Seth Klarman and the Threat to American Democracy

In another thinly veiled reference to President Trump, he said that Americans “kowtowed to a guy who was doing everything wrong. Nobody was willing to see the situation for what it was.”

“It makes me mad when business leaders don’t respond to those challenges,” he said.

He criticized politicians in Texas and Florida for attacking ESG and gay rights policies, adding that it made no sense to go after Disney for its opposition of what has been called the “don’t say gay” law.

Klarman said he does not understand conservative and Republican positions anymore. They have historically stood for “wonderful” values, such as fiscal conservatism. But that should start conserving things like the environment. Immigration is a “giant win” for America, he said, “but we are not openly embracing it. Businesses need to find their courage.”

He said he did not want his talk to be a “one-sided smash” of Republicans, “but they deserve it.”

“It doesn’t need to be this hard,” Klarman said, “but we have let it be this hard.”

He praised Ukraine, whose citizens have taken up arms and are willing to sacrifice their lives to preserve its democracy. Ukrainians are dying, he said, but Americans accept a leader who promises not to count the votes properly. He donates to voting reform, but said it is “terrible” that he has to be active politically.

“I am not going to let crazy people steal elections,” Klarman said.

He discussed some examples of his leadership at Baupost. Its clients have become more interested in the impact of its investments and the makeup of Baupost team. He supports those trends and said that the energy behind them is “healthy.”

Klarman said he has a deep responsibility to make every employee comfortable regardless of their politics. He does not tolerate discrimination, but he said there are “limits to tolerance.” Employees cannot express views that tread into rights of other employees to express their values. He also avoids religious issues because they “don’t have a strong place in the workplace.”

“People are glad they know where I stand and that I care about things.”

Every investment is a test for Baupost of its values. He related the story of when they once owned a mall with a gun company, which led to a discussion over what would happen if, for example, the shop sold “Saturday night specials.” He once considered investing in a life settlement business, but passed because it would have rewarded Baupost when people died.

“Just because you can doesn’t mean you should,” he said. “It is better to make less and feel good. Our clients are happy with that.”

The most incisive moment of the session came when Spar asked Klarman how he balances the feedback he receives about controversial issues from his clients, employees, family, friends and the public, including those who have occasionally protested Baupost’s actions.

“I listen to my conscience the most,” he said.

He is very responsive to employees. Employees need to know where a business is going, he said, because they will be more invested in their work. He related that one of the proudest moments in his life happened about a decade ago. He was meeting with an employee who confided that he had come out as gay, and it was because felt comfortable because of Klarman’s open stance on gay rights issues. The employee said that his entire life changed because of that.

“That’s what leaders do,” Klarman said.

“You have a voice,” he said. “It’s your world too, especially when a void needs to be filled. You have an opportunity to do some good.”

He doesn’t pay much heed to protesters, who he said are generally “not open to discussion.” But Klarman spoke about the controversy he faced in 2017, after hurricane Maria, in response to Baupost’s investment in Puerto Rican bonds, when protestors asked it to forgive the debt. Two years before that, Baupost bought bonds in Cofina, a financing arm of Puerto Rico. At the time, Klarman thought the market didn’t understand backing of the bonds, and they were better protected than the consensus believed. When the storm hit, he instructed his team to stop buying the bonds, lest he be accused of profiteering. He said he worked behind the scenes to restructure debt, “but the reality is more nuanced” than what the media reports. As a fiduciary, he could not walk away legally, and Baupost needed to protect its clients. But the debt was restructured at a substantial discount, eventually returning 35 to 65 cents on the dollar.

“It was the right thing to do,” Klarman said. If Baupost had canceled the debt, Puerto Rico would have lost access to the bond markets. As a result of the restructuring, Puerto Rico was able to raise new debt. “We couldn’t and didn’t accept zero,” he said, “but took a substantial discount to make that happen.”

More than half the bonds were held by people on the island. Everyone took a haircut, he said, but the Puerto Rican people were put first.

Now, he said, “the bar is extremely high to get involved in sovereigns,” and he prefers not to be in those situations.

Klarman discussed his approach to philanthropy. He has a family foundation with approximately $1 billion in assets and has joined the Giving Pledge, committing to donate the majority of his assets to charity.

His views on philanthropy were shaped in the mid-1990s, when he was chair of Facing History and Ourselves, an organization that uses history to develop and foster moral reasoning among students and adolescents. He told a story of when Elie Wiesel, the author and Holocaust survivor, was on stage with inner-city children from Chicago. A fifth or sixth grader asked Wiesel, “There are so many problems, where do you begin?” It does not matter, Wiesel said, you just begin; when you see one problem, you find others to solve.

Klarman said he also looks to Warren Buffett and Bill and Melinda Gates, who have a “very thoughtful focus” on areas that not getting attention and where they can “get more bang for the buck.” Klarman’s strategic philosophy for charitable giving is to donate more in areas where he can have a leveraged impact. That has included eating disorders, support for democracy, and improving Arab-Israeli relationships.

“Philanthropy is a place where we see the acknowledgement of those who are well off to lift up others who were not as fortunate,” Klarman said. “It is a source of pride to be a part of that. It is one of many things that can be done to level the playing field.”

Robert Huebscher is the founder and CEO of Advisor Perspectives.

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