APPENDIX 2

BRENNAN’S LEADERSHIP GUIDE^*

Do the right thing: Vanguard people are allowed to make mistakes, but they are never allowed to make ethical mistakes. Violate the confidentiality of client information, and you’re out. Accept a gift of material value from a client or a vendor, and you’re out. Make investments that are forbidden because of your job responsibilities, and you’re out. Ours is a “no ifs, ands, or buts” policy. There are no gray areas. We make no apologies for that black and white view.

Lead by example: Our great leaders must:

•   Be the hardest workers.

•   Be the most client focused.

•   Be the most driven to succeed.

•   Be the most caring and compassionate.

•   Be the most flexible.

•   Be the best role models with unquestioned integrity.

•   Be the most committed to excellence.

Love . . . our people, our company, and our business: This is a great company in a great business. Among all the competitors in the industry, this is the preferred place to work. We do things right, and we do right by our clients. We never compromise on those fundamental principles.

Foster teamwork: In embracing this premise, the successful Vanguard leader “puts her ego in her pocket.” Effective leaders exhibit personal humility, a trait that is vital in the investment management business considering that we ply our trade in the financial markets, an unpredictable environment in which we have very little control over the results. Investment firms that give in to hubris are apt to find that pride leads to their downfall. The dustbin of history is littered with examples of financial firms that failed to stay humble.

Accept paradox: To accomplish our mission, we must be both the highest-quality provider of services in our business and the lowest-cost producer in our business. It is difficult to name a second organization, in any business, that is accomplishing both of these goals. This is why a focus on continual improvement is so important to our current and future competitive success.

Work hard: Why? Two reasons. First, I’ve never seen, or even heard of, an organization where emulation of leaders by the employees is so critical to success. And we want our crew to work very hard for our clients. Second, frankly, we want a lean leadership, and a lean ship requires hardworking leaders.

We must be a very profit-driven organization to remain vital and growing. Yet our financial statements say that “revenue equals expenses” and that makes no profit. How do we reconcile those two statements? Simple. We’re driven by our clients’ profits, not the firm’s.

We have the freedom to manage our business for the long term because of our unique structure. Yet we are driven each day by service-level standards that we measure minute by minute, hour by hour, day by day, week by week.

. . . But be balanced: While leaders should work hard, they should also lead a balanced life. We all know that staying balanced is sound investment advice and a sound business strategy. It is also the path that leads to personal and professional fulfillment. The need to work hard but be balanced is one of the paradoxes of being a Vanguard leader.

Compete tenaciously: The drive to succeed has been a critical element in our success at both the personal and corporate levels. One of my coworkers said it profoundly some years back on the day after the stock market’s worst single-day setback in a decade. At the end of that day, when it was clear that our client service had been splendid and that all client transactions and requests had been handled, I asked, “How does this happen? How do we, alone in the industry, treat a day of surging volumes and great stress as a normal day, even an enjoyable one?” She responded, “Jack, you know as well as anyone, we’re the most competitive firm in the world; we simply won’t let someone be better than us on a day like today.”

Be decisive and accept responsibility: A great leader accepts all the blame and distributes all the credit. Being the leader is credit enough. Decisiveness—particularly when tempered with sound judgment—is an asset that you won’t find on our balance sheet but that has helped us conquer many obstacles and lead the way in this industry for years and years.

Value diversity: This is a people business, and we must have the best people working for us in all positions, at all locations, and at all times. It would be foolish for any of us to think that all of those people should look “just like me.” Thus, the high-impact leaders of this company understand the power that embracing diversity can bring to Vanguard. Diversity is important at Vanguard. First, I have learned so much over time from those people who aren’t like me that I consider working with a diverse team a simply fabulous ongoing educational opportunity. And second, it’s more fun.

Set high expectations: Well-run departments become exceptional departments when a new leader is installed who has higher expectations for the group. Conversely, when a unit’s relative performance has declined, invariably we can trace the problem to a leader for whom “good enough was good enough.” There are a number of lessons to be learned here. The great leaders of this organization have unfailingly high expectations for themselves. In fact, high personal expectations are a must for a leader.

Embrace change: For years, I’ve heard people outside the company say Vanguard hasn’t changed much through the years. “Still dominated by mutual funds . . . still owned by the client . . . still focused on low cost . . . still not too glitzy.” On the surface, it’s true. We haven’t changed much. Actually, this organization has changed frequently and the people who have embraced change are the ones who have led us to success and have thrived. Those who have resisted change have slowed our development and—not coincidentally—have hurt their own careers.

Be personal: One tremendous difference between good leaders and great leaders is this: The great ones are personal. By “personal,” I mean they work at being more than a boss, more than someone who guides a team. Vanguard’s great leaders open themselves up, letting their people in on their personal lives, their hobbies, their families, their likes and dislikes. In turn, our most effective leaders want to be let in on their team’s lives, too, so they can know the crew as people, not just employees. The personal can never get in the way of the professional, but it sure can enhance it. We want everyone on the crew to have both a professional relationship and care about you as a person and know about your children—or your partner if you’re gay.

Be positive: Face it. Work is work. Most people don’t choose to work; they must. Those are the stark realities of life in a business or in any organization. That said, a leader’s job is to make work challenging, enjoyable, and rewarding. You cannot do that except in a positive environment. The need for a positive environment places a big burden on our leaders. The great ones recognize one simple fact: they can never have a bad day. Because if they have a bad day, their work unit has a bad day. And if that happens, the client will know it.

Be resourceful: Our great leaders understand what needs to be done, and they get it done, no matter what it takes. When there’s a roadblock or unexpected hurdle, Vanguard leaders figure out a different approach. In other words, leading successfully here requires that innate ability to carry out a mission without turning aside or relying on others when things don’t go quite as expected. Our most resourceful leaders don’t write a memo to someone explaining why something can’t happen; they just get it done.

Develop successors: We all know who the great people developers are at Vanguard. They touch the entire company; they touch hundreds of crew members. We also can identify managers who subscribe to the “no one too close to the throne” school of thought. The people developers thrive and prosper with us; the others don’t work here anymore.

Prize (and demonstrate) loyalty: Vanguard values loyal clients and a loyal crew—both are critical to the long-term success of our company. And, as in any relationship, loyalty must go both ways. A company can’t expect to receive loyalty unless it also treats its clients—and its people—with loyalty.

Be in touch: Our best leaders want to know how they’re doing. They want candid feedback from their boss; from their team; from their clients. They actively seek face-to-face feedback knowing the more you show you’re really listening, the better the feedback will be.

Forget glamour: Clearly, low cost is not the glamorous or glitzy place to be in business. Few firms seek it out; in fact, only the winning firms end up in this position. We’ve had people say to us “Working at Vanguard is an acquired taste.” I agree . . . proudly. Our great leaders understand that low cost is not the same thing as cheap. The Vanguard leader must be comfortable with our low-cost strategy; comfortable with our “no frills.”

Minimize politics: Politics have never had a place at Vanguard. We are a mission-driven organization with one set of clients—Vanguard clients—and one overriding goal—to provide the maximum return for each of those clients. In serving those clients, there is no room for self-interest.

Welcome debate: The ability to disagree is important. The willingness to say to a colleague, “You’re right” is essential.^*

Teach: One of the major privileges of serving in a leadership role at Vanguard is the chance to teach. It’s an opportunity that is presented in many ways. People who view themselves as merely “managing” feel no compulsion to teach. Our best leaders can think of nothing more fun.

Think globally: We are becoming a better company as we become a global company. The perspectives that crew from various countries and cultures bring to the proverbial table are incredibly valuable. International diversity strengthens the human fabric that has distinguished Vanguard in every endeavor we’ve undertaken since we began. It’s another one of our subtle competitive advantages.

Grow . . . personally, intellectually, and professionally: Not coincidentally, those who succeed most in meeting new challenges do so because they’ve been preparing for additional responsibilities throughout their entire careers.

Avoid complacency: The facts and figures about our successes are impressive, but as we should always be reminded, that is all “yesterday.” What is relevant is our performance for our clients and our crew members as we move into the future. It takes enormous discipline—personal and institutional—to avoid complacency in a successful organization, and very few organizations have done so. Our own scorecard is in fact not perfect. But I hope we have learned from every episode in which complacency hurt our performance for clients and crew. Our focus on continuous improvement provides the motivation to avoid repeating mistakes. And, in this organization, the great leaders are entrusted with the responsibility to keep us focused, keep us sharp, keep us driven to be the best.

Have fun: The leaders of this company work hard. Very hard. We have trillions of dollars of other people’s money in our care in markets that can be volatile and treacherous. It’s a huge responsibility. We cannot control the ultimate product we produce—investment results. That’s a humbling prospect. With that as background, the great leaders recognize that you have to have fun when working here. Our leaders don’t have to be comics or entertainers, but if they don’t demonstrate the humanity and the humility required to have fun, crew members will be less likely to rally around them and follow them through tough times. So have some fun. Demonstrate a lighter side; a sense of humor; a lack of fear of embarrassment. It will pay big dividends. No team wants to be led by a stiff.

^* See Chapter 13.

^* Expanding later on this item, Brennan had no interest in holding back: “The willingness to say to a colleague ‘That’s stupid’ is [also] essential.”