SPEAKER 1: This is a production of Cornell University.
JOE THOMAS: My name is Joe Thomas, Dean of the Johnson School of Management.
Thank you. I'm very happy to welcome you to this marvelous event, USA Today CEO Forum. We've been very pleased to work with our colleagues from the School of Hospitality Management--
--School of Hotel Management. And we're thrilled to introduce this dialogue with Ken Chenault, one of the world's great CEOs and leaders. And with USA Today, the nation's largest, most read newspaper. The only other duty that I have today, other than having my picture taken later, is to introduce President David Skorton.
President Skorton joined Cornell in 2006. He is, in addition to being president, he is a member of the faculty of Internal Medicine and Pediatrics at Weill Cornell Medical College and Biomedical Engineering in the College of Engineering. He's an experienced administrator, previously, having been president at the University of Iowa.
He's a board certified cardiologist in case anybody feels chest pains. And he's a biomedical researcher, having worked in many important areas, such as congenital heart disease and cardiac imaging. But in addition to these, he's an accomplished musician and an advocate for the arts and humanities. He is on the board of many national and worldwide organizations and has contributed in many ways.
He's already left his mark at Cornell and in the world. And I believe that we are very fortunate to have as accomplished and experienced a president with the depth and breadth that David Skorton has. So I hope that you will join me in welcoming David Skorton to this event.
DAVID SKORTON: Did I mention this guy's the new Dean of the Johnson School?
I agree with you. Provost made another good choice, . Fantastic It's good to be with you today. And you can just imagine what an accomplished musician I am if I'm here with you today. Anyway, thanks Dean Thomas. It's great to use those words, Dean Thomas. I want to welcome everyone to this USA Today CEO Forum, hosted jointly by these two wonderful colleges and two wonderful sets of leaders, neighbors on the campus, neighbors intellectually, and neighbors geographically.
But it's my special privilege to get on and off quickly today so that we can get down to the business at hand over here, and introduce our distinguished speaker Kenneth Chenault, Chairman and CEO of American Express Company. He's joined by David Lieberman, Senior Media Reporter for the Money Section of USA Today, which I read. How many read that section? That's right, I do. Those of you who don't, you're missing something. I wish you'd read it.
For the past 15 years, David has led USA Today's coverage of some of the major media deals of our time, including Disney, Capital City, ABC, and AOL-Time Warner, among many others. I've read a lot of his copy. We are delighted that Mr. Lieberman has agreed to moderate this session and answer questions that follow Mr. Chenault's talk.
As Amex's Chair and CEO, Mr. Chenault heads a company that is a world leader in providing charge and credit cards to consumers, small businesses and corporations. It is also the world's largest travel agency, offering travel and related consulting services to individuals and corporations in 130 countries around the world.
And I'm pleased to note that at last count, there were 167, I hope that's the right number, Cornellians at Amex. And I just learned a few minutes ago that our graduates are number one in retention at American Express. So Cornellians--
Mr. Chenault began his career at Amex in 1981 as Director of Strategic Planning. Since then, he has made his way up through the travel related services side of the company, and became the company's President and COO in 1997, and assumed his current position in '01. He serves on the boards of several nonprofit organizations in keeping with this company's well-known commitment to good citizenship.
They include the Arthur Ashe Institute for Urban Health, the National Center on Addiction and Substance Abuse at Columbia University, the Smithsonian Institution's Advisory Council for the National Museum of African American History and Culture, Phoenix House, and the World Trade Center Memorial Foundation. He also serves as the Vice Chair of the Partnership for New York City, the Business Council, and the Business Roundtable. And he is a Fellow of the American Academy of Arts and Sciences.
He served as the Durland Lecturer in the Johnson School in '01. And we're so delighted to have you back. Join me in warmly welcoming our guest, Kenneth Chenault.
DAVID LIEBERMAN: Thank you so much for showing up today. It's gorgeous weather and I'm sure there other things one could be doing. But it's great that you're spending time here. And for the hospitality. If not here, then where?
Ken, let's start off with I think a subject that's on everyone's mind, which is the economy. Now Ben Bernanke, the Chairman of the Federal Reserve, said yesterday that we may be in a recession. Your largest shareholder, Warren Buffett, says that we are. Where do you fall on that?
KENNETH CHENAULT: What I would say is there are a lot of different views about where we are. What I try to focus on is to make sure that we have a very flexible business model, that we can deal with a range of economic environments. Frankly whether we are here or not, I can tell you that certainly the economic environment is challenging.
And what I believe very strongly is that what we need to do is not only to understand how to navigate through a challenging economy, but in fact, how to gain competitive advantage and how to figure out ways to serve our customers better. And that's the focus that I believe we need to have.
DAVID LIEBERMAN: There's a school of thought out there that the economic crisis starts with housing, but then it could fall into the credit card business, right on your lap. Do you see this as being falling dominoes?
KENNETH CHENAULT: I think clearly what we've seen is a correlation between falling home prices and the impact on credit. And certainly, we've seen an impact on spending. But what I would say is that the consumer has held up fairly well. We certainly saw a decline in spending in the last month of '07, but the reality is consumers are still spending. We are very, very focused on growing, even in this environment.
We've got to be careful. We've got to be more targeted. But the reality is that I think that the consumer is still holding up. And what we've got to be very focused on as we look through our portfolio of products and services, is what we're doing for our midsize corporate customers, what we're doing for a large market customers, and what we're doing with personal consumers.
DAVID LIEBERMAN: It's interesting you bring that up, because some people thought the deal you got just last week, $1.1 billion for the General Electric Corporate Card's business, was a way to shift your focus away from consumers a bit more and more on to corporations.
KENNETH CHENAULT: I don't really think it's an issue that we're shifting from consumers. What I think is it's building on the fact, and I've really emphasize this point, that we have a very diverse payment's portfolio. We're the largest issuer in the world in terms of consumer spending on a card. We are the largest issuer in small business, and middle market, and large market.
What I believe very strongly though, and it's one of the reasons why I organized in this way, is I put together a business to business structure to be side by side with a focus on the global consumer. Because I think that the risk profile in business to business is a very attractive risk profile. The margins are very high. The credit losses are not as high as they are on the consumer side.
And what I clearly am focused on is growing outside of the US, which is very strong from a consumer standpoint. And in the US, we're growing our consumer business. But the chance to, in fact, acquire that portfolio, and build on our leadership role that we're already playing was actually too good to resist.
DAVID LIEBERMAN: Sticking with consumers for a moment though, I read that consumer credit card debt is approaching almost a trillion dollars last year. That's a record amount. Can consumers continue to pile up this debt? Has it reached a breaking point?
KENNETH CHENAULT: I think what's important is, if you look at write-off rates on a historical basis over a 10 or 15 year period, despite the increase in write-offs, we're still very much in a tolerable range. By no means should anyone be complacent about the credit environment. One has to be very, very focused on that.
But what we really have tried to drive is that our focus is on that high spending, high credit worthy customer. And, in fact, what we want is an array of products that balance our risk profile. And I think what's important is if you look at our mix of revenues in the card business against our bank competitors, the vast majority of our revenues are driven from transactions and fees, not spread income.
Our bank competitors, the majority of their revenue mix is reliant on spread income. So we're in a very different position as far as our economic model. And that's something that I will continue to push on. The reason why we got into the lending business 10 years ago was, frankly, based on customer needs.
We wanted to accelerate our progress in lending. We've been in that longer actually than 10 years, probably 15 years. But the reality is that the lending, what we talk about is that our growth is focused on driving spend. And customers have needs for different types of credit card products. Some people like to pay on time. Some people like to pay right away. And our focus was to make sure we had a range of products and services for our customers.
DAVID LIEBERMAN: But it sounds like you're not terribly worried that a lot of additional people won't be able to pay at all or will have to pay late.
KENNETH CHENAULT: I think what's important is to separate my views on the general economy from the situation that we face with our customer segments. And I think the reality is, with the mortgage prices crisis that is going on, with the economic environment, I think we obviously are concerned and should be concerned.
But as I look at our company, while I'm certainly very, very focused on credit, what I believe is, that we have enough levers in our business, and our portfolio is broad enough that we will be able to generate very good performance.
DAVID LIEBERMAN: You've projected, I think, for this year, was it 5% write-downs, 5% delinquent or non-payment?
KENNETH CHENAULT: What we said was, in fact, that we were making some estimates of what the write-off range would be, 5.1 to 5.3. What we didn't do, because I don't believe in that, is, in fact, to say here's what the number is going to be. What we said is, if, in fact, billings perform at the 8% to 10% level, and write-off rates are 5.1 to 5.3, we believe we can generate decent earnings per share growth.
What I do not want to do is to get into the game of projecting what the numbers will be. What I also emphasized was that when I compared the write-off rates to the historical range, that we are still in what I call a tolerable zone.
DAVID LIEBERMAN: I know you don't want to get into the game, but having put out the 5.1 to 5.3, you're sticking with that now, even after what you've seen perhaps in the last couple of weeks?
KENNETH CHENAULT: One of things, David, that I'm always very careful about is, since we reported our first quarter earnings, what I can't do as project out where we'll be, or say what my comfort level is. I was explaining this inside the company. The reason why I say that is, I love my children and I don't want to go to jail. So I'm going to have to be very, very prudent there.
But what I would emphasize is we are very focused on managing credit. And I think we have demonstrated that we are performing top of class, as I look at our competitors. What I also emphasize though is that we are not as reliant as banks. And I call their model the lend centric model, and or model the spend centric model. And the proof there is in the revenue mix that we have. And so we are not reliant on spread income to the level that our bank competitors are.
DAVID LIEBERMAN: Haven't your [INAUDIBLE] changed though over the last few years. I remember years ago, when you think of American Express, and it was a card that you had to be very rich to get and travelers checks. Now you can use an American Express card at Costco and Burger King.
KENNETH CHENAULT: Absolutely. What's very, very critical, and I think it's important in understanding how to drive strategy and how to meet customer needs, as a company in the '70s and the '80s, we really created a very successful model. But it was focused on T&E spending. As we pursued more growth, what we did was to take this charge card product, which was this pay in full product at the end of 30 days, and we stretched that product too much to appeal to a range of segments.
What we also did was we ignored the fact that even affluent customers sometimes want to revolve their spend. And the reality is that our job is to meet our customer needs in the most effective way possible. And the reality is we were leaving a substantial share of spend on the table.
So someone who shops at Costco-- I don't know if you've been to the parking lot lately in Costco, the types of cars that are parked there, you have a range of customer segments. And our job, in fact, is to meet the range of spending and to gain what I call share of wallet of our customers. So I want their T&E spending, and I want their personal spending.
So what we needed was a range of products that would meet the spending of those customer segments to allow us to grow. And I would say the failure of the company in the '90s to, in fact, have expanded in a more accelerated way, to meet that personal spending, invited banks to, in fact, come through the door of personal spending in to T&E spending.
And so the mantra that I have in our company is we have a spend centric model. We want our organization focused on driving spending from a wide range of categories. Because the opportunity to grow and to penetrate the market with plastic is substantial.
DAVID LIEBERMAN: Let's go to the T part of the T&E, the travel part. You used to think of American Express as being the company you would deal with when you were going to go overseas, because you'd get those travelers checks. Are you still as committed to travel?
KENNETH CHENAULT: Absolutely. What I think is very, very important is this is not an either/or game. It's an end game. We believe that we need to meet your T&E spending needs, and we want to meet your personal spending needs. Travel has continued to grow. We are the largest travel company in the world.
We are very focused, in fact, in building our travel business, which has been very successful online as well as offline. So we have grown our personal travel substantially. And certainly, on the corporate side, from a service standpoint, it is absolutely critical for us to continue to meet the travel needs of our corporate clients.
So the company has a strong history in travel, to your point. But what I'm very proud of is that we have substantially changed the economics of our travel business so that we can operate certain areas in a low-cost way, and other areas, we, in fact, are able to offer some terrific services to our customers and clients.
DAVID LIEBERMAN: And how has the weak dollar affected your travel business?
KENNETH CHENAULT: I think that what we have seen is that on the business side, we have seen good growth still in the US. But the point is we're a global company. And the reality is that our travel business has continued to grow in a range of markets around the world.
DAVID LIEBERMAN: One of the products you've been getting into a lot more is the gift cards, if I'm not mistaken. Obviously, they're very, very successful. I think that your company puts out a report each year showing how much they've grown.
And this year was a record year. There are some consumer groups that have some problems with gift cards, saying that they encourage people to leave money on the table if they don't use them by an expiration date, or that they don't understand all the terms. Do you think that, perhaps, there's some things that need to be changed about the gift card business?
KENNETH CHENAULT: I think, again, if one looks at the entire gift card sector, there are obviously issues that need to be addressed, just as they need to be addressed in the credit card sector broadly. But I think what's important is to have full transparency and disclosure, that customers know the terms. And I think the point is that with us, we have a very, very strong position in the marketplace as being a company that our customers can trust.
It's one of the reasons why our gift card business is doing so well, is they know that we will really stand behind our products and services. What we need to continue to do is to make sure we have very strong disclosure, full transparency, and excellent service.
DAVID LIEBERMAN: And how about the rest of the industry? Do they have some catching up to do?
KENNETH CHENAULT: I think at the end of the day, my view is that there probably is, not just probably, there is more work that needs to be done on disclosure and transparency.
DAVID LIEBERMAN: So what are some other areas where you can grow? It's my impression that the credit card business is getting to be pretty mature at this point.
KENNETH CHENAULT: Here's what's very important I think in fashioning a business strategy, is to be very clear about what your competitive advantages are and how do you define the market. And so what's very important is, even in the US, which people see sometimes is a saturated market in the credit card sector, the penetration of plastic against cash and checks is around 40-plus percent. There is still substantial upside.
But, if, in fact, you are running a lending part of the credit card business, you're looking at growth rates in the 3% to 4% level. When you factor in the penetration levels of plastic against cash and checks, you're getting into 10% to 12% growth rates. And then you overlay, and say, well, what's the penetration level in small business? Pretty low.
Large corporate-- corporations, corporations, sophisticated corporations, still, in fact, do a lot of purchasing with cash and checks. So the opportunity to grow. And then, you go outside the US, and the penetration levels are very low in a range of markets. So you look at Asia, tremendous growth possibilities. Obviously China, tremendous growth.
And so that's why seven or eight years ago, what I said to the organization is, we need to understand what are our core advantages as a company. And we came up with this concept of what we call the spend centric model, of how do we ensure that we're using every lever of our business model to in fact drive spend? What's the satisfaction that we can bring to our customers? What are the loyalty programs that we can develop that will encourage them to spend? What are the personalized services that we can provide?
So the reality is payments is a very attractive area. And now there's one other point I would make that's critical. Is one of the things that capabilities that we have is we, in fact, are in the information management business. I'll explain what I mean by that.
We talk about the fact that we have a closed loop. A closed loop means that in the issuing business, we have some very valuable information about what our customers do, where they purchase. We also have information from the merchants' side of the business.
If we look at one of the reasons why Google is so effective, one of the things that they are selling is that we can make your marketing programs work better. We have a number of programs with our merchant partners where we can bring very attractive offers from merchants in a targeted way to our customers. And so it is a win-win cycle that we have created. So we're using the assets from our business to move up the value chain.
DAVID LIEBERMAN: But for me, as a consumer, it sounds a little bit scary. You've got a lot of information about me. How can I be sure that it wont get stolen?
KENNETH CHENAULT: What I want you to be very, very confident about is that I'm not using any of your personal information, David. But in all seriousness, what we don't share is we don't share individual account data. What is important is we can aggregate, we can model, but we have very strong privacy policies.
In fact, this morning, before coming to the meeting, I had a two-hour meeting going through privacy. Because what our brand is all about is trust. If our customer feels that we are misusing that data, our business goes away.
DAVID LIEBERMAN: But we've seen a couple of examples already where computer hackers have been able to get into some pretty sophisticated systems. You're trustworthy, but how about someone who gets in?
KENNETH CHENAULT: The whole point is that you've got to set up proper controls in your systems. You've got to be vigilant about it. You have to monitor that. You have to have a level of capability that is best in class. And the resources, for the very reason that you've talked about, that we have put into this area have been very substantial. Because that goes to the core.
DAVID LIEBERMAN: Let's talk a little bit about your background. You weren't trained to be a businessman. You went to law school. Tell us about how you went into the corporate world.
KENNETH CHENAULT: Well, let me say that I had very little exposure to business growing up. And so a job in business was just not something that I really thought about. I probably was far more focused on public service or teaching. And that's where I had a strong interest.
I went to law school because I was interested in the law. But growing up, I also was very focused on the civil rights movement. And I saw law as a vehicle to really bring about substantial change. But business was just not known to me in a major way. And I probably had a, clearly now, incorrect view of people in business.
DAVID LIEBERMAN: Incorrect in the sense that you would stereotype them as being--
KENNETH CHENAULT: Stuffy--
--not that open, more closed.
DAVID LIEBERMAN: Greedy.
KENNETH CHENAULT: Not necessarily greedy. Not necessarily greedy, because, frankly, again, my exposure was relatively limited. And it was more a feeling of just the unknown.
DAVID LIEBERMAN: So how do you break in? How do you get to be a CEO from a starting place like that?
KENNETH CHENAULT: You know, what's important, and I guess really a philosophy of my life, is that I've always tried to seek out environments with excitement, where a lot of change was going on. And one of the things I started to feel, but not really realize when I was in law school, because I actually practiced law for two years, is I actually got excited talking to some of the students at a business school about their cases, different issues.
And I frankly got excited about the level of talent. And so when I-- more as a-- almost a lark-- went to Bain and Company, I knew nothing about consulting and what it was like. The reason why I went to Bain is I thought that there were incredibly intelligent people there, and I felt the excitement in the place.
DAVID LIEBERMAN: And you are hired by Mitt Romney, weren't you?
KENNETH CHENAULT: Well, I worked a lot with Mitt, but I was actually hired by Bill Bain. But I did work a lot with Mitt.
DAVID LIEBERMAN: And has he changed much over the years?
KENNETH CHENAULT: Has he changed? Well, he was running for president, as you know.
DAVID LIEBERMAN: Yes.
KENNETH CHENAULT: I don't think he necessarily changed dramatically. He was, at Bain, very, very bright, very focused. And actually I enjoyed working with him.
DAVID LIEBERMAN: So, OK, you go to Bain. Now you're starting to learn about business. What is the thing that you learned that helped to propel your career?
KENNETH CHENAULT: I think there's several things that I learned throughout my career. One, and it obviously wasn't just at Bain, but it was law school, it was the practice of law for two years, or just growing up, is one, that I really feel very strongly is, that many people don't focus enough on execution.
And what I believe very strongly is if you make a commitment to get something done, you need to follow through on that commitment. What I liked about business was I liked the measurements, and the outcomes, and the ability to drive change, and to be held accountable for driving that change.
And I also like the fact that you had to develop both a strategy, but then create a set of arguments and a followership to carry out those strategies. And that to me was incredibly exciting. So part of what I think I learned, both in school, and in law, and at Bain, was how to analyze different issues, and, in fact, to elicit different perspectives. But then, in fact, to come out with a very clear point of view.
DAVID LIEBERMAN: Is there a winning mindset to have? Is there some way of looking at things that you think is characteristic of people who do particularly well?
KENNETH CHENAULT: Let me just give you a few mottos that I've tried to follow that have helped me. And I would say the best definition of leadership, to me, is summed up in a quote, "The role of a leader is to define reality and give hope," Napoleon. And I paraphrased that quote. I don't want to wind up like Napoleon.
What I would clearly say is the reason why that quote resonates with me so much is what is very hard when you're in a leadership position is, in fact, to get reality, and to define it. Because you have so many competing forces, whether it's the business issues you're facing, whether it's people giving you different perspectives. Part of what you got to do as a leader is to really define what that reality is.
And then the second, and this goes back to the winning, is a very bright person can analyze a situation and say, here's the problem. It takes someone, in fact, and it takes a winner to say here are the reasons why you should have hope. Here are the pragmatic reasons, here are the aspirational reasons why you should have that hope.
And I think to have a winning mentality is, and to be a consistent winner, you've got to have a basis in reality. And you've got to have the ability to, in fact, envision what are your objectives. And so for me, for our company, what I've said is I've got two aspirations for the company.
I want us to be one of the most successful companies in the world. Well, a lot of people can give an aspiration I want to be the most successful company, but we've defined it. And so we took our financial metrics, and we said how many companies have achieved those metrics over a 10-year period. This is the way I talk to our people about it.
We looked at 800 companies. I said two. So understand what you're signing up for. Two companies, you know the odds of that happening. They say, Ken, yeah, you know, that's really tough. That's the aspiration.
Second aspiration was I wanted to be, and want us to be, one of the most respected and admired companies in the world. And I think what you want is you want people to clearly aspire, but you also want them to know that you're going to measure how you're doing on that journey.
DAVID LIEBERMAN: There's a lot of talk now about what's really important for leaders is, beyond IQ, is EQ, some kind of emotional mastery. Is that really important?
KENNETH CHENAULT: I think it is important. But I would interpret that in the following way. We would all agree, as you started off with your first question on the economic environment, we all agree in the world we're living in that we're in a more uncertain world. Therefore, what's the implication of that for a leader? You need trust.
So I'd start off with integrity is critical, because you can't gain a followership, if you're asking people to, in fact, take some risk, they have to have a level of choice-- they have to have a level of trust. And so what's important is that the leadership behaviors and the leadership values need to be understood by the people in the company. And the leader has to exemplify those values. And I believe in that to my core.
DAVID LIEBERMAN: And can this be trained? Or is this something you just have?
KENNETH CHENAULT: I think that obviously there are some people who are born leaders. But I will tell you, I think the best leaders are people who will work at it day in and day out. And I do believe that good leaders can be trained. One of things that we've done in our company is we have a very extensive leadership training program throughout the company. I actually taught a class three weeks ago.
And we actually have our business leaders help teach the course and are very involved in the program. And part of it is to make sure that people understand what's the framework and what's the criteria. So what are the leadership behaviors that are tied to the aspirations that I just went through with the company? What are the values of the company?
Because I want people to align with the values that our company stands for. Because at the end of the day, if you don't think you can subscribe to those values, then you're not going to have a level of engagement that's necessary to win in our company. And that's important. So I think that leadership to me is something that everybody talks about, but most people don't spend enough time understanding what are the qualities of leadership, what are the gaps in my leadership that I need to improve, that I need to work on.
When we judge people in the company, one of the first questions I ask, in addition to what were the outcomes, is does this person have any followership. Describe to me the quality and level of their followership. Because when people ask, well, how do you know who's a leader? Pretty easy, just look at the followership. So I think that leadership can be taught. It can be measured. And it needs to be focused on by all levels of management.
DAVID LIEBERMAN: How well prepared is Gen Y for this world?
KENNETH CHENAULT: It is interesting in Gen Y, and the reality is I think there are certain differences. But also believe one needs to have a global perspective as one thinks about Gen Y. Because we tend to just look at the US market. What I would say to Gen Yers is you can have a number of different beliefs, but some of your colleagues in China and India are incredibly hungry, incredibly driven.
And what needs to be focused on is that we really are competing in the global marketplace for talent. And that said, what I do believe very strongly, and, in fact, admire, is that I see in a lot of Gen Yers a view that they have to believe in what they're doing, they have to be engaged.
It's not just going to be about a paycheck. It's can they make a difference. Now, there's also a downside, is you can ask someone sometimes a question, and it's always hard to give anecdotes. But I said to one person who would fit in the GY group, I said, in the short term, what is it that you want? Your job.
I said, well, let me give you a reality check. I don't plan to be here in the short term. But the reality is, again, and what is critical in a leadership context, is to give people what is the context that they should operate in, how should they, in fact, evaluate their opportunity and their success. What is it that they need to learn. What's the level of feedback that you're giving to that person.
And I believe that if you can connect and align someone's values and interests, you have an incredibly motivated group. So I've been very, very pleased with the requirement that a number of Gen Y people have, that you got engagement. And that's what our company is all about. Because to be in the service business, you've got to be engaged.
DAVID LIEBERMAN: And how do you drive innovation in an environment like that? Do you think the temptation is to play it safe?
KENNETH CHENAULT: I think that the enemy of successes is staying with the status quo. And you constantly have to challenge your status quo. And you want to reinvent or invent the company that's going to put you out of business. That has to be the focus. And if you want to be a leader, a leader as a company, what you've got to talk to your organization about is you have to innovate. You have to bring about change.
And those companies, and we see it all the time, that stand still and get complacent. And I can speak from experience when I look at the Amex of the '80's and the early '90's. I came to the company in 1981, incredibly successful company, that in fact stayed in its strategy too long. And they thought they were in the groove of success. And that became a rut.
And the rut was we are only a charge card, we're only going to be focused on T&E. We're not going to meet a range of needs. And the reality is that the level of innovation that has to take place has to be at a very, very high level. So in this environment, what do you think is one of the key themes I am stressing this year? Is innovation.
Because in a downturn, what I've emphasized to our organization, and I really think you need to take an athletic stance, which is you've got to be on the balls of your feet. In a downturn, most people are on their heels. Why do you think they get pushed down? As I look at our history, we have, in fact, in the most recent downturn of 2001, 2002, when we had the impact, the devastating impact for our company, of 9/11, and the travel sector was hit, in 2002, we also made major investments in our company.
And so what you want to do is to innovate even more in a downturn. Because that's where you can gain tremendous competitive advantage. So in addition to the investments we're making in the businesses, I, in fact, established this year a $50 million fund that I would like to pay out for the company, that employees around the world come up with ideas, present proposals. We have a range of groups that evaluate those, and that we're going to invest in and move forward.
Clearly, now, am I concerned from a contingency standpoint about the environment? Yes. We have we have tremendous focus on that. So you can't blithely say I'm going to ignore the environment. You've got to be very, very focused on the short term. But part of the job of a leader is to have that balance between the short term, and the long term, and the moderate term.
And so I emphasized that, not only to our employees, but to our analysts. Is to say, look, I want to be very, very clear. I'm managing this company for the long term. And the way you're going to be a long term leader is through innovation.
DAVID LIEBERMAN: Talk to us for a moment about compensation. Executive compensation has become a hot button issue at this point, that maybe too many executives have depended too much on this argument that they need to be incentivized by a higher paycheck. First, do you think that that's true, that there's been too much focus put on paying that top person more? And secondly, talk to us, if you would, about really the innovation that America Express came up with, with your latest package, it's more of a long term.
KENNETH CHENAULT: You know, what I believe, let me just say, personally, one, what motivates me, and I want to be very clear, I think compensation is important. But what motivates me is really driving success. And I think if you look at the best CEOs out there, it doesn't mean that I'm going to give up my paycheck. I want to be very clear. That's not going to happen.
But what I want to emphasize is that really is not what gets me up in the morning. And I am not, just on my personal style, not someone who goes through every component of my compensation package. But what I am very, very focused on is driving for success. Now, in my newest package, I believe that the interests of the CEO need to be aligned with the shareholders.
And the board has felt that the performance of the company was very good. They wanted to increase some of the financial incentives. But, in fact, the performance criteria is very, very strong, and very significant. So I went back to the objectives that I've set for the company, and I won't go through each of them because it will take too long.
But if you went through the financial metrics, and said you've been on a really good performance curve for the last seven years, those objectives are very high. And the reality is if we achieve those objectives over a five or six year period, we will be on that list of only two or three companies that have achieved that level of performance.
Secondly, the performance of our stock has to be above the composite performance of the S&P by a certain percentage. And I think this is why some people, surprisingly, in the media have said it's a package that is aligned with shareholders.
What I think is important is no one wants to work for free. There has to be a balance in compensation. But also, I believe if, in fact, you have an alignment between the performance criteria and the pay, you're in a much better situation. And if I don't hit those targets, I don't get any of that compensation.
DAVID LIEBERMAN: Generally speaking, let's take you out of the equation, generally speaking, has executive pay gotten out of hand?
KENNETH CHENAULT: You know, I think there are examples of it, David, where it's gotten out of hand. I'm obviously not going to cite people where it's gotten out of hand. But I think it has to an extent. But I also believe that if you focus on that being the overriding issue, I don't think that is the overriding issue. I think what is important, rather than just the level of pay, is what is the alignment and what are the drivers for that compensation. And I think that the focus in a compensation plan, if I would just use an example for us, and every company is different.
What we believe in our service profit chain is that we need to have motivated employees. So in our incentive compensation, 25% of our incentive compensation is based on a employee survey, which we've studied, which we focus on, which is correlated very strongly with the customer service results that we've been able to achieve, and with shareholder performance. And then we have 25% that's focused on customer metrics, and 50% on shareholder.
There are a lot of different judgments. So some people, when it first came out with it, said, geez, it should be a 100% shareholder. We said we don't think that's a long term performance. Because any compensation program can be gamed. And the reality is I think you've got to have your compensation aligned with what are the drivers.
DAVID LIEBERMAN: A lot of companies now have a shareholder proposal called say on pay, where the shareholders don't get to determine the compensation, but they get to say whether they think it's fair or not. Do you think that's a good idea? You know, I think at the end of the day if you have a situation where
KENNETH CHENAULT: Everything you do is up for a vote, then the next thing is maybe we should have one strategy. You might have a different view because my strategy may not drive shareholder value for you. So you should vote on the business strategy. I think at the end of the day, the shareholders have certainly the rights and the opportunities to influence the governance of the company. And that should be the focus.
I think when you get into a micro management situation, and I would view that in my view as a micro management situation, that you can get some unintended consequences, where people are playing to the chorus. So should it be that they're making an evaluation that your strategies are good for 12 months? And so you do some things that are there for 12 months. Or is it two years? Is it three years? Is it five years?
At the end of the day, the balance for any company and the management of a concern is how you're managing that company over a period of time. In certain situations, one year objectives may be what that company needs. In another situation, there should be a balance between those short term objectives and those moderate term objectives. And I think to expect that you're going to have millions of shareholders who understand all those aspects, I'm not sure that ultimately you're going to drive real shareholder value.
DAVID LIEBERMAN: Speaking of leadership and votes, this is a presidential election year. And I know that in the past, you've donated to Barack Obama's senate campaign and also the Hillary Clinton's senate campaign. Have you taken a position on this year's presidential race?
KENNETH CHENAULT: I'm so surprised you asked that question.
What I'm not allowed to do, and, in fact, we have a board resolution on this-- not because of me, but it was set up probably 20 years ago-- that the CEO cannot, in fact, endorse or contribute to anyone running for president.
DAVID LIEBERMAN: Senate is the top.
KENNETH CHENAULT: Senate, Congress, that's about all I can do. So I've got to obviously be very, very careful. But it is a very interesting race.
DAVID LIEBERMAN: Well--
KENNETH CHENAULT: That's all my board will allow me to say.
DAVID LIEBERMAN: Let's see if we can push your board a little bit. Both Hillary Clinton and Barack Obama have come out with proposals for the credit card business. Hillary Clinton is proposing really more of a regulatory structure. She wants to create a-- I think it's called a financial Product Safety Commission, and cap credit card rates of 30%.
Barack Obama is looking, I think, more information, a five-star plan, consumers could see on a scale of five stars what the rates and fees are like. And also he has a credit card consumers bill of rights that would require contracts to be in plain English. Do either one of those proposals interest you?
KENNETH CHENAULT: I'm not going to comment on any specific proposal, David. But let me make some general comments. One is there are a lot of different perspectives about different changes that should be made to the credit card sector. And the reality is, is I, again, look at the positioning of our company. JD Power had us as the highest quality provider in the credit card industry.
I think the reputation of our company and the trust is very strong. However, the credit card sector has some real issues. And so I believe that the whole issue of disclosure and transparency is critical. And while I won't list all the issues, but I have certainly in conversations that I've had on the hill made my points of view very clear, that there are certain practices in the credit card sector that I think need to be changed and need to be focused on.
What is important though is that people are very clear about the unintended consequences that could result from certain changes. And here's a point I'd made when I have talked to different people in the Congress and Senate. I, in fact, could take a parochial perspective and simply say we're dealing with a higher end customer, and so the public policy issues, this will, in fact, have a more negative impact on a number of bank card competitors based on certain changes that are there.
But, in fact, what we need to be very careful about in our society is-- and I'm concerned also with the impact of the mortgage crisis-- is that people who need credit and can use that credit in a responsible way, will be able to continue to get credit. And one of the concerns I have is that as we look at different proposals, and I want to be clear, I think we do need to look at those proposals, we need to understand what those impacts are.
And if the result is that in risk-based pricing, because if you're going to extend someone credit, you want to have a pretty good view that they're going to pay you back, what clearly could happen is in risk-based pricing, you just say there's certain segments we're just not going to lend to. And we're not going to give them certain types of products.
This is the industry overall. There are clearly some policies that need to change. And the reputation of the credit card industry, if you look at it's ranking, is not high, is not high. So I think that reforms need to take place. My job, I think, not only as a CEO, but as someone who should be concerned about broader societal issues, is to make sure that there is at least a dialogue, and discussion, and an understanding of what the public policy issues are. And to make sure people are aware of the unintended consequences so that they can make the trade-offs.
And I think that there are-- step one, is substantial improvements in transparency and disclosure. And then I think step two is to focus on some of the practices that need to be changed. And step three is to ensure that we have a process and a capability that we can lend money to people, that we can give people access to credit cards, in a very broad way. But not, in fact, to have a situation where people are running up large losses and can just walk away from them.
DAVID LIEBERMAN: We wanted to leave some time for questions from the audience. Are there microphones out there? I think we do have some microphones that will be in each aisle.
AUDIENCE: Hello, so my question for you, Mr. Chenault, is what advice would you give to a young entrepreneur who is looking to close those gaps, as you speak of, in his style of leadership? What has been your method of introspection for self-improvement over the years?
KENNETH CHENAULT: Let me let me talk through sort of two or three ways that I've gone about it. And some of it has not just been on my own. Some of it has been getting some very good feedback from different sources. One of the aspects of our program in leadership is something we call upward feedback, which is very, very useful. And when I started to go through my first set of upward feedback, this was in the early '90's, I, in fact, thought I was a pretty high powered person, I was getting things done, and I seemed to have a followership.
The way we did the upward feedback, there was five things you can do really well, five things you don't do very well. And what is very, very important that I will also try to do, almost on a quarterly basis, is to try to think through and elicit feedback in areas that I've been particularly effective in, and areas that I need to improve.
Early on in my career, I sometimes got so focused on my ideas that while I was not intentionally trying to ignore someone, if I didn't think that they really had a high quality idea, I didn't focus on what they had to say that much. And if they couldn't get out that thought in 30 seconds, I was off to the next thing.
And what I realized is that one of the areas that people now say, Ken, boy, you're a very good listener. I wasn't always a good listener. And to be able to listen in a conscious, intelligent way, obviously can give you a major advantage. But that was one of the things I got from formal upward feedback coming in.
What I think is critical as an entrepreneur is I would say you really want to understand what are the behaviors that are going to allow you to, in fact, move your business forward? And I think that one, if you're going to be successful, I go back to integrity, no matter what you're doing. And for me, integrity is the consistency of words and actions. And no one's obviously 100% consistent in that. But if you're going to be an entrepreneur and I'm going invest in you, I got to have a very high level of confidence and trust in you.
Also, I think what you want to do is try to always take a customer-client perspective. What is it that the client needs? How, in fact, can you make that person's performance or their life better? And the reality is, it always starts and finishes with the customer. That has to be clear.
Three is really understand what other competitors are doing to serve that customer. What is it that they're leaving out? And then, the fourth point for me is, which I also believe you need to do in your personal life as well as business, is what makes you unique? And at the end of the day, what is your proposition? Because if you want to stand out, people have to really see some uniqueness in the proposition that you're putting together. So those would just be a few of the ideas.
AUDIENCE: Thank you very much
AUDIENCE: As an undergrad, I recall getting my first credit card was a green card. And since then, through some entrepreneurship, and as a grad student, I've been able to upgrade to the Centurion card levels. So I fully endorse that quality of service.
KENNETH CHENAULT: Thank you.
AUDIENCE: Some of my friends, however, in London, are very enthusiastic about the red card that you offer, a program that helps sponsor support for AIDS. And I was just wondering, what plans do you have to introduce humanitarian orientated products, either focusing on AIDS or other important causes in the American market? And are there plans to launch a red card or something equivalent?
KENNETH CHENAULT: Yeah, here's I think what's very, very, very important. There is a philanthropic set of objectives that the company has that we're very focused on. The red card program is one that, what we're trying to do, which is challenging, is to blend meeting a philanthropic need, a societal need, with, in fact, a profit motive. That's not always an easy combination.
We have been one of the leaders in cause marketing. And it is a tough balance. And what's critical is to make sure that all the parties understand with clarity the objectives that need to be set. So when we had our conversations, I had conversations with Bono, was important is that he understood the profit objectives that we had, and we understood his social needs.
So in London, we are evaluating the program. And we're pleased with some aspects of it. And what we want to do is to make sure that we have full confidence that this is something that can be rolled out to other markets. We're not at that stage yet. But it's something that we are measuring very carefully. And the reality is, and this is a very, very important point, is what I can't do is simply say I'm going to allocate dollars to a social program, if it, in fact, is not making money.
I do that with our foundation. And that's important. So that's the balance. And it is, from a blogging standpoint, a lot of people in the States want the red card. So there is interest there. And so we've got to size with the market and the profit opportunity is, and to make sure that we're really focused on what we need to do in the UK.
DAVID LIEBERMAN: How we doing on time? Do we have time for one more? One more?
AUDIENCE: First off, sir, I'd like to thank you for coming here today and sharing your words of wisdom. My question for today is how do you serve many different consumer segments and continually expand and innovate without diluting your niche or your target market?
KENNETH CHENAULT: Good, that that is probably one of the most challenging issues that I think anyone faces in managing a strong brand. What I've developed for our company when I was running the card business, and the then CEO at the time, Harvey Golub, adopted across the company, I have three operating principles.
And what I believe very strongly is that you need to manage by principles and not rules. The first principle is that we will provide superior value to the customers and clients that we serve. That means really understanding what customer needs are, it means understanding the competitive environment, being able to manage that value.
Second is we've got to do it in a way that allows us to achieve best in class. Because we want to make sure that the economics are best in class. And third, everything we do must support and enhance our brand. Now, we're in a situation where from the '80's, we had probably five to seven basic card products. We now have several hundred different card products.
We have a range of co-branded deals. We, in fact, market products through over 150 banks around the world. And we have our own proprietary card business. But what's critical is that we really try to focus on implementing those principles that we can't compromise. So we can't have a situation of someone saying, well, you can provide superior value, Ken, but you know what, we're going to take some of this brand value that you talk about, we're going to borrow some of it.
I say no, no, no. We only make-- we only will make deposits in the brand bank. We're not going to withdraw from the brand. So, in fact, if we do something, if we partner with a bank, if we come out with a different product, we need to make sure it has superior value and it's also supporting the brand. So that means that in the organization, throughout our organization, we, in fact, talk about, and educate, and train people in what our brand stands for.
And we measure it. We measure the value of our brand, because the dilution issue is critical. Warren Buffett, who owns over 12% of our company, obviously is a terrific, terrific investor. But I also find is someone who really understands the essence of how to really create a competitive advantage.
He always talks about a moat. And the moat for us is our brand. At the end of the day, obviously we have to have content in our product, but the way you build the brand is through some of that content. And so we've got to be very careful in how we are managing the brand. And so we adhere to those three operating principles. And we constantly evaluate the strength of our brand. Because I want that brand to be enhanced dramatically.
On the other side, the mistake made by some companies is you become so protective of the brand that, in fact, you don't expand. And so the example I would use is Diner's Club. That's what we could have become. T&E product. We're not going to get out of T&E, we're not going to get out of the high end. And at the end of the day, different situation.
So what you've got to do is how do you build that value, don't compromise it, but be driven by what the customer needs are. And our customers had a range of spending needs. And we, in fact, wanted to gain scale and relevance around the world. And partnerships, frankly, was one of the most innovative things that we've done, by partnering with a range of providers and companies that could provide increased value at expanded scale if we did it on our own.
If I could do it all on my own, I wouldn't have any partners. No one would. But the reality is you need to work with partners, you need to expand. And what you can't do is shrink to greatness. You've got to grow. And you've got to use your brand to grow. But you've got to treasure that brand, because that your moat around your castle.
AUDIENCE: Thank you.
DAVID SKORTON: You're coming at an extremely opportune time. For those of us in the Hotel School, it's the start of HEC, which starts right after this. So it's been incredible to have you both here today. On behalf of the Johnson School and Dean Thomas, on behalf of the School of Hotel Administration, I want to extend my gratitude to all of you for joining us.
We have a lot of not just students in the crowd, but we have industry people, we have alumni here. I want to thank you all for being here. But I especially want to thank Ken Chenault and David Lieberman for a very candid and inspiring conversation. We look forward to seeing how this gets written up and reading USA Today next week. So thank you again for both of you coming here and sharing your thoughts with us.
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Kenneth Chenault, chairman and CEO of American Express, didn't have a typical start in the business world. He studied law, not business, and he used to stereotype business people as "stuffy," he admitted to a Cornell audience April 3. But despite his unusual background, Chenault rose through the ranks at American Express, first working in strategic planning and eventually reaching the top post in 2001.
In a candid interview with USA Today reporter David Lieberman, Chenault shared thoughts on success, leadership and business strategies with a capacity audience in Statler Auditorium during the USA Today CEO Forum, hosted jointly by the Johnson School and the School of Hotel Administration. ... more from