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A Conversation with Kenneth I. Chenault

Speaker: Kenneth I. Chenault, Chairman and Chief Executive Officer, American Express
Presider: Alan S. Murray, Deputy Managing Editor and Executive Editor, Online, The Wall Street Journal
December 6, 2011, New York
Council on Foreign Relations

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ALAN S. MURRAY: Thank you. Thank you. We're very fortunate this morning to have Ken Chenault as our guest. He has -- as you all know, has been the chairman and CEO of American Express for -- 11 years now?

KENNETH I. CHENAULT: Yes.

MURRAY: His bio is in your papers, so you can read it more extensively. He's been very active on various both private and nonprofit boards and in government advisory committees.

This is part of the Bernard Schwartz Lecture on Business and Foreign Policy.

Please turn your cell phones completely off -- not vibrate, turn it completely off. I can tell by looking that there are a bunch of hyperactive twitterers in this group. (Laughter.) I'm sorry, you won't be able to tweet this morning's meeting. But it is an on-the-record meeting; everything is on the record. And we have CFR members around the nation and the world who are participating and will be able to send in questions when we get to that.

And if it's all right with you, I'd like to start with the news this morning.

CHENAULT: Sure.

MURRAY: Which is Europe.

CHENAULT: Right.

MURRAY: Last week, it looked like the eurozone was about to fall apart. This week, there's a little more optimism. How do you read that, and what effect does it have on your company?

CHENAULT: Well, I think, from my standpoint, we have to be more encouraged than discouraged. But I also think we need to put things in perspective. I think it's very positive that Merkel and Sarkozy seem to have worked out a(n) agreement that can move things forward and give some real credibility.

The question at the end of the day -- it's one thing to set some fiscal targets, and it's one thing to say if people don't agree to those targets that they'll have to leave the eurozone. My view is that I'm hopeful that -- I think it's on Thursday there's a summit meeting -- that we will have some form of a(n) agreement.

That said, what I would emphasize that the key thing for me is what's going to be the enforcement of those fiscal targets, because as we all know, it is one thing to set objectives -- and I think the markets will react positively, because that's good movement -- but then the next question is going to be, soon thereafter, what's the level of confidence that these fiscal targets are in fact --

MURRAY: Because they have targets now which -- right? The eurozone has targets now that have been pretty well ignored.

CHENAULT: Right.

MURRAY: But to the first part of your answer, do you anticipate that some questions that are currently part -- or some questions that are currently part of the euro will not choose to stay in? Greece is the one that's most (recently mentioned ?).

CHENAULT: Yeah, my view is I think the pressure is going to be pretty intense, that I believe that the strong push is going to be for them to accept, because the consequences are so obviously negative on the other side. But that's why I keep coming back to it's one thing accepting, it's another thing executing and implementing.

MURRAY: And how quickly is the -- if there is an agreement on Thursday and Friday and the nations do accept and stay in the eurozone, how quickly is that agreement tested?

CHENAULT: You know, I think it's really hard to predict how quickly the different countries are going to be able to come up with a game plan. I think what Monti was able to do in Italy, I think at least there are signs that he's put together a -- the start of a pretty comprehensive plan. But these things don't happen overnight. And what we do know is that uncertainty is a real enemy, and there's going to need to be a focus on a time frame that's a reasonable time frame, so that people can start to see some signposts that real movement is taking place.

MURRAY: And what difference does all of this mean to us, to you at American Express? And I heard somebody say the other day that there hasn't been this much attention on Greece in 3,000 years. (Laughter.) Why -- what are the ramifications?

CHENAULT: Yeah --

MURRAY: Are you feeling it now? Will you feel it in the future?

CHENAULT: Yeah. Here's what I think is important. First, to put things in context, the reality is that as we look at exports to the eurozone, that's only 3 percent of the American economy overall.

MURRAY: Right.

CHENAULT: But I would say that the industry, as we all recognize, that is far more impacted is the financial services industry. And clearly the uncertainty, the concerns about sovereign debt -- as far as our company, I'm glad that we don't have sovereign debt exposure to the troubled European countries --

MURRAY: Zero? None at all?

CHENAULT: Not to the troubled countries, no.

MURRAY: But what -- which are the troubled countries? (Laughter.) Are you --

CHENAULT: Well, at the end of the day, we --

MURRAY: -- are you counting Italy? Are you counting France? Are --

CHENAULT: -- we only have -- we have very limited -- in Germany and in the U.K.

MURRAY: OK.

CHENAULT: And so I don't think people will call those "troubled countries."

MURRAY: That's pretty good. That's pretty good. Yeah.

CHENAULT: And not very large amounts at all.

But I think what is critical, if you look at the financial services sector, is that if you're a diversified financial services company -- and this is where there's the backdrop of what happens in Europe -- you're already in a situation that you are starting to question, pre-financial crisis, where you were and what the economic drivers were. And if you look at the increased capital requirements, the increased regulatory rules, the changes in consumer behavior, you're hard-pressed, in fact, to say that you're going to be able to return to the economics and, in fact, revenue growth rates that you achieved pre-financial crisis.

MURRAY: It's a much less attractive business.

CHENAULT: That's right, it's a much less attractive business.

MURRAY: To some degree, by intention of the policymakers.

CHENAULT: Right. That's right. Now, what's important, and where I go back and I give a little bit of this history lesson, is the reality is American Express used to be a highly diversified financial institution, if we go back to the '80s. And at least one of the areas that I was involved in the company was, in fact, focusing our strategy. But to remind some people in this room, we used to own Lehman Brothers, we used to own Hutton, we used to own Shearson. And as I emphasize, if we had all that, I wouldn't be sitting up here today. (Laughter.)

MURRAY: (Laughs.) Congratulations. Yeah. (Laughter.)

CHENAULT: But the purpose -- the purpose, frankly, of our strategy was, we firmly believed that we wanted to be in businesses that reinforced what our brand stood for -- not that we thought those businesses were bad, not that we foresaw all the risks. But what is important is I think we're one of the few companies that has not only returned to profitability in economics and revenue growth post-financial crisis, but I think that's also because of the way our businesses are configured.

And so you have the backdrop of a challenging set of issues for diversified financial services institutions. Then you have the overlay of Europe. And going back to the need to take some actions, what's going to be very critical is the level of sovereign debt that's out there; the actions that have to be taken to really improve the economies in those countries. That leads to a high level of uncertainty. And we can all remember several days before Lehman, there were very few people who in fact rejected that the disruption would be as pronounced as it was.

MURRAY: It happens like this.

CHENAULT: That's right. And so I think that the financial services marketplace, as we know, is an interconnected marketplace, and for that reason, we clearly need to be concerned about what's going on in Europe.

MURRAY: And the kind of imminent risk that we felt last week is not going to go away for some time. I mean, this is more of a roller coaster ride than it is a valley and a hill.

CHENAULT: Yeah, I think -- I think it's an ebb and flow. But what I would introduce is at least a level of cautious optimism that if, in fact, a(n) agreement can be struck, that's good news. It's not bad news. And despite the question that I raise of enforcement, I would at least say the momentum is moving in a better direction.

MURRAY: But you are by nature a cautiously optimistic man.

CHENAULT: I am by nature, but I'm also a pragmatist and a realist -- because I never -- (wouldn't ?) have gotten through this -- (laughter, inaudible) -- if I didn't have those qualities.

MURRAY: So, yesterday Standard & Poors put a gun to the head of the eurozone --

CHENAULT: Right.

MURRAY: -- saying that it was going to downgrade the debt of, what, 14, 15 countries --

CHENAULT: Countries.

MURRAY: -- if Thursday and Friday didn't work out well. Do you find it ironic that the -- that the ratings agency that to some degree brought us the last financial crisis has set itself up as the enforcer in this one?

CHENAULT: You know, I think the reality is that given the scrutiny that rating agencies are under, it's no different from the overall regulatory environment. There's more of a bias to be conservative and to make sure that you're protecting your flanks than in fact to take a risk.

I think also -- given the past history, I think there are certainly reasons to raise questions of what's going to happen. And it certainly will give people an increased incentive, hopefully, to make sure something happens.

MURRAY: So it's a constructive role?

CHENAULT: I -- you know, it's hard for me --

MURRAY: Your -- you choose the adjective.

CHENAULT: Well, yes, yes. So what I would say is it is not a(n) unreasonable position. I'm not going to, in fact, say one way publicly whether I agree or not with that position. But I don't think you can look at this and all the circumstances and say: I'm a hundred-percent confident that everything is going to go well.

MURRAY: So S&P tried to play -- or the S&P tried to play the same role in the U.S. in August. August led to the supercommittee and to November. Didn't work out so well.

CHENAULT: No.

MURRAY: What do you make of that experience?

CHENAULT: Yeah, I think it was very disappointing for America. What I've said publicly is I think our leaders need, in fact, to face reality. I think the American people want them to face reality. I think that this need to engage in what I call principle compromise -- it really is in our society increasingly people look at compromise as a weakness. And to me, the way you manage your business, you've got to manage your business against a criteria, you've got to manage your business against values and you have to have principles. And the reality is, you've got to compromise. And I think that -- the absolutist positions that are being taken.

So as I look at the deficit, and I look at this from a business perspective, at the end of the day, we need to cut expenses, we need to deal with entitled -- entitlement programs, we need to reform them. But what's the ratio? So do we have a ratio of, for every $3 of expense reduction, $1 of revenue? But if someone says, look, I want it all done on costs, I don't know of many business that are able to cut their way to glory forever. You do need to in fact deal with the expenses, and I believe in that strongly, but at the same time to take an absolutist position that we're not going to deal with the revenue side I don't think is appropriate. And I think what has to be set out is, what's the framework?

So in my conversations with people on the Hill, what I've said is, how do you define winning? Help me with the ratio here. Is it $3 of cuts, $4 of cuts for $1 of revenue? Because then we can start to fashion a strategy and a game plan.

MURRAY: They said they want the -- you had eight Republican candidates for the presidency who said they won't take a 10-to-1 deal.

CHENAULT: Right. Right. And you know, at -- the reality is, where I start is, I think, where a lot of people is -- are -- is that the Bowles-Simpson commission, I think, did a fabulous job. I think Erskine Bowles and Alan Simpson were just superb. And that was a very, very good start.

And I think we've got to deal with this reality, and I would say the Western world in general, not just the U.S. -- I think our leaders need to speak more directly to their people, and they need to give the context for the situation we face. That's what -- I think anyone in business who is facing a crisis, if they're successful, they're in fact defining the crisis. They're letting people know what sacrifices have to be made. But they're also giving people hope about what's the multiyear strategy going forward.

MURRAY: But it sounds like from your comments over the last 15 minutes that you feel like European political leaders are exercising more responsible leadership than U.S. political -- freedom fries are out and French fries are back, something like that.

CHENAULT: I would not -- I frankly would not go that far at all.

MURRAY: I had a feeling. But I was just trying to see how far you would go.

CHENAULT: No, no, not that far. (Laughter.) No, I would not say that European leaders are necessarily, at this stage, exercising greater responsibility and leadership. The proof is in the pudding of what happens. Do they stick to it?

What I'm saying is, I think in the Western world, in general, part of what needs to happen is we need to have our leaders engaged in principle compromise. They have to have the willingness to in fact confront their electorate and talk to them openly and honestly about the issues. And we need more of that.

MURRAY: So you have gotten personally more involved in policy and politics in the last year. You're a member of the President's Jobs Council, writing op-ed pieces on that and so forth. How has that worked out for you?

CHENAULT: You know, I think that obviously we would like to have more jobs. It's --

MURRAY: Have you made real progress, do you think?

CHENAULT: I think -- I think we have made real progress. The question at the end of the day is the execution. And I'll talk to you about a few of the areas. One is, what we've tried to focus on is a strategy that deals with the unemployment issue from a short-, medium- and long-term perspective, and that it's comprehensive.

I would preface this by all strategies have to be executed. That's going to be the key. But I think the way that we've gone about it is, I do think it's one of the most comprehensive plans that has been created. The first area of focus that we had, that I believe in strongly, is infrastructure and energy development. I think that that is very important. If we look at the infrastructure in this country, it does need to be upgraded, it does need to be repaired. I do think it will create jobs.

I think the second area that we focused on in a comprehensive way was the need to focus on startup businesses, small businesses -- the reality is small businesses have created half of the jobs in the private sector, two-thirds of the net new jobs over the last 17 years -- and really focus on putting a range of programs together on that.

The third, very importantly, is to create a national investment initiative. If you think about trade, those of you who have been to Singapore and have had an experience with the Singapore economic board, the reality is the ECB has a centralized plan for trade and investment. And what we need to do is we need to focus on some inward investment to make America more attractive not just for U.S.-based companies, but for international companies to, in fact, come here. I think that is absolutely important.

The fourth area is regulation and streamlining regulation -- streamlining and making sure we get movement that we can really push the business forward. And I think a number of the regulations we have are not only a burden, but are not well thought out.

And then the last piece, which is absolutely critical, is we've got to develop talent. We need a strategy for this country for talent. There have been a series of studies that by 2020, we will have a gap of 1.5 million jobs just as a result of not having college graduates, enough college graduates. We will have a gap of 1.6 million jobs from a vocational technical standpoint. So if you look at the health care sector, if you look at the manufacturing sector, we're going to have a substantial shortfall. So we think --

MURRAY: So that's the plan.

CHENAULT: That's the plan.

MURRAY: How about the execution?

CHENAULT: I think that the execution, the way we've separated it out, is, one, what are a set of things that can be done by the executive branch? Because from an accountability standpoint, my view is that the executive branch should in fact be focusing on a set of actions that they can take to create jobs. And I'll give you one or two examples of where that is being done.

The second area is, what are the set of things that need to be done from a legislative standpoint? And third is, what are some responsibilities of the private sector and what they have to focus on?

So I'll give you two examples from an executive branch standpoint that does not require any action from Congress at all. And the reality is, as you look at travel and tourism and the whole issue of visas, as we all know, it takes a tremendously long time to get a visa. Now, the result of that is the impact on jobs. If we could substantially reduce the time it takes to get a visa -- and the White House has assigned people on that to reduce that time dramatically --

MURRAY: Has this started yet? Is it happening?

CHENAULT: It has -- it has started. We're starting to see some impacts. But literally, it is not a trivial number; it could be a very substantial number on jobs.

The other issue, frankly, is on permits, existing -- the existing permitting process for construction; if we can reduce the amount of time it takes to get a permit.

So I think there's a lot of efforts that can be done that don't require legislative involvement.

Now, the key thing here for the White House, for state governments is, my view is, every single regulation, every single action should be put through the prism of job creation. And we really need a -- more of a single-minded focus of what are we doing to help create jobs.

MURRAY: Is that happening?

CHENAULT: I think it's -- I think it's starting to happen. You can't have --

MURRAY: Starting to happen.

CHENAULT: Starting to happen. You can't have a conversation --

MURRAY: Because you're also a member of the business roundtable, which has been relenteslessly critical of this administration on this issue.

CHENAULT: I wouldn't say that they have been --

MURRAY: You don't like my adjectives. (Laughter.)

CHENAULT: Yeah, yeah, that's right. I don't -- I don't think they have been relentlessly critical. I think, in fact, there has been a level of cooperation, but there also has been a strong focus that there needs to be comprehensive plans, as I talked about earlier, on trade, investment, on jobs. I -- you can't have a conversation with the president without jobs being top of mind.

At the same time, he'd be the first to say and I'd be the first to say that there is a lot more that has to be done to, in fact, improve the overall economy, and not enough has been done -- (inaudible).

MURRAY: Yeah.

And then the legislative piece, briefly.

CHENAULT: You know, I mean, that comes down similar to the deficit, is, you know, the way I look at it, almost you've got two prize fighters who want to stay in their corner. And so the fight for the people never takes place. We've got to have -- just as we need on the deficit, we've got to have a focus and recognize that we have 25 million people unemployed. It can't be business as usual. And we need both sides coming together on what are the strategies, what are the (tactics ?).

MURRAY: What's the role of presidential leadership in making that happen?

CHENAULT: I think what's important, from the standpoint of leadership at any level, including the president, is you've got to use the bully pulpit of saying from day one jobs are critical. Here are the things that we need to do. Here's what the executive branch is going to do. I think that's very important from a leadership standpoint. They're talking that up more. I think that needs to be talked up more, because that gives you the high ground in fact to say now here are the key things that Congress needs to focus on.

MURRAY: And so from an execution standpoint, give this president a grade: A, B, C, D -- (laughter).

CHENAULT: You know, I'm not -- you know, Alan, you are trying -- you are trying hard. (Laughter.) And I appreciate the effort; I do appreciate effort. (Laughter.) But I always focus on outcomes, and so the outcome is that what I would say is the attitude is one where I do think the president is committed to jobs. But at the end of the day, what I would say for everyone involved, the results have not been at the level that they should be. And I think everyone should be held accountable for those results -- Congress, the president, private sector. I think we all need to be held accountable.

MURRAY: And how about American Express itself? How many -- how many people do you employ in the United States today, versus 11 years ago when you took this office?

CHENAULT: Well, as I said, we used to employ more when we had a lot of financial services companies. But if you look at --

MURRAY: But you can adjust for that.

CHENAULT: But if you look -- yeah. If you look at it on an apples-to-apples basis, I think we've had very good growth. We would have had maybe 10 years ago on an apples-to-apples basis maybe 35(,000), 40,000 employees. We're at 60,000 employees.

MURRAY: In the U.S.?

CHENAULT: No, no, on a worldwide base. In the U.S., just half it; it's basically 50-50. But the growth rates are similar.

MURRAY: So it's remained pretty much 50-50 over those -- over those 11 years.

CHENAULT: Yeah, yeah. Right, right, right.

MURRAY: Interesting.

CHENAULT: And I think what we've seen is we've actually had pretty good growth. We've had good topline growth. That's enabled us to invest in the business. And we've had investments in our existing business. But the other area that we've invested in across the company is, we really believe in the digital transformation that's taking place. And we've made substantial investments in those areas.

MURRAY: Let's talk about the digital transition. I was reading some tech blogger the other day who was talking about how remarkable it is that we all carry around this little pile of plastic cards in our wallets in the current digital age when everybody has a cellphone, seems completely unnecessary. How quickly is that going to change? And what does that -- and when it does change, what is that going to do to your business?

CHENAULT: I'm really excited about the set of changes, because --

MURRAY: Really?

CHENAULT: Oh, absolutely.

MURRAY: Not a little bit scared?

CHENAULT: You know, at the end of the day, I always think it's useful to be paranoid about the competition, paranoid about changes. But one of the things that I always focus on and I've said a lot in our company -- every crisis that we've gone through, whether it was 9/11, whether it was the last one, is, crises you got to use to bring about major change, and I always ask the question: Were you stronger pre-crisis and post-? And fortunately, we've be in a situation where we've always come out of a crisis stronger and you've seen tremendous growth.

We've also used a crisis -- because everyone's focused on the day-to-day, you've got to focus on the day-to-day, but where you can separate yourself out is if you can focus on the day-to-day and where you want to take the company.

And if you look at our business model -- and I'll try to be very, very brief here, but I think what's unique about our company is, we in fact are a diversified payments platform. So unlike Visa or a traditional bank card, we operate across the entire payments landscape. So we acquire merchants, meaning we get merchants to accept our product. Visa does not do that. Some of you may think: Boy, I thought Visa acquires merchants. They don't acquire merchants. Why is that important? It's because of the information that we're able to gather.

Secondly is that we process transactions, and we're a network. Visa is a network; that's -- and they process transactions. It's all they do. They're a network. We also issue cards. Now we have this common platform where we have what we call a closed loop network, where I have all the information on the issuing side and I have all the information on the merchant side, and I can provide algorithms against that information and data and models which help me provide value and services to merchants and value to card members.

MURRAY: And so when the time comes for me to get rid of these two silly little pieces of plastic that you have me carrying around in my wallet --

CHENAULT: Right. Right.

MURRAY: -- and do it on my iPhone instead --

CHENAULT: Which will not be any time soon. But go on.

MURRAY: Oh, there you go. So you'd like a slow transition.

CHENAULT: No, no. Here's the point. What I want is optionality. And the reality is, as I've said to our organization, I frankly care less whether it's a piece of plastic, what the form factor is. It's what's underneath the form factor.

And here's the point. We have a great brand. American Express has an incredibly trusted brand. If you think about the digital world, what people want is, they want to transact with a brand that they can trust, because what's behind the form factor is critical.

Second is, we have outstanding service, whether it's online or offline.

Third is, the data that we have and the ability to integrate that data is, I know what transactions are in fact consummated online or offline. I know all categories of the transactions. I authorize all those transactions instantaneously. And increasingly, if you talk to the Googles of the world and the Amazons of the world, what they will tell you, where the game is going -- it's all about big data. And if you look at the role of payments, payments increasingly is the connective tissue that allows you to in fact access reams of data and information.

And then I'd look at my model, and here's a fundamental difference. Against a bank card model, 60 percent of their revenues are spread. So what they need is, they need customers in fact to revolve. That's not my model. I don't need customers to revolve. I have people say to me, you know, I must be one of your worst customers because I pay you off every month. No, you're one of my best customers, because our model -- only 20 percent of our revenues are spread, because we have fees that we charge for the end-user customer, and we have fees on most of our cards and we have fees from the merchants and we provide the merchants.

Now here's a development online that's happened -- tremendous convergence of online and offline. So it used to be online against offline. But think about what happens in retail now. I go into a store; on my phone -- on my phone is, in essence, a laptop. I get a(n) alert. There's a sale in this store. The GPS tells them I'm in that store. If I can provide information -- and from a closed loop, we're one of the unique entities that can provide that information -- this customer, in fact, is entitled to this type of offer.

So I've done deals with Foursquare and Facebook, lining up our data, allowing customers to opt in with that data, where I can give customers what they want at the time they want it, and I can also provide a capability --

MURRAY: Why -- what effect -- (audio break) -- just on its own?

CHENAULT: Here's the issue. One is, I think if you go ask Sheryl Sandberg, and you ask her irrespective of any --

MURRAY: She'll tell you what she tells us: We don't want to compete with you. (Laughs, laughter.)

CHENAULT: No -- no, no. But what she'll also say is we're one of the best companies to work with, and she'll also say AmEx has -- it's the only one who has a global platform around the world; and because they, in fact, have data across a range of customers and elements, they are the only ones that have a level and scale of data that covers the end-user customer and the merchant.

And what does Facebook -- where do they want to make their money? They want to make their money in marketing and advertising, and in marketing performance; not in payments. So increasingly for us, we in fact are making money in payments, but what we're also doing -- and we've done this historically, but the digital opportunity in our platform enables us to accelerate it -- is we now have a marketplace that's defined: Groupon, Living Social. What is being, in fact, paid for now -- and that's what we're doing -- is bringing buyers and sellers together, and then saying: How much will you pay for new customers?

So when people sometimes talk about the merchant rate -- you've heard that some, the AmEx merchant rate is high? -- our argument is we provide a lot of value, we're four to five times the average charge. Well, guess what the merchant pays to Groupon and Living Social? A 10 (percent) to 50 percent commission. Five years ago, I didn't have that marketplace. Now, in fact, I can point to that marketplace and say --

MURRAY: So you don't think digital -- the digital world puts pressure on your margins?

CHENAULT: I think at the end of the day it will put pressure if we're brain-dead and don't move and don't leverage our model. (Laughter.)

MURRAY: (Laughs.) You're not going to do that.

CHENAULT: We're not brain-dead.

MURRAY: What -- you know, we talked about Facebook, but what about Amazon? I mean, Amazon is the giant in the digital space that does have a (payments ?) platform.

CHENAULT: Here's the example. Again, they have a form of payments capability, but for those of you who have gone on Amazon, I would look at a program called Shop With Points. American Express has the largest rewards program in the world. So if you look at points as a bank, we're 10 to 15 times the size of the next-largest rewards program. That gives us an incredible advantage.

So if you go on Amazon and you're on Amazon Prime, and it becomes a frictionless experience, you can use your membership reward points to purchase anything on Amazon. That becomes a form of virtual currency. And so what is absolutely important and what we're doing is taking the assets that we have of a broadbased platform, the assets of rewards and the opportunity to leverage what we call our closed-loop network -- and now we have what we call a digital closed-loop network -- that we have a range of levers that we can pull and a range of elements that we can work with digital companies to really drive our business.

And I would say the last point that I would make is this transformation is occurring across the company. In online spend -- many of you have heard of PayPal? We're larger than PayPal in online spend. So we do over $100 billion in online spend; PayPal does 92 (billion dollars). They're growing at 20 percent-plus; we're growing at 20 percent-plus.

So I think what's important is my view is -- throughout my involvement is, you want to get in businesses that run the risk that they will cannibalize you, because if you don't do that, you lose. But what you have to do is understand what are the assets that in fact can give you an advantage. And we're (not ?) in a situation where the card business and the assets are legacy assets and we've got to say we've got to get rid of these assets. If we use these assets in the right way, they're going to accelerate our progress.

MURRAY: That's a great issue. That's interesting. One last question, and then I'm going to open it up to the audience. But Occupy Wall Street, your neighbors downtown --

CHENAULT: Right.

MURRAY: -- they were your neighbors for a while -- what do you make of that? What's the lesson? Is there some message there that we need to pay attention to, that you need to pay attention to?

CHENAULT: Yeah, you know, I think it's easy to be dismissive, to be angry, to say they don't really have a coherent approach and strategy. But I think what you can say is there is a level of helplessness and anxiety and frustration about what's going on. Generally, when you have that in a country or a company, it means that people don't have an understanding of where they fit. They don't see a set of strategies that address what their issues are. I do think it is obviously challenging, because you don't know what exactly to address.

But where I would step back is we know we have an income inequality issue in this country and in many countries in the West. We have to deal with it. We spent a lot of time this morning talking about jobs. Some think it is an intractable problem. We've got to deal with it. And so, you know, I think in some cases, for some people, it may be a wake-up call. For others they may say, look, I'm focused on the issues. I don't need this. But I think it is a voice and a set of voices that we should not ignore, even though I can't tell you what the literal message is.

MURRAY: And it's -- and if you go down and if you talk to the people who are there, it was very hard to get a clear, precise message. But one of the messages you -- obviously the inequality was one of the messages, and CEO pay in particular was one of the messages.

CHENAULT: Right, right.

MURRAY: What's the -- and obviously you aren't making as much money as you did in 1995 and 1996 and 1997, but you're still making a lot more than most folks down in Zuccotti Park.

CHENAULT: Yes.

MURRAY: Or what is the -- (laughter) -- what -- how do you -- what's your answer to that? Is the escalation in CEO pay part of the problem or not?

CHENAULT: Yeah, I -- you know, I think, at the end of the day, it's probably too simplistic to say the problem for what's really ailing this country is CEO pay. I don't think that is the problem. I think the problems are far more challenging.

I do think that the issues of CEO pay, over the years, historically, we've obviously had examples where there wasn't a correlation between performance and pay. And my view is, there has to be a very strong correlation between performance and pay.

What I also am concerned about -- despite the excesses -- and I do think the excesses needed to be addressed and need to continue to be focused on -- but where I do have some concerns for the country is an idea that setting up a false limit of how much you could achieve is a very concerning development. So I want to be clear and I want to draw a distinction. What I'm not advocating is that CEOs should be paid outrageous sums. And I think that there needs to be continued focus on pay for performance.

MURRAY: And just hard for people to understand. So how is it we got from 20 X to 200 X -- X being the -- you know, times the average salary?

CHENAULT: I think, at the end of the day, you've got to look at how individual companies have compensated their executives, as well as what's happening in aggregate. And that has to be dealt with.

But what I would also say is, you've got to look at the growth of the economy overall. And as people deal deal in extremes, let's talk through several extremes.

How does one feel -- you know, everyone talks about the tremendous contributions of Steve Jobs, which were unbelievable. The reality is, 10 years ago, when the board bought his plane, people said that was incredibly excessive. Was is excessive? Maybe. But the question is, what was the contribution? How do you balance that off?

MURRAY: Right.

CHENAULT: I think that it is very hard to legislate what happens from a compensation standpoint, because I will tell you: The unintended consequences are incredible.

In my last 30 years, all right, we went from a situation where people said, we want to move away from cash, where in fact if you go back in the '80s and '70s the compensation was lower. But we don't think that there is enough skin in the game for executives. So in fact, these were governance folks, not business people, who said you've got to move the options.

MURRAY: Yeah.

CHENAULT: We want to have more stock out there, because then you have skin in the game. Well, what happened? At the end of the day, people said, even now, if in fact you take over a situation that's a turnaround or the stock is low, and you get options, then you see a report three years later, boy, those options we gave Ken Chenault -- look what's happened!

Well, the company's done pretty well. Yeah, but if we'd known that, we wouldn't have given him the options! (Laughter.) We would've given him cash.

MURRAY: (Laughs.)

CHENAULT: So it's back to what are your objectives, what are your incentives.

MURRAY: Yeah. OK.

CHENAULT: So I -- you know, I would say, Alan, I think that there needs to be a rigorous focus from boards, from governance authorities on defining pay for performance, and there has to be this balance on short- and moderate-term performance.

And I will just say that whenever you get government or you have an overregulation of compensation, you're going to have distortions, unless you simply say we're just going to lower it all the (comp ?).

MURRAY: Yeah.

All right. Let's open it up to the members. Please raise your hand. Did you have a question, Jacob? Right here in the front.

Name, affiliation, and only one question. You can't pile on three questions today. (Soft laughter.) I can, but you can't. (Laughter.)

QUESTIONER: Thank you. Jacob Frenkel, JPMorgan. Thank you very much --

CHENAULT: Thank you.

QUESTIONER: -- for a fascinating presentation.

The beginning of the conversation focused on Europe, with some sense of maybe optimism. The question is, how -- what is the definition of success and what is the real test? If we are talking about a photo op with nice smiles of Sarkozy and Merkel, then the success has been achieved. If it is more signatures, then by the end of the week, we will know. If it is parliamentary approvals in 17 countries, then it's a longer process. If it is the implementation, it's another longer process. And if it is the treatment of the first violator, then it will be even longer process, remembering that France and Germany were the first violators of the previous agreement.

CHENAULT: Right.

QUESTIONER: Will the markets have the patience to wait for all of that, or something must be done up front to define the test and define a success? Otherwise, everyone will look at a different metric.

And it's not a second question, but related -- (laughter) -- given -- no, given that we are talking about a global matter and the impact of Europe, (whose ?) smaller cities -- (automatically ?) is huge, also on the world, what is the role of the U.S. in it? And is -- when Geithner is going there today without a budget agreement in the U.S. and without supercommittee, et cetera, what is the message that he will give them?

CHENAULT: Yeah, I would say that what's very important in the situation that Europe is in is you've got to provide some signposts.

And just to give an example from business, whenever I'm involved in a new business opportunity, the first question you get from investors and analysts after you've announced it is, well, tell me when you're going to generate a bottom line. And you say: But I just announced this new business. We haven't even launched the product.

But part of what then I try to do -- and that's why, in answer to your question, I think that it's going to be a number of those things -- I think first what we have to define is what's the success if we agree on the terms that Merkel and Sarkozy have put out. I think that's an important signpost. I don't think it's overselling, in fact, to say that if we can -- if we are able to get a principled compromise by Thursday, I think the markets will view that positively if they see this is a -- this is a real agreement, this is a real deal; there are components of the deal there. I think that's going to be important.

My view is, if the supercommittee had in fact agreed a week or two before the deadline, I would have said that was positive.

Now the next step, to your point, is going to be what are the targets; as I said earlier, are they going to be enforced. People are going to be looking at what are the individual countries doing relative to their deficit, relative to their economy, what steps are going to be taken. That's going to be important.

So I think part of what we have to prepare people for is what should the expectations be over the next six months, over the next 12 months, over the next 24 months. Back to leadership: That's what leadership needs to do, is to define for people here's what winning is; here's what I'm -- the leader -- I'm going to be very focused over the next 36 months of this happening.

I think -- for the U.S., I think it's constructive that Geithner is going over there. Obviously he's going to say we need to -- you've got to bring stability. You've got to get this deal done. The whole world is looking. Here are all the impacts on the rest of the world.

Obviously our credibility is (hampered ?) some because of failure in the U.S. But I still think it's worthwhile for him to make that trip. But I think defining expectations and success is going to be very important.

MURRAY: Question right here.

QUESTIONER: Thank you. David Rivkin from Debevoise & Plimpton. Given American Express's unique role in the marketplace, you have a special view on trends in the economy.

CHENAULT: Sure.

QUESTIONER: Recently some trends have been a bit positive, we hope. And I was wondering what your view is about the next year and where we might be standing a year from now.

CHENAULT: Good. I've always got to be careful about giving projections, so that I can -- I can stay free. But let me give you a sense of some of the things we've said for the third quarter, and then I'll give you some general comments.

We've been very pleased with the spending performance that we've seen around the world. So we've averaged pretty consistently in the 16-percent growth range in billings year to year, and that's off of a growth of 15 (percent) to 16 percent.

Now, what I would say, that's enabled us to gain substantial marketshare in payments. Again, because the way our model is designed, we don't need the growth of lending since 70 percent of our billings are generated by people who pay in full. So that has helped us.

It also has helped us that we have generally a more affluent customer base. And I think you're seeing a real demarcation, as we have talked about. As I've talked to small, medium and large retailers, I think most of them will tell you that the holiday season was a little bit better than what they thought, and that they were encouraged.

If you look at the growth of online spending, it's been incredible. And it really has moved very well. So, you know, I think that my comments going forward would be, if the volatility continues, and the uncertainty increases, I think we're going to see a further impact on spending.

But what is encouraging is the -- is the strength that we've seen and the strength of the holiday season. I'll just give you one example, is we promoted a program called Small Business Saturday for merchants. And it was a program that was not just focused on using the AmEx card, because we said this is a serious problem the country is facing, and this is one of the few times that I said publicly, you can use competitors' products, use any card you want; use cash, use checks, but the key thing is, support small business, because small businesses create half of our jobs, two-thirds of the net new jobs. And if you as an individual really want to make a difference, this is something you could do.

And so it was a Saturday after Thanksgiving. It was a tremendous success. We got all 50 states to be involved. This is probably one of the only resolutions that was passed unanimously by Congress, which doesn't happen that often. The president was out shopping. But what we have seen were some really strong increases.

And as I said, I always talk to big retailers before or after Thanksgiving. They performed well. The online retailers were feeling very good.

All that said, when you have a high unemployment rate, the GDP growth is slow and the housing market is depressed, you've got to be very careful of saying I see a clear runway. What I would say is, I'm again cautiously optimistic. But it won't take a lot -- it won't take a lot at all to throw things off course.

MURRAY: Yeah.

A question right here, then a question in the back.

QUESTIONER: Doug Haynes from McKinsey. You talked about your excitement with regard to digital payments and digital commerce.

CHENAULT: Right.

QUESTIONER: What do you think the impact will be of those on financial inclusion, particularly in emerging markets?

CHENAULT: Good. I think the financing inclusion point is a really exciting one. I mean, for those people who are not aware, in India there is a massive project going on to give every Indian a financial ID which -- you talk about a massive change in the financial services system and the payments industry, what that could do for the economy of India, it would give them the most advanced financial and payments system in the world. Now, it is a daunting challenge, but they have really some incredible talent against it.

What's also interesting is to understand how it will change the social character of India. Sixty billion dollars of cash is dispersed for social welfare payments in India. We all know what happens when there's a lot of cash in the system, and the corruption, the fiefdoms that develop, the power bases that are created. Financial inclusion can change that in a major way.

But what's also important about financial inclusion is the device that they're going to use to in fact transfer the funds is a mobile phone. So back to your earlier question is, I think you're going to see a leapfrog of traditional payments right to the mobile phone that's going to be massive. Two-thirds of the world's population carry a phone, and the increase in smart phones is tremendous. So I think the financial inclusion movement, which I would put India right at the forefront -- and it's very, very exciting.

And the other point I would make is only 2 percent of Indians use revolving credit. So I think you're going to see -- and growth of prepaid and debit and P2P payments that are going to change dramatically. But if they succeed -- and I will tell you, I was -- I spent a half day with the people involved in it. I was very, very impressed with the quality of the leadership and the team and the resolve. This could catapult India in a -- in a major way.

So I think this concept of financial inclusion is a powerful one because it not -- it doesn't just address the financial and payments infrastructure issue, it really deals with the social inclusion, and I think it can really change the social character of that country in a major way.

MURRAY: A question all the way in the back.

QUESTIONER: Hi. Ninh Sing (ph), with Fortune. Thank you so much for taking the time to talk and share your thoughts. Just had a question going back to U.S. debts and deficits, and I was wondering how you felt about taxes.

CHENAULT: About what?

QUESTIONER: About taxes.

CHENAULT: Yes.

QUESTIONER: I'm just wondering, do you feel that the top 1 percent should pay higher taxes than the rest of the population?

CHENAULT: Yeah, here's -- I would answer that broadly. I -- one is, to me, the biggest issue is not more taxes for the top 1 percent. I think what we've got to be careful about in America is the single-issue focus that we have. The question is, we need a total reform of our tax strategy and programs, and we can't do it in isolation.

And back to my earlier point, if we're going to have tax reform, what we also need to understand is we need a healthy economy. So the point I have on should we increase the taxes, if we increase the taxes, what I think should be important is what are we going to do with respect to entitlement programs and expenses? Because that's not going to close the gap. It could make people feel very good, and I mean that -- and I don't mean that in a patronizing way, if we said, look, at the end of the day, to get the level of support that we need, here's what we're going to do. Then we, in fact, have to put together a comprehensive plan of how we're going to revitalize our economy. And tax reform is one, but simply saying we're going to tax the 1 percent and say we've solved the problem -- what happens next year? What happens the year after?

So I think that what is absolutely critical is that we need to have a forum and a set of dialogues, one, to say: What will it take to make America more competitive? What will it take, in fact, to have a fair tax system in this country? What will it take, in fact, to encourage employment? And if one of the elements is that we, in fact, increase the taxes to the 1 percent, that's not an issue that I, personally, would have a big problem with.

Where I would have a big problem is if someone said: That's the isolated issue, that's the only thing we need to do, and we're going to be in great shape.

I would say you're kidding yourself. We're not going to be in great shape. That would be a temporary relief for some people, but we've got to face the comprehensive issue of tax reform and how we have a sustainable strategy for this company so that all segments can prosper.

MURRAY: Question right here.

QUESTIONER: Good morning. Marshall Sonenshine, Sonenshine Partners. I'm going to ask, as we get to 9:00 here, what might be an ironic question for the CEO of a credit card company. But you could look at the great deleveraging that we talk about going on in this country and Europe, et cetera, and I don't think we really delever. Whoever are the winners and losers in all of this, one could pretty well trace that we have gone from too much debt in consumer and, for -- at a time, corporate life -- corporations are now substantially delevered --

CHENAULT: Right.

QUESTIONER: -- to too much debt in financial institutions and now too much in debt in sovereign or governments. Is it possible that however you look at this and whoever are the winners and losers in pre-crisis and post-crisis life, that we in Western capitalist societies, U.S. and Europe, simply have too much debt and are addicted to it and can't get out from under it, one way or the other?

CHENAULT: Yeah, I would say I hope that's not the case, but I do agree with you fully that the deleveraging that has taken place in the corporate sector, I think, has been pretty profound and in fact has occurred again at a much faster pace than people would have thought in 2008, 2009. I think we have more to go, but I think it's very positive.

I think the consumer deleveraging that's taking place is also bringing about important changes, and it's why, frankly, one of the points that I make when I discuss the traditional payments industry -- I simply make the point that, pre-financial crisis, as we know, the savings rate was zero. I think it's good for society that the savings rate has gone up, and I think that's a very positive development. It will have an impact on the profitability of those institutions that have a heavy reliance on their retail card business and --

MURRAY: Meaning your competitors?

CHENAULT: Yes. (Laughter.) Yes, but I'm trying to keep this very high ground.

MURRAY: At a high level, yes. (Laughter.)

CHENAULT: Yes, but it -- but in all seriousness, what has changed is that I think there's a fundamental change in consumer behavior, and what's going to be very tough for the American people is the deleveraging that has taken place is not just temporary. Can't just be -- (audible inhale and exhale) -- and then you just release everything and you go back.

I think that one of the challenges that governments have, that CEOs have, that I've said in our organization is, I've sort of described this dynamic that it used to be, over the last 20 or 30 years, you'd have a year or two of crisis, but then you'd look out three to five years and you'd say, I think I've sort of figured this out; we're going to be moving in this direction. The world we live in today, I think you got to say, we're going to have a level of uncertainty like we have not had in the last 30 years, and it's going to persist.

And the question is, to what degree will it persist? How do we manage that? And how to manage a company, how to govern a country is an incredible challenge, but I think that the deleveraging issue that you cite, I would say that many companies have not come to grips with the implications of that and how long and pronounced it will be and how it will affect the fundamentals of their business.

MURRAY: So with those encouraging comments, we're going to let everyone go back out to their whitewater rafts -- (laughter) -- and continue the journey.

Ken Chenault, thank you very much.

CHENAULT: Thank you, thank you.

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