Welcome to the Boardroom Governance Podcast. I’m your host, Evan Epstein. In this episode, I talk with Bill McNabb, the former Chairman and CEO of Vanguard, the world’s second largest mutual fund manager with over $7 trillion in AUM. Bill currently serves as a board member of UnitedHealth Group and IBM, in addition to several other PE and VC-backed private company boards. Bill is the author of the book "Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR", along with his co-authors Ram Sharan and Dennis Carey (2021). In their book, they argue that since TSR (total shareholder return) cannot keep the short and long term in balance, boards should focus on a different kind of TSR—talent, strategy, and risk—because decisions and actions around these factors, more than any others, determine whether or not a company creates long-term value. The book seeks to redefine the board's agenda and explains how to: 1) Build and incentivize the right leadership team, 2) Help leaders take a longer view and communicate it to investors, 3) Refresh board composition and create diversity to meet the new challenges, 4) Keep major risks, such as cyberattacks and sexual harassment allegations, front and center, and 5) Analyze the business through the eyes of a shareholder activist. In this podcast, we talk about many of these issues including Bill’s thoughts on how to create a capable board, redesigning board committees, how to reduce information asymmetries between management and the board, and the importance of engaging with investors. We also address the rise of Chief Human Resources Officers, lessons from private equity boards and shareholder activists, the latest trend of delegation of voting power from large institutional investors to beneficial owners, and his take on ESG and corporate purpose (shareholders and stakeholder value). If you like this show, please consider subscribing, leaving a review or sharing this podcast on social media. You can find all the show notes on the website boardroom-governance.com and please feel free to subscribe to the Boardroom Governance Newsletter at evanepstein.substack.com
0:00 -- Intro.
2:21 -- Start of interview.
3:14 -- Bill's "origin story".
6:57 -- On why he joined Vanguard in 1986, and what makes the company so special. "Intellectual rigor of Wall Street with mid-western values."
10:30 -- On Bill's board career. He first joined the Philadelphia Zoo (he stepped down this summer after 16 years) and currently serves on the boards of UnitedHealthcare Group and IBM, plus other PE and VC-backed companies and non-profit boards. The connection between public and private boards.
13:03 -- On his book Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR and what made him write it. The early governance stewardship by Vanguard (Jack Brennan's letter to 450 CEOs in 2002 laying out Vanguard's governance expectations on governance matters). The Common Sense Governance Principles (2016). His work with the Raj & Kamla Gupta Governance Institute at Drexel University, where he met his co-authors Ram Charan and Dennis Carey.
17:13 -- On shareholder engagement and why directors should understand their investor base. Traditionally, the only times there would be shareholder engagement was when an activist would get involved (and how their role has evolved), and with say-on-pay. The role of permanent capital (index funds).
21:21 -- Why some of the best-run public companies operate with a private company mindset. Some advantages of private equity boards.
26:51 -- His take on dual-class stock structures. The good and the bad. "But making them permanent is a mistake."
29:30 -- The focus on Talent, Strategy and Risk (TSR) in his book:
38:46 -- On creating a capable board: board composition and expertise.
45:59 -- On the work and focus of board committees: "Talent, Comp and Execution Committee" & "Strategy and Risk Committee."
48:43 -- On the rise of Chief Human Resources Officers (CHROs). Talent and culture is critical. It has become a strategic function more than just an administrative function.
52:14 -- On how to reduce the information asymmetry between management and the board. The Netflix case study by Larcker & Tayan (2018). "This is where having a couple of domain experts on your board is important because they can at least open some doors and give ideas to pursue." You need to be creative and bring in experts to present to the board (example: cybersecurity, geopolitics, activists, buy-side analysts, venture-capitalists, etc).
56:52 -- On the new trend of large institutional investors delegating voting power to beneficial owners. "If you delegate to sovereign wealth funds or large pension funds who have staffs that can vote in a thoughtful way I see no problem with that. But the problem is delegating to individual investors (99.9% will not vote and the proxy advisors will determine how this is all done [and I don't think they do a great job.]" "I'm glad that Vanguard does the voting with its long-term value creation approach."
01:01:28 -- His take on ESG, and the distinction between shareholder and stakeholder value. The pushback from governments failing on some large macro issues, asset managers seeking new fees, and its politization. "ESG is just a subset of the shareholder and stakeholder debate." The 'E' in ESG is the most complicated because it is so tied to these very specific climate goals. I think that this is a reaction to the fact that governments have not been able to come to any agreement on some of these issues, and I'm skeptical that companies can achieve some of these goals. It's going to be very difficult for companies to manage their businesses accordingly."
01:07:16 - What are the 1-3 books that have greatly influenced your life:
01:10:22 - Who were your mentors, and what did you learn from them?
01:13:23 - Are there any quotes you think of often or live your life by?
Two last lines of Invictus poem: "I am the master of my fate, I am the captain of my soul."
01:14:02 - An unusual habit or an absurd thing that he loves: Analog and Asimov's Science Fiction magazines.
01:14:39 - The living person he most admires:
Bill McNabb served as chairman of Vanguard from 2008 until his retirement in 2018 and served as CEO from 2008 to 2017. He is a corporate director of UnitedHealth Group and IBM. Bill also serves on the Wharton Leadership Advisory Board, the Dartmouth Athletic Advisory Board, the Advisory Board of the Ira M. Millstein Center for Global Markets and Corporate Ownership at Columbia University and is also a board member of CECP: The CEO Force for Good.
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Music/Soundtrack (found via Free Music Archive): Seeing The Future by Dexter Britain is licensed under a Attribution-Noncommercial-Share Alike 3.0 United States License