From American Affairs Journal:
On October 1, 2018, the newly christened
Klarman Hall opened to much acclaim on the campus of Harvard Business
School. The stunning $120 million building houses a conference center as
well as a gleaming auditorium built around a 32-million-pixel,
1,250-square-foot video wall and a state-of-the-art, modular design that
seats up to a thousand attendees.1
To mark the opening, the school held a daylong series of speeches and
lectures, headlined by the building’s namesake and one of the school’s
wealthiest living graduates, billionaire investor Seth Klarman.
Sixty-two-year-old Klarman leads Baupost Group, a hedge fund headquartered high above historic Boston Common. The New York Times has called Klarman “the most successful and influential investor you have probably never heard of,” while the Economist nicknamed him the “Oracle of Boston,” a comparison to Warren Buffett.2
Like Buffett, Klarman has a cultlike following within so-called value
investing circles. An out-of-print book that he wrote early in his
career, Margin of Safety, now commands over $1,500 for a paperback copy on Amazon.3
Although the building has certainly enhanced his reputation on
campus, the school has long held up Klarman as a role model for its
students. Klarman launched Baupost with several million dollars of his
professors’ money immediately after receiving his MBA from Harvard in
1982, brashly bypassing the apprenticeship model that is common for
aspiring investors.4
When faculty members introduce Klarman during classroom visits, they
emphasize Baupost’s early days as a start-up, and Klarman is presented
both as a bold entrepreneur and a stock-picking wizard with a
near-superhuman ability to make money.
Although famous in part for his reticence, Klarman has come out of
his shell in recent years, accepting more interviews and taking on the
“thought leader” persona that wealthy elites occasionally ascribe to
their peers who display a concern for politics. Klarman does not attend
Aspen or Davos, but many of those who do studiously examine his annual
investor letters, which detail his thoughts on value investing, markets,
macroeconomic trends, and global politics.5
In recent conversations, Klarman has voiced concerns about the state
of Western democracies. After quietly spending decades as one of New
England’s largest GOP donors, Klarman loudly threw his support behind
moderate Democrats in the 2018 midterm elections, an effort to check
what he saw as the cowardice of a Republican Party in full submission to
Donald Trump. The switch from Romney Republican to Clinton Democrat
has been well received at his alma mater, where the student body is
generally economically conservative and socially progressive. Indeed,
with his name on the newest building on campus, Klarman is no longer a
mere role model—he has joined the school’s
pantheon of business heroes. As Harvard president Lawrence Bacow said
during the Klarman Hall dedication, “Seth and Beth Klarman embody what
we hope to see in every HBS graduate—active, engaged citizens working to make our world, our community, a better place.”6
A Symposium on Democracy
In an unusual move, Klarman and Harvard opted to bill the dedication
event as a “symposium on democracy” and invited politicians, pundits,
and political scientists to join them. “My great concern at this moment
is for our democracy,” Klarman said in his opening remarks.7
Later that day, Klarman was joined onstage by Jamie Dimon, another
titan of American finance. The two men have developed an easy rapport
since graduating from HBS in the same class almost forty years ago. The
school’s dean moderated their conversation, which elucidated the day’s
main theme: that business leaders must lead the way in fixing the
country’s broken politics and shoring up the electorate’s eroding faith
in capitalism.
Speaking again that evening, Klarman returned to his disdain for
politicians. He used the language of business to highlight how their
selfishness offends both Klarman the citizen, concerned with the
sustainability of American democracy, and Klarman the value investor, a
patient allocator of capital to America’s best companies and managers:
“Politicians tend to follow the polls instead of their hearts or brains.
They listen more to political consultants than to voters. Our
short-term-maximizing politicians fail to tackle longer-term societal
challenges such as climate change or unaffordable entitlement programs
and the resultant on- and off-balance-sheet liabilities.”8
But it was his rebuke of Wall Street and the nation’s elite business
schools, his alma mater included, that would ripple through the American
business community in the weeks ahead. These constituencies were also
guilty of short-termism and an unhealthy focus on share price
performance, he said. He urged his audience to place their customers
first, to pay their employees generously, and to lead with integrity and
honor.
Klarman closed with a warning of what Washington held in store for them if they did not correct this myopia:
With an overly narrow focus on the near-term maximization
of corporate profits and share price, business leaders leave themselves
vulnerable to criticism and harsh regulation. When business owners and
business schools fail to regularly ask hard questions about capitalism .
. . we increase the chance that when these questions are asked, they
will be asked by ideologues seeking to point fingers, assign blame, and
make reckless changes to the system. One U.S. senator recently unveiled
the Accountable Capitalism Act. . . . This seems both ill-considered
and unlikely to work. I doubt this bill will become law. But when
capitalism goes unchecked and unexamined . . . the pendulum can quickly
swing in directions where capitalism’s benefits are discounted and its
flaws exaggerated. . . . While it’s hard to see how this proposed
regulation would solve the problems that I’ve raised tonight, it’s
exactly the kind of proposal that business will have to contend with
when complex issues go unexamined, and when character, sound values,
restraint, and long-term thinking fail to gain the upper hand.9
At first glance, this is sound—even admirable—advice
for aspiring business leaders. But a closer look at Klarman’s remarks,
as well as the origins and trajectory of his career, suggests a deeply
flawed messenger. Indeed, Klarman’s story provides an interesting window
through which to understand much of what afflicts our economy and
society today.
A considerable amount has been written about the financialization of
the American economy. Less understood is the financialization of
America’s business talent. Klarman, his alma mater, and its peer
institutions are all part of this story. What we confront today—a
business elite dominated by financiers and their squires, presiding
over a disordered economy gutted of both its productive energy and the
ability to generate mass prosperity—is a direct result of this economic and cultural evolution.....
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