By Evan Osnos
Klarman has criticized business practices he sees as damaging confidence in capitalism. He has been a hot topic at this year’s World Economic Forum, despite not being in attendance.
Davos is having a down year. Every winter, attendance at the World Economic Forum, in the Swiss Alps, provides an informal checkup on the health of global capitalism. China has posted its slowest growth in twenty-eight years, and President Xi Jinping is staying home; France is beset by protests, and President Emmanuel Macron has sent his regrets; and America is slogging through the longest government shutdown in its history, forcing President Donald Trump to cancel his trip. So it’s fitting that one of the most talked-about people at Davos this year is also not in attendance: Seth Klarman, a low-key but highly influential investor based in Boston, whose recent annual letter to investors represents what Andrew Ross Sorkin, of the Times, calls “a huge red flag about global social tensions, rising debt levels and receding American leadership.”
Klarman, who is sixty-one, is the C.E.O. and portfolio manager of the Baupost Group, a hedge fund with twenty-seven billion dollars in assets. Owing to his success in making long-term bets on stocks that he considers undervalued, he is frequently compared to Warren Buffett. (Klarman is nicknamed the Oracle of Boston.) His 1991 book, “Margin of Safety,” which argues for resisting the fads of Wall Street, is long out of print, but regularly sells on Amazon for more than a thousand dollars. His latest letter, a twenty-two-page report that is circulating in Davos, states that “it can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions.”
Klarman is concerned about more than political disarray. He doesn’t give many interviews, but, when I contacted him recently, he agreed to speak because, he said, shortsighted business practices are imperilling public confidence in capitalism itself. Among business leaders, he told me, “I think people realize that we’re not where we should be.” He added, “It’s maybe not an inappropriate ask to say, ‘Let’s all look at just where we were taking things for granted, and where maybe we were shortchanging.’ We took the game we were playing for granted—whether that’s investing, or business, or politics.”
In 2016, Harvard’s Institute of Politics found that only forty-two per cent of millennials supported capitalism. Klarman believes that he and his peers need to prevent their field from being defined by some of its worst actors. “People will say the words ‘Wall Street’ with a derogatory tone. They’re talking about an immoral place, where there’s just disgusting amounts of greed and nothing good happens—which isn’t fair and isn’t true.” He said, “I’m not on Wall Street, I’m in Boston, but you’re tarred with that brush.” On balance, he said, “We’re complicated individuals. Each of us is good in this way; we’re not good in that way.”
In various forms, Americans are engaged in a growing debate over the fundamentals, and the future, of the market economy. Senator Elizabeth Warren is building a Presidential campaign partly around the Accountable Capitalism Act, a bill she introduced last year that, among other proposals, would give workers the right to elect forty per cent of seats on corporate boards. Oxfam, in its latest report on inequality, calculates that the combined fortunes of the world’s twenty-six richest people reached a record $1.4 trillion last year, equal to the total wealth of the 3.8 billion poorest people. In “Can American Capitalism Survive?,” a new book that is attracting attention in Washington, Steven Pearlstein, a Pulitzer Prize-winning business columnist at the Washington Post, contends that the singular focus on “maximizing shareholder value” has “led business leaders to abandon their role as proud stewards of the American system.”
For a generation of business leaders, maximizing shareholder value has been a central doctrine, a theory that is invoked to justify cutting jobs and benefits in order to reward investors with dividends and stock buybacks. But, in a speech at Harvard Business School last fall, Klarman argued that American capitalism has been damaged by the obsession with short-term stock prices. “Does anyone really believe that shareholders are the only constituency that matters: not customers, not employees, not the community or the country or Planet Earth?” he asked.
In those remarks, Klarman challenged C.E.O.s and fellow-investors to accept greater responsibility for the consequences of their actions. “It’s a choice to do things that ‘maximize profits,’ to pay people as little as you can, or work them as hard as you can,” he said. “It’s a choice to maintain pleasant working conditions or, alternatively, particularly harsh ones, to offer good benefits or paltry ones.” Also, without naming specific cases, he criticized the kind of buyouts in which private-equity investors saddled a troubled company with so much debt that it helped push the company into bankruptcy. (The collapse of Toys R Us is a recent example.) He said, “It’s a choice to leverage up your company to the hilt, to pile on non-recourse debt to pay special dividends to the owners, and then walk away if the business falters and the debt comes due. Just because you can do something definitely doesn’t mean that you should.”
In conversation, Klarman is both candid and prone to self-reflection. At one time, he was New England’s largest donor to the Republican Party. He has attracted criticism from liberals for backing conservative causes, and from activists who wanted his fund to cancel its holdings of Puerto Rican debt after Hurricane Maria. But, since the 2016 election, Klarman has been outspoken in his conviction that Donald Trump poses a grave threat to democracy. The shock of Trump’s victory was, to Klarman, an urgent warning. “When I’m confronted with some world event that I don’t understand, like when 9/11 happened,” he said, he thinks, “Oh, my god, the world has been evolving while I wasn’t paying enough attention, and I’d better pay attention.” In the 2018 midterms, he donated heavily to Democratic candidates and to organizations dedicated to shoring up the rule of law, like Protect Democracy. He said, “Evolving is usually called ‘flip-flopping,’ but, as humans, who are we if we don’t evolve? I’m proud that I evolve, because I think people who fail to evolve and learn are part of the problem.”
Raised in Baltimore—his father was an economist and his mother a social worker—Klarman picked his first stock when he was ten years old. He graduated from Cornell, and, after business school at Harvard, he joined Baupost at its launch, in 1982. In the decades since, he has watched investors and corporate executives become increasingly fixated on boosting stock prices at any cost. “I’m convinced, as an investor, that the world I live in every day has gotten more short-term-oriented,” he said. “The pressure on the game changed the game.” Some investors, he said, are too quick to demand ephemeral fixes: “Why aren’t you restructuring? Why aren’t you doing a spinoff? Why aren’t you buying back stock?’ ”
In his view, companies that operate with integrity rarely get enough credit for it from investors or the press. “You have people who are princes, who have good values, who treat people right. We don’t tend to pay a lot of attention; we don’t get a lot of stories about them. The surveys of the most admired businesses—how much do those evolve over time based on your market cap? What’s in vogue and in favor is ‘admired.’ ” He has watched, with chagrin, as Wall Street firms pocketed billions in fees and commissions by steering clients to bad deals that they dismiss as “O.P.M.”—Other People’s Money. “Talking about clients as though they are to be taken advantage of rather than to be honored, and respected, and cherished, as your lifeblood—it’s disgusting, but you see that in individual behavior.” He added, “When one person does that, it’s bad for all the rest of us.”
He told me, “I don’t think it’s too late for business leaders to start doing the right thing for their employees, their clients, and their communities.” And if they don’t? It could lead to regulations that, in his mind, would go too far in constraining corporate behavior. In his speech, he said, “When capitalism goes unchecked and unexamined, and management is seduced by a narrow and myopic perspective, the pendulum can quickly swing in directions where capitalism’s benefits are discounted, and its flaws exaggerated.” Seth Klarman hopes that politicians in Washington will hear his message, but, more to the point, he wants fellow-practitioners to hear him. “If every businessperson, or enough businesspeople, don’t act as stewards of more than just the bottom line, somebody’s going to come along and do it for them.”
Seth Klarman ’s critiques of Washington and of irresponsible business practices share a common target: the selfish disregard for the future. “If we think of free enterprise and democracy as games, a lot of people are breaking the rules and disrespecting the other players and even the game itself. Mitch McConnell is disrespecting the game. Donald Trump doesn’t even know what the rules are. Free enterprise has been good for me and for the world. It has been good for my two-hundred and eighty employees. It has been good for my clients. Let’s honor the system. Let’s make sure that we leave and improve it for the next generation to benefit just as much as we did and with as much respect as we showed.” Otherwise, he said, “What kind of scorched-earth cost might we have to pay for that?”