Pursuits | Books

Book excerpt: Creating Great Choices

A preview of Jennifer Riel and Roger Martin’s National Business Book Award-nominated book

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book cover for Creating Great Choices by Jennifer RielAside from integrative thinking, the book also highlights diversity of thought and how our ideas are framed by our own biases (Harvard Business Review Press)

It’s hard to find many individuals who have had a greater impact on the way the world invests than Jack Bogle. Founder and former CEO of The Vanguard Group, an investment firm with more than $3.5 trillion in assets under management, Bogle brought a new focus on costs to an industry obsessed with returns. He introduced the first index fund. He pioneered the no-load mutual fund. He was named by Fortune one of four investment giants of the twentieth century (along with Warren Buffett, Peter Lynch, and George Soros).

But before all that, Bogle was fired. 

While still in his thirties, he had become the head of Wellington Management Company, which was a leader in managing and selling balanced mutual funds. These balanced funds, as their name suggests, had a broad portfolio of holdings, mainly conservative stocks and investment-grade bonds. When Bogle became CEO, Wellington Management was facing a crisis: with the emergence of more speculative (read: higher risk, higher return) equity funds, investors were losing their taste for traditional balanced funds.

Bogle recalled this time in an essay marking his sixty-fifth anniversary in the mutual fund industry: “We could only watch helplessly as the balanced fund share of industry sales fell from a high of 40% in 1955 to 17% in 1965 to 5% by 1970.” Pressured to embrace the “go-go” philosophy of the era, Bogle arranged a merger with an aggressive equity fund, giving his new partners the largest share of Wellington’s voting control. Bogle was named CEO of the combined firm.

By 1974, Wellington Management was hit hard by the great bear market: assets fell from $2.6 billion to $1.4 billion, the stock price dropped from $50 per share in 1968 to less than $10 at the beginning of 1974. Finally, on January 23, 1974, the aggressive money managers Bogle had brought into the firm had him fired as CEO.

By chance, Bogle had a meeting the next morning with the board of the Wellington funds. A complex organizational structure meant that management and oversight of the funds were separate from oversight of the management company. Bogle had been CEO of both Wellington Management and the Wellington funds. When he was fired from the management company, he remained, at least overnight, the CEO of the funds. Exhausted and more than a little angry, Bogle made a last-ditch effort to stay on as CEO of the Wellington funds. He convinced the board to make him CEO of a new subsidiary, owned by the funds and solely responsible for their administration. 

The subsidiary was directed not to engage in investment management, marketing, and distribution; Wellington Management would continue to perform those tasks. It was an absurd arrangement. “I was very honest with myself; there's no point in starting an administrative company that doesn't control investment management or distribution. Yet we had an understanding that I would not do either. But I figured we could work around that,” he says with a chuckle.

Bogle did not want to run a administration-only shell of a firm, but he knew he could not simply ignore his agreement. He needed a new solution. Bogle had long believed that the mutual fund customer should be the driving force of the industry. In his senior thesis as a Princeton undergraduate, he wrote that mutual funds should “serve their [customers] in the most efficient, honest and economical way possible.” But he recognized that in the prevailing construct, the mutual fund customer was often a pawn. The management company’s shareholders held all the power. Through the investment management and distribution fees it charged the fund, the management company earned a sizable portion of a fund’s investment return. The returns went to shareholders of the management company rather than to customers of the funds.

In his new subsidiary, Bogle decided to make the customer more central than ever before. He did so by changing the structure of ownership. Rather than accept the prevailing structure of shareholders versus customers, he used mutualization to turn his fund customers into the ultimate owners of his firm. (mutualization is a process by which a company previously owned by shareholders changes its legal form to become a mutual company or cooperative in which the majority of the stock is owned by customers.) Bogle mutualized his subsidiary, then stripped down the management apparatus and fees to ensure that he could maximize the total benefit to customers. He did so, he says, because “I'd been concerned about the industry structure for a long, long time...No man can serve two masters.” Bogle picked the master he wanted to serve—the fund customer—and created a structure that would allow him to do so. He created a new solution when the existing options were simply not good enough.

Reprinted by permission of Harvard Business Review Press. Excerpted from Creating Great Choices: A Leader’s Guide to Integrative Thinking. Copyright 2017 Jennifer Riel and Roger L. Martin. All rights reserved.