F William McNabb

William McNabb
Chairman, President and CEO

The Vanguard Group Inc.

Bill McNabb is the Chairman of the Board, President and CEO. He was elected President and CEO in 2008, and became Board Chairman in 2010. Bill is a former managing director overseeing Vanguard’s institutional and international businesses. He has been a Vanguard board member since 2008 and a trustee of each of the Vanguard funds since 2009.

 

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A view from the top

In this short video, F William McNabb III shares his view on today's key business issues: risk, volatility, innovation, talent, and growth

 

Quotes

William McNabb

F William McNabb

Chairman, President and Chief Executive Officer, The Vanguard Group Inc.

We still are relatively optimistic that we have an awful lot of opportunities both domestically in the US, as well as around the world to grow by, frankly, taking market share.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

A lot of the factors that got us to the recession and the crisis are still in place and need to be worked out.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

The biggest challenge that anybody in the investment management industry has right now is the level of volatility that we see in the markets, in particular the equity markets, but you also see it in the bond markets. It could scare people away from investing, and if you don’t have people who want to invest, then obviously your growth isn’t going to be what you would hope.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

The lack of a credible, long term fiscal plan in the US is probably our chief concern. The fact that there is not one actually contributes to the market volatility.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

I’m optimistic, because I think the core of what needs to be done has been thought through. There were two bipartisan commissions put in place over the last couple of years, and both of them came up with reasonably credible plans. There’s a core commonality among the two plans, and it would be a great starting point.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

As we came through the financial crisis, we stepped back and asked ourselves how we need to evolve as a firm, without losing any of the key components that have made us successful.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

First, we felt that we needed to think through how we were going to expand and deepen relationships with existing clients.

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

Second, what new markets did we need to consider addressing, and if there were new markets to address, how did we want to do that?

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

What steps do we need to take to make sure that we continue to be the price leader for investments, both domestically and in any other markets we might go after? Finally – and this is more internal, given the evolution of the workforce and as we become a more global organisation – what did we need to do as a company to be truly a “best place to work?”

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

We’ve spent time thinking about flexibility and mobility. Historically we’re a company that only has a few locations, and people generally come to those locations, and we spend a time in face-to-face meetings. We’ve begun to ask ourselves. Are there other ways to manage the business that provide some of our people a more flexibility, in terms of where the work gets done and how the works get done?

William McNabb

F William McNabb

Chairman, President and CEO, The Vanguard Group Inc.

If I had to peg a couple of traits, one, people will have to be more global in their perspective. They will have to understand the interconnectedness around the world. That’s going to be a very important element. Second, people are going to work differently, so we’re very much a hands on senior leadership team.

 

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What is your current outlook for the global economy?

If you look at the macro economy right now, it’s hard to make a case that there’s going to be solid growth around the globe. There will be pockets of it, but we seem to be in a period of relatively slow growth, certainly in the developed markets. We see that continuing for a while to be relatively slow. A lot of the factors that got us to the recession and the crisis are still in place and need to be worked out.

We still are relatively optimistic that we have an awful lot of opportunities both domestically in the US, as well as around the world to grow by, frankly, taking market share. Our business model and value proposition have much to offer, and we’re well set up for successful growth. Very importantly, that’s growth done our way — earned, if you will. We’re a very organic company. We’ve never grown through acquisitions. I like to describe it as earning our way to growth with our clients.

What is the one risk to Vanguard’s growth that you’re most concerned about?

The biggest challenge anybody in the investment management industry has right now is the level of volatility we see in the markets, in particular the equity markets, but also in the bond markets. It could scare people away from investing, and if you don’t have people who want to invest, then obviously your growth isn’t going to be what you would hope. The uncertainty that permeates the developed world right now is a big driver of that volatility. If we can take some steps to decrease that uncertainty, we’ll have an opportunity to mitigate that volatility.

Are there things you can do to try to restore confidence in the markets that would help ease consumers’ concerns?

In terms of restoring confidence, the thing we’ve tried to do, and we will continue to do, is to be out with our investors talking about the issues and not being Pollyannaish about them — telling it like it is and trying to get them to understand what’s going on. Unfortunately, a lot of investors focus on what happened in the last six months and what they think is going to happen in the next three. To be a successful, long-term investor, you need a much longer perspective than that, and we try to make that point as often as we can.

How much do the fiscal policies of the US, Europe, and other foreign governments worry you, in such areas as performance, tax policies, and broader global stability?

The lack of a credible, long-term fiscal plan in the US is probably our chief concern. The fact that there is not actually contributes to the market volatility. Just look at August of this past year and the debate about the US deficit, and the inability for both political parties and the Obama administration to come together on the issue. We saw levels of volatility that are typically not seen.

In Europe, you see some similar issues. The markets are paying a lot of attention to how credible are the solutions that are being promoted among the European Union. A credible, long-term solution there is going to add to stability, which would reduce the uncertainty a bit more. Globally, however, the most important market to get right is the US.

Has volatility in capital markets or exchange rates become an issue for Vanguard?

Volatility in the markets in general has been an issue for anybody in the business, because it keeps investors from having confidence in the markets, putting some people on the sidelines. In terms of the way we manage money — certainly in the fixed-income markets — it’s put us on a more conservative end of the spectrum. We’ve tried to make sure that we’re prepared for as many contingencies as possible, again, given this volatility and lack of certainty that exists.

What should governments in general do to address stability?

The most important thing right now for governments to do in terms of stability is to develop long-term, credible fiscal plans. The US, for example, can’t continue to run the kinds of deficits it has built up over a long period of time. Now, that’s not to say that you have to solve the problem in the next 24 or 36 months, but there needs to be a plan in place that actually addresses the long-term structural issues that exist.

In terms of other policy elements that need to be in place, the single biggest is the lack of jobs. And where is job creation going to come from? There could be more thought given to training, with the focus on education, and where to invest to create the next generation of jobs.

Over the past year, in what ways has your strategy at Vanguard changed, in terms of business model, markets, new products, and other areas?

Our strategy at Vanguard in some ways is timeless. We’ve had a value proposition that we believe in very strongly, which is low-cost, high-quality investments coupled with great service. To help investors meet their goals is what we’re all about. As we came through the financial crisis, we stepped back and asked ourselves how we need to evolve as a firm, without losing any of the key components that have made us successful.

But there certainly were opportunities for us to evolve, and I would put our evolutionary moves into four broad categories. First, we felt that we needed to think through how we were going to expand and deepen relationships with existing clients. A tremendous amount of our growth historically has been organic, through our existing client base. Second, what new markets did we need to consider addressing, and if there were new markets to address, how did we want to do that? Third, we’ve made progress industry-wide in terms of emphasising the importance of cost in investing. We asked ourselves, What steps do we need to take to make sure that we continue to be the price leader for investments, both domestically and in any other markets we might go after? Finally — and this is more internal, given the evolution of the workforce and as we become a more global organisation — what did we need to do as a company to be truly a “best place to work?” We put a lot of time and energy into that category and thinking, as well.

Can you cite anything specific that you did in that area over the past year?

Specifically in terms of best place to work, we took one of our most senior business leaders, removed him from his area of responsibility and gave him the agenda of tackling things from a different perspective. Around health and benefits, for example, we opened a new wellness centre, which has onsite health clinics at our major sites, as well as promotes health and general physical fitness. We think this is going to be a good step towards reducing long-term healthcare costs while, very importantly, making the workplace a little bit more vibrant.

We’ve spent time thinking about flexibility and mobility. Historically we’re a company that only has a few locations, and people generally come to those locations, and we spend a time in face-to-face meetings. We’ve begun to ask ourselves. Are there other ways to manage the business that provide some of our people a more flexibility, in terms of where the work gets done and how the works get done? We’ve made some important strides there.

Do you anticipate any strategic changes for 2012?

We will continue to make some tweaks to our long-term strategy, but the core elements are in place. Frankly, we’re focusing a ton of time on execution and making sure that the plans actually get executed over the next three to five years the way we envision. Of course, as outside factors shift, we have to make adjustments, and we will, but we think the core elements are strongly in place. Now it’s up to us to execute.

Has your view of the attractiveness of foreign markets changed? What progress have you made, and what difficulties are you finding, either through investment opportunities or operational locations?

Several years ago we stepped back and asked ourselves“What do we want to be globally?”. We had operations outside of the US, primarily in Australia and Continental Europe. We wondered what’s it going to take for us to have a larger global footprint, and what kind of markets do we want to operate in? We turned one of our senior leaders loose on the problem. He assembled quite a team, and now we’re making tremendous progress.

In the past 12 months, we’ve opened an office in Hong Kong, and another in Canada. In fact, our Canadian funds just launched a short time ago, and we’re getting a lot of attention in the press. We have continued to invest very heavily in the UK, which is our European centre, and to on our investment team there, as well as our service teams. Again, we are making great progress.

In Australia, we’re the fourth or fifth largest investment manager. That’s been a terrific market because of the dynamics of the Australian economy. Australia as a country has benefited immensely from the growth of China and other emerging markets, so it’s turned out to be a terrific place for us to be as a provider of investment services to individual investors.

How do you assess customer needs in those new markets in Canada, the UK, and Hong Kong?

When we look at non-US markets and whether or not there’s an opportunity for us, one of the first things we look at is “Is there anybody providing a similar value proposition to ours?”. We’re finding that in many markets there isn’t a firm that’s been disruptive from a price standpoint. We believe price is the one thing you control as an investor in terms of your return, and it’s a very important component in our value proposition. We look at marketplaces where we can be disruptive and give investors the value proposition that perhaps they have not seen before. At least based on the reaction we’re seeing in some of the new markets we’ve entered, that seems to be working quite well in our favour.

Has building relationships and strengthening partnerships become more important to succeed in those new markets?

Building relationships wherever you go is always important. A good example of relationship building is occurring in the UK. As the United Kingdom goes through its own metamorphosis and retirement, not savings, shift from traditional defined-benefit plans to defined-contribution plans, there are a couple of firms emerging as real leaders in that space. We have great expertise there, so we recently were awarded a large investment mandate by one of the UK service providers. We’re going to be working very closely with this service provider to make sure they have high-quality, low-cost investments coupled with their service. We’ll also bring some knowledge and expertise to the marketplace around defined contribution.

We’ve been doing that here in the US for a very long time and with some success, so it’s the sort of opportunity we look for wherever we go. We’ve been in Australia for a number of years. There was a very similar development a number of years ago where we partnered, very explicitly, with one of the leading Australian firms to bring cutting-edge contribution services to that marketplace. That’s actually become one of the real backbones of the business.

How is your approach to managing enterprise-level risk changing?

Enterprise risk is obviously a hot topic, given everything that’s gone on in the last few years in the investment world in particular. For us, it became clear that we needed to take a different approach as we began to expand more globally. We hired a senior individual who had extensive experience putting enterprise risk in a couple of other very prestigious institutions, including the Fed at one point, and he has brought an amazing new perspective to us, which has been very helpful.

He’s leveraging what I think is in our DNA, which is a sense of control and of risk management that permeates the organisation. But he’s putting more formality around it and making sure there’s consistency wherever you go at Vanguard, in terms of the way we think about risk. He’s also making sure there’s real transparency throughout Vanguard.

It’s become a board-level discussion at this point. Good boards of directors want to know what every institution is doing from a risk perspective, and ours is no different. This was a positive change for us, and I’m excited about the journey we’re on.

Are there any specific initiatives that have been put in place or are being considered to deal directly with risk management?

The most important initiatives are twofold. First, creating a framework that everybody in the organisation can understand and use, in terms of assessing risk. Second, creating a powerful reporting tool that comes right up to me, billed as the CEO’s perspective on risk. Essentially we’ve looked at the 10 major risks we face as a firm and tried to shed light on those risks. It’s been a very iterative process to get to where we are, and we’re not done, but it’s been a good evolution for us.

As an investment management firm, have you had to deal with environmental or social issues, or sustainability in general, regarding cost management initiatives, corporate reputation, or business growth expectations?

Any time we take on a new facility, whether it’s leased or we’re building it, we look at what it would take to make the building “green.” We’re finding that doing so a good way to save money in the long run. You may pay a little bit more upfront for some of those capabilities, but the savings seem to be pretty substantial.

The second thing is, our people feel great about it. When you certify a building as being green, for example, the crew who are a part of that building take pride in it. There’s more to be done in that area, but as we shape our physical plant, we’re going to look for sustainability opportunities.

How is your approach to innovation changing?

Innovation is an interesting concept in the investment management world. I’ll give you a couple of perspectives on it. First, we think it’s very inappropriate to innovate around product, in the sense that you’re experimenting with other people’s money. We don’t think that’s a good idea. Investment ideas, for example, need to be proven before they’re introduced.

Now, there are huge opportunities for innovative investment services. We’ve created a framework within the organisation for pursuing innovation with a small “i.” Where can we try a new service or a new way of doing things? We actually call it — a very technical term — “firing a bullet.” The term comes from an ancient naval tactic: In the late 18th and early 19th century, when two ships of war would face each other, before they would fire their cannons and make the big commitment — there were a limited number of cannonballs — they would fire a musket to gauge distance, wind, and so forth. We’ve analogised that concept and applied it to the business world. We first fire bullets to gauge whether or not a new service makes sense and how clients are going to react to it, before we introduce wholesale change. That framework is going to lead to even better things for our clients over the long run.

Are innovations coming from different places and parts of the Vanguard organisation?

Innovation can come from anywhere — from any crew member or any part of the organisation. Frankly, some of our best ideas come from clients. We gather input from clients and sift through it to figure out where there is an unmet need being expressed, and what we can do about it.

Can you cite a recent example of where a client’s suggestion has turned into action?

Several years ago we introduced our Life Strategy Funds. We had four funds, each with different risk parameters, including conservative, moderate growth, more aggressive growth, and so forth. Life Strategy Funds essentially allowed an investor to consider two risk parameters. One, what was your timeframe? How long an investment period were you investing for? Two, what was your own personal risk tolerance? We actually created a risk quiz to help them with that.

Over time, though, the answer to the risk quiz was coming up almost identical no matter who the investor was, and they didn’t value it that much. Simultaneously, there was the development in the marketplace of so-called target date funds. We had a number of our clients say, “Your Life Strategy Funds are interesting, but have you ever thought about doing a target-oriented retirement fund, where you have a specific date?” They were interested in whether we would we do it in an indexed fashion as opposed to traditional active management?

We had thought about that, and back and forth from a design standpoint, but that client feedback helped drive the development of our target retirement fund series, which in the industry today is probably the most successful target retirement suite of funds anywhere. It’s very low-cost, all indexed, very transparent. How the asset allocation changes is very clear to investors right from the get-go, and they’ve met with remarkable success.

Some people would say that wasn’t truly an innovation, because we didn’t invent the concept. Target retirement funds had existed before us. But what was interesting was the client feedback around our Life Strategy Funds. How we should be thinking about them going forward played a big part in our thinking around the target retirement funds. Also, the emphasis on cost, transparency, and indexing was something that didn’t exist in the marketplace.

In what ways has talent become a strategic issue for you, and how are you addressing such talent challenges as diversity, work/life balance, and gender equality?

Talent has always been a big focus at Vanguard. We have a philosophy that people really do make a difference. A lot of firms say it, but I tend to like things that are backed up by data. Here is one of the example I’ve used when talking to our people about this: In the early days of 401(k) searches, a company would bid for a plan, they send out a request for proposal. They would get all the RFPs and invite four or five finalists in for a presentation. Then typically they would narrow it down to the final two and conduct site visits.

We found that when a site visit did not occur, we’d win one out of five opportunities. But when site visits occurred, we’d win one out of two. Whenever we asked, Why did we win, it was always, “Your people made the difference. We liked your team better than what we saw anywhere else.” That was a real data point. Clearly people were making a difference, even though the recordkeeping technology, the education, and investments were similar from vendor to vendor. We take that data point and use it as an example to our own team as to how important talent is.

We’ve evolved, talent wise, in a couple of dimensions. One, work/life balance is certainly a bigger issue, especially as you deal with people coming into the company today, fresh out of school or from another firm. We’re trying to figure out how to make it easy to manage both your personal life, as well as work, and optimise both.

Second, we believed very strongly that we needed to nurture women as leaders more aggressively than we had. Over the last decade, the percentage of women going into general management leadership roles was down. This is a secular issue, not just a Vanguard issue, but it didn’t make sense to us, especially considering that women comprise roughly 50 percent of the population at Vanguard. We initiated our WILS Program — Women’s Initiative for Leadership Success — and put a great deal of time and energy into it. Two years into the program, we’re making progress. It’s still a journey that’s not complete, but I feel good about the progress to date.

How are talent challenges different in Vanguard’s various global markets?

The broad talent challenges are similar throughout the world. We’re looking for people with great capability, who believe in our values and want to view us as a long-term place to work. If there’s a difference, it’s probably on that last point. We want people who want to make Vanguard a career, and that has been an important element of our success. We have very low turnover. We have people who spend 20, 30, 40 years with the organisation. We think there’s great value in that.

As we’ve gone overseas, in certain markets that’s just not a common equation for a lot of people. We’re trying to make sure we attract the same like-mindedness that we’ve been able to attract in the US around that concept. Time will tell, but I feel great so far about the way our teams are evolving overseas.

In what ways have the requirements for senior leadership positions at Vanguard changed?

The evolution of the senior leadership teams is ongoing. If I had to peg a couple of traits, one, people will have to be more global in their perspective. They will have to understand the interconnectedness around the world. That’s going to be a very important element. Second, people are going to work differently, so we’re very much a hands-on senior leadership team. We like to get together. We spend an awful lot of time together, usually concentrated in one particular conference room. Over time that’s going to change, especially as our senior team becomes more geographically dispersed.

In fact, for the first time in Vanguard’s history, one of our senior leaders is not resident in Pennsylvania — nor in the US, for that matter. He’s headquartered in London, and we’ve had to adjust how we work as a team because of that. It’s been very healthy, but I can see that continuing to evolve as we go forward.

Do you move personnel around when you open a new office or operations?

One important element of our talent strategy is what we call “purposeful rotations,” and we move people around a lot. We do it domestically within business lines. We will take people who are serving 401(k) clients, for example, and put them in our direct retail business. We take US-based people and place them in London, Australia or any of our other foreign offices. We think that’s a good way to develop people.

We have a huge advantage over a lot of our competitors with our deep pool of general managers who can do many different things. They gives us flexibility to respond to new opportunities or to respond when something changes in a way we hadn’t anticipated.

Earlier you mention the younger generation and work/life balance. Are there particular challenges with Millennial workers who are coming into the workforce?

Much has been written about Millennials. Are they harder or different to manage? Maybe I’m a little biased because I have four children, all of whom are Millennials but my perspective is, Millennials bring tremendous passion and energy to any task that they take on. It may manifest itself differently from my generation’s passions, but they’re there, and the question is, How do you tap into them?

For example, we’ve seen a tremendous sense of wanting to belong to and contribute to a community in a broader way than just work. Volunteerism, for example, has become a big initiative. We have instituted an addition to our bank of days off, with one day devoted purely to volunteerism. We’ve also established a viral network, where people can connect around different community activities they want to be involved in. We have found that when people get involved with their communities, especially the Millennials, and volunteer activity, it makes them even more productive at work. It also reinforces the bonds at work more strongly than the task itself would suggest.

Do you ever encounter the classic “generation gap,” as you have senior managers dealing with younger workers and some of their differences in approach to work?

We haven’t seen that yet. I’m sure we’ll face it at some point but — again this is just personal experience — one great piece of advice I was given early in my career was to always seek out the younger generation and spend some time with them. Because technologies evolve, ways of thinking evolve. It was a good way for me to stay fresh. I’m a former schoolteacher, so I love being in that role, where as a teacher you’re sometimes learning as much from the students as they are from you. So I encourage our people to get out and spend time with different generations.

By the way, the same is true on the older side, too. We have a number of second-career people who’ve come here after having retired from very successful careers elsewhere, and I find they have a great deal to offer.

Do you work with universities or governments to help nurture talent or develop curriculums?

Our main connection from a talent perspective is through a number of universities. One of the great things about being headquartered outside of Philadelphia is that this is such an education center. Within a two-hour drive of Philadelphia, there are 100-plus major universities, and we have good relationships with many of them, several with whom we’ve done more explicit partnering.

I’m involved with my alma mater, the Wharton School of the University of Pennsylvania, and its leadership development. We also partner with St. Joseph’s University to provide an on-campus MBA program, which has been popular with a number of our leaders. We’ve had more than 200 people go through the program so far.

As we move forward, those kind of linkages are going to be vital if we’re going to continue to attract and develop the best people in the industry.

Does that change at all when you go to some of your overseas markets?

Overseas, it’s a little more challenging, because you typically are smaller and not as well known, but we will look to make those connections. Interestingly, some of the US institutions with whom we’re best connected are quite global in their reach. Wharton, for example, had a huge global footprint, while Drexel University is developing its. If we can tap into those global networks, that will help us, even if initially we’re not as well known in the local communities.

In what ways has the allocation of your time and attention changed during the past year? Do you expect a change or a return to “normal,” if there is such a thing?

In terms of time allocation, I don’t think there is any return to normal — because I don’t even know what normal is anymore. As CEO, I have spent more time in Washington, from a regulatory standpoint, than I would have anticipated. But that’s one of the outcomes of this crisis. Where does that time come from? I’m not sure you re-cut the pie. You just keep adding to it over time.