Luncheon Keynote: Fireside Chat with Paul Singer

Paul deserves a long, extensive, flowery introduction, but since we actually want to hear from him, I won't give him that. Paul Singer is the founder and head of Elliott Management, extremely successful, well-respected hedge fund, and he is also an extremely well-respected intellectual leader in the business community and outside the business community with a huge number of philanthropic endeavors, some political endeavors, chairman of the Manhattan Institute. We've been involved in a couple of things together. And really, I say this honestly, not just a businessman, but an American—one of the Americans I most respect, both for his thoughts, but also for his willingness to take risks to put those thoughts into action.

If you want to get in touch with Paul and stuff, if you want to apply for a job, that's paulsinger at Elliott Management. Just kidding.

Just kidding.

These are business school students. We have to really get to the important stuff. So I thought I'd begin by asking Paul. Paul's given a lot of thought to the current state of American capitalism. He's an active participant, you might say, in the capital markets in so many ways. We'll talk about that for a bit and then talk maybe a little bit also about advice to business school students. American capitalism: healthy, flourishing, on the rocks, in trouble? What do you think?

I think it's at a stage where it's facing two or three almost existential challenges. So I want to talk about the challenge related to corporate governance and the basic tenets of public capitalism in America. I'd also like to talk briefly about public policy, monetary policy, economic policy, and what that may do to harm or really destroy the system over a period of time. So let's start with what has been a magnificent driver of both prosperity and mass buy-in to the notion of economic freedom. Capitalism is kind of economic freedom. And that's the public, not only the public ownership of corporations, enterprises, business enterprises in the United States, but the system that's built for over 100 years, I suppose, built around

facilitating, encouraging, validating the system of public ownership of enterprises. What I'm talking about is the brokerage firms, the exchanges, the ability of little people, regular people to open a brokerage account and/or a margin account and own a piece of whatever they want, Facebook, General Motors, Exxon, and feel that they actually have a part of it. They certainly have a part of it, whether they know it or not, through their pension plans and other benefit plans in many of their places of work. But this system depends upon a perception of fairness, a perception of progress, the ability to make a rate of return, and also the ability to think that there's a fair deal in the governance of the corporations, vis-a-vis the relationship between shareholders, management, and the board of directors, compensation.

Let me tell you exactly what I mean by that. Many of you know that one of our businesses is activism, and activism means not just passively taking an outright position in a company's security, stocks or bonds, because you think they're undervalued, and you think that the market will come to your excellent judgment in some period of time that gives you a rate of return. Activism is doing all that work to assess value and then taking steps, self-help, bootstrap—however you want to characterize it. It's actually taking manual steps to impact the direction of the company, management, et cetera. So let me go back to what I started saying about corporate governance. The basic concept is the shareholders own the enterprise.

They certainly have the residual interest in the results of the enterprise, profits or losses. The shareholders select a board of directors. The board of directors is responsible for the strategy of the company and selecting management. Well, just about everyone in the room knows that that's not how it actually works. That in American capitalism today, far more frequently, there's several impediments to the realization of that ideal. One impediment is that far more frequently, it's the management that actually selects the board of directors, and that cozy arrangement just persists as close to forever as the management cares to take it. Many of you probably who invest may invest in tech stocks, and in many or most of the tech stocks in which you invest, you will find that the founders are

nowhere to be seen. They may be the CEOs, but they own zip in the company. And so what's come to pass in American capitalism is not everywhere, but a tremendous amount of stultification. I'll give you just one example from one of our past crusades. We're still a shareholder. I shouldn't use that word. I'm sorry. And a reminder, this is all off the record. But Bill says that everyone has a cell phone. What's a cell phone? It's a bad thing, right? Hess, Hess Oil Company. When my team showed me Hess several years ago, at first hearing, I couldn't believe it. I couldn't believe how entrenched management was, that management owned some stock. But the board of directors consisted, I believe, of 14 or 15 people.

John Hess Jr., the son of the founder, was the only one on the board who had any oil and gas experience. The rest were either luminaries in life that didn't have any oil and gas experience, or like family trustees of John. And everyone told us when you make your checks to validate what you're thinking about and what you've analyzed deeply, hopefully, everyone says, "Hey, John's a great guy. He's a member of all these clubs. He's a friend." Nobody wanted to go against him. And there had been, I believe, no activist moves. And we embarked on a proxy fight. We made a settlement. And so capitalism is not helped by stultification, cronyism, management boards which do not contain the requisite expertise.

Virtually the entire set of boards of directors in the financial sector in 2006, 7, 8, and before, obviously, had little to no deep understanding of risk, trading, derivatives. And nobody was watching the store when Chuck Prince was dancing, because while the music plays, you have to keep dancing. And Stan O'Neill was destroying a 100-year franchise, et cetera, et cetera. Dick Fould. can we give credit to Dick, who was watching that store. So that's one part of it. Post the financial crisis, public policy has been completely, in the economic sphere, has been completely dominated by monetary policy. And super low interest rates and various forms of money printing or quantitative easing, negative interest rates, zero interest rates, have completely supplanted

the structural reforms that would help capitalism work better for the workers, for the shareholders. So it's been entirely monetary-policy-driven. As a result, and it's also exacerbated inequality. Why? Because the dominant force of this set of policies is rising asset prices, rising stocks, real estate, and bonds as a corollary of the declining interest rates. And so the financial sector asset owners are doing fantastically, and the middle class is under tremendous pressure, and that's part of the populist edginess, which is, as one of its effects, calling into question the broad acceptance of economic freedom, which is the absolute essence of modern capitalism. There has to be an acceptance that somebody can pursue their destiny in the economic sphere, keep more or less what they create and what they make,

There has to be a reason why people that don't succeed in that fashion, people that feel beleaguered, people that are beleaguered, are willing to live with inequality or willing to live with the economic freedom.

These things presumably are somewhat fixable by, well, in two ways, I suppose, by some policy changes in terms of corporate governance. And should that be more of an agenda item for an administration in power? And secondly, fixable by people going into the business world. Maybe say a word about each of those, the policy side and the kind of individual business school graduate thinking about his or her future side.

Sure. On the policy side, you're absolutely right. It is fixable. A lot of the reasons why these impediments and infirmities, really, of American capitalism exist is that responses to crises or public anger or public attention occur. They result in regulatory or legislative changes. And then long stretches of time allow ossification to creep in and allow other franchises, really, to grow up that impedes change. For example, one of the great legal—the legal profession in America, which is way out of proportion to the legal profession in any other country in the developed world, the legal profession is under pressure. And one of the enduring and marvelous, admirable in the sense of a franchise that keeps printing money—

—franchises in American legal practice is the Wachtell, Lipton-led franchise of protection money for corporations. Hire us and we'll ward off—you know, they say the short-termists, the activists, the raiders, whatever names they can come up with. But they're really talking about, 'Hire us, pay us a lot of money, and we have these cool mechanisms which somehow—many of which, most of which have survived court challenges—cool mechanisms to head off change and keep you in there forever.' You know, if an outsider buys more than a certain amount of stock, they get diluted. They lose their voting rights. There's all kinds of poison pills and mechanisms. So I think in the policy area, it's very difficult.

It's difficult because of crony capitalism that is really built over left-wing and right-wing regimes. But there are definitely fixes. There's an activist community now. It's different from the activist community of the 1980s. There's no more or hardly any more greenmail. And the tactics of the 1980s raiders are not really the tactics that are pursued. And many of the people who engage in corporate activism now understand that they need to connect with Congress. They need to have credibility. They need to have sobriety in messaging. And so there are power struggles going on, which I think are very important and important to get right. And it's important for people like myself and my peers to take a role in as unbiased and unconflicted a way as possible to help educate congresspeople who otherwise would just have access to lobbyists or possibly ideologues.

The second part of your question was really interesting because I think that the people in this room, which is an absolutely stunning and stunningly growing crowd of young, prospectively active, successful, intelligent business people—the opportunity and almost the obligation, but I'm not going to put that on anybody, but the opportunity to make a difference, to become not only leaders in finance, business, hedge funds, private equity, venture capital, whatever element of capitalism or quasi-capitalism or policy related to capitalism you choose, I think the time to start thinking about policy and getting involved and the ability to make a difference is actually now. I think it's a mistake for young people to say, 'Well, I'm not rich.'

Now, when I get rich, I'm really going to be a big shot and a big philanthropist or make a difference, blah, blah, blah. Sure, you could do that. But there's no necessary connection, and I would argue that the time to get involved is at the time of your career when you're just in or getting underway or developing your passions, intellectual as well as career passions, because there's so much that could be added to policy and governance, corporate governance, philanthropy, charity, while you are just able to add your body, your energy, your persuasive power to your peers, not just your money. I'll give you one brief example. We have this—one of the things I'm involved in is a charity based in Israel, a philanthropy, philanthropic project,

based upon a book that our partner Dan Sinor wrote about the startup culture in Israel, Startup Nation. Our philanthropy is called Startup Nation Central. It's meant to fill in gaps. Obviously, Israel is the startup nation and there's lots of connections and there's lots of ferment and creativity and business value in Israel now, but there are gaps. And Startup Nation Central is meant to fill in those gaps between entrepreneurs, technologists, innovators in Israel, and countries, companies around the world to help them, the ones that don't yet have connections, solve their problems. One of the members of our board of directors is a guy named Rafael Ruzon. And he just sold his company, BillGuard.

He's a young man. He's like 30. Just sold his company, BillGuard, to a bigger company. It's some kind of cybersecurity in financial sector company. And he's a member of our board. He's super creative. He's interested in entrepreneurship in general, the Israeli economy, helping Israel's acceptance in the world. And he's a great and wonderful addition to the board, the other members of which are Dan and myself, Terry Kassel, my partner who was the interim CEO for several years. So there's ways to get involved in philanthropy, policy, groups like the Manhattan Institute, like the Adam Smith Society, to help and to be the cadre that overcomes what is actually a stacked deck. When you're talking about media, when you're talking about the

the ideological and policy breakdown of probably all of the or almost all of the institutions that you folks attended or attend. We're not talking about 55-45. We're talking in most cases about 99-1, 95-5, 90-10. And what I would say about people like yourselves and the people that I know in the Federalist Society, the legal version, what you folks will be in 10 or 15 years, they have, I believe, 60,000 members. It's fantastic. But what I'd say is, from my observation, I have a center-right program for the study of American foreign policy at Williams College. Because of the orthodoxy and because of the comfort of being part of a herd, part of groupthink, part of being cool by saying the cool things, the cool buzzwords, intersectionality and microaggressions, dude, dudess, whatever.

Because of that, the courageous people, the people who are open-minded, fresh, and the smartest kids on campus are more likely to be or migrate to center-right, because the left-wing orthodoxy, which is now a religion, is mostly full of it. And the smartest kids on campus see that. So it takes courage. It takes open-mindedness. So I would say don't get too narrow. I don't believe it's the most precise quantitative and modeling skills that will govern your success. It is common sense, logic, ability to actually think for yourself and actually survive mentally when you think that either you're out of your mind, all by yourself, or the whole world is crazy, and you're saying, 'But how could that possibly be?'

That kind of thinking, if you sometimes in your life have that kind of thinking, you've got a shot. Because sometimes it's actually true that the whole world has gone nuts, except for you and maybe a small group of hidden compatriots. So I would say that some of those things, at the top of it, your tenacity, your open-mindedness, your ability to actually think for yourself is, to me, at the top of the list. And it feeds into, among other things, being community leaders and being able to add value to your community, whether the community is literally a community, your block association, or your city, or your country.