Davis on Corporate Backlash Concerns

Dan Culloton: Do you see a difference in regulatory risk in the domestic financial holdings you have and the foreign financial holdings you have, such as Julius Baer?

Christopher Davis: Yeah. There is an enormous danger when you get into the world of - particularly investment banking versus commercial banking - that handicapping or restricting one set of competitors in a way that you don't restrict the entire field of competitors disadvantages those companies. So imagine in sports if one set of teams that had been terribly managed and had had terrible...

Dan: We don't know anything about that in Chicago. [laughter]

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Christopher: Well, imagine if there was such a backlash against them that they said, you know from now on, we're capping the amount that you can pay your players. Because we feel that you overpaid for a bunch of palookas that couldn't hit the ball. They couldn't pitch. You overpaid them. From now on, we don't want you to overpay terrible players again, so we're going to put a salary cap on your team. But we're not going to put it on the others. Well of course you can predict what would happen over time. And in a sense, if that team worth was owned by the community, you would be punishing the community twice: for having overpaid the palookas in the first place, but then, in a sense, for being permanently disadvantaged.

So as we think about institutions where highly compensated people may be integral to the way those businesses are run, we do think a lot about whether a domestic company could be permanently disadvantaged.

I think it's unlikely that restrictions will be put in place that will last beyond the period of this political backlash. I don't think anybody in the country is against pay for performance. What we're all against is pay for mediocrity.

I think it expands beyond just the financial sector, to executive compensation in general. Restrictions that require there to be standards that are set in advance, goals that are set. If they're achieved, people get paid extraordinary amounts.

I think the world -- nobody's ever complained about what LeBron James makes. But there's something wrong with a mediocre CEO of a failed company walking away with $100 million or $150 million.

I think it's appropriate that there's a backlash against that. I don't think that will permanently disadvantage us. Remember in Europe, it's often the case that protesters are out there burning effigies and waving torches and pitchforks at executives who are modestly paid in comparison to what they're paid in the US. So I doubt the US - financial institutions or companies in general - will be permanently handicapped.

I think the greater concern is around a corporate backlash that forces double taxation of corporate profits or things like this, that could force companies domiciled here to be at some sort of disadvantage. I think that's the greater concern, when we think about regulatory or populist backlash against corporate America.

You know one of the great points, Dan, is that corporations in America are owned by the people. You know our average client has $14,000 invested with us, and yet mutual funds own more than 50% of the shares outstanding of most of America's corporations.

So that has been one of the great engines of this economy, of wealth creation and of the way our enterprise works. So the idea of punishing corporations in a way is punishing the citizens. I think that is to be resisted.

Dan: Could all those mutual funds that own such a great share of corporate America have done a better job of policing corporate America?

Christopher: Yes, yes. And they still could. I mean, when you think about what we went through with trying to get stock options recognized as what they obviously are, which is a compensation expense, a handful of mutual funds could have made that happen simply through the ballot box. So I do think it is absolutely essential that owners of businesses - really the mutual funds are the owners, and they are voting as proxies for those shareholders - that they vote in the interests of those shareholders and that they take that responsibility seriously.

They don't outsource it to some proxy voting firm. They really make their decisions and they demonstrate what the rationale is for those decisions. Yes, I think that we could have done - mutual funds as an industry - could have done a far better job.

Now I will say that it is often the case that intelligent people can disagree about the right outcome for a company. It is possible that they might have different measurement periods. They might have a different view over whether pressuring the board or voting against certain directors is appropriate or inappropriate.

Remember when people felt that some of the proxy voting firms idiotically thought that Warren Buffet was an unsuited director, or a conflicted director, at Coca-Cola (KO)? So you can get differences of opinion that can make it hard, in a sense, to build a coalition. But I do think that industry is rightly on-notice.

Proxy voting is something we would never outsource at our place. We think it's a core part of our responsibility, and we have very clear principles. But they are not principles that lend themselves to a check the box approach.

They are really principles that are based on the record of the management of having represented shareholders' interest, and the board of having represented shareholders' interest over a long period of time. Not on, well, we're for poison pills or we're against them. Or we're for staggered boards or we're against them. It's not a "check the box" culture. And that is something that can make this a complicated subject.

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