CAHPTER 10
CHANGEOVER
Jack Bogle and Jack Brennan were for many years a rewardingly balanced team—Mr. Outside and Mr. Inside, CEO and COO, working father and son. Both believed deeply in the Vanguard mission of serving investors with solid investments and good service at low cost with high integrity. During their first 15 years, they found many ways to enjoy working together. Both were frugal: simple offices, mid-range cars, off-the-rack suits. (Bogle’s well-worn suits looked old, Brennan’s were well pressed and replaced sooner.) As they worked together, they were increasingly impressed with each other.
Both put in long hours. Both were facile with numbers. Each was finding the other wonderfully complementary in skills and interests, and they knew they were making great progress in developing Vanguard toward its potential. The two soon developed a familial relationship: they were in and out of each other’s offices multiple times a day to share information or ideas, and usually had lunch together. Friends believed Bogle had an even closer and stronger relationship with Brennan than he had with his own children. (He did make Brennan trustee for the children’s trusts.) Both believed in long hours at work and, in what may have been an early red-light signal, both were highly competitive. Bogle’s brother told of Bogle’s saying, “I used to get to work at 7:30, but then Brennan came at 7, so I started to come at 7. Then Brennan started to get there at 6:30, so I started being there at 6:30.” He could never let Brennan be first.
As Brennan settled into his new job as Bogle’s assistant, he became increasingly aware of several key factors: he liked his position and its prospects even more than he had expected; his managerial skills and interests were more in demand than he had expected; and the long-term opportunities at Vanguard were wider and deeper than he had realized. People warned Brennan that Bogle had impossibly high standards. Brennan saw that as a great learning opportunity.
Brennan had no trouble deferring to Bogle in the early years and no trouble being designated as Bogle’s assistant, as so many others had been before going on to great careers. Promotions came swiftly. Both knew they were on an interesting and exciting adventure, and had many reasons to believe they were on their way to a major success. Brennan couldn’t say enough good things to express his admiration of Bogle.
In the 1990s, by then president, Brennan was a quietly bold user of computers despite knowing Bogle’s resistance to the technology’s dismaying upfront costs. Bogle, still enamored with his slide rule, had not objected so long as computers were confined to back-office operations, where he had little interest. Still, he persistently dismissed computers as too expensive, waving away talk of the operational savings that would make those investments pay off. Brennan moved quietly to install computers and search for opportunities to use technology as an alternative to labor both to reduce costs and to increase value, particularly in services to clients. Because so many operational aspects of financial services are relatively routine, this strategy proved highly productive. Rivals such as Fidelity and T. Rowe Price were so far ahead in automation that catching up—or at least not being left even further behind—had become a competitive imperative.
In the long arc of their time together, the two Jacks might have been seen as surefire exemplars of an ideal transition in leadership. But that would eventually prove impossible. Years before, the personal forces driving Bogle had led Jim Riepe to realize that Bogle could not and so would not relinquish or even share control as CEO. The board of directors pleaded with Riepe to stay and assured him of eventually becoming CEO, but once he had come to understand Bogle, he realized that he would need to leave Vanguard to have the career he wanted.
Brennan and Bogle had fundamentally different concepts of organizational leadership. These differences became more visible with time and Brennan’s rapidly expanding responsibilities. One difference hadn’t mattered in the early stages of the relationship. Brennan was not offended by Bogle’s habitual use of the possessive “my”—as in “my company” or “my leadership”—when discussing Vanguard in public. After all, it had been exactly that in the beginning. Yes, Vanguard had a board of directors, but Bogle saw it as his board. He had recruited each of them and believed they joined because they wanted to be part of the wonderful work he was doing with Vanguard.
It never seemed to bother Brennan when Bogle took credit for advancements that had been conceived and developed by Brennan, such as the Partnership Plan, the Swiss Army, and connecting with Primecap. If Bogle cared so much about being celebrated publicly, so be it.
Always pragmatic, Brennan cared about the progress of the whole Vanguard organization. As a veteran team player in lacrosse, hockey, and soccer, he cared little about personal recognition but greatly about the team winning. Brennan was and is modest: “Being famous was never part of my agenda.”
These personal differences may be tolerated in the short or even medium term, but as time passes and examples accumulate, they can go from tolerable, to troublesome, to difficult, to annoying, to unacceptable. Brennan had a thick skin and a deep appreciation for Bogle’s capabilities, so he was able to take the long view. Near-term tolerance and patience made great sense for anyone with a long-term perspective and ample time for transition. After all, Vanguard’s policy requiring retirement at 70 had been set by Bogle and Riepe many years before, and Bogle’s health was clearly compromised and declining.
Bogle was the classic entrepreneurial founder: tough, creative, decisive, unrelenting; driven to succeed and self-confident; skeptical of the capabilities or commitments of others, though sure that he sought others’ best ideas; and, on all sorts of decisions, controlling. A small indication of his need for control was his compulsion to restructure, reorganize, and edit almost every sentence of every memo or report he had insisted others prepare. Bogle was proudly a fighter and liked battles. He not only enjoyed winning, but also enjoyed defeating his adversary. In contrast, Brennan saw fights and battles as a waste of energy and time.
As military history has shown again and again, while success on the attack usually produces the most exciting adventure stories, the absolute imperative for sustained success is good governance long after the sound and fury of combat have passed. Bright and quick and right so often, Bogle had learned to trust his own instincts and judgment. But astute as he was, the odds of being always right on every matter were obviously stacked against him. Defining himself as the leader and dismissing all those who were “mere managers,” he did not recognize, as Vanguard grew, the accelerating need for skillful, collegial managers and sustained, systematic processes throughout the organization. As the business grew and grew, Bogle’s perceptions understandably tended to be retrospective rather than prospective. He knew and took justified pride in how far Vanguard had come. But it was hard to see as clearly how much Vanguard needed to change how it operated to continue achieving what it had promised, explicitly and implicitly, to each of its rapidly increasing number of investors.
Brennan progressed rapidly in responsibilities and in titles. He became CFO in 1985, executive vice president and a member of the board of directors a year later, and president in 1989. He was just 34. At the directors’ urging, Bogle began to encourage Brennan to give public speeches, meet with large investors, and discuss major strategy decisions with the board of directors. Brennan recognized the need for strong managers in one part of Vanguard after another, so he went looking for the experienced business managers now needed.
Brennan was a professional manager—a “servant leader,” always striving to find ways for Vanguard to improve at every level. Modest, deliberate, and steady, he liked building teams and developing a strong organization centered on systems and process. He looked for ways to upgrade the capabilities of middle and senior managers, and their teamwork. Managers gained confidence and strength by joining Brennan to set realistic objectives that were matched with rigorous performance reviews. Promising managers rotated every few years from one managerial responsibility to another, gaining in-depth understanding of other parts of the Vanguard organization.
In his 1992 sacred-cows speech, Bogle declared that Vanguard would strive to be the industry’s technology leader. Brennan spread responsibility for technology throughout the company and warned senior managers that their jobs depended on their mastering technology, saying, “If [then head of institutional business Jim] Gately lacks the technology ability to be successful, then Gately gets fired, not [technology chief Robert] DiStefano.”
Bogle was still clearly CEO, the inspirational leader of the enterprise and the principal decision maker who managed the board of directors and made all public announcements and spoke with the media. But directors knew that Brennan was the agent of change—advocating investments in information technology to increase the speed and convenience of shareholder services and expand capacity to ensure growth in number of accounts, transactions, and dollars; bringing down costs so Vanguard could keep reducing the funds’ expense ratios; and developing a stronger and larger team of experienced, able managers.
Brennan recognized that Vanguard’s management was stretched in several areas. In ETFs, a major innovation that Bogle had dismissed years before, State Street and others were establishing a commanding market share in a rapidly growing sector. Indexing was attracting stronger competition, so Vanguard needed to be even more innovative and aggressive. The institutional business, while a major opportunity, particularly with the surging growth of 401(k) plans, was indifferently managed and losing market share and money. More broadly, Vanguard’s many units were increasingly siloed and separated. Vanguard was missing the bottom-up, close-to-the-market awareness needed for an effective business development strategy.
Jim Gately, a mid-career financial services executive with senior managerial promise, had been recruited from the pension division of Prudential in 1989 by Jack Brennan to solve a problem. Because Vanguard focused on retail, whatever institutional business that “came in over the transom” was taken catch as catch can. In the fast-growing institutional market, Vanguard had no defined objectives, no clear strategy, no defined target market, no clarity on what the firm wanted salespeople to sell, no consistent pricing policies, little leadership or management, and no support from headquarters. Salespeople in the institutional division were on their own and were expected to improvise. So they did. Beyond selling Vanguard’s mutual funds and record-keeping capabilities, all decisions on what was offered to corporate prospects—even what fees and service standards were promised—were controlled by individual sales representatives, whose main focus was getting a new account and getting their incentive compensation.
This guaranteed trouble for the people in the Operations Group back at Vanguard. They were expected to deliver on the sales commitments and promises, but had no say in what was being promised. “As might be anticipated in such a set-up,” recalled Gately, Vanguard was winning only small 401(k) plans by making big commitments for special services. To make matters worse, the sales promises differed a lot from customer to customer. “It was a grab bag of clients and a grab bag of commitments,” the direct opposite of how a business should operate.
The salespeople were effectively working for themselves, not for Vanguard. They scrambled to close sales, any sales, and pocket their bonuses. Few looked back to see how things had worked out. So, Gately found, “Vanguard was not learning from experience and was not improving in any way: not in product design, not in service capabilities, not in pricing and not even in sales process. And nobody knew which accounts or which lines of business might be made profitable or which were serious losers.”1
Brennan had been candid with Gately: “The unit needs focus. We’ve already decided it should come out of Retail and become a stand-alone Institutional business unit. We have a consultant’s study of the opportunities in the corporate market that shows that the 401(k) retirement plan business is destined to boom.” Plan sponsors had no great love for traditional “defined benefit” pensions because of increased regulations, charges for Pension Benefit Guaranty Corporation insurance, and the uncertain impact on earnings from stock and bond market price changes, which accountants required be factored into current earnings reports. Employees did not all like the traditional defined benefit plans either. If workers left within five years of starting, they got zero benefits. There was usually no protection from inflation, and that worried workers a lot, since the 1970s had seen such serious inflation.
Not only was the 401(k) business sure to be fast growing, there were only three major providers: Fidelity, T. Rowe Price, and Vanguard. Fidelity was by far the largest and, with a clear strategy and strong sales, the fastest growing. Vanguard had fallen significantly behind and was in disarray.
Gately was getting really interested. “Jack, is there a job description?” “Yeah,” Brennan replied with a smile, “and it comes in two parts: First, figure out what to do. Second, get it done!” That sold Gately.2
All he knew for certain was that the business unit he was taking over was saddled with a very high expense ratio, not growing as it should, and not headed in any particular strategic direction. He saw major changes were needed. He also soon decided that most of the salespeople would have to be replaced. Of 15, he kept 3.
New salespeople without bad habits were recruited. Many were transfers from other parts of Vanguard, particularly Client Services and Operations. They already knew Vanguard and its special culture of teamwork. Transfers who wanted to keep advancing within Vanguard saw an ideal opportunity to join Gately in a promising new venture. Training for the new sales representatives focused on making them experts on Vanguard and on the needs of carefully selected prospects. By starting afresh with a new sales team, Gately could change the entire direction of the unit. Known for calm optimism, Gately learned that, surrounded with challenges, he was “free to attack in all directions.”
Next came a typically savvy move by Brennan. He assigned a cluster of rising stars from various areas of Vanguard to work with Gately: Paul Heller, Martha King, Greg Barton, and Bill McNabb. Gately and his new team quickly developed a “strategic tripod” to build the 401(k) business:
• Vanguard would focus on its major competitive strength: low-cost investing in stocks, bonds, and money market funds.
• Each new corporate prospect would be qualified, using a simple checklist of what Vanguard was really looking for in new clients. To ensure consistency, qualifying was centralized in a small steering committee of people from Operations and Legal. Sales reps were strongly encouraged to concentrate their time and effort on the most attractive prospects—401(k) plans that Vanguard really wanted for the long term and prospects that would really want what Vanguard was best able to deliver. Gately explained, “We were looking to build a strong portfolio of clients that we knew we could serve really well and that Vanguard would want to keep forever. We developed special educational programs for our crew and were able to demonstrate to our clients and prospects that if their key people developed a solid understanding of why best practices were important in designing their 401(k) plans, they would actually save money by adopting those practices.”
• Salespeople would be trained to understand and take advantage of an important reality of selling 401(k) plans in the corporate market. Almost always, success depended on two separate sales successes: one in finance to the treasurer or a deputy specializing in pensions, and another with the head of human resources. Often, particularly in larger corporations, these executives would not know each other well and might even be jealous, turf-protecting rivals. Special sales skills were often needed to complete a successful two-level sale.
Geographically, Gately and his new team began with the companies near the Vanguard headquarters outside Philadelphia. As sales and service resources grew, they expanded to the mid-Atlantic region and then, by stages, nationwide. Gately recalled, “Every time we were able to get included in a competition, we offered prospects two great choices: index funds or Windsor Fund with John Neff. Later we also offered Primecap with a great growth stock record or Batterymarch, then a remarkable investment innovator. Fidelity would counter by putting up Peter Lynch during the era when his Magellan Fund was having great performance. Fidelity had a big advantage in pricing. Because most mutual funds had wide profit margins, particularly on incremental business, Fidelity could offset any losses on record keeping with high mutual fund fee income. Since our funds already operated at cost, we couldn’t do that. But once we got properly organized, we went about 50-50 overall in competitions against Fidelity. Low cost was the key to our success.”
Asked for one tip he always gave his salespeople, Gately smiled and said, “Make your client look smart to his boss.”
Developing a strong service culture, according to Gately, depends on “knowing how to keep your best people.” Vanguard was able to keep Gately for 27 years. To signal how important they were to Vanguard, he gave the best relationship managers a special title: relationship executive. They gathered together for an annual dinner and got an extra share in the Partnership Plan.
Years later, when he was heading the 401(k) business, Bill McNabb met monthly with a group of relationship executives, each giving a 10-minute “highlights” presentation of what they were seeing and hearing in the field. This sort of commitment from senior managers to understand marketplace realities was meaningful to the front-line salespeople, underlining how valuable their work was to the firm and that their challenges were recognized.
In 1994, Jack Brennan asked Gately to move over to the Individual Investor group. “My first reaction was to say, ‘Jack, this comes as a real surprise, and I have to admit I don’t quite get it. Why are you asking me? Retail would be entirely new for me. I don’t know anything about retail except that it’s very different from the institutional business where I’ve spent my whole career.’ Several days later, I found myself thinking, if your boss knows you and respects your capabilities, and thinks a particular spot would be good for you and good for the organization, you might be wise to give it some serious consideration.” Brennan believed that regular rotations kept leader-managers from complacency, that they reenergized themselves, learned to think about “whole Vanguard” and brought fresh thinking, different experiences, objectivity, and energy to their new units. Soon Gately was heading up the Individual Investors Group and achieving another success.
“After a year or so, just as Jack had predicted when he surprised me with my new assignment, I was loving retail. We segmented the individual investor market and introduced Admiral Share pricing: ‘even lower than low fees’ for large accounts. In addition, we developed several types of specialists to focus on different groups of individual investors: IRA specialists, 403(b) specialists, large ‘Flagship’ investor specialists, etc.”3
For Bogle and Brennan, the coming change in command over several years looked only moderately more difficult than other similar changes. They were each “age appropriate,” comparably committed to Vanguard and, thanks to Brennan’s having no need for the limelight, their priorities did not visibly conflict. Both were devoted to Vanguard’s being the best Vanguard that Vanguard could be. But they differed in personality and style, in their interest in recognition, and in their emphasis on distributed management strength versus centralized command leadership, among other things.
Leadership transitions may appear natural and easy from the outside, but seldom are. Even if management style, corporate strategy, and personalities are all closely aligned, change is usually hard for the individuals most directly involved. Taking control, power, stature, and significance away from a driven leader is no gentle act.
Brennan—private, modest, and humorously self-effacing—would later be comfortable quietly easing out of the CEO position at only age 55, chuckling at how anonymous he had always been. Bogle, 30 years his senior, was still described by friends as a “complete media hound”4 who couldn’t stop citing his “never-ending examples of rhetorical brilliance or citing passages from his own speeches verbatim off the top of his head.”5 And then Bogle would carefully project humility with self-deprecations such as “I’m an extremely ordinary human being” or “my brothers were both smarter” or “the fact that I’m not brilliant is Vanguard’s greatest asset.”
Brennan had an unusual ability to lead a collaborative team of senior managers to its highest performance. His general counsel, Heidi Stam, recalled, “Basically, we were brothers and sisters who looked out for one another and didn’t mind calling each other out when we disagreed. It was never personal. We persuaded each other with reasoning and kept open minds, and when we reached a conclusion we were all in with our support for the decision. We were expected to and genuinely wanted to help our colleagues by giving them people of talent and funding out of our own division’s budget if it was for the overall good of Vanguard. There was no tolerance for anyone who was not a team player, and Jack never put anyone on the senior team who wasn’t a team player.”
Brennan increasingly demonstrated his capabilities as a leader and his versatility: integrating technology with organizational units, transforming business units, identifying and engaging future leaders, and moving the whole organization forward in new directions and upward in standards of performance. The board of directors, and particularly chairman J. Lawrence Wilson, recognized that Brennan was demonstrating how effective a leader he would be. The timing seemed right. Brennan was coming up just as Bogle, who had been increasingly seriously ill, would be going into retirement. Some felt his retirement was coming somewhat later than optimal for Vanguard, but Bogle had achieved so much in the past that many felt it would have been unfair to push him out sooner.
Directors knew it was their responsibility to provide balanced judgment on the timing of the transition. They knew Bogle’s focus on costs made him too reluctant to invest substantially in computer power and automation as key competitors were doing. As Vanguard grew in scale and complexity, it would need a different organizational structure to serve many more investors in more markets with more and better services.
Directors understood the need to switch from a pioneering entrepreneur founder to an organization builder-manager and knew making that change was their responsibility. By early 1995, it was clear that it was time for Brennan to become CEO and for Bogle to enjoy well-earned retirement. At a distance, the transition from Bogle to Brennan seemed a perfect illustration of the classic sequence from entrepreneurial founder-proprietor to professional manager and organization developer.
Brennan was the only colleague Bogle told in advance of his May 24, 1995, announcement to the board of directors that he would step aside as CEO on January 31, 1996—but would, if approved by the board, continue as senior chairman. The press release announcing his retirement quoted Bogle as saying, “I will still be around,” and explained that Brennan would not become CEO for seven months.
Bogle’s cardiologist declared that his condition was “progressing”—getting worse—and that his chances of living even one more year were in jeopardy. His hands and feet were badly swollen, and he had difficulty breathing or walking. Bogle needed a heart transplant—soon. Then, because his condition was so terrible, he was upgraded on the waiting list for a transplant.
On October 18, 1995, he went into Philadelphia’s Hahnemann University Hospital to wait for his new heart. Bogle being Bogle, he organized his hospital room into an office with a computer, telephone, and files. He continued writing articles, memos, and letters, and made frequent phone calls to the Vanguard crew, to clients, and of course to his many friends in the media. Brennan visited with Bogle in his hospital “office” at least two or three times a week, and on Christmas Eve was there with his wife and kids to cheer the patient.
During the four months of waiting for the transplant and the subsequent months of Bogle’s recuperation, Brennan was pouring it on at Vanguard to forge ahead on automation and computerization. He organized a rigorous evaluation of every major aspect of the organization and developed a complete reconceptualization of the management structure and staffing. He pressed a transformation of Vanguard operations, which had fallen behind the competition. Organizational capacity expanded and productivity increased to accommodate the burgeoning volume of transactions.
For all those months, the nurses had been treating Bogle with the deference accorded senators, corporate CEOs, movie stars, and major hospital donors. Finally, on February 21, 1996, a nurse confirmed: “Well, Mr. Bogle, today is certainly your big day. After all your patient waiting, it proves the proverb: All things come to he who waits.”
“Yes and no, nurse.”
“Meaning what, Mr. Bogle?”
“Yes, it’s a big day for me on a personal level. After waiting 128 days in this hospital, never being sure of ever getting one in time, we now know that before the day is over, I’ll have a new heart, thank the Lord. But no. No, it wasn’t patience, nurse; it’s never patience. It’s always personal commitment: deciding what you want to accomplish, figuring out how to make it happen and then having the courage to press on regardless with great commitment, the commitment of the individual in the ring, in the action.”6
The heart transplant was a great success. Bogle’s luck provided him with a 28-year-old’s heart which, combined with Bogle’s drive and determination, made his recovery—in both speed and degree—simply phenomenal. He was home from the hospital in just nine days. Six weeks later, he was back in his office. Day after day, he felt stronger. On May 8, his sixty-seventh birthday, he gave a rousing speech on the benefits of indexing. A few days later, he was hitting balls in a squash court. Said an admiring friend, “It was absolutely amazing to see him playing squash again. And it’s very clear that if he’d known that he’d come out of the surgery and feel the way he did, he would never have given up the CEO position in the first place.”
Some directors worried that Brennan might have already lost his edge—the will to lead—after 14 years of serving under Bogle. Others believed the opposite: that those years of experience had compressed Brennan’s energy and drive, like a coiled spring, into an even stronger and more determined sense of purpose. As directors discussed the leadership transition, they became increasingly clear about how much Brennan had already been effectively the real CEO responsible for several strategic decisions he had carried out.
While Bogle had epitomized Vanguard and its beliefs externally, Brennan, as chief operating officer, had been crucial to its internal success. Brennan designed the Partnership Plan after recognizing a need, borrowing the idea from his prior employer and adapting it for Vanguard (see Chapter 6). Sending Jim Gately in to diagnose and then revamp the floundering institutional business into a major success exemplified Brennan’s talent for delegating strategic initiatives to other leader-managers instead of insisting on being the locus of control like Bogle. He supported leaders like Gately or Bill McNabb with a cluster of talented, young, ambitious teammates so they would have many hands and eyes to figure out major managerial problems. Rotating able people at all levels from one assignment to another challenged them to develop different skills and see themselves not in a job, but in a career. They learned about Vanguard as a whole and how each of the major parts connects with and can best relate with other parts.
“Brennan sought people who are different: different in skills and experiences, different in the way they think about big issues, whether problems or opportunities,” managing director Michael Miller said. “He believed that the search for people with real differences is the key to true diversity, the best protection against groupthink, the best way to assure creativity. Each senior manager had a different perspective, a different previous history or a different experience. We knew each of us had been selected for that reason, so we became great believers in airing different views. But once a decision had been agreed, Jack always expected all of us to line up in support of and make a 100 percent commitment to the success of that collective decision. When he committed to Six Sigma as a disciplined approach to problem solving, Jack would not let go. He changed the program from GE’s model to Vanguard’s Unmatchable Excellence and he was determined to make it work for Vanguard.”7
Brennan was confident of his ability to identify and develop future leaders. He’d been doing just that at Vanguard since he had first arrived. At one of the first management offsites he attended, Bogle had noticed. After the meeting, he turned to Brennan: “I know what you were doing. Evaluating everyone. So give me your report.”
Looking for favorable surprises but also quick to see mistakes, Brennan took notes on people and their responsibilities so he would always have them at hand. He was always looking for leaders and managers with strong growth potential such as Gus Sauter, Mike Miller, Heidi Stam, Bob DiStefano, Glenn Reed, Jim Gately, Tim Buckley, and Bill McNabb. He thought productively about how and why candidates might become well matched to the responsibilities of each new position. What will she add? What will he be able to learn? How will this particular assignment help develop this particular manager’s career at Vanguard?
Mistakes have been few but can be painful. “What really bothers us now,” Brennan said, “is when we decide, after three years of experience at Vanguard, that a man or woman is not working out, and we go back and look and see our assessments had identified the key problem the person had—three years ago!” Then, with his eyebrows rising, Brennan shares the lesson: “You can’t teach brains and you can’t teach character.”8
Naturally, every time anyone is advanced to a new role, at least several others will wonder, “Why not me?” So, instead of thinking just about who will be best for this role, Brennan thought about the “not chosen” and figured out beforehand what to say and when to say it to them, because they too are important to the organization.
Every year Brennan averaged nearly 200 of his skip-level meetings with those who reported to his direct reports, usually at a quiet lunch table off to the side in the Galley. (Do the math: these meetings were clearly a top priority.) The participants were guaranteed that their comments would be held in confidence. Brennan was completely open with these colleagues. Some were intimidated at first, or worried that they were being “taken to the woodshed.” But he was so low key, and so obviously interested in learning, that virtually everyone soon relaxed and opened up—to everyone’s benefit, particularly Vanguard’s. Brennan observed: “Top-level people are always ‘selling’ their policies and strategies to folks on the firing line and need to know what the people on the firing line are hearing and accepting . . . and what they are not ‘buying’ and why not. Meanwhile, those on the firing line want to know what top-level executives don’t fully understand or appreciate.”
Operating in the highly regulated securities industry, Brennan made special efforts to know and be known by government regulators. He invited them to meet with senior staff and directors so key people at Vanguard would understand how the regulators were thinking about the industry, about Vanguard and about the major issues in front of them and coming up. And the regulators got to know and appreciate Vanguard.
Readers will recognize how important each of these practices was in developing the collaborative culture at Vanguard and to its remarkable transformation from a small proprietorship to a large organization capable of growing into an investment industry leader that serves tens of millions of investors unusually well. Today Vanguard is entrusted with more retail investor assets than the combined assets of the three next largest competitors and has compelled its competitors to adopt two of its main strategic thrusts: lower fees and offering investors more advice. As Brennan observed, “The long-term thinking and behavior required for successful investing is different from the transactional focus of traditional investment services that dominated the investment industry in the past. Vanguard is moving out to intercept and succeed with this profound transformation just when investors are recognizing their need for a different kind of investment service that is centered on sound, customized advice.”
In 1999, Bogle turned 70, the age of mandatory retirement at Vanguard. He assumed the retirement-at-70 policy he and Riepe had established many years before would not apply to him; after all, he was the founder. When the directors realized how upset Bogle was about holding to his own policy, they were amenable to his staying on a year longer as senior chairman. Bogle saw this as a token gesture and refused.
Bogle was upset by a quote from a source in the Philadelphia Enquirer, “If you have been happy with Vanguard during the past three years you have Jack Brennan to thank for that,” and reacted typically: “There was a bull market, and I think the company’s success might have something to do with index funds and managers I chose, the structure of the company—all of which I take responsibility for. To credit that to someone else is extraordinary, unbelievable, and irresponsible.”
Some fund shareholders, not knowing the nature of the board of directors’ extensive discussions, reacted to the retirement news on the Vanguard Investors’ Forum maintained by Morningstar, suggesting that as a mutual fund organization, Vanguard should put such critical policy matters to a vote by the shareholders. One shareholder caught the thinking of the dissidents: “No matter how difficult it is to live with The Saint, management should realize that it is counterproductive—if not self-destructive—to make him a martyr in the house he founded, especially now that he has become a symbol of Integrity and Honesty in a world almost synonymous with fraudulence and back-stabbing.”
“Memo to Vanguard: Have you lost your minds?” Jim Cramer, cofounder of thestreet.com, an investing website, said. “You can’t kick John Bogle off the board like he’s just some sort of old guy that needs to be sent to the mutual fund pasture. . . . He is the only person willing to speak freely about how mutual funds routinely overcharge people and don’t give you value versus the index funds.”
Although most who commented online wanted Bogle to stay, some were not upset. “I’ll hate to see the day when the old, contentious warhorse Mr. Bogle is gone from the scene, but I see no evidence that Vanguard will suffer much for it,” a writer named “Mohuck” posted on Morningstar’s site. “Bogle isn’t the sum total of Vanguard, and I think Mr. Brennan, the current directorship and management are positioning the company correctly in order for it to maintain its leadership position in the rapidly changing financial services industry.”
As Jack Bogle saw it, the obvious move was for him to return as chairman of the board and take up the leadership of Vanguard again, right where he had been obliged to leave off. He felt great and was increasingly focused on the future—his future at Vanguard, which he always described as “my company.” But by then, Jack Brennan was established as CEO and making great progress in developing a strong leadership team and catching up in technology.
When Bogle later learned about the accelerated investment in computers (and a modest increase in advertising), he expressed his objections clearly: “My company is going to hell!” But the board of directors did not agree. The change in leadership was working well, even better than expected, and the directors were determined to do all they could to help the new leadership succeed. They were relieved and delighted to see Brennan performing so effectively as CEO. They were most certainly not going to displace him now—particularly since Bogle was so close to the mandatory retirement age of 70 he himself had set long ago.9
Bogle rejected that thinking. Surely an exception could and should be made for Vanguard’s founder! But the directors stood firm.
When asked by a TV reporter, “Are you happy with Brennan as your successor?” Bogle replied, “Happy? Not really. I’m not really so sure he’s ready for all that responsibility just yet.” Brennan was stunned and confronted Bogle directly: “After all I did for you all those times, you go public with a statement doubting I can do the job as CEO? You are not so sure of me?” The cord of trust and confidence had been broken.
Informed observers, then and now, agree unanimously that without Bogle, Vanguard could never have come into being or developed into an early success. Bogle established Vanguard as a low-cost, low-fee provider with a high-integrity culture focused on investors’ long-term success. Bogle was present at the creation. He made it happen. Through force of will, persistence, impassioned persuasion, clever legal maneuvers, and crucial lucky breaks, he lifted Vanguard from a narrowly limited, small entity into a new kind of investment company. As Burt Malkiel, Bogle’s close friend and a long-serving Vanguard director, put it, “Vanguard could never have been conceived, launched, or made successful in its early years without the unrelenting drive, determination, and creativity of Jack Bogle and Vanguard could never have become the great success it so clearly has become without Jack Brennan taking over as CEO.”
The directors had great affection for Bogle, and they tried time and again to find ways for him to leave graciously. But it was taking an unusually long time to negotiate the final terms of his separation agreement. Finally, Bogle understood that the board would not go any further, and that he would be wise to accept the final offer or risk seeing it start to unwind. Vanguard agreed to provide Bogle with a three-person staff, generous annual expenses, an office suite in the main Vanguard building in Malvern, Pennsylvania, access to Vanguard’s computers and its extensive database, plus a car and driver—and an unusually large one-time payout. Bogle accepted.10
When Brennan learned the magnitude of that settlement, he went for a long, long run.
Taking the long view of the history of Vanguard thus far, both Brennan and Bogle “won.” Jack Bogle was driven to win recognition and fame that would save him from his fear of being forgotten and make his many great contributions worth remembering and admiring. As the next chapter will show, those hopes have been more than fulfilled.
Jack Brennan, not interested in whether or how the world would perceive him, quietly concentrated on converting Vanguard into an effective, self-sustaining, large-scale, persistently innovative, continuous-process organization 10 times the size of the outfit he took over. He left it fully capable of self-financing bold strategic moves to create its own future, and to change the global investment management industry again—and again.