things as
adopting the continental
bipartite board with supervisory board
and the management board and
union representation and so on.
Since she did become a prime minister,
it evolved into a parliamentary inquiry,
which then has evolved into
a green paper of legislation.
Each step, it sort of
got modified down a bit,
but it's still hanging out there,
and there is a possibility
that the green paper will
actually result in legislation
that does change two things.
One, the UK Company Law,
section 172 of the Company Law
actually copied the constituency statutes
that we adopted here
in the US in the 1980s
in order to support boards of directors'
rejection of takeover bids
and to make it clear that it was within
the business judgment of
the board of directors
to reject a takeover bid
in favor of the long-term
growth of the company.
Section 172 basically
copies the form of statute
that was adopted by some
30 states in the US.
Green paper actually talks
about making it clear
that 172 says what it says,
and then it doesn't prefer shareholders
over employees, customers, suppliers
and most importantly, the community.
And then just this week,
on Monday of this week,
the Supreme Court of Massachusetts
in a case involving the
constituency statute
in Massachusetts, loudly and clearly said
that the board of directors
clearly has the right
to take into account
and actually determine
to take a lesser bid for
a company on the basis
of the interests of
employees and the community.
All this is floating out there now,
and I think the ultimate question
is either this is all going to go away
and we will continue with short-termism,
we'll continue with activist hedge funds
seeking to impose short-term
strategies on companies,
or we're going to get legislation
or the New Paradigm.
Probably not in exactly
the form it is today,
but the New Paradigm will
be essentially adopted
by business corporations
and by the asset managers
and institutional investors and will have
a modus vivendi that
everybody lives together
on basically a set of principles
that will promote long-term investment.
We've put together something
that I jokingly refer to
these days as the new New Paradigm,
where we just took, again,
the best of the best.
We took the best of what
the Business Roundtable,
the common sense principles,
the New Paradigm,
the same on the stewardship.
We took what we thought
was the best of the best and maybe,
there's an organization
called Focusing Capital
on the Long Term that essentially
was first put together
by Dominic Barton, the CEO of McKinsey,
and by Mark Wiseman who is now
a vice chairman of BlackRock,
but when it was formed, he was the head
of the Canadian Pension Investment Board,
and designed to promote
long-term investment.
And it is an active group,
has just hired a professional
president to run it,
a woman by the name of Sarah Williamson
who was with Wellington, and
maybe they or some other group
will pick up this opportunity
because ISG, this investor group,
basically, if you look at their provisions
on both governance
engagement and stewardship
basically mirror the New Paradigm.
So there's hope for the New Paradigm,
and with that I'll step down.
- Thank you, Marty.
(audience applauds)
thank you so much.
You can sit here, and then
once they Finish talking,
I'll bring you back up for the discussion.
So we have a distinguished
panel of commentators today.
I will introduce them in the
order as they come to my right
though they're gonna speak in
a slightly different order.
Leo Strine, as most of you know,
is the Chief Justice of Delaware.
I was the Chancellor
of the Delaware Chancery
Court before that.
Before that he was the Vice Chancellor
of the Chancery Court.
And way back when, he was a student
at the University of
Pennsylvania Law School.
To Leo's right is Matt Mallow.
Matt was, for a long time, the
general counsel at BlackRock,
is now a Vice Chairman,
and the proxy voting group
reports to Matt at BlackRock.
To Matt's right his Jean-Pierre Rousseau
who is the Vice Chairman of
the World Economic Forum USA,
which is the US branch of
the World Economic Forum,
the people who bring us Davos.
So here's our Davos man who's here today.
And to Jean-Pierre's right is
Bob Schumer from Paul, Weiss,
a leading M&A lawyer Chair of
their corporate department.
And we'll start with Matt
to give his reactions.
I've invited people,
I want this to be as conversational,
as interactive as we can have it.
So we're gonna let, I'm
gonna let the commentators
make brief remarks, then
we'll bring Marty back up.
We'll have a conversation
among the panel and Marty,
and then take questions and
comments from the audience.
So get your questions and comments ready.
Matt.
- Thank you, Ed, and thank
you for convening this group.
And even more importantly,
thank you for bringing
the Law and Finance Institute here to NYU.
This may be the public, first
public launch of the program,
but I can tell you from prior experience
that Ed's already held
seminars and round tables
on the Chatham House Rules and otherwise
in which we've participated in and others
and some of the people probably
sitting here in the room.
And of course, thanks to Marty,
because he has really been
the beacon for all of this
for, as it was pointed out, 60 years,
and that's quite extraordinary.
It's unduplicated.
Many of you may know that
I was at Skadden, Arps,
for 30 years before I
went over to BlackRock,
before I retired and went
to BlackRock in retirement,
failed retirement.
And so we know Marty and
his colleagues at Wachtell
very, very well, and they've really been
at the forefront of all of this.
And so Marty, we do owe you
a deep, deep depth of gratitude for this.
Let me set the stage a
little bit in two ways
that I don't think have yet been mentioned
but which really do drive the change,
I think drive the change
in investor attitude.
Let me also mention, by the way,
give you the usual disclaimer.
I was never at the SEC, but I can give you
the SEC disclaimer on behalf of BlackRock
and just accept it as
given for the moment.
These are really my
views and my colleagues'
from the Investment Stewardship Group.
And we do call it investment stewardship
even here in the United States.
Many of them are sprinkled
throughout the audience
and will roll their eyes
at the appropriate time
when I say something I shouldn't have.
But two things have really changed.
Yes, there's been the rise
of institutional investors,
but that has been, in large measure,
driven by the vast increase
in retirement and pension
funds that have accumulated
all around the United States particularly
but elsewhere in the world as well.
And so the consequence of
that is that about 2/3,
maybe it's 60% but I think it's about 2/3,
don't hold me to the exact number,
of BlackRock's ultimate clients,
we deal with the pension fund
but the ultimate underlying beneficiaries,
are either people who
are retirees themselves,
or in many cases, people who
are saving for retirement
through their contributions
to pension funds
or outside of that.
So if you think about what do we do,
we actually are largely driven,
not entirely, but largely driven
by the imperative to
provide long-term returns
for our clients who are saving
for what we now euphemistically call
the decumulation phase of their lives
rather than the accumulation
phase of their lives.
And so that's an important
change in the landscape
over the last 25 or 30
years, whatever it may be,
but it's a very large period of time.
The second important
change in the landscape,
from my perspective, is the
rise of passive investing.
Now, there always was passive investing.
This is actually not brand new.
It goes back 30 years or more.
But the fact is that post
the financial crisis,
it has really accelerated,
and it's accelerated in
hugely dramatic ways.
And so anybody who runs a significant
passive investment business,
and obviously, BlackRock
is among them, maybe,
and somebody from BlackRock
may correct this number,
but I wouldn't be surprised if it's 40%
of our $5 trillion of
assets under management.
Maybe it's even more that are invested
in passive investment vehicles,
even if it's through our trust company
or through iShares principally.
The rise of passive investing means
that our job is to replicate an index.
It could be the common
ones, S&P 500, Dow Jones,
Russell 2000, but it
could be one of hundreds,
if not thousands of other indices.
And we're not trying to
outperform the index.
We're trying to replicate
it and perform as it does.
That's the bargain that we
have struck with our clients.
That's what we've told
them we're gonna try to do.
And that means that we own the shares,
and we own them so long
as they're in the index,
and that's the crucial point for today.
So long as General Motors stock
is in the Dow Jones index,
we're gonna own General Motors stock
on behalf of our clients.
When I say we, not us,
we don't own anything,
but our clients will own it,
and we will manage it for them.
And so the consequence of
that is that we have to decide
what do we do with that.
Do we sit idly and not
engage with companies,
not vote those shares?
And we actually don't think it's,
we think our fiduciary
duty demands actually
that we do vote the shares,
and that we have views
and that we take views on
the corporate governance
and now, environmental and social
and many other issues that come across
a corporation's management
and board's plate.
And so those two changes
are quite, quite dramatic
and have really changed
the landscape of how we,
and I think, basically, how corporations
are forced to react in
the new environment.
So the New Paradigm, which
Marty has said is aspirational,
and we hope to sign up both corporations
and investors like ourselves,
certainly has many,
many attractive features
from our perspective.
The transparency of what
a corporation is doing
is certainly something that,
in what is now Larry's famous letters.
He's written, I think, three of them,
all the time saying we
need long-term strategies,
but we wanna know what your strategy is.
We wanna know that your board
of directors has been involved
in the creation of that
strategy and the approval.
And since the world changed dramatically
this year from last year, we wanna know
what have you done to react to that?
How have you changed your your strategy
to accommodate the new realities?
Now, you can see from the
diminution of quarterly earnings,
from the diminution of
companies that sometimes predict
what their quarterly
earnings are going to be,
from the effect of the stock market,
you can see how effective we've been.
So anybody who says that the
institutional investors who,
and the other big institutional investors
are essentially similar to us
in terms of their investor profile,
not quite always, but generally,
you can see how effective
we've been in changing,
and Marty, getting adopted
a long-term strategy.
But we're not giving up, and
we're gonna continue to do it.
Now we do believe that
we will best accomplish
a change in the attitude
and approach of corporations
by following certain principles.
And the principles basically are
we think it's the board's
responsibility to run,
to hire the management
and determine what a company is gonna do.
It's not the shareholder
responsibility to do that.
We believe that, excuse me,
that the best methodology
of getting a our views across
is through private engagement.
By meeting with companies,
we meet with 1,500 companies a
year, something of that sort.
We voted at 13,000 meetings
around the world a year.
Think about that in terms of
just the mechanics of doing it,
but we do it, and to the
best of my knowledge,
we haven't missed a
vote, although there are
other asset managers,
we all know, who have.
But we haven't, and knock on
wood, hopefully, we won't.
So it's a very big process.
We employ the largest group
of investment stewards
of any asset manager, they number 30.
But there are hundreds of others
within the BlackRock world
that actually deal with the
investment stewardship issue
because not only do we
run passive investments,
we also run active investments,
large numbers of active investments
of very many different types
and shapes and descriptions.
And those portfolio managers
and those portfolio teams
who number in the,
the total number of portfolio managers
numbers in the thousands.
There are actually teams of people
who do it, several thousand,
but sort of the big ones
with numbers in the hundreds,
they often have views on
investment stewardship.
And so we parse through that.
We believe that investment stewardship
is part of our fiduciary duty,
part of our investing as well.
And certainly, I am old enough,
as you noticed, I'm grateful
that Ed took down the screen
because it showed what
year I graduated from here.
I'm only grateful, Marty, that you are--
- [Woman] It's right there.
(audience laughs)
- I'm only grateful that Marty is actually
10 years or 12 years ahead of me.
But the fact is, Marty, that
over our 50 years, 60 years,
the notions of what is
fulfillment of fiduciary duty
has really evolved.
It's changed.
And it's changed a fair amount,
and it presumably will
continue to evolve and change,
and so we too have to do that.
Finally, let me just say that
we, Marty, believe entirely
in the basic principles
of the New Paradigm
that you've set out here,
that it's our responsibility
to actively listen and
review company communications
about strategy, long-term
objectives and governance,
to participate in meetings or
other bilateral communications
with investors, were the
investors further engaged,
and communicating our
preferences, our expectations.
We put on our website all of our standards
by which we vote shares.
We've put a record of every
single vote that we take.
So anybody wants to go to our website,
you can find it out and you
can see who we voted for,
who we voted against and the like.
So we totally subscribe to that.
Where we come up short,
so I'll be honest and
open and candid with you.
Where we come up short is on signing on
to support every long-term,
every management that says,
"We're here for the long term
against an activist investor."
We don't typically
support activist investors
but it's not inconceivable
that some corporation
to have a management which,
while giving lip service
to long-termism, doesn't,
in our view, live up to it,
and some activists may have a program
that's an appropriate one.
So to sign on totally,
in our view, would be to,
in some measure, abdicate
our individual fiduciary duty
to our clients and our shareholders.
But certainly, in general
terms, we're there,
and we've been in support of this.
- Terrific.
Thank you, Matt.
Jean-Pierre, what's the World
Economic Forum's interest
in in corporate governance, right?
This is, there's, the World
Economic Forum, over the years,
has not primarily been interested in law.
They've had other focuses.
And over the last couple of
years, as Marty described,
the World Economic Forum
is moving into this space.
And, you know, from your perspective
as somebody from that organization,
how do you react to this?
And just tell us a bit
about about the involvement
from the World Economic Forum's side.
- We don't look at this
from an ego point of view.
But indeed, Marty Lipton came last August
to our International Business Council
and presented a proposal
for a compact New Paradigm,
a compact for responsive
and responsible leadership.
In Davos, we produced a one-pager of this
which was signed immediately
by over a hundred
companies, mostly worldwide
but with the majority of Anglo
Saxon companies, of course.
But the points I wanna
make briefly is number one,
the forum is interested, as we say,
in moving this the other
way, which basically means
moving the needle in the right direction.
When it comes to corporate
governance becoming essential
because short-termism
has become a disease,
I have my scars facing
analysts on a quarterly basis,
but the words I want to
insist on is responsible
because we see companies responsible,
certainly to their stakeholders,
number one, shareholders
but all stakeholders,
but at large, to society.
And society means, obviously,
just to take for example, environment.
I know in this country,
climate change is not popular
in some circles, but it's a fact.
And companies play a role.
- Facts are not popular
in certain circles.
(audience laughs)
- Sorry.
- I mean, we just might as well
through all this concentric circles.
- But companies play a significant role
regarding the environment.
Second, of course, is health
because again, companies
play a key role in health.
Now, companies have also realized
that employees are more motivated
when they realize their company
is engaged in some good things
around their communities.
The second thing I wanna
say is that the reaction
from the International Business Council,
which is a hundred CEOs
of the largest companies
in the world, was very positive
to Marty Lipton's proposal.
And one of the elements
that they recommended
is that an index be developed,
the concept being that
if you don't measure it,
you don't know what you're talking about.
So how do we design tools
to measure, report,
implement long-termism?
That's the assignment that has been given
to a small group of companies and with us
and some external advisors as well,
and we're supposed to come back
to the International Business Council
with an index proposal in August.
So that's probably the
most important thing.
But to answer your question, Ed, we,
the forum is absolutely
committed to this initiative.
40 years ago or 45 years ago,
Klaus Schwab, the founder,
instituted the multi-stakeholder
model and said,
"Look, if you don't deal
with all stakeholders,
"you're not doing the right thing."
So it's not just shareholders,
which are still there
and still very important,
but all stakeholders that
we have to deal with.
That's our commitment.
So that's the role we play.
And if we can indeed make a difference
and move the needle in the right direction
in this whole area, we'll be very happy.
- Terrific, thank you.
Bob Schumer.
- So thank you.
And I applaud Marty and his
efforts, and I happen to agree
with just about everything
he says in his report.
And I agree with a lot
of the prescriptions
that he is suggesting.
And the world would be a much better place
if everybody did follow
what was laid out there,
but you know, were it be so.
And what I worry about is the marketplace,
and you sort of touched on
this a little bit, Matt,
when you talked about
the change in investing
over the past 30 years, but
the marketplace has become
incredibly short-term focused.
When you look at the
amount of daily trades
that are generated by computers,
by algorithmic trading
or high-speed trading, and it's enormous.
And you know, the programmed trading
doesn't look at the alpha.
It doesn't look at the long-term situation
or the long-term prospects of any company,
and it hardly looks at
medium or short-term results.
It's gonna look at the daily headlines,
and it's gonna react to things
that happen almost instantaneously,
and it's gonna trade on this.
And this is, again,
an enormous amount of
trading on a daily basis.
So Janet Yellen may say, you know,
we're gonna have increased rates,
and then you have the
financials go up immediately.
And you have, you know,
the dollar goes long
and gold is shorted,
and you see that reaction
time and time again.
And then the ETFs and the
passive and, you know,
the index funds, which you
mentioned, have to follow that
because they have to
recalibrate every day.
And so as you have those changes
in the short-term trading,
it then, you know, has some impact.
What that impact is, I don't
quite pretend to understand,
but it has to have a significant
impact on the market.
And then you have the
active, you know, managers
and even the active managers
who are, these days,
so afraid of underperforming.
Or I think, Leo, you even
mentioned it in your article.
I guess you called it benchmarking.
But they're all looking at everyone else
to see how everyone is doing.
And so, you know, and
then you have derivatives
and you have other things
that kind of exacerbate the situation.
So collectively, we trade and we trade
and we don't really invest.
And so Marty's entire
philosophy is really based
on long-term investing,
and it's a good one.
And I wish, you know,
that we could implement
a change in paradigm, you know,
a new paradigm that would reflect that.
But it's very hard to
see how that operates
in light of what's
happening in the markets
and how things actually trade.
And so the question is,
can you do it with sort of,
I mean, call it a gentle
person's agreement.
Can you do it without legislation?
And can you do it without tax reform?
And we all know that
legislation and tax reform,
in today's environment,
this is not gonna be top of the agenda.
And even if it is,
based on what's going on
in Washington or elsewhere,
they're not gonna get it right.
So I'm a little bit pessimistic about it.
Again, I can't really, I'm not a trader.
I can't tell you how these
things actually work,
but it has to have a
significant influence on this,
and you have to, we have to figure out
how to take that into account
if we're gonna deal with the issues,
because I do believe the
issues that you lay out
and certainly, that Leo lays
out in some of his articles
about the need to focus
on long-term development
and long-term investment are critical.
But I don't know how
we actually get there,
so I'm a little bit of a
pessimist when it comes to this.
- Thank you, Bob.
Leo.
- Well, I had my bald head to the,
pointed to the back and
my eyes to the front.
And any day where you get to
be introduced by Marty Lipton
and in the same sentence with
my predecessor and friend
and a person I think the world of,
Bill Allen, is a great day.
And I get to see Bill
who is one of the funnier
people too in the world.
It's a different sense of humor than mine
but one that I enjoy.
I wanna get the students here.
I wanna ask students a
question as we start this.
What companies are most
American stockholders?
If you had to think of a company
that has the most Americans'
capital, what would they be?
- [Woman] Apple.
- Apple.
Anybody else?
What?
None?
None of you know any
company besides Apple.
(audience laughs)
Anybody, anything else?
Nothing?
- [Man] GE.
- Okay.
- [Woman] AT&T.
- AT&T, GE, because they
get the nerdy commercials
that hire people, okay.
How about, ever heard of Vanguard?
Ever heard about Fidelity?
Ever heard about BlackRock?
Most of you will not get
close to investing in GE,
Apple or whatever those things
unless you actually go to work
there early in your career
and unless your parents
gave you a trust fund
and you have no loans.
Part of what continues to be
ignored in this conversation
is what it means to be an investor
and what I call force of capitalism.
The money management industry
is a federally subsidized industry.
When you get out of NYU Law School
and some of you went in between,
you will give a portion of your pay
every paycheck over to money managers.
You will not be able to pick
individual stocks and buy and sell.
You will largely be given a
choice of investment funds
that are selected by your employer.
They will look like, if you're lucky,
it will be high quality.
It can be BlackRock funds.
It could be Fidelity--
- Oh, they will be high quality.
- Right.
(audience chuckles)
You will then have access
to that money when?
When you, and it'll
probably get older for you,
but now it's about 59 and a half.
Before that time, you will get,
people don't like it.
Law review editors always edit me.
I put in Castro-like expropriatory taxes.
Oh, we can't have that.
I mean, you know, like
here's news for you.
Nobody wants to cut Diaz back,
but nobody really thinks
Castro was all good.
But then again, compared to
the Chinese, maybe not so bad.
But they tax, they expropriate people.
If you take your money
out before you're 59,
they're gonna tax you to death.
So it's basically given
over to these folks
for the rest of your
life until you retire.
Now, you don't give a damn
about quarterly earnings at all,
to the contrary.
Things, bubbles, things that
go bad that aren't there,
and that's not good for you,
noise, siphoned off stuff.
But who do yo, are there
separate groups of fiduciaries
who have to take your money into account
for the fact that they're
holding this trapped capital?
No.
They're not separate funds
from other types of funds.
I react a little bit like
I'm mad about index funds.
I'm an index fund investor
because I actually listened
when I took economics
and I took law school corporate finance.
And it doesn't mean that
the market's always right,
because this is the
problem that Bob's getting
and we'll talk to it.
You know, the market is, it doesn't mean
the efficient capital
markets hypothesis and also,
it does not mean that the
market is right at every moment.
It means that if you try to put together
an active trading strategy
where you try to get,
outguess the market over
time, you are unlikely
to beat the collective
guesses in the market
and you are unlikely, for the excess costs
and risks you take to be compensated,
and you're better off trying to take
a buy and hold strategy
over the long term.
Ben Graham, before there was indexing,
was sort of that point.
Why I reacted a little bit to the fact
that I buy an index funds
for its match in index,
well, that's sure as shit what,
excuse me, I'm on film,
(audience laughs)
but it's sure as stuff
what's in the thing I get.
But really, what I get is a choice of,
sometimes I get a choice of 25 funds
and I can pick what I'm doing,
and I pick the closest to rationality.
I didn't pick to have a system
where I have the least voice
because I'm the most rational.
I didn't pick to have a
system where there's one vote,
one issuer by issuer voting decision
often made at the fund
manager level that flows down
and where my index fund will
vote the same as the funds
that are along the company.
I didn't pick to have them vote yes and no
on the same merger on my index
fund, because that happens.
It happened in Hewlett-Compaq,
the Hewlett-Packard-Compaq
thing where people who were,
owned Compaq voted for it
because they wanted the premium.
People at Hewlett-Packard voted no
because it would destroy value.
Well, index funds voted yes and no.
Why?
Because they don't think.
Now, it's changing at BlackRock,
but what I'm saying about the system is
and what you're taught in law schools
and you're taught by
professors at business schools
is you spend all the time still
focusing on the fiduciaries,
the people running companies like Apple,
running General Electric,
and about the accountability
metrics for them.
For those of you who
are ordinary Americans,
you will be so far from
being able to influence
those fiduciaries, because
you'll have to go through a thing
called a money manager, mutual fund.
For my friend, Lucien, and he is my friend
and he's Marty's friend, and
it's an unusual kind of thing
to terrorize people
because he's very gentle,
but he doesn't, he believes
you should vote on,
whether this was still or sparkling
should have been a stockholder vote.
(audience chuckles)
He does.
But there's never been a
situation where there's been,
you know, too many derivative fights
or too many proxy fights.
There's always not enough proxy fights.
There's always not enough proposals.
There's always not enough.
Then you look at the people
who actually hold Americans' capital,
and you have no effective mechanism
to actually change fiduciary ownership,
there's very little
mitigative accountability,
and there's very little accountability
to the actual investor in
terms of performance over time
because you really can't
switch out of the industry.
And for example, I'll give you Lucien's,
in terms of academics,
you always say to students
the thing called the Wall Street rule.
The old rule ought to be if you
didn't like your investment,
you should, you would walk.
It was rarely worth it
to exercise voice because of the cost.
Well, the folks who propose our new system
never looked at the application
of their own theories
about the Wall Street
rule to the actual people
whose power they continue to pump up,
because ordinary, the end
user, investors' capital
can't do the Wall Street rule walk.
They're not the ones,
they can't even do that,
and so the point, at all.
And so if the Wall Street
rule is not an answer
for Fidelity, Vanguard, BlackRock
and the public pension
funds, how can it be
that there's an answer
for the ordinary investor
that you just switch funds?
Because you're gonna get
the same kind of governance.
Because this is what Bob and
I think were getting into.
I don't like to demonize anybody.
I think it's silly to
just demonize people.
You have to look at their incentives.
And ???, I applaud the New Paradigm.
Mary and I have been working
on a lot of these things.
He'd like to go further, so would I.
It's at least a nod in
the right direction.
But I am skeptical that boundaries
and power do not matter.
My friend, Lynn, is over there.
She and I, I think, share
most of the same values.
We share a different belief about power.
I don't believe that power is unimportant.
I believe it is the most important signal
of what society cares about.
We do not debate in our polity
that our polity is about human beings.
That does not mean that we
can't care about the environment
or the arts or other
things, but as human beings,
we decide what value to
give to those other things.
We did not put in the US Constitution
that this is about human beings.
We might have put some things in it
that it's about some human
beings, but we never actually,
you know, Ed or Marty,
we never put in there
that we're not a
multi-constituency republic.
We didn't say the trees
are equal to the people,
or as much as you love your dog,
that they're equal to the people.
Why?
Because we built the republic
where the only citizens
who are capable of being
citizens are human beings.
Well, in the American corporate
republic, and this is,
and Europe is totally confused
on a lot of this stuff
because they have stakeholder BS
right next to direct stockholder action.
Actually, one of the problems
is their model's changing.
Their old rules apply to different games,
and they're now having rules
used by American activists.
But the point is when you only give power
to one constituency,
which is the stockholders,
to expect a group of people
that's only accountable
to one constituency to
be better than the world
and to balance all these
interests, I just think,
I happen to be coming out
of two people who got,
whose views of the world were
both distorted in Chicago,
Adolf Berle, the good
Adolf, and George Orwell.
Power matters, and I think what
we have to talk about today
are whether you can actually
get to where Marty wants to go
without more accountability on the path
of the people who actually invest capital,
whether we're using economic pricing.
For example, any state you go to
has fuel taxes, sin taxes
and basic sales taxes.
It is amazing to me how people
still buy clothes and
other things in states
where the average sales
taxes are six or 7%.
But we're saying on an economic
trade in the United States
that even if you had a
fractional tax of less than 1%,
that somehow, economically
useful trades will not occur.
I would actually argue that
anybody who says to you
that if a trade will not occur
if you pay a fractional tax
of less than half of 1%,
I would say that's a tax,
that's a socially useful
move to tax that transaction
because that's exactly
the kind of transaction
that is pure speculation,
increases externality risk,
and tilts the markets
in the wrong direction.
So I think, looking at things
like first best tax policies
that actually apply
old-fashioned conservative
economic principles about externality risk
and having a trading tax,
looking at more patient capital models,
I think, are important,
and frankly, some fiduciary requirements
for the center of the plate investors
so they can get, actually
do what they want.
They're at a comparative disadvantage,
and people don't have to actually,
if we're gonna make
people vote, for example,
and I will finish on this,
if we're gonna make people vote,
if it's important enough
to make people vote,
and I've said this to Lucien,
then they should do it well,
and they should have to do it in a way
where they're aligned with the
interests of their investors.
ISS has voting things.
They did change the horizon after.
And I'm not against ISS
or anything like that,
but they are a symbol of market failure.
They only exist because of a
government mandate to vote.
Lucien is not true to his principles,
because if he was true to his principles,
he would allow institutional
investors to decline to vote
on things that they think
are socially useless.
The problem is we've now put all the,
we've changed the inertial direction
of people who are along the company,
we've changed the initial
direction of their votes
towards change, because it used to be
you actually had to bring
out enough of the electorate
to change the status quo.
Now, because they'll kick
your butt if you don't vote,
you have a situation where when,
any of you in the room, students,
when you don't really want to do something
and it really doesn't
count against your grade,
do you do a lot of thought
and thinking about it?
No!
If you can just walk
up and say, "I voted,"
and have a reason for it and
it not cost you anything,
well, that's the republic we have.
And so I think Marty is trying
to get to a better place,
but I think the central
concern I have with it
is the accountability around
the one side of the equation,
which is the people who
are actually running
the public companies and actually doing
the economic creativity that
really leads to genuine wealth.
They are under the Klieg
lights of the market.
They have all the regulatory inputs.
They have all the litigation inputs.
They have the ballot box inputs.
The other side, the people that actually
are the direct fiduciaries
of most Americans
and most Europeans, their
accountability framework
is entirely unworked out and undeveloped.
And so I think we're
sort of muddling through
and looking for leaders
like BlackRock and Fidelity
and Vanguard to start to step up,
but I'm a little dubious about that, so--
- But Your Honor, would
you have fiduciary duties
imposed on the BlackRock?
- Again, I think the term--
- For the benefit of the--
- Here's the thing.
I think that if we're
going to have regulation
at the federal level about
the money management industry
that we federally subsidize,
then I think there should
be smart regulation.
Smart regulation means if
you're gonna make people vote,
and we do make people vote,
that the voting policies they
have should take into account
the investment horizons and
philosophy of their investors,
that when one of the few things
Strine is smart enough to do
is to invest in index funds,
my index funds should be
balancing the stupidity
of the gerbils on the wheel
who are proposing idiocy.
- [Bob] But it is.
- No, they don't.
That's not true.
In many of these things, and I, again,
I do actually do empirical
stuff and I look at the data.
People vote the same way
in many of these funds,
I found, for example, on
social proposals, Bob,
I did a study on social proposals,
there are funds which are
socially responsible mutual funds
within fund complexes.
How they invested was
different from the other funds,
but all the funds actually,
that pick stocks does
so a little differently.
You know what's exactly the same?
- Well, because--
- No, no, no, let me,
no, no, no, let me, no, let me--
- The people who vote,
the people who invest are not always--
- No, let me tell you what they did.
So on social proposals,
things like climate change,
which I believe in, Mr. Rousseau.
I actually believe it.
I believe in actuaries and scientists
when they are united unanimously.
That's actually not a
good thing to bet against,
actuaries and scientists.
(audience chuckles)
Bob, they voted against
all the social proposals
in the same proportion as
every other fund in the complex
because there was a
fund-wide voting decision.
So people who had chosen
to give their capital
to funds that invest on a
socially responsible basis
were having them vote
against climate change,
fair worker policies,
sustainability policies.
That is ridiculous.
And by the way, the
Americans and Europeans
and Asian people, working people's money,
it should not be the play
toys of a bunch of idiots
who run around and have fun
and goes around the world
and talk about social
proposals and litigation.
There's a lot of people in
this who make a lot of money
off of just a lot of hooha.
And it's a lot of rent
seeking, and it's real.
And we're also, the
part of it is it's fun,
but it actually hurts real
people, and it diverts attention
from people in businesses
from creating value.
It also leads, and I'm
passionate about this,
it leads to ways of doing business
that involve not investing
in your human capital
and creating wealth in a
socially responsible way.
And for most of you who
are students in this room,
you will not earn your living
because of your investment income.
You will derive your
wealth from your sweat.
And it's not until you get
to the very top of the income
distribution in this society
where it gets to be even close to relevant
how much you really make
from your investments.
How much you have invested
turns almost entirely
on your access to a good
job over a durably long time
where you can provide for your family.
- Marty, let me get you back up here
to respond to the commentators.
And then we will open it up
to questions and comments
from the audience.
- I wish I knew how to respond.
(audience laughs)
well, let me start with Matt.
I think that the section that you read
from the New Paradigm is at least balanced
by three other sections which
essentially say and that the,
if the institution or the investor
is dissatisfied after it's engaged,
it's free to do whatever it,
and if we could get ISG to buy into it,
would shop in that language any way
that ISG wished to shop, and
I think I could sell that
to the International Business Council
of the World Economic Forum.
And Jean-Pierre is nodding his head,
so now, I know we could
sell it to the WEF.
Chief Justice Strine and I
have been at this a long time,
and we even tried very hard this past year
in another context with
an Aspen institute group
and then ultimately, with
a group that I described
as far right, right, middle,
left and far left.
And we had all of them together in a room,
and we had a fairly interesting discussion
for half a day, and we
accomplished absolutely nothing.
(audience chuckles)
- And we had some of the worst sandwiches
that were ever created.
(audience chuckles)
- Well,
but the cookies were good.
In any event, these are
very, very difficult issues
to get agreement on.
I must say the people
who have worked on this
and have debated it and
so on have all done it
with a view toward trying
to accomplish something,
but there are fundamental
beliefs that people hold.
The economic group at the
American Enterprise Institute
don't believe that
short-termism is a problem.
They think that the
Chicago school of economics
has been absolutely correct since 1970,
and that the failure of
the efficient market theory
should be ignored,
and it's still Milton
Friedman all the way.
So they hold that belief, and
there's no way we're gonna get
concurrence with those with them.
One thing that I think
is crystal clear today
is that we're not gonna get legislation
in the United States
that would do anything
along the lines of what
the Chief Justice suggests
in the wolf bites article.
All of those,
he and I disagree with respect
to the transaction tax,
not on the substance of it
but on the politics of it.
I just think it's impossible
to get the transaction tax--
- No, no, I agree that we can never get
people who call themselves Conservatives
to actually follow conservative economics,
which is why we could never,
for example, tax carbon
because we couldn't possibly
go with the first best
conservative economic approach
to reducing the externality.
- Yep.
Bob, Bob, Bob--
- I just came from the Heritage Council.
- Yeah, it's because they
wouldn't do the first best,
which would be, and tax,
anybody think, any student in the room
believe cap and trade
was a Democratic idea?
It wasn't.
- [Bob] Or Obamacare.
- It the Heritage Foundation second best
because they wouldn't
tax the externalities,
so they did cap and trade.
Then when the Democrats
adopted the second best
Republican alternative, it
became President Obama's.
- And as Bob pointed out--
- I agree with you.
- The Affordable Care Act
was a Republican idea.
- That was Romney in Massachusetts.
- Well, I think Marty
should give the background.
Marty and I should give the background.
One of the things we were
trying to achieve, right, Marty,
was that we did see, among some
of the political candidates
last year, and even frankly,
the current president,
we saw some agreement around issues
like the need for
infrastructure revitalization
and an indication that
even if you just put aside,
you know, even if you go back
to this John McCain thing,
right, Marty and you just say
it's better to be environmentally
responsible than not,
and that it could provide America
with a comparative advantage,
that you might wanna do
something like infrastructure investment,
that people seem to be
focusing on, a little bit on,
you know, the so-called Main
Street versus Wall Street,
even wanting, frankly, to temper
some of the intrusive
regulatory aspects of Dodd-Frank
and maybe have some pricing
policies like friction,
pricing friction that would
deal with some of that itself.
And we were trying to
actually look at something
that was a centrist agenda.
I think we now know, we can't
figure out what this is now.
- I keep trying to get Leo the run.
- Marty, Marty, let me--
- I just wanted to say one thing.
Bob's point, which obviously
is correct, except I would
fundamentally disagree
that this speedy trading
and all of the things that
one would deter with a
transaction tax and so on
are in any way socially useful.
I don't think they add to liquidity.
I think that where we've
fundamentally gone the wrong way,
we've basically financialized the economy.
And by doing that, we
encourage short-termism
not just with the respective
corporate business strategy,
but we're encouraging short-termism
with respect to the entire economy.
And it's led to--
- I couldn't agree more.
I'm not applauding it, and I'm
not saying it's a good thing.
I'm just saying it's a fact of life,
and unfortunately, we
have to deal with it.
And I don't see, you know,
legislation being adopted
that is going to deal with it
or anything else right now.
Unfortunately, the only thing
that's gonna deal with it
is another market meltdown,
and then we'll have to pick up the pieces.
- [Leo] I think there's--
- And hopefully, we'll do
it a little more rationally.
- I think there's another thing
that we were thinking about too,
which is that what we need as,
I'll use the OECD as a sort of proxy
for the enlightened form of market economy
that we've prided ourselves
on since the big war,
and that wasn't the Grenada
(audience chuckles)
but you know, it's the
WWII, is we all know
that we have social fabric
issues to deal with,
with promises to aging folks
and people who have needs.
And I would like to think that
we would wanna meet those.
We have challenges of
investing in infrastructure
and in dealing with climate change.
Transactional taxes dealt with, OECD wide
is a very efficient
way of dealing with it.
Carbon taxes are too, and they
won't shut down the world.
And they're actually the sort of things
that you actually wanna
reduce these arbitrage.
You don't want Cook Islands.
You don't want, frankly, you know,
I have Bono, I got problems with Bono.
I'm sorry, here's my problem.
Do you know he's Dutch?
- [Woman] He's Irish.
- U2's Dutch.
And you know why?
Because they didn't wanna
pay their taxes in Ireland.
So when a leftist,
I'm on the left, but I pay
my frickin' taxes, you know.
When he inverted, he was on
the cutting edge of inversion.
(audience laughs)
But here's the thing
about the fractional tax
that I think it's
important to keep in mind
because I would like Matt,
you know, Marty, Marty knows.
I didn't just focus on the fractional tax
because it should apply to
just the speculative traders.
It provides a benefit to money managers
who are tempted to deviate.
There's a lot of problems
when you have to compete
on Morningstar ratings and
other things like that.
Money managers face,
there are a lot of good money managers.
If you talk to some people
from Fidelity and Vanguard,
they lost some really good active managers
just out of being dispirited
during weird markets
because you try to hold it in there,
you're losing funds under management.
So my Democratic friends
all wanted to be exempt
from the trading tax,
ordinary investors in 401(k),
and I think it has to apply to everyone
because part of what you want to do
is when people trade funds,
you want it to apply to them.
When active traders trade stocks,
you want it to apply to them,
because you want, over time,
for that, to also account in the returns
and for investors to think about
what they do to the money managers,
because it's a two-way
relationship, honestly,
and we don't really use many incentives.
But I agree with Marty.
I mean, I'm not sure,
we thought we were fairly close
to some rational conversation
because we could find,
one of the things we went through
is we looked for Republican and Democratic
elected officials, Republican
and Democratic economists
who were respected on a lot
of these kinds of ideas.
And it was really easy to
find very sensible people
who are for a lot of this.
Now, of course, they've all--
- [Ed] So Marty, let me--
- They Brexited.
- Let me pose a question
and then we'll turn it
over to the audience.
Does one have to be with you
on the short-termism issue
in order to be with you
on the New Paradigm?
It seems to me that you could have
a completely orthodox
finance view on short-termism
and still think that with
the current distribution
of shareholdings and balance of power
that the New Paradigm makes sense.
- I agree.
No, you don't.
It's to encourage long-term investment.
It's not to mandate it.
In other words, it is to enable companies
who adopt a long-term strategy
to pursue that strategy,
but it doesn't guarantee
the strategy is correct
or that isn't subject to change
at the instance of the shareholders
who decide they don't like
that strategy any longer.
So, no.
It goes to the question that Matt raised
and to the extent that it's
not clear in the New Paradigm.
Clearly, that should be corrected,
because there's no intention
to lock in long-termism.
And Colin Mayer, the Oxford
professor who you know well
has just written an article
for the Oxford Review,
in fact, it's a compendium of,
Lynn is the one who sent it
to me just the other day,
and it's a brilliant article
on all of the different issues that arise.
And he comes to the conclusion
that Chief Justice expressed
that it's not really possible today
to deal with all of these issues
other than a comprehensive review
of the entire business corporation ethos,
that have we ended up in a
situation where we're not really
fulfilling the fundamental
purpose of maximizing growth,
maximizing the creation
of value for people
and having an equal
distribution of that value.
And those tensions show up
in every aspect of this,
things like union representation
on the board of directors.
Interestingly enough,
it's worked just fine.
GM, as part of the
settlement, a UAW official
is on the GM board, and
it's worked just fine.
GM has done extremely well
since it came out of
reorganization and so on.
So I think long run,
Colin Mayer is correct.
We need to redo it.
But that happens only in a dream world.
We're not going to redo the
whole structure and so on.
So I think we have to
take it step by step.
We've tried to take some major steps.
They didn't come off, so we
have to take shorter steps.
And hopefully, they'll at
least improve the situation,
but they're not a permanent solution,
unless it's possible,
I doubt it, but I might hope for it,
that we could get a full understanding
with respect to what is the right approach
to the creation of value and
the distribution of value.
But so far, I gave some thought
to starting the discussion
of the New Paradigm in 1720,
seriously, with the South Sea bubble.
And I've always felt kind
of that we made a mistake
in the constitution,
that bills of attainder
can be very useful
(audience laughs)
if you've suffered a
loss from bad management.
In any event,
literally,
the settlement, no one has,
throughout all of history,
come up with a rational solution to it
or an economic theory that
has stood the test of time.
Everybody thought that the
efficient market theory
was absolutely correct and so on.
And no, I didn't, but everybody else did.
And then it gets,
Robert show and has
demonstrated it's nonsense.
- Matt, you wanted to jump
in, and then Jean-Pierre.
- Well, I just wanted to,
although it's a little
hard for me to remember
everything the Chief Justice said
because that was 20 minutes ago
and my memory capacity
is shortened these days,
but I wanted to comment
on a couple of things.
One is that it is absolutely
true that all of you
who will invest in a
BlackRock, Vanguard, Fidelity,
whoever's fund cede the
right to vote to the manager
because we haven't developed a system
whereby we pass through the vote
to the underlying beneficial owners,
but I point out to you
that the managers do vote,
and in our general
elections, the people do not.
So we get 40% of the
population or whatever it is
who are eligible to vote in the
presidential election voted,
whereas half the people, whatever it is,
it's a very small percentage.
So I wonder if we developed something
that would pass through the vote
to our underlying beneficial owners,
whether we'd have any better system.
My first point.
Second, the Chief Justice
is absolutely right.
When you start at age 25 or whatever it is
to put money away in a retirement plan
chosen by your employer,
you may have a menu, but it's limited.
It's not gonna be the broadest
and invest anywhere you want,
and it won't be invested in
Apple directly, that's for sure.
On the other hand, we need
to develop and have a system
that actually does at
least have some prospect
that when you get to
be 59 and a half or 65,
or now 70 where people are working longer,
you will have some accumulated nest egg,
because all of you who are
in the back of the room
have never tried this,
but some of you in the front of the room
do get social security.
And it's not something anybody can live on
in the city of New York,
in Manhattan easily,
and it's not something that's
really is a real safety net
in most parts of the country.
It's a nice supplement,
but you are at the poverty
line or just above it
if you are to rely solely
on social security.
So we need to develop some system
that allows you to save along the way
and saving with at least
some prospect of a return
is hopefully a better system.
Now, whether that's a
professional money manager
or some other way, we could we
could have a debate about it.
And certainly, over any 50-year period
or almost any 50-year period you pick,
investing in an index fund
that's broadly
representative of the market
and diversified since, who
was it, Harry Markowitz
or whoever said to diversify,
probably has gone up
a fair amount, even
though they've had dips
and many substantial dips along the way,
but if you hold it for a
sufficiently long period.
So we need to develop some system,
and we've developed a money
management system to do that.
And thirdly, I can tell you,
and this is being supportive of your view,
if you look at the
statistics of votes on things
like say on pay, which is
a very hot button issue
and it's very emotionally laden
and may not be the best issue,
but if you look at those votes,
you will see that many companies,
not many get beaten on it,
but many companies wind up
getting 25 or 30% voted
against them on say on pay.
But then you look at the
parallel election of directors
at the very same meeting,
and those directors get reelected
by 90-something percent.
And that's something which
we've said and we believe
that it's not to say on pay
vote that's the important vote.
It's the vote on the comp committee
or the directors who
created the the pay scheme
that we don't think is appropriate.
- It's often the pay scheme
too that they voted on,
the same pay scheme they
voted on three years in a row.
- Correct.
- And they switched because
something happened that year,
not because of the pay plan.
- Yes, but they don't vote
against the directors.
- No, they don't.
- Who created the plan.
- But can I ask you a question?
I mean, what do you think--
- Can I get Jean-Pierre
into the conversation?
- Briefly, briefly, I
wanna make two points.
One is that there's a difference
between short-termism,
we should distinguish
between short-term investing
and short-term actions by
companies and CEOs in particular.
I'll focus on the second one
because obviously, I'm not
a fan of short-term trading.
But when it comes to companies and CEOs,
they have to face into
short-term decisions,
and that is not necessarily bad.
So short-termism in that context
should not be always be seen as negatively
as long as the CEO keeps
his eye on the long term
and as his long strategy,
his long-term strategy,
well developed, well understood.
Second point, it seems
to me that a company
which has a good image in the public,
a good image with its
stakeholders, its employees,
but the public at large
now is very sophisticated.
The young generation has
access to lots of information,
about quality of products,
origin of products,
and the image in the public
will make the company
in the long-term basis.
Those companies who do make real things,
design products, make
products, sell products,
they have to deal with their image.
And it seems to me that
if they have a good image,
then they're worth investing in
because it carries a
promise of good results.
And therefore, investors
should be investing
in those companies that
have a long-term strategy
and are doing the right
things, meaning a good image,
good products and good everything.
So that would be a righteous circle
to pursue, and that's what we are pushing
in the World Economic Forum,
is that this is the way we
should go, in that direction,
because the young generation,
I'm not from that generation,
but they're different.
And they have access to
information completely differently
than older generation has
and deal with it completely differently.
- Let me get, turn it over to the audience
to get questions, comments
from the audience.
Stewart.
- The way I see the short term issue,
there are two aspects of it,
similar to what you said slightly.
One is, is the company being managed
for the long-term growth, not
for its short-term earnings?
Do they make investments
in capital expenditures
versus making sure each year the company,
each quarter, the company does better
than the quarter before
or the year before.
And that's one aspect that I don't have,
I don't see any issue.
I mean, I don't think a
company should be managing
its earnings to please the stock market
and how to show steady growth.
But the other aspect of
activism or short-termism
is extraordinary transactions,
whether a company should be sold,
whether it should spin off a division,
whether it could even be,
whether management is just ineffective.
And those decisions, to me,
seem like they're
particular to the situation.
I mean, I don't think you
would say that companies,
no company shouldn't be sold
if the company doesn't wanna be sold.
It may make sense,
it may be rational to
have the company sold.
And the only way you could analyze that
is to look at the situation
and see, you know, what the issue is.
Should the company be divided?
And does that make more economic
sense to the shareholders,
to the whole community?
So I see these two different
aspects, one very--
- Let me collect a few
comments from the audience
and then we're gonna have a
final run through on the panel
because we are unfortunately
running out of time.
Jeff Gordon.
- It seems to me we might be mistaking
the effect that governance
has in the economy
in a general way.
The macroeconomic environment
has a major factor
in what the right term investing is.
And in an environment in which
the euro may not exist in a year or two,
or the stability of major
financial firms is at risk,
that's hard to invest, quote
for, for the long term.
I mean, in a similar
way, it seems to me that
the New Paradigm, the
stewardship, et cetera,
really misses the lesson
of the last election,
which is to say that the
adjustment costs of economic change
and the competitive pressure
that trade brings on,
the competitive pressure that
good governance brings on,
that's the issue that is really before us.
And I think from the
maintenance of the system,
its ability to invest for the long term
or the short term, it would be a good idea
to bring these collective energies
to focus on how these adjustment
costs of economic change
can be better addressed,
because I think what the,
what we're learning is that
if those are not addressed,
then the legislation that may result
will not be about a change,
you know, voting rules,
but will be a change that
will go in a much deeper way
that I don't think probably would be
to the taste of many in the room.
- Bill Anderson.
- Yeah, it's funny to have,
indeed, a statement like this
that long term is a good way to run things
but the daiLy stock prices
are an unbelievable thing.
But the market is speaking
with or without the exchanges.
We had a session last week on
the West Coast with Donahoe,
who was the CEO of eBay,
the chairman of Microsoft,
and the audience was
mostly tech CEOs and CFOs
who were not public.
And they're saying Apple,
Qualcomm, great companies
that are in the tech space,
or outside of the tech space,
Pepsi, a lot of pressure on short-termism.
Why are we going public?
Why would we ever wanna go public?
And if they are going public,
they're going public with dual class.
So the market is, if the
institutional shareholders
are not going to address
that, the market will speak
by not having companies go
public or going dual class.
I would just say that a couple of things,
when you think about
implementing the paradigm
to some market issues,
one thing is I think
a lot of shareholders are,
over the long term, even activists,
but there is, when a company
has a demand for change,
it usually takes about
three months for a vote.
And directors do not
wanna go through that.
Maybe they should know they
should be going through that.
But the way to get,
when we were defending
Cadbury a few years ago,
we called seven or eight shareholders.
They gave us their views
and we know what to do.
In an activism or a
hostile situation nowadays,
you know, the mutual funds,
it's tough to get their view.
They have a view, they
don't wanna share it.
To get to the long term,
you need to give the voice
back to the companies earlier
than wait till the vote.
And the second thing is,
I think, transparency.
And I think what Leo pointed out around
and Marty on the 13D filings,
but in the last year, we've seen fights
where the shareholders had debt positions
and all kinds of positions
across the capital structure,
the same kind of transparency
that companies have
is not applicable to the investors.
And I think ??? a little bit of that
and ask them how long
??? Is gonna stick around
after the changes made
and whether they're
willing to commit to that,
a couple of modest changes here,
a little earlier feedback in situations,
a little more transparency,
I bet you that'll be pretty helpful.
- So let me now turn it back
to the panel starting with Bob
and further thoughts, final
thoughts from panelists,
and we will close with Marty.
- So I agree with Bill.
I think that will make a difference
since they're small little
steps that try to get there.
And I think Marty's whole
paradigm is aspirational,
and it's good because it focuses people
on the right things to focus on.
But again, unfortunately, I
just think market realities
will dictate, will necessarily
dictate a different outcome,
and we're gonna have to figure
out how to deal with that
in order to come up with a
solution that could work.
- Jean-Pierre.
- I think that to the point I made is that
we intend to develop tools to measure,
to report on long-termism,
on companies that have the
right long-term strategy
and what they do and how they do it.
We are working to have this index,
We use this word, by the summer,
and we'll see where we go with this.
But the key feelings
among the CEOs in Davos,
CEOs in Davos is that
we have to measure this.
We got to find a way to assess this,
to make sure it's not fluff.
- Matt.
- I agree with what my
colleagues to my right just said.
I just wanna point out that tech startups
have access to capital as
private companies at a multiple.
So going public has a
whole different meaning
than it might have been 15 or 20 years ago
where you couldn't get a
multiple except by going public.
Tech companies can,
I mean, we invest in private companies,
so does everybody else,
so it is a decidedly different world.
Look, I think the one party that's missing
here on this panel is a company.
As a real company, you were
a CEO of a real company,
but a real company that
faces the daily pressures
or the quarterly pressures or whatever
and getting their view is pretty helpful.
But I think that the
discussion and the debate
needs to be continued.
I think it's a very healthy
thing and we're moving, clearly,
in a direction we would all support.
And I think it's a tough slog,
but it's well worth continuing to do it.
- Leo.
- I'll finish with just two points.
One, in honor of the
mention of Silicon Valley,
one granular, which is
there is a promising
legal development that has
a realist tinge to the thing
which is called the benefit corporation.
And I think that in the
Silicon Valley and others,
it allows you, and this goes
in the change of control,
it allows you to essentially
temper the doctrine
but with enforceable duties
to a commitment to sustainability,
and that there have to be super majorities
in the context of transactions
where that commitment
to that sustainable approach goes away.
So it's a modest but realist thing
that actually gives some power to it.
On a bigger picture thing, I
wanna mention something again
to the students to think
about this whole overlay
of how perfectly sensible things
that people who have
spent most of their money,
except for me, I guess I'm the
human who hasn't made money
and I'm not that sort of investor,
but perfectly sensible people
of the center, right and left
could agree on in terms of
doing more pricing incentives
and less sort of nitpicky regulation,
things that would move the
dial around disclosure,
how those could all be done,
but why can't they be done?
And it relates to something
about this money management
machine and what's,
one thing I think Matt
would agree on is that
none of you in the back
will be giving your money to
Matt or Fidelity or Vanguard
as an expression of your human values
and for them to pull into
the political process.
And it's also true,
(audience laughs)
it's also true that nobody--
- I agree.
(audience laughs)
- And I'm gonna come back
to what you do about it in a second.
And no one gives their
money, nobody invests in,
you know, I'm an index investor,
so I have money in Exxon Mobil.
I have money in all these things.
I don't wanna invest in them,
and frankly, conservative
economist, Milton Friedman,
believed that nobody invests in companies
in order to be an expression
of their political values.
But the reality is that we have freed
our society's corporations to pour money
into the political process,
and they're all doing
it in their own space.
Marty will tell you we got great reaction
to our Aspen piece.
Everybody came back to us and said,
"95% of what you say, we're with.
"The 5% that asked anything
of our particular industry
"to be part of the solution,
we can't be on board of."
Well, guess what the money
managers have decided.
Because they know that when
they have people's money,
they can't rationally represent them
in the political process,
they've decided to actually
abstain on whether corporations
should give political contributions.
Most real corporate CEOs
don't wanna give money,
and it was a great excuse
to be able to say no.
But the reality is corporate
money is going all the way
into the political process sideways.
And when you look at all the
solutions we've talked about,
from the pricing of the energy taxes,
to pricing speculative trading,
to dealing with disclosure
from activist hedge
funds, all of those things
are heavily influenced
by moneyed interests.
And by the way, it is not a
polity that we would want.
The individual industry lobbying
for what is most important
to their profitability
and each of them getting
individually what they want
does not add up to what an
actual living, breathing
human investor wants in terms
of the creation of wealth
and health in a society.
And that is an aspect of that
that this wonderful institute
that Marty and you have created
can discuss in the future.
- Marty.
- Well, I think we've had
an excellent discussion
of the New Paradigm.
I think we've actually explored
the various aspects of it,
good and bad, and I
very much appreciate it.
I think that we had a very
nice start to the institute,
and I wanna thank Bob,
and Jean-Pierre, and Matt,
and Chief Justice, and you, Ed.
So thank you all, and thank you all.
(audience applauds)
