Part III

ECONOMICS AND IDEALISM: THE VANGUARD EXPERIMENT

THESE NEXT FIVE chapters describe how Vanguard has developed over the years. Together, they describe not only why and how the firm came to be formed, but the philosophical ideals inspiring our novel “mutualized” corporate structure, as well as the investment ideas and human values that have remained, to this day, at the very heart of our enterprise.

In Chapter 16, I present a short chronology of our history, focusing on the seemingly endless series of random accidents that made it possible to test my idealism, financial ideas, and organizational values on the hard anvil of the business world. These fortuitous events begin with the genesis of my Princeton senior thesis in 1949, followed by my first job, offered to me by my great mentor Walter L. Morgan; a failed merger, the happy event (as it turned out) of my being fired; the founding—and even the naming—of Vanguard in 1974. Each of these events offered the opportunity to take “the road less traveled by.” Without them, Vanguard would never have come into existence.

From the outset, given the unprecedented nature of our structure and strategy, I frankly referred to our mission as “The Vanguard Experiment,” part of the title of a speech I gave to the Federal Bar Association in March 1975, six months after our founding (Chapter 17). In it, I urged, perhaps too boldly, that our industry rivals, in their enlightened self-interest, “might want to consider” a similar approach. (So far, none has done so.) Initially, our structure—described in detail in the talk—called for the mutualization only of our fund governance and administration. But within two years we had undertaken our first step toward mutualization of investment management and completed our mutualization of distribution. While we were barred from both activities at the outset, I argued (perhaps a bit disingenuously) that we could undertake them by not engaging in them at all. Our management of the index fund entailed no active management, and our going no-load—after a half-century of distributing funds which carried sales charges—entailed no active distribution. So Vanguard's present business model—internalization of all aspects of fund management—became fully functional early in 1977 and has remained essentially unchanged to this day.

The concept of an ideal industry structure, however, had occurred to me much earlier. First aired in my 1951 thesis, I spelled it out with surprising candor to my associates at Wellington Management Company in 1971 in my fifth annual “State of the Firm” address as Wellington's chief executive. In the speech entitled “Deliverance,” (Chapter 18) I made so bold as to suggest a coming need for investment managers to measure up to higher standards of professional responsibility and fiduciary duty, perhaps through some form of mutualization. I described the concept as “a great objective to be accomplished by 1976.” And accomplished it was, but only through the harrowing sequence of fortuitous events that led to Vanguard's foundation.

In recent years, I've thought a great deal about the strong link between Vanguard's economics and its idealism, from the principles I advocated in my thesis to the Vanguard structure itself, to our low costs, and to our index and index-oriented funds. When I studied the enlightened economic philosophy manifested by that great Princetonian Woodrow Wilson as the 23^rd President of the United States and his own extraordinary idealism, I sensed a similar connection between the two. In Chapter 19, I explore that parallel, concluding with a citation of Wilson's inspiring 1901 message of hope for the 20^th century as the harbinger of my own hope for the 21^st century that now lies before us.

The final chapter of Part III may be the most idealistic of all. “On the Right Side of History” was the keynote speech at the 1998 Conference of the Greenleaf Center for Servant-Leadership. In it I discuss the idea of building a model institution, how the superior company can arise from a liberating vision, and what can happen when a company grows from small to large. My words may seem poignant—and in a sense they are poignant—but I have no difficulty in reaffirming my confidence in our extraordinary crew, “who know what ought to be done, and have done the right things at the right time.” Our structure and strategy, and the ethical foundation that is our rock, place us, I suggest, “on the right side of history.” And so to this day I continue my mission, facing the marvelous challenges that life has always afforded me with an enthusiasm and idealism that remain undimmed by time and tide.