Meeting

CEO Speaker Series With Doug Peterson

Wednesday, February 12, 2020
Kevin Lamarque/Reuters
Speaker
Douglas L. Peterson

President and Chief Executive Officer, S&P Global

Presider
Soumaya Keynes

Trade and Globalization Editor, Economist

Doug Peterson discusses corporate leadership, environmental, social, and governance criteria for investing, and S&P Global's role in the world.

The CEO Speaker Series is a unique forum for leading global CEOs to share their insights on issues at the center of commerce and foreign policy, and to discuss the changing role of business globally.

KEYNES: Welcome to today’s Council on Foreign Relations meeting, “CEO Speaker Series: A Conversation with Doug Peterson.” I am Soumaya Keynes. I’m the trade and globalization editor of the Economist and I will presiding over today’s discussion.

And having welcomed you all, I would—I’m delighted to welcome Doug Peterson. So I’m hoping you all have his lengthy bio in front of you, so I’m not going to go through that again. And, obviously, the reason Doug is here is that since 2013 he has been the president and CEO of S&P Global.

So the timings are that I’m going to grill Doug with lots of very, very mean questions for about half an hour, and then you’ll get your turn. So get thinking of yours. And with that, Doug, thank you for coming.

PETERSON: Well, thank you for having me.

KEYNES: So I want to start with arguably the biggest story in the world right now, which is this nasty virus that is—that is going around. So I guess how are you thinking about the impact of coronavirus?

PETERSON: Well, let me start by thanking you for interviewing me today, as well as being invited to the Council on Foreign Relations. I’m a member and I always appreciate being at your events, and so thank you for having me.

Now let’s go to the—to the coronavirus. So I want to give you two perspectives. The first is as a company, and the second is what do we see from our economists and others.

As a company we had to take this very seriously because we have hundreds of employees in China and Hong Kong, across Asia, and there were concerns that they started having about the virus itself as it started percolating up that this was becoming a threat. And so we started thinking about our employees: How are we going to work with them? And we had a combination of working with our employees on the ground—what were they hearing, what were they feeling about this—as well as following the guidance from the government itself. The government officials, after the Chinese New Year, asked employees to stay home for an extended new year leave. And I would probably say everybody in this room who has colleagues in China, they’re probably working from home right now, and in our case they’re working from home. This is probably a very interesting experience for people in human resources to see what is it really like to have all of your employees working from home. And so we have our employees working from home within China, mostly in Hong Kong, partially in Singapore, and we’ve also put in place some deferral of travel into and out of the region, and that’s the way we’ve dealt with it now. We also have daily phone calls. We’re keeping very close to this.

Now, what about our economists and our analysts? What are they seeing from coronavirus? There is a—studies that we’ve done looking at prior pandemics or prior serious health care scares, and they’ve looked at a curve, and they’re expecting that the best-case analysis of this is this peaks sometime in March or maybe the beginning of April. It could be as soon as the beginning of March. It could be as late as into June. But their expectation is it’s going to peak in April. And there will be an impact on the Chinese economy. Our latest forecast would drop the growth of the Chinese economy by seventy basis points, from 5.7 percent to 5 percent, in 2020, with the impact of that being over the next few months. And if you like we can talk about what it means for certain sectors.

KEYNES: I would like that. (Laughter.)

PETERSON: So when you—when you look at this from a sectoral point of view, you’ve already seen the impact on leisure, on travel. So airlines, hotels, they’re virtually empty, and they’re—those types of industries are having a very large impact, which has an impact on their cashflow, potentially on their—on their credit. And so airlines, leisure.

Another group is, believe it or not, luxury goods—luxury goods in two ways. Companies like LVMH and others, they have large, extensive footprints in China, but they also depend on Chinese tourists in New York City and Paris and Rome, et cetera, for shopping. And so you’ve seen a big impact on those.

In the industrial sector, you’re seeing an impact within China on construction because people can’t work right now, on consumer goods because people aren’t shopping.

So across the economy there will be a lot of impact. And the hope is that it’s a short-duration drop of economic activity, and it could be followed by a very fast recovery. In addition to that, the government has a lot of capacity to support the banking system, the consumer system, et cetera. So nobody’s worrying that this is going to be a really long-term downturn, but over the short term it could be pretty severe.

KEYNES: I think in the—in the past sometimes when there have been crises like this they are an occasion for countries—sorry, for companies to realize just how exposed they are to this, you know, extreme supply-chain disruption. You know, do you think that there was less surprise in response to this, perhaps since—you know, since the trade war alerted companies to the tariff risks?

PETERSON: Well, during the tariff risks and the—and the discussions that have been going on in the last year with the tariffs with China, there—you mentioned supply chain. There are a lot of industries that had started diversifying their supply chain, especially things like apparel and more simple electronics. They diversified into Vietnam, Malaysia, Thailand. Vietnam has been a huge recipient of new investment on that diversification.

But Wuhan itself is the center of the automotive industry. And Japanese in particular, and then the Chinese automotive industry, there’s a lot of dependence on Wuhan. And you’re starting to see that disruption hit the automotive manufacturers around the region, and that’s not something that you can move as fast or diversify as fast as something like apparel.

And there will be discussions about this, but this isn’t the first time you’ve seen that. There’s been flooding. There was SARS before. There has been political interruptions. So this discussion about diversification of supply chains is something that this might accelerate that even further, but this isn’t the first time.

KEYNES: What do you make of the—I guess the investor reaction? Do you think that everyone—you know, are we in an unknown-unknown world, or in a known-unknown world?

PETERSON: I think right now the—economists and others would say we’re in a known-unknown world.

KEYNES: Well, they would always say that, wouldn’t they?

PETERSON: Right. That it is unknown, but it’s not anything that’s—that we haven’t looked at before. And it’s going to be, does this extend further? Does the virus have characteristics of being more deadly or mutating more than people would expect? But I think right now people have an expectation this is going to play out over—peaking, as I said, kind of March/April, maybe a little bit further into May or June. But people have modeled that into how they’re thinking about—how they’re thinking about it.

And the other assumption is—the markets are making is that China has a lot of firepower. China has firepower in its reserves, in its banking system, in their ability to provide stimulus to the economy, and so that the—that the Chinese government is going to act in a way that’s going to keep the economy moving.

And so those are the assumptions that the markets are making.

KEYNES: Can I now switch to asking about the experience of your company in accessing the Chinese market? So, as I’m sure everyone knows, in January of 2019 S&P Global Ratings was the first foreign firm to independently conduct a credit rating business in China without—not being part of a joint venture. So first, could you talk a bit about the challenges in terms of accessing that market, and then how that is going for you?

PETERSON: Well, first of all, the interest in being in China goes way back. We’ve already been in China for over thirty years with domestic employees on the ground across all of our businesses. But generally, what we’ve been doing is selling services from offshore into China. And as we’ve watched the evolution of the Chinese financial markets, it was our interest to play a much more deep and active role domestically.

And so the last five years I was looking very carefully at the market and working with our local employees, as well as meeting with the government and the regulators and the financial institutions frequently, and my argument has been that you can make something in China that’s as sophisticated as anything you can make in the world. If you look at the phones that all of us have, the computers you have in your pockets or your purses, you know how sophisticated that is in terms of the manufacturing, the microprocessors that are inside it, the memory, et cetera. But if you go to the banking system, the banking system does not have that level of sophistication.

And so I’ve been—I’ve been talking to the regulators and the Chinese bankers and saying, if you want to have the same level of sophistication in your real economy that you have in your financial economy, you’re going to need to start embracing global standards. And that would be from organizations like ours that have rating agencies, the indexes, data and information businesses. It would be in the capital markets. It would be for banks. It would be for insurance companies. And maybe at the core of what I’m advocating is that they develop an institutional financial market. And this is what I’ve been talking for many years, and I believe that there is interest and really clear commitment from the Chinese to open up their financial markets, which we saw in the recent trade agreements.

And so as we had those discussions over the years, then in the first year of the Trump administration there was a new agreement that came out. It was called the hundred-day agreement. Most of you might not have ever heard of it, but I heard of it because it had a provision in it that allowed rating agencies to be a hundred percent owned by foreign companies. So we immediately jumped on that. It also had provisions for beef and for credit cards. But we immediately jumped on that and started to go—to meet with the PBOC to ask them about filing an application, and that’s how that all came about. Sort of a long story, but it came about and we filed the first application. It was accepted, and we’re very pleased with where we are so far.

KEYNES: And so one of the complaints is—with the way the Chinese authorities behave sometimes is that you can—it may look as though you’re getting access, and then actually there are all these hidden barriers once you get there. Perhaps you’re not getting treated as well as domestic firms. Has your experience been—you know, how positive has your experience been?

PETERSON: Our experience has been so far very positive. We’ve seen no interference. But when we started making our application, I went to the—to the PBOC—to the People’s Bank of China—and I told them—I said, we’re not going to start our business with three people. I said—OK. So we start our business with three people, and I say if we get a couple of ratings we’re going to go to three and then four and then five. I promised the regulators in China that we would start our business as if it was a full-scale business anywhere in the world. And originally what we did is we brought in ten people who are native Mandarin speakers from our offices—from New York and Hong Kong and Taiwan and Australia. We seeded a business with ten analysts. We hired a head of technology, a head of human resources, head of compliance. We set up the entire team in the way it would be set up anywhere else in the world. And then once we started back-testing credits and doing all the work with those ten analysts, then we hired another twenty analysts from the market.

So we started—the day we had our license we had already back-tested, theoretically, hundreds of credits and showed that to the regulators: This is what our ratings are going to look like. And then on top of that we already had thirty analysts who had done hundreds and hundreds of hours of training. And so we didn’t start with three people and say we hope it starts moving; we started with thirty analysts and a very large team around them to get going.

And what I told the regulators is, that’s the way we’ll approach your market. We’re going to take it seriously. It’s a long-term investment. And so I think because of that we’ve also been taken seriously and given a lot of room to operate independently.

KEYNES: OK, so last question on China. So we have this grand, amazing, wonderful phase-one deal that has just been agreed. What is your take on how grand and wonderful/amazing it is? I mean, was there—were there any—and I guess, you know, from a kind of S&P perspective, were there—were there provisions in it on—were there provisions in it that were helpful to you? Did you see anything and say, yes, I’m glad that’s in writing?

PETERSON: Well, there’s a—I have—I look at it in one way, that we had—the tariffs and the negotiations had created a lot of uncertainty. And we had also withdrawn from the U.S. point of view from the TPP, which meant that we were in a bilateral negotiation with China instead of a multilateral negotiation. And so the situation for the business community was one that the tariffs were creating a lot of uncertainty related to financial sector, to trade. When I had to—in our case, soybeans and agricultural products and other products going to China, and then vice versa, Chinese products coming to the U.S. So removing that uncertainty was very positive. It had a positive impact.

Specifically to the provisions themselves going to the financial markets, which I mentioned earlier that I believe that the Chinese are sincere about wanting to reform and modernize their markets, there are provisions inside of this trade agreement that are providing more foreign financial institutions more access to China. Just yesterday MasterCard was given approval on their JV, and they have majority ownership on that. We’ve seen that other rating agencies, the other two big ones—

KEYNES: More competition.

PETERSON: —global ones are going to probably go in the market. And so, you know, we’re—we like competition. In addition to that, we think that something like a credit market—a credit rating agency market—benefits from multiple opinions, and so having other rating agencies in the market, we think it will benefit the market. It will—it will move for a faster adoption of the international standards for information markets, which would be ratings and data services, et cetera. So we see that as positive. We see that—the whole financial market reform, this—from this latest negotiation and where they ended up, that part of it is very positive for the markets. It’s positive for our business. I could talk our own book. But talking broader than that, it’s positive for—it’s positive for the financial markets and for this financial market reform.

KEYNES: OK, great. OK, so on the theme of multiple opinions, I would love now to talk about environmental, social, and governance factors.

PETERSON: Oh, yes.

KEYNES: So this is something that we see that S&P has been very engaged in as a—as a supplier of ESG metrics. So I’m going to play devil’s advocate and maybe kind of give a cynical—some cynical lines, and then you can tell me why I’m being too cynical. So a cynic might say, OK, yes, you know, S&P’s been very supportive of all these fuzzy, cuddly things that we should all care about, but obviously, you know, what’s maybe going on is that someone has identified something that could be measured, and you are in the business of measurement, and so you’re going to do pretty well if something new needs to be measured. Now, one could also point to the various different measures of ESG sort of factors out there, and they—you could say that actually they don’t seem to correlate that well with each other, right? And that raises the concern that perhaps this is just a kind of random rubber-stamping exercise, greenwashing, and not really yet measuring anything real or kind of, you know, not doing what it’s supposed to—what it’s supposed to do. So tell me why I’m being too cynical.

PETERSON: Well, first of all, you mentioned that there’s a lot of metrics out there. So let me just comment a little bit about that.

There are right now, for those of you that aren’t informed or maybe don’t quite know all the themes, it’s there’s a lot of demand that’s started to crop up, especially from investors, and that goes all the way to what you’d call asset owners putting pressure on the investment community to know more about what’s—what are my investments represent when it comes to environmental, social, and governance risks? And so the ESG is the broad definition of the demand that’s coming from the markets into institutional investors to know more about what’s the risk inside of my portfolio—not the credit risk and not the trading risk and not the pricing risk; it’s about what are the fundamental risks that go beyond traditional credit and equity analysis into these new factors.

Today there’s thirty-six different companies that are providing some sort of a rating or a data service around that. The industry is consolidating rapidly. We’re one of those companies that’s doing the ratings, and we’ve actually acquired two or the others, so we’re part of the consolidators. And we see this as a—as an area that is being measured now where companies and investors are starting to say, well, does it matter? And it does matter.

You know, there’s a whole debate. Probably within the environmental, social, and governance factors, the environmental factor is the one where there are investors who are now very keen about what would be the environmental impact of their portfolio. I’m expecting that very soon the ECB out of Frankfurt is going to require all of the European banks to undertake some sort of a climate attribution risk stress test across their portfolios. And so there’s a—there’s an opportunity for somebody like us to have this standardized, independent data that could be used by the investors, by the banks, by the regulators, et cetera.

So we’re approaching it from a point of view of—you mentioned we’re an independent data company. We gather data from many different sources. And so, through our own company and our acquisitions, we’re preparing the kind of data and analytics and benchmarks that we think will respond to the demand.

KEYNES: And do you have any—do you have any evidence that what you’re measuring has any kind of tangible impact, I suppose, on performance measures?

PETERSON: There are a few things that we can measure. So let me just talk a little bit about the factors.

So the E-factors—environmental factors—the most important ones are greenhouse gas emissions. They have to do with chemicals, with water usage, with waste, et cetera. And when you look at that, you can see that right now there’s a—there’s a major concern with energy transition. And you can tell the difference when you look at those metrics of an oil company that is—has a transition plan—that has started investing in their refineries and their pipelines, et cetera, to capture methane, so they’re reducing their methane, they’re reducing their waste, they’re reducing spillage, et cetera—versus an oil company that’s not making those investments. And so when you get the data, you can start determining which one of these oil companies do I want to invest in and which one will be—and so if you think about it in the long run, because of the focus on environmental factors, the oil company that doesn’t start building a transition plan is going to lose capital. Their cost of capital is going to go up. People are not going to be investing in their stock. People are not going to want to buy their debt. And you’re going to see this is going to start—it’s actually starting to happen, but it’s going to become quite severe.

On the social—the S part of it—this is by far the least well-defined. There’s research about diversity. There’s research about safety. The part where you could see today the S factors which are clearly—you can clearly define and see an impact are things like safety. So on the oil and gas industry or the mining industry, your safety record could have an impact on the quality of your—of your business, et cetera.

And then the G side—the governance—that’s been studied for a long time. And for instance, in our rating agency, we frequently see downgrades because of governance factors—bad management, bad risk management, fraud, et cetera, which show up in the G factor. So that’s probably the most well-understood, the most well-documented. E is moving fast and the S is kind of in its infancy of what really matters.

KEYNES: Where do you see demand for these ratings coming from, say, in the next ten years?

PETERSON: Yeah, the demand is going to come from a combination of the—of the regulators, kids who are my children’s age who are—really care about these things. And if you look at the history of this, this started in Scandinavia, in the Nordics, where the Nordics have been very progressive about thinking about environmental risk. And they started—eight years ago I was at a conference in Copenhagen in a room like this, and we had table discussions, and every single table discussion there was—people were talking about environmental risk. And that was eight years ago. And when I came back to New York after that trip and I was at a couple meetings like this, nobody in the U.S. was talking about environmental risk.

And so this has come from Northern Europe. It’s moved around certain centers. So if I were anywhere in Northern Europe, now in most of Europe, if you’re in Tokyo or Singapore, some parts of Australia, you’re going to find when you meet with investors they want to understand what are the risks that are embedded in their portfolio on environmental and social and governance factors, and they want to start managing their portfolios along those lines.

Just one tidbit. And I don’t want to make this sound like an advertisement, but last year—well, twenty years ago in our—in our company we launched a product called the Dow Jones Sustainability Index. And it’s measured by a company called RobecoSAM that we just recently purchased. And the—this is a sustainability index for companies that meet a whole set of factors to be part of this index. So that’s twenty years ago.

Last year we launched the S&P 500 ESG Index. It’s comprised of 333 of the S&P 500 companies that meet the ESG screens. And that—by the end of the year it had already had $450 million of assets under management that was launched by UBS and a couple of other banks. So we rarely see a product take off that fast.

KEYNES: Right. So I want to—I want to build on this, you know, do-gooding to talk about your role in a Business Roundtable statement that, you know, we should redefine the purpose of the company. So can you give us the inside scoop on how that came to pass?

PETERSON: Yeah, this was a—this was an initiative by the board of directors of the Business Roundtable. I’m on the board of directors of the Business Roundtable. And last year—it was about a year ago—we were having discussions about the purpose of a corporation, and the Business Roundtable’s purpose of a corporation was defined to maximize shareholder value.

And in the board meetings—and we were talking with the CEO of—Gorsky of J&J, who was leading the governance subcommittee—we were talking about, well, how many companies around the board manage their companies that the only purpose is to maximize shareholder value? And nobody raised their hand. And we said, well, what do—how do you measure your performance in your companies? And we had a discussion about it, and all of us had some level of metrics on customer satisfaction, on customer—how do customers think about your ability to serve them, are they—are you providing them value. We talked about employees and communities. And in that discussion we said, well, then none of us are managing our companies to be solely focused on maximizing shareholder value; in fact, if you’re not providing good service and loyalty and thinking about long-run relationships with your customers; if you’re not employing your people in a way that they’re motivated, inspired, and they feel like they have an opportunity to grow, and they’re serving customers in a way that they’re satisfied; if you don’t have good risk-management systems, if you don’t have good governance, et cetera; you’re not going to provide a good return to your shareholders.

And so we had a lot of discussions about this. And the way we thought of it at the end is that it’s not only serving your shareholders; it’s an and/and/and/and. You need to do all of these things in order to provide the right kind of shareholder return and the right kind of approach to manage your company for the long run and to be sustainable. And so that’s where—that’s how we ended up, then, deciding to change the statement.

KEYNES: OK. So I’m sure everyone saw there was a bit of a backlash to—against some of this, and I suppose the circumstance you’ve just described is perhaps more relevant to a situation where the economy is doing very well, the labor market is pretty tight. Obviously, you know, a good business will try and do well by their customers, otherwise they’ll lose their customers. And when the economy is hot, you really need to think carefully about employee retention because it’s going to be hard to find new employees. And so I guess one could ask, well, you know, this is lovely, but what happens in a recession, when you might start to see some conflict between, say, you know, wage bills and shareholder value? So I have a stat, which is that, you know, in the last recession profits would have been 24 percent lower had American companies not cut their wage bill by 6 percent. So what happens when, from a corporate perspective, there might be a tension between some of these values?

PETERSON: Well, absolutely. When you—if you get into a situation where you have a recession or a downturn or industry-specific pressure, you have to take a step back and look at how do you continue to be sustainable. So it would not be sustainable to run your business in a way that you can’t continue to make your payroll or you can’t pay your creditors or you’re not able to invest in some future growth, which means that you have to have tradeoffs. And that’s where the role of a CEO, the role of a board, the role of a management committee come in, when you have to start making those tradeoffs and say in order for our company to be a good corporate citizen, to be involved in our communities, sometimes you have to cut costs. Sometimes you do have to make the tough decisions about your employment levels. And I think that that’s consistent with this theme about being a good corporate citizen and having a stakeholder theory to how you manage your company.

KEYNES: OK. OK, so we’re in the last couple of minutes of my time. Can we just briefly talk a bit about technology and AI? So tell me a bit about S&P’s strategy for AI? I know that in 2018 the company bought Kensho Technologies. So can you tell us a bit about your experience with that? Any broader lessons?

PETERSON: Yes, that’s—thank you for that. In 2017 I had been the CEO for about four years, and we had had a strategy for the first four years that was a very simple, very clear strategy around our company on serving markets and how we thought about the portfolio, and we had done a lot of divestitures and a lot of acquisitions. And so we got a point where I said, well, we need to revisit our strategy and think about it now that our portfolio of companies is pretty well set.

And we went out and visited 155 companies. We took some of our very bright people, put them on teams, and we went out and listened to our customers. And while we did that we said, what is the world going to look like in the next five to ten years? And we also asked our customer those questions: How is your work changing, what we do for you, the data and the analytics that we provide for you? How is that changing? And as the result of that work, we came back with a scenario and a theory that said over the next five to ten years our customers are going to be deploying more and more machines in their decision-making. And our theory of the case is that we’re going to end up in a point where it’s going to be humans making decisions assisted by machines.

And so with that theory of that case we said we have to have our own strategy around this. We can’t just be wait and see what happens. We need to lead. We need to be on the lead in this area of AI and machine learning because we think what we do is going to be impacted by that.

And as a result of that—we had already been invested in a fintech portfolio of small companies that are across the data and analytics fields, and one of them was Kensho, which is an AI/machine-learning company based in Boston—in Cambridge. They have about a hundred and fifty Ph.D.s in computer science, math, physics, economics, et cetera. And they were already providing us with services and serving the markets, and we got to know them better as a supplier. And then at one point I said, let’s just buy them. You know, instead of trying to go out and hire a hundred and fifty Ph.D.s in computer science, let’s buy the company and bring them in house.

And we did that. We bought the company. We brought it in house. And I will be honest with you and tell you the first nine months was really tough. It was very hard to figure out how does a traditional, pretty stodgy company, New York-based company, have a group of people in Cambridge that—they have a couple people that work from nine to five, 9 p.m. to 5 a.m. (Laughter.) And they’ve got—you know, it’s just—it is a very different environment and a very loose environment.

They were used to being able to deploy something in a matter of days, and we have our technology cycle on quarters and months. You know, we have releases that are going to come out. We’re at—a batch processing, they were a continuous processing kind of a company. So for about a year it—it was going well and we had really good conversations, but it was—but it was hard.

But what we did is after about six months we said, OK, we’re going to start applying, you’re going to start taking teams in Kensho, and everybody in the company’s going to have to start using them. And then we started getting early winds, and now it’s fantastic. We’re using—across the company we have Kensho projects on data ingestion, on data linking.

We have a project that in our—in our services that are desktop services we have a pilot right now that will go live pretty soon of—it’s something called Omnisearch. It’s a completely new search algorithm for data that instead of reading a field it reads context, and so you can—you’ll be able to search across our data using context.

One final interesting one they did. One of our businesses, Market Intelligence, we print transcripts—earnings transcripts. And when the Kensho team found out that we had hundreds of thousands of transcripts and we also saved the recordings of the call, they built algorithms that listened to the calls and read the transcripts, and now all of our transcripts are being done by a product called Kensho Scribe. So we used to have to have actually people that are court stenographers in India that were typing out earnings calls and then somebody else was editing them, and now this Kensho Scribe automatically reads and processes and prints—comes up with a print of an earnings call, and then we have a team that edits it and makes sure it’s OK. But it completely changed our workflow.

But it’s been fantastic. We have them working across the entire company. And I think that, going back to my original thesis, I believe every company has to have an AI and machine-learning strategy because the world is changing very, very fast.

KEYNES: And on that note I would love to open it up to members to ask questions. A reminder that this meeting is on the record, so no expletives or secrets. Wait for the microphone to come to you. Do speak directly into it. Please stand up, state your name and affiliation. Try to limit yourself to one question. I would encourage that to be a question mark at the end of the question; it’s always lovely. And just, you know, let’s try and get as many people to ask questions as we can.

Yeah. Should we—(inaudible). Should we start at the front and then go back? Yeah.

Q: Hi. Aynne Kokas, University of Virginia. Thank you very much for a lovely talk.

So my question for you is about the ES&G indexes or measurements. I’m curious, have you considered including cybersecurity risk in—or is it included in the governance structure? Or would it be—or are you considering it as a separate potential area to invest in or look at? Thank you.

PETERSON: Yeah, thank you. And cyber risk is definitely on people’s minds, and it will—it’s included in a way that’s implicit but there are a lot of people that want it separately. So when we meet with investors and we talk about how cyber risk will be included in the—in the governance aspects of a company—because you include risk management there—they want to know that there’s some kind of a metric there, but there’s actually an entire new field that goes way beyond just what the ESG factors are for people that want to know what is the cyber risk of a company or an organization.

And there are ways that—there are companies out there that have started—they’re fairly new—and they’re using algorithms and data-search tools to identify the risk of a company from a cyber point of view, which means that they—they’ll look at tools to see how often do companies get hacked, how—is it easy to hack them with passwords. There’s ways that they can look on the Dark Web to see what kind of information is floating around about a company, et cetera, et cetera. So there are companies that specialize in cyber risk, and it’s something that we’re also looking at ourselves.

Thank you.

KEYNES: Yeah.

Q: Hi, Doug. Susan Greenwell from MetLife.

PETERSON: Hi, Susan.

Q: Good to see you.

Recently I know you’ve also had a big focus on gender and women’s empowerment. So I’d love to hear more about your program, and particularly what impact it’s having.

PETERSON: Thank you for that. And I want to give you two aspects of that.

The first is that as a company ourselves, when I first joined the board of directors as the CEO of the company we had one woman on our board out of fifteen board members. And as we transitioned the board and we had some people retire, we shrank our board from fifteen to twelve, and then the next three board members that came on were women. And out of the last six, four have been women. So we shifted our board from being one out of fifteen to four out of twelve.

And one of the reasons I start there is that I wanted to send a message that it matters, and it matters at the top of the company. So if the board of directors is going to take this seriously, then our entire company has to take this seriously.

And about a year and a half ago we had—some of our women economists did some research that was to look at what would be the impact on economies around the world if the participation of women in the workforce was the same level as Norway—basically, use Norway as the benchmark. And for the United States that would mean that our economy would be 8 percent larger, or $1.6 trillion, if you had that same level of labor participation. And we did that work, and there was a lot of work around it.

And we launched a campaign last year about a year ago called Change Pays, and it was a campaign—it’s still live. It’s still going.

And then, as part of Change Pays, we launched that initial research about market participation of women in the workforce. We did work that looked at what would happen if you had more women CEOs, what would be the impact of women CEOs and women CFOs. That research we did in the middle of the year. We showed that companies that have women CEOs and women CFOs for the next two years have outperformed companies that have male CEOs and male CFOs. So it doesn’t give you a lasting forever impact, but there’s definitely the first couple years you see a big pickup in performance. And so we’re continuing to do research around this theme of Change Pays.

And whenever I talk about it, you know, one of the things I always say is, you know, how many of you in this room have a mother? How many of you in this room have a spouse or a daughter or a cousin or a daughter or a child, somebody who you want to ensure that they have the same kind of opportunities in the future that men have? And that was the philosophy behind this program that we did. We want to make sure that we can provide the research and the data and the analytics behind why it’s valuable to have women participating more in the workforce than they do now.

KEYNES: Let me go there and then we’ll—yeah.

Q: Pamela Passman with the Center for Responsible Enterprise and Trade.

There’s a great deal of focus—

Q: It’s not on.

Q: Pamela Passman with the—(comes on mic)—Center for Responsible Enterprise and Trade.

There’s a great deal of focus on corporate culture, increasing focus on the board of directors being responsible for the oversight. How is that going to be integrated, at least into the G or more broadly?

PETERSON: Yeah, that’s absolutely important. One of the things that we’re trying to do, and we know a lot of the other data providers in the ESG analytics, isn’t to necessarily say what’s good and what’s bad, but to report what is—what you see going on in companies—because it’s—it would be hard for somebody like us to say what’s a good culture and what’s a bad culture. Sometimes you can see it because it’s—something doesn’t work, but what we’re trying to do is come up with ways to measure and demonstrate what is inside of the governance.

And I’ll give you an example. In our own company we decided that if we’re going to be rating ESG and we’re going to be providing opinions and facts about it, that we also have to have good practices ourselves. And so one thing that’s very—it’s a tiny indicator of culture is do you have a CEO and a chairman? Are they same role or are they split roles? And we decided in the case of our company we’re going to maintain a split between the chairman and the CEO. It’s a best-governance practice. I know it’s controversial. There’s a lot of people who are chairman and CEOs. They’re not happy when I say that. But we in our company, we decided explicitly that we’re going to keep that split.

And I see benefits from it myself because you have a different dialogue with the board. You have a different dialogue between the board and the company when you have the split between the two roles. So that doesn’t—that’s not a direct answer to your question about culture, but there are things like that that when you measure them and you start reporting on them you can start seeing them as indicators of culture.

But one of other things I’d say is that when you—when you read and look at the different academic research, there’s a lot of groups that—out there right now that do research and write articles about boards and boards of directors and governance. One of the most important themes right now is what you just said, culture. And so every board is expected to be involved in defining the culture of a company, and you can see that through what’s in the annual report. And you can then see the behaviors of the company: How are the—how is the board involved in that culture? And is the board involved in it, or are they just rubber-stamping it, or are they not involved at all? And so those are things that, for this ESG ratings, we will be looking at those things. In fact, we’re already looking at those things. We’re looking at them now. But I do think it’s very important that the board be actively involved in defining, in overseeing, and in helping shape culture in a company.

KEYNES: This gentleman back there.

Q: Barry Wood, RTHK in Hong Kong.

Amazon has complained about China’s digital localization law. Does that impact you?

PETERSON: There are—well, I could complain a lot about a lot of local digitalization laws, not just China’s. And it doesn’t impact us yet. It doesn’t impact us in the sense—in the way we work. We are—the way our company works, because we have offshore products going into China we’ve never had any issues with them going in. And then as we’re developing our domestic market, one of—there’s something called a(n) internet service license. I forget; that’s not the exact name. But there’s a name for that in China that’s very hard to get. And so there—one of the issues in China has been getting licenses to be able to actually operate the way you do in the rest of the world.

But your broader theme about building boundaries or building borders around countries for data privacy, for data rules, et cetera, that’s a difficult topic. And going back to earlier when we were talking about the Business Roundtable, one of the topics at the Business Roundtable that we are talking about right now is actually having a single data-privacy law for the United States. California has a data-privacy law which just went into effect. There’s other states looking at data-privacy laws. You have GDPR in Europe. And so if you start getting a fragmentation of data-privacy laws across the United States, that’s going to make us much less competitive. It makes it much less—make(s) it much harder to have a national, especially a retail-oriented business.

So the question you ask about China specifically is something that’s way beyond just China, making sure that we look at what are the digital boundaries around borders, and how do we ensure that you can still have open architecture, open commerce. And commerce in data is just as large as commerce in goods.

KEYNES: Yeah.

Q: Hi. Jennifer Hillman from the Council on Foreign Relations.

First, I wanted to just thank the question on women and participation in boards, and just wanted to put a little plug in for the Council on Foreign Relations that just a few weeks ago we launched a Women’s Power Index, which is trying to do the same thing for women in government positions throughout the world. And it’s a very cool index if you want to look at whether there are women as heads of state, in Cabinets, in national legislatures, as candidates for political offices in 193 U.N. member states. And again, you can click on it, et cetera. So if those of you that are interested in this, I’m only putting in a little plug for a Council on Foreign Relations product that I think is really interesting and is sort of a complement for what’s happening for women on the government—public-sector side that might be analogous to what you’ve talked about on the private-sector side.

If I could, then, just a quick question on your comments on China and what the—what the phase-one deal or China’s general opening in the financial services sector has meant, because I’m curious whether you’re an outlier in terms of being a rating agency as opposed to credit-card companies or others. Because some of the concern has been that China basically has now finally agreed in a phased way to open up its credit-card market, basically, when the economy has moved on, where no one in China uses a credit card; they all just do Wepay. And so now it’s OK to let anyone in because their economy has moved well beyond that and that, you know, again, good luck to MasterCard, but you know, maybe that’s not such a desired product anymore.

PETERSON: What I would say is that, first of all, we felt like we had been—we had been advocating on the ground for a long time and working hard to demonstrate what would be the power of having independent international standards in the rating-agency space. And I also believe that that coincided at a time when the Chinese genuinely wanted to have more transparent data for credit markets and institutional markets to make decisions. And so I think that we happened to be there at a time when there was a need for what we were doing, and the domestic Chinese rating businesses were rating bonds very high. Most of them are AAA and AA. It’s—even though they might—the inherent risk might be much lower.

So when you come to the question about the MasterCard and Visa and the way the markets moved on, I think that MasterCard and Visa still see value for being in the Chinese market because a lot of the underlying payment systems are still going to go through rails that Visa and MasterCard could be part of, or even—or own or manage.

And so when I look at the next two or three years to see how successful is the opening of the Chinese market, I’ll look across all of the different aspects of it. In addition to the service providers, information providers like us, I’m also going to look at the insurance companies, property/casualty/life insurance; institutional investors, what’s happening with the asset-management companies; what’s happening with the—with the banks. And right now maybe one of the most important indicators I’ll look at is the volume of capital markets activity.

Most—the U.S. economy, one of the most important strategic competitive advantages that we have in this country we don’t talk enough about is our capital markets. If you look at the percentage of capital markets activity for corporate financing in the United States, we’re about 65, 70 percent capital markets; 35, 30 percent banking markets. Europe is not quite the reverse of that. It’s maybe 60 percent banking, 40 percent capital markets. It kind of depends on what’s happening with the central bank, ECB’s rules. Japan is about 50/50, maybe 60/40. But places like China are more like 30 percent capital markets, 70 percent banking. And even in China the capital markets, when a company issues a bond, it’s a short bond. It’s three years and it’s highly likely it goes onto the balance sheet of a bank, not an insurance company, not a pension fund, not a—not a long-term investor.

And so the indicator I’m going to be watching very closely in China is, will their capital market start developing? And that’s where the people like JPMorgan and UBS and Nomura are trying to get in so they can help with that development of capital markets. So credit card, payments systems, rating agencies, indexes, et cetera, and then in addition regular banking, but very importantly capital markets, that’s—those are the indicators I’m going to look at.

Q: Tom Petri, retired member of Congress.

You discussed the Chinese market in some detail, and it’s been very helpful. Could you talk about doing business in India, and what your—what your experience is, and what you think is going to be the future?

PETERSON: Yeah. India is, for us, a really important market in two senses. It’s been a much—it’s been an open market for a long time, and we own a rating agency in India called CRISIL. We own 68 percent of it. The other 32 percent is publicly traded. So we—there’s a board of directors with local board members, and then we have members of our company on the board as well and the person who runs it is part of our management committee. And so the company in India, CRISIL, it’s the largest rating agency. It also has outsourcing, provides services to international banks for risk management and modeling and things like that. So it’s a very important business for us.

We think that India in the long run is going to continue to reform in many ways. India has some challenges on infrastructure. It needs to build out much more sophisticated, more modern infrastructure. And that’s ports; they’re doing a lot on roads, but they need to do more; they have a few good new airports. But they need to do airports, roads, broadband, et cetera, and the country’s aware of that.

The other reason India’s important to us is it’s our largest employee base. We have almost twelve thousand employees in India. We have—our company has a little bit over twenty-two thousand employees, so more than half of our employees are in India in Hyderabad, Ahmedabad, Gurgaon, and Mumbai.

And last year, to show how important India is to us as a company as well as to show appreciation to our employees, we took our board of directors to India for a week. So in November last year our board went to India. We visited all of our sites with at least two or three board members. And by the end of the week we had had our board meetings, but we had also visited—we had seen in person, floor walks and townhalls and things like that, nine thousand out of our twelve thousand employees to show how much we appreciate what they do.

So we have—we’re very, very bullish on India in the long run. It’s very volatile. You know, it goes up, it goes down. There’s challenges on growth trajectory. It’s still very dependent on a rural economy. But when you look at the long-run investments they’re making and their commitment to reforming the banking sector, building infrastructure, they’ve had a couple of advancements that are quite interesting. They have something called the Aadhaar. I don’t know if anybody knows what that is, but it’s an—it’s an individual identification that everybody in the country has and you can use it in ways that disintermediate a lot of middlemen to get financing or money to people or allow them to have more services, et cetera. So there’s a lot of conditions in India that are quite positive, but currently the environment is a little bit slow for various reasons.

Q: Irving Williamson, retired; former commissioner, International Trade Commission.

I wanted to talk to the global competitors of the U.S. And one of the things I think people are concerned about is growing income inequality, failure to invest in infrastructure and education, and things like that. And my question is, the sort of corporate sector’s focus on the ESGs and awareness of all that, does that have the implication for helping the U.S. deal with its own global competitiveness going forward? And I’m particularly thinking of our most competitive sector is probably our services sector, and you’re in the heart of that.

PETERSON: Yeah. Well, first of all, I would say this conversation we had about ESG, if we were sitting, as I said earlier, in Stockholm or Copenhagen, everybody in the room would be really well-informed on it. When I think about this in the U.S., we’re only in the second inning. We’re very much at the beginning of people’s understanding of ESG—what it means, what are the implications—and so this ESG is just starting to roll out in the U.S., the how investors think about it, the kind of data people need and want. And I do think it’s going to move fast. We’re going to move into the third and fourth inning pretty fast.

But when I go back to—maybe reinterpret your question a different way. When I’m meeting with—when I’m meeting with other corporate executives or at the Business Roundtable and we talk about U.S. competitiveness, we believe that the U.S. is a very competitive market. And some of the most—some of the aspects that give us the most competitiveness is our resilience, our rule of law, the ability to have an economy that’s driven by technology. And by technology, I don’t mean hardware; I mean software. I mean the companies like the Amazons and Googles and Facebooks and Apples, companies that have been very innovative, they’ve been resilient. And that’s something that gives our economy a huge competitive advantage. Our financial system, as I said earlier, our capital market system, our banking system, our services, et cetera, those are—those give us huge competitive advantages. And when you go to other markets around the world and you find what American companies are doing well, it’s—those are companies that are always at the top of the list that are doing very well.

We have right now a very competitive energy sector. This is a sector which is giving us a competitive edge. Natural gas is probably the natural transition energy, if you think about energy transition from wood to coal to petroleum to gas to renewables. And even with renewables, there’s a spectrum of what’s more renewable or less renewable—you know, how much metals and chemicals and toxic things are inside of a battery versus what’s in a hydroelectric plant, which is probably the cleanest of the renewables. So if you think about that whole spectrum, the U.S. right now has a very positive competitive position in gas to be one of the leading—one of the leading countries to help with the energy transition with our gas position.

So the U.S. has a lot of competitive advantages, and we need to take—we need to take advantage of those.

KEYNES: OK. I know that lots of people have other questions they want to ask, but to maximize mingling time I’m going to draw things to a close right now. And so I would ask everyone to thank Doug for his time, and thank you all for coming.

PETERSON: Thank you. Thank you. (Applause.)

(END)

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