2014

Zhou founded 3721 in 1998, a search engine that sold Chinese-language keywords for Roman-alphabet domain names, an early and distinctly China-specific internet business model.

Values, Ethics, and Structure in Finance Remarks by John C. Bogle, Vanguard Founder Keynote Speech The Public-Private Partnership Symposium Georgetown School of Law Washington, D.C. October 31, 2014 I’m delighted to have this opportunity to address this symposium on “Structuring Public-Private Partnerships for Asset Management and Co-Investment,” focused on values and ethics. As I review the impressive backgrounds of each of you participants, I’m honored by your presence here today. I’m familiar with—and I applaud—the incipient development of P3s, but have little first-hand experience in that area. But I have more than 63 years of experience in our nation’s financial sector, and have a strong foundation of beliefs about its values, ethics, and structure that are also applicable to public- private partnerships. As some of you may know, much of my recent work has focused on the flaws that have developed in the American financial system in general, and specifically in the field of institutional money management. No mean problem, since our institutional managers collectively hold some $13 trillion of U.S. stocks—65% of the shares of virtually every publicly held corporation. These managers—largely mutual funds (the major holder), public and private defined benefit (DB) pension plans, and private defined contribution (DC) thrift and savings plans—have the power to change corporate behavior for the better. So far, however, their massive collective power remains largely unexercised.

In a 2014 email interview, Birla traced his business philosophy to Marwari traditions: value creation, a culture of productivity and efficiency, prudence in financial management, and the parta system of working a daily profit and loss account. He argued these principles are common across traditional Indian entrepreneur families and that much of the learning happens subconsciously — across the dining table — when growing up in a business household.

Chairman and CEO John Watson opened the Q4 2014 review against the backdrop of a more than fifty percent collapse in crude prices during the second half of 2014. Management told the call that the Company was entering 2015 with the largest long-cycle project portfolio in its history, anchored on the Gorgon LNG project in Australia, the Wheatstone LNG project, the Jack/St. Malo deepwater project in the Gulf of Mexico and the Big Foot tension-leg platform, with aggregate capital commitments that would peak at approximately $35 billion during 2015 before tapering sharply through 2016 and 2017. CFO Pat Yarrington walked analysts through the capital allocation framework, indicating that the Company would fund the peak capex year from operating cash flow and the balance sheet, with the asset divestiture program contributing additional funding. She flagged that the dividend had been increased for the twenty-seventh consecutive year, that the Company intended to continue the multi-decade trajectory of dividend growth through the downturn and that share buybacks were not part of the framework given the long-cycle investment pipeline. On the Q&A, analysts pressed on whether the dividend was safe given the crude price environment and the capex burden. Watson responded that the Company had stress-tested the dividend through a $50 per barrel environment and that the balance sheet and the asset divestiture program provided the bridge through the downturn. He also argued that the long-cycle projects entering service during 2015 and 2016 were the structural drivers of cash flow growth through the back half of the decade and that pulling back on the final completion capex would have been the wrong decision under any plausible price scenario. The call closed with management reiterating the long-term objective of upstream production growth toward 3.1 million barrels of oil equivalent per day by 2017 and a return on capital employed above the peer group average through the cycle, and committing to defend the dividend through the downturn even if doing so required incremental balance-sheet leverage.

Wang opened the 2014 annual results briefing against the backdrop of a year in which BYD had sold approximately 19,000 pure electric passenger vehicles, the largest pure-EV volume of any Chinese manufacturer, and in which the Qin plug-in hybrid had launched successfully. Management told analysts that net profit had grown to approximately RMB 2.28 billion on revenue of approximately RMB 58.2 billion, with the automotive business contributing the majority of both revenue growth and operating profit and the secondary battery business continuing to provide a stable earnings baseline. Wang walked analysts through the strategic positioning, indicating that the Company had moved from being a rechargeable battery manufacturer that had entered the automotive market to being an integrated new energy vehicle manufacturer that used the captive battery supply chain as a structural advantage. He flagged that the new energy vehicle, the new energy passenger vehicle and the energy storage product lines were being positioned as the long-term growth engines of the Company, while the traditional internal combustion engine passenger vehicle business was being managed for cash and market share rather than for aggressive growth. On the Q&A, analysts pressed on whether the new energy vehicle business was earning an adequate return on the invested capital given the early stage of the market. Wang responded that the unit economics of the Qin and the e6 were tracking within the long-term target range, that the scale being achieved through the captive battery supply chain was driving the unit cost down faster than the industry had projected and that the regulatory environment in China, including the purchase tax exemption and the license plate preference in the major cities, was supporting the volume trajectory. He also defended the vertical integration, arguing that the captive battery supply was the central structural advantage of the BYD franchise. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles, anchored on the vertically integrated battery, automotive and energy storage franchises, and with the Company committing to invest aggressively in research and development through the cycle.

On January 5, 1914, Henry Ford and his vice president James Couzens stunned contemporaries by announcing that Ford Motor Company would roughly double its workers' wages to five dollars a day. The move generated glowing newspaper headlines and editorials around the world; the spectacle of a wealthy industrialist voluntarily sharing profits on such a scale was without precedent. The Henry Ford museum's account notes that experiments through 1913 and into 1914 had already compressed the time required to build a Model T from twelve and a half hours to ninety-three minutes, and that increased efficiencies had lowered production costs, lowered customer prices, and increased demand. The five-dollar day came at the precise moment when the moving assembly line was making the work itself more monotonous, turning a wage shock into an instrument of retention, market creation, and brand differentiation all at once.

In a June 2014 Wall Street Journal op-ed co-authored with former Federal Reserve governor Kevin Warsh, Stanley Druckenmiller set out the argument that the United States had become an asset-rich, income-poor economy as a result of the Federal Reserve's post-crisis monetary policy. The piece argued that the central bank's balance-sheet expansion had lifted the prices of financial assets without producing a proportional lift in the cash flows that ultimately justify those prices, and that the gap between the two had been papered over by the suppression of the risk-free rate. The op-ed is one of the rare instances in which Druckenmiller put his name to a written policy argument, and it has been cited in subsequent years as the foundation of his structural concern about debt sustainability and asset-price fragility. The piece is widely shared among investors and analysts looking for a serious articulation of the principles at stake in the broader debate over how institutional money should be deployed. Warsh and Druckenmiller wrote that the asset-rich, income-poor condition was unstable because the gap between asset prices and cash flows could only be closed in one of two ways: a sustained acceleration in nominal income that justified the valuations, or a repricing of the assets back to a level the cash flows could support. They argued that the Federal Reserve's stated expectation of a gradual normalisation was unlikely to produce the first outcome and that the market was underpricing the probability of the second. The op-ed closed with a call for the central bank to articulate an exit framework that explicitly acknowledged the trade-off, rather than continuing to assume that the expansion of the balance sheet had been a costless intervention in the financial system. The article is widely used as a teaching document in business-school courses on the subject and in wealth-management training programmes that draw on the published record of the investor. The op-ed has been revisited at several points in the subsequent decade, most notably in 2022 when the inflation that Druckenmiller and Warsh had warned about finally materialised and the Federal Reserve was forced into the fastest tightening cycle in four decades. The piece is now cited as a foundational document for the structural inflation thesis that Druckenmiller has continued to articulate in his subsequent public appearances, and it is paired in his public bibliography with the Lost Tree Club talk and his more recent Squawk Box appearances. The op-ed also marked the beginning of his public partnership with Warsh on policy questions, a partnership that has continued through subsequent op-eds and through public appearances at policy conferences and academic venues. The piece is paired in the secondary literature with the original source documents and with the broader coverage of the subject in the financial press and the academic literature that followed.

An Education Next profile catalogued the scale of Hastings's education work: he had given millions of dollars to start charter schools and millions more to develop education software to personalize learning, and, in the magazine's phrase, he does not just give money, he makes things change. He led and financed a 1998 campaign that forced the California legislature to liberalize the state's restrictive charter law, served four years on the California Board of Education, provided start-up funding for the Aspire Public Schools charter network, and helped launch and bankroll EdVoice, a lobbying group, plus the NewSchools Venture Fund, a backer of education entrepreneurs. He funded Sal Khan of Khan Academy to build teaching videos and a dashboard for tracking student progress, used in the United States and around the world, and backed Rocketship Education, which blends adaptive computer learning with teacher-led instruction. He sat on the boards of the California Charter Schools Association, the KIPP Foundation, DreamBox Learning, and the Pahara Institute, a portfolio spanning advocacy, school networks, and the software layer underneath them.

Financial Reform: Investment Standards and Ethical Values By John C. Bogle, founder of Vanguard before The Community Forum Distinguished Lecture Series of The Bryn Mawr Presbyterian Church Bryn Mawr, PA April 28, 2014 I last addressed this Forum eleven years ago. Since then, we’ve all seen remarkable changes in business, commerce, and finance in our nation . . . too many of them, alas, leading us in the wrong direction. Even worse, I think, is our failure to take significant steps to deal with the challenges that I outlined in those earlier remarks, entitled “What Went Wrong in Corporate America?” Then, my primary theme was the ascendance of a “bottom-line society” in our nation—measuring America’s success by our national output, our stock market, the earnings of our corporations, the strength of our businesses, our high standard of living, and the wealth—however unevenly divided—of our citizenry. I concluded that we were measuring “the wrong bottom line—form over substance, prestige over virtue, money over achievement, charisma over character, the ephemeral over the enduring.” While that flawed “bottom-line society” remains dominant, tonight I’ll focus on how it has affected our nation’s financial sector, and distorted the interplay between the investment standards and the ethical values that now prevail in our world of finance. Both these standards and these values have deteriorated even further since last I spoke in this sanctuary.

At the 2014 Daily Journal annual meeting, Munger returned to one of his favorite themes - the slow death of the print newspaper business, and the specific case of Daily Journal's own former moat. The company had once held a near-monopoly on the prompt publication of California appellate court decisions, a service the legal profession could not do without. Every year, Munger noted, the company raised subscription prices and every year its customers paid. That, he said, was a wonderful business. He was unsentimental about what had broken the moat. Technology changed, lawyers stopped needing the print product for information about appellate decisions, and the newspaper business shrank. The franchise did not collapse in a single quarter; it bled out over many years as the internet absorbed the function the print product had once owned. Munger treated the decline as a textbook case of how a durable franchise stops being durable the moment its distribution advantage is bypassed by a cheaper technology. The lesson he drew for the room was not nostalgia but discipline. Companies with that kind of historical monopoly do not deserve permanent worship; they deserve to be re-underwritten every year against the technology that could displace them. The same logic that emptied out the legal newspaper's circulation is what emptied out Kodak's silver-based photography and what emptied out the Sears catalog. The job of the long-term owner is to keep re-checking the moat, not to keep telling the old story.

In early 2014 Icahn bought a stake in eBay and publicly demanded the separation of PayPal, arguing that keeping the payments business inside the marketplace company suppressed the value of both and that the board's refusals reflected entrenchment rather than analysis. His letters were unusually blunt, accusing the board of conflicts and poor oversight while praising the PayPal franchise itself.

Moynihan opened the Q4 2014 review by reporting full-year net income of $4.8 billion, with operating earnings per share of $0.75 for the quarter, and a return on tangible common equity of approximately twelve percent for the year. Management told the call that the legacy mortgage-related charges had finally rolled off and that the Company's operating leverage during the quarter had been the best of the post-crisis era, with operating expense down year over year on the back of Project New BAC's full run-rate savings. CFO Bruce Thompson walked analysts through the Common Equity Tier 1 ratio of approximately ten percent, the supplementary leverage ratio build and the share repurchase activity during the year. He flagged that the Federal Reserve had conditionally approved the 2014 capital plan and that the Company had repurchased roughly $1.5 billion of common stock during the quarter, with the intent to step up the pace as the operating earnings power normalised. On the Q&A, analysts pressed on whether the Bank could finally return to a steady-state capital return trajectory given the litigation and regulatory overhang of the prior five years. Moynihan argued that the litigation pipeline had been substantially resolved, that the Company had moved into the upper quartile of CCAR stress-test outcomes and that the intent was to step up the common dividend at a measured pace and to drive the buyback pace off the operating earnings power rather than off the excess capital build alone. The call closed with management framing the next phase as the operational transformation of the consumer banking and the wealth management franchises - investing in mobile banking, financial adviser headcount and digital mortgage - rather than as the capital-restructuring phase that had dominated the prior five years.

In a BCG conversation, Agarwal framed Vedanta as the product of a relentless search for undervalued assets combined with lean operations. From selling scrap metal in the 1980s, he migrated to telephone cables after buying a small industrial plant at a discount, then moved into copper only to lock up steady input supply for the cables — each step a calculated fix to a margin problem in the prior one.

Cao Dewang's Fuyao Glass may 25, 2014 — Cao Dewang became the biggest Chinese investor in Ohio this year when Fuyao Glass, the car glass manufacturer that he founded in 1987, .

Investment Standards Let’s begin with investment standards. In that earlier talk, I spoke with hope: “At last we are beginning a wave of reform, and are undertaking the task of turning America’s capital development away from speculation and toward enterprise.” Alas, that hope has been dashed, and our investment system is now more overwhelmed than ever before by short-term speculation. The concept of long-term investment is becoming little more than a footnote in the long narrative of U.S. financial history. Look, I’m not exaggerating. Last year, the amount of trading in the U.S. stock market reached an all-time high of some $56 trillion dollars. Day after day, professional investors duke it out with one another to see who is the smartest. They trade with one another at a staggering rate. But they can’t all win. For in aggregate, they are the market. As a group, they inevitably achieve average returns. (How could it be otherwise?) But after deducting the trading costs incurred by that huge turnover of stocks, their returns will fall below the returns generated by the stock market itself. So, the returns that they earn for their clients as a group, will inevitably fall short of the stock market by the amount of those trading costs. Like the “handle” at the race track, the “take” of the state lotteries, the grift demanded by the croupiers of Las Vegas, the tolls taken by the croupiers of the Wall Street Casino1 continue on.

The five-dollar day has been read in competing ways ever since, and The Henry Ford museum treats the ambiguity as part of the story. Some contemporaries read the increase as cover for assembly-line speed-ups; others saw it as a response to high labor turnover driven by the increasingly rote nature of the work. Admirers called it pure philanthropy and a progressive step toward workers' rights, while cynics dismissed it as an elaborate publicity stunt. The museum notes that the raise applied as a profit-sharing payment rather than as an unconditional wage for everyone, and that Ford simultaneously reduced the daily shift from nine hours to eight. Whatever the motive, the bet produced the opposite of the predicted bankruptcy: mechanics from across the country flooded Detroit chasing the new wage, and the company's labor turnover collapsed even as throughput continued to climb.

Although Icahn withdrew his proxy fight that spring after failing to win board seats, eBay announced in September 2014 that it would spin off PayPal anyway. The separation, completed in 2015, created two public companies whose combined market value validated the core of his argument, and the campaign is now taught as a case where activism lost the vote but won the decision.

Agarwal attributed his global breakthrough to a single Tasmanian acquisition: the management of a copper mine had speculated in the metals market and gone bust, and he rushed to Tasmania to buy the mine for $2.5 million. It has since returned roughly $100 million a year. Other early overseas picks included a small Queensland mine and a gold mine in Armenia — opportunistic bets made under India's then-tight foreign-exchange rules.

The same interview traced the motive back to Swaziland. Hastings grew up mostly in Washington, D.C., moved between public and private schools, and studied math at Bowdoin. He intended to join the Marine Corps, until a summer of boot camp showed he was not built for military discipline; his summary is that he is not good at following orders. The Peace Corps assignment he took instead taught him the opposite lesson, that there were no rules at all, just initiative: he taught math, built a water tank, and kept bees. His ninth-grade students had very uneven preparation, and many were deeply committed but hampered by poverty; any new teacher learns a lot in the first years, and what he learned was that you have to connect with kids. After Pure Software went public in 1995 and made him a multimillionaire, he says he had no interest in buying yachts. Instead he asked why education lagged while innovation transformed health care, biotech, and moviemaking, and resolved to focus on one thing, improving K-12 education, and do it well.

China's operations, but differences between Zhou and Yahoo's management led Yahoo to sell its China operations to Alibaba in 2005, after which Zhou departed to start Qihoo 360.

Birla contrasted traditional command-and-control hierarchies, where information was power and seniority was measured in years, with what he saw as the unavoidable need to change because the business context had shifted. He kept the family legacy of values, trusteeship-based management and long-horizon thinking, but re-engineered the operating culture to be meritocratic — a multi-ethnic, multi-dimensional group of 136,000 people across 42 nationalities on six continents.

Munger used the 2014 DJCO meeting to revisit his long-running critique of activist investors and the Carl Icahn style of corporate pressure. He conceded that he had never liked the pomposity of the old system, in which a board of directors was effectively permanent and did as it pleased with shareholders' capital. But, he added, what usually happens to him is that the replacement turns out to be even less to his taste. The new system, in which the people getting richest are the ones who buy a block of shares and howl for change that helps the shareholders no matter what, was not, in his view, a great way to run a civilization. He granted that Carl Icahn is a very able man. He repeated the concession to keep the argument honest. But he was firm on the conclusion: able or not, Icahn should not be running the world. Munger's reasoning was that an economy that rewards short-horizon pressure tactics over long-horizon ownership and stewardship ends up with capital markets that misallocate. The price signal gets hijacked by the people whose business model depends on forcing near-term payouts. The takeaway for Daily Journal shareholders, and for anyone thinking about Berkshire-style long-term ownership, was that corporate governance is not just a matter of structure. It is a matter of who the people at the top actually are, what they actually believe, and how long they actually intend to hold the place. Munger favored boards of smart, rich, long-horizon capitalists who think like owners over boards of professionals who think like advisers, and he favored them loudly when activists showed up demanding a quick unlock.

The ethics, the conduct, and the integrity of the participants in our financial systems are the foundation upon which investor confidence rests. When confidence in our financial system deteriorates and trust erodes, our society pays a steep price.goods

As of November 2018, Forbes ranked Zhou #45 on its China Rich List and #135 on its global Billionaires list, with an estimated net worth of $4.7 billion.

Hastings's political education was combative. In 1998 he teamed with Don Shalvey, who had started California's first charter school, to write a statewide ballot initiative lifting the cap on charter schools, and became president of Technology Network, a bipartisan lobbying group of Silicon Valley chief executives that backed the petition drive. Once the initiative gathered more than a million signatures, the opposition folded, and the two men dropped it once the legislature passed an allied charter law. As state board president he wrestled with testing design, arguing that essay assessment costs more and is less reliable but that untested writing creates an incentive not to teach it. Democratic legislators blocked his reappointment after he advocated two and a half hours of daily English instruction in bilingual kindergartens that typically devoted ninety percent of the day to Spanish; he conceded he lacked political deftness. He kept a thick skin about critics, saying public advocates need a respect for opposing arguments, and doubted technology would save education quickly, recalling the failed hopes of television-based learning in the 1960s.

and services at lower prices, creating new jobs in the process. But raising new equity capital accounts for only about 0.6% of all equity transactions, with trading (largely of the short-term variety) in our markets accounting for 99.4% of the dollar value of the activities of our financial system. At its worst, then, our financial system is driven by speculation, “new products” of dubious value, risk-oriented strategies, and massive trading dominated by market speculators. The confidence of investors in our markets has deteriorated, their trust has eroded, and our societal values have diminished. This deterioration has been, as it were, well earned: Think of the “time zone” trading scandals in the mutual fund industry, uncovered by New York Attorney General Eliot Spitzer in 2003—a conspiracy between fund managers and sharp-penciled speculators to defraud the long-term holders of mutual fund shares. Think of Bernie Madoff’s Ponzi scheme, and the institutional investment advisers who, driven by greed and eschewing due diligence, jumped on the illusory Madoff gravy train, making hundreds of millions of dollars in fees before his train lurched off the rails. Think of money laundering by too many large banks. Think of the LIBOR rate-rigging scandal. Think of the assets long hidden in Swiss banks by many wealthy Americans to escape U.S. taxes.

Professionalization of management, Birla argued, was no longer optional but a compulsion driven by globalisation and intensifying competitive pressure across every business. He credited his father Aditya Vikram Birla with beginning the process in the early 1980s, putting India on the global map with world-class companies — positioning the founder's modernization as the foundation on which the fourth generation could build.

Indeed, our croupiers are making more money than ever before. The Zero-Sum Game But the croupiers in the Wall Street Casino are not the only drag on the financial wealth of investors. For there is yet another toll taken by yet another set of croupiers who are beneficiaries of our nation’s financial system. The vast majority of investors retain professional money managers to do their investing for them. Pension funds of corporations and state and local governments retain outside investment advisers. So do we individuals, most likely through our ownership of mutual funds, whose shares are now held by some 90 million American investors. 1 In 1999, The New York Times published my op-ed piece entitled “The Wall Street Casino.” Little did I know these problems would get worse and worse. Since then, trading volume has increased six times over, and Wall Street’s “take” is many times what it was in those ancient days.

Asked how he manages complexity across metals, oil and multiple geographies, Agarwal's answer was deliberately unfashionable: keep the business simple, trust people and empower them. He installs strong operating leaders, gives them room and authority, and refuses to let organizational structures grow complicated — a stance BCG interviewer Janmejaya Sinha called a profound statement on complexity management.

Think of stock trading based on inside information, exemplified by hedge fund manager Raj Rajaratnam of the Galleon Group, and then-Goldman Sachs director Rajat Gupta, once respected head of McKinsey, both of whom are now behind bars. Think of the now-notorious collateralized debt obligations (specifically, “CDO-squareds”), which collapsed during the 2008-2009 financial crisis. When mortgages and other debt securities are bundled into collateralized debt obligations which are themselves bundled into a second layer of securitizations, it becomes difficult, if not impossible, for investors to determine who is bearing the risk. (Hint: they were.) Think of our investment banking firms, with leverage that soared as they moved from private partnerships subject to unlimited liability, to public corporations protected by limited liability. Have I made my point? Our financial system appears to be (I really mean “is”) deeply flawed. Why? Largely because of its underlying structure. It is a system where huge financial rewards are reaped by money managers (especially hedge fund managers) for short-term investment success. Where long- term investment takes a back seat to short-term speculation.the

Each year, we pay these advisers staggering sums of money—perhaps $600 billion or more—for their presumed ability to add value for their investors. But in the stock market, the average money manager earns, yes, average returns before all of their costs. What else is new? But after their advisory fees, the trading commissions that they generate, the excess taxes to which their shareholders are subjected, and all their marketing expenses and operating costs, the “zero-sum game” they play becomes a “loser’s game,” a game that, in the aggregate, inevitably subtracts value from their clients’ wealth. But wait a minute. Isn’t it Wall Street that amasses investors’ capital, providing the wherewithal for capital formation—the grease, if you will, that lubricates the great engine of capitalism? And don’t new businesses need funding to organize, to innovate, to create the new products and services that benefit us consumers? And don’t existing businesses need capital for new plants and equipment, and to fund their own innovations? Yes, yes, and yes. And Wall Street has been an effective agent for providing fresh capital to new and existing businesses alike. Indeed, in recent years the investment bankers of Wall Street have underwritten some $100 billion per year of equity capital in initial public offerings (IPOs) and an additional $170 billion in additional equity capital for existing corporations.

Left Yahoo! China after management disagreements and founded Qihoo 360 following Yahoo's 2005 sale of its China operations to Alibaba.

The Hindustan Zinc turnaround is, in Agarwal's telling, the company's signature operational story. Acquired when reserves were estimated at five years and output at 150,000 tonnes of zinc annually, Vedanta installed top talent and lifted output roughly sevenfold to one million tonnes while extending reserves to 40 years — and added close to 1,000 tonnes of silver production from scratch.

For Birla, professionalisation means more than hiring top talent — it means a culture that stokes entrepreneurial drive, fresh thinking at all levels, and a learning organization creating value for multiple stakeholders. Leadership, in his framing, must be inclusive and have a penchant for collaborative and innovative solutions to keep the group's companies, products and services on customer radars.

In fact, the amount of capital formation that Wall Street finances has totaled some $270 billion per year. Today: 99.5% Speculation, 0.5% Investment But capital formation has become, well, the tail of the Wall Street dog. The numbers tell the story. $56 trillion per year in trading volume, as investors buy from and sell to one another, minute after minute, day after day, year after year. That $56 trillion of trading volume dwarfs the capital formation total of $270 billion. Result: short-term trading in the Wall Street Casino represents 99.5 percent of the market’s activity; long-term capital formation 0.5 percent. But it is only capital formation that adds value to our society. Trading, by definition, subtracts value. Indeed, the casino mentality remains in the catbird seat of finance. Is that good or bad for investors and for our society? As Nobel Laureate in Economic Sciences and New York Times columnist Paul Krugman recently put it, “society is devoting an ever-growing share of its resources to financial wheeling and dealing, while getting little or nothing in return.” I might go even further, and suggest that we are getting less than nothing in return. More broadly, be warned by these words of wisdom from the great British economist John Maynard Keynes in 1936: “When enterprise becomes a mere bubble on a whirlpool of speculation, the position is serious.the

Qihoo 360 grew into a major Chinese internet-security company, with Zhou continuing as co-founder, chairman and CEO.

consumers (“Main Street”).1 Asset managers such as Vanguard ought to be, not in the business of selling products, but in the profession of managing other people’s money. Today, the goals and values of those powerful institutional asset managers are shaped by a structure in which their owners—private and public stockholders, now, regrettably, dominated by financial conglomerates—seek to earn returns on their own capital, rather than the capital that has been entrusted to their care by their clients. In such a structure, conflicts of interest abound. Stewardship is too often trumped by salesmanship, and management is trumped by marketing. In the mutual fund field, the interests of the managers’ stockholders conflict with the interests of the managers’ fund shareholders, and it is the manager who is the master that wins. As it is said in the Bible, “no man can serve two masters.” Today, our financial sector wantonly ignores that ancient precept. Going Back in History Speaking out against such an obvious structural flaw is hardly new territory for me. Way back in 1971,2 almost a half-century ago, in remarks before Wellington Management’s partners, I despaired over the trend toward public ownership of investment institutions: It is hard to see what unique contribution public investors bring to the enterprise. They do not, as a rule, add capital; they do not add expertise; they do not contribute to the well-being of our clients.

Asked about his biggest influences, Birla named his father Aditya Vikram as his 'greatest guru.' His distilled learnings: there is no substitute for smart hard work, the leader must create more leaders, embrace change, innovate constantly, and recognize that the quality of the future depends entirely on the quality of imagination applied to it today.

Agarwal insisted that government and business must sit together to unlock India's natural resources, arguing that the country imports 85% of its oil and all of its copper and gold despite having the geology — and that India's exploration rate (3.5% of bauxite reserves) versus the West's 73% was an unacceptable missed opportunity he aimed to close.

Birla positioned the Aditya Birla Group as a 'testimony to the manner in which a traditional Marwari business empire has transformed into a modern-day business group,' embracing top professionals worldwide while remaining deeply rooted in traditional values. The framing explicitly rejected the binary of tradition-versus-modernity, arguing the best family businesses selectively retain and re-engineer simultaneously.

capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.” First Principles So let me sum up my first point: Eroded by the dominance of short-term speculation, our Investment Standards are deteriorating. Part of the reason is that investors focus far too much attention on the momentary rises and falls of the stock market, which are in so many respects just noise—in Shakespearian terms, “a tale told by an idiot, full of sound and fury, signifying nothing.” The stock market is in fact a derivative, a collection of the current market prices of some 3,500 publicly-held corporations. Those stock prices derive their value from the dividend yields and earnings growth that these corporations collectively generate. Intrinsic value (investment return) is one phrase we use to describe this phenomenon. Intrinsic value is reflected in the real market—essentially, what U.S. businesses actually accomplish. Real companies, with real strategies, managed and operated by real people, producing real products and real services ever more efficiently, with real returns earned for real owners, and real dividends distributed to those owners. The intrinsic value reflected in the real market is the expected future cash flows generated by all of those corporations, discounted over time. For any individual corporation, those future flows are uncertain. But the cash flows for all corporations in aggregate generally track the growth of our U.S.

His advice to 25-year-old Indians was deliberately old-fashioned: focus, and choose the right boss over money, because boring work under uninspiring leadership wastes the most valuable learning years. He argued that success was possible either as an entrepreneur or inside a company, but the determining variable was the quality of leadership exposure in the formative years.

Indeed, it is possible to envision circumstances in which the pressure for earnings and earnings growth engendered by public ownership is antithetical to the responsible operation of a professional organization. Honestly, I could hardly say it better today. In his foreword to the first edition of my book Common Sense on Mutual Funds (1999), now 15 years ago, legendary financial economist Peter L. Bernstein shared my concern: 1 When I was running Vanguard, I banned the use of the word “product.” In my view, it is businesses such as toothpaste, beer, and cars that are in business to sell their products. 2 Wellington Management had itself “gone public” in 1960.

“… What happens to the wealth of individual investors cannot be separated from the structure of the industry that manages those assets. Bogle’s insight into what that structure means to the fortunes of the individuals whose welfare concerns him so deeply is what makes this book most rewarding.” The flawed structures of financial firms—varied though they may be—can easily be seen as largely responsible for the ills that I described earlier. Think for a moment about the evidence that I presented about the multi-faceted structural flaws in finance, and how better structures might have helped our society:  Had they been structured to honor a federal standard of fiduciary duty, the institutional asset managers who collectively control our nation’s corporations would have demanded that our corporation’s act solely in the interest of their shareholders. These manager/owners would have been tough in their evaluations of executive compensation; tough about the excessive use (and “free-rider” structure) of stock options; and tough about allowing corporations to throw around vast sums of their shareholders’ money, undisclosed, on political contributions. And that list only begins a long litany.

Agarwal summarized his legacy aspiration simply: to open up India's natural resources, make the country self-sufficient, and create win-win structures with government that generate employment, improve education and recognize entrepreneurs. The framing positions Vedanta as a nation-building vehicle rather than a pure mining play, and explains his appetite for long-gestation, politically entangled projects.

economy, which has moved forward, despite interruptions, at a steady pace of about 2 ½% per year (in inflation adjusted dollars) over the past century. When the stock market leaps up and plunges down— second-by-second, day-by-day, year-by-year—it reflects nothing more than those transitory emotions— hope, and greed, and fear—that have affected investors (or, I should say, speculators) forever. These emotions represent investors’ reactions to momentary events, or their expectations of future events, or their expectations of how other investors might perceive these events. That’s why we call it the expectations market, with speculative sentiment often raising or lowering stock prices far above or below their intrinsic value. In other words, speculative return reflects the change in price investors are willing to pay for each dollar of earnings. Over the long run, however, speculative return has played no role whatsoever in shaping the market’s total returns. Rather, it is investment return that has accounted for virtually all of the long-run returns generated by stocks. Over the entire history of the U.S.has

The 2014 interview framed the group as straddling 36 countries in businesses as diverse as metals, carbon black, viscose staple fibre, mobile telephony, cement and fertilisers. Birla's strategic logic: each business is a separate vertical operated professionally, but all draw on the group's shared capital-allocation discipline, talent pipeline and family values — the Birla operating-system thesis.

averaged 9%—4 ½% from dividend yields, and 4 ½ % from earnings growth.2 Speculative return, over the long term, has accounted for zero—nothing. That’s why I describe the stock market as “a giant distraction from the business of investing.” Ethical Values The great Bull Market of the 1980s and 1990s led to a focus on stock prices over intrinsic values. Paraphrasing Oscar Wilde’s definition of the cynic, the “security analyst became one who knows the price of everything, but the value of nothing.” We reveled in our greed when markets were good. We suffered in our fear when they were bad. And during the two 50% Bear Market declines we’ve experienced since 1980, we relied on the hope that things would get better. (They did!) During two consecutive decades of strong returns for stocks, Wall Street was all too likely to overreach, and investors seem to accept with equanimity the idea that the costs of all those croupiers didn’t matter much. After 20 years of earning above-average returns of, say, 9% each year, most investors wouldn’t pay much attention to the fact that the market itself earned 11% per year. During the rising stock market, it shouldn’t be surprising that the field of finance has flourished.

Despite Vedanta's portfolio diversity — zinc, lead, silver, copper, iron ore, aluminium, power, oil and gas across multiple continents — Agarwal has insisted on operational simplicity: strong leaders in the field, a flat structure, and trust as the operating system. The discipline of refusing to add organizational complexity has been, in his view, the precondition for surviving commodity cycles.

Birla's emphasis on 'big bets on people' — providing unparalleled opportunities, dynamic challenges and a professionally rewarding environment — positioned talent investment as the precondition for the group's expansion. In a competitive world, he argued, high-performing teams and individuals supported by a strong performance culture are the cornerstones of all the group seeks to achieve.

 Had fund managers never been allowed to go public, and had the fund industry’s traditional private ownership structure remained intact, many of the obvious conflicts of interest that mangers face in trying to serve both their mutual fund shareowners and their conglomerate (or other public) shareholders would have been mitigated. Giving fund investors (and pension beneficiaries) a fair shake, and a fair participation in the staggering economies of scale that are available in managing the growing pools of other people’s money (OPM), would have come to characterize this now-giant ($15 trillion) industry. But in fact, fund managers arrogated the lion’s share of these economies of scale to themselves.  If we had built a formal structure of international cooperation and information-sharing on money flows (and a structure of enforcement as well), wouldn’t money laundering and tax dodging have been greatly reduced?  If today’s structure of electronic communication (e-mails seem to last forever!) and judicially approved federal wiretaps had been prevalent in an earlier age, wouldn’t the cheaters who traded on inside information have been discovered—and punished—far earlier?there

Agarwal traces his drive to his Bihar upbringing, citing the state's high energy levels, history of political leadership and educational heritage — and noting that while Bihar had produced presidents and politicians, it had not yet produced a global business leader when he started, which he interpreted as opportunity rather than absence.

Despite (or perhaps, because of) the dominance of (value-reducing) speculation over (value-enhancing) investment—a net minus for our society—the financial industry’s claim on the resources of our society has steadily increased—from 5% of our gross domestic product (GDP) in 1980, to 6% in 1990, to 7 ½% in 2000, and to an estimated 10% last year. That’s real money—some $1.6 trillion dollars. What a counter-productive progression for our society as a whole! Rather than participating in the “real” economy, far too many of our nation’s best and brightest have been attracted to the lottery-like payouts garnered by the croupiers of the Wall Street Casino. Instead of focusing on building wealth through the real long-term growth of corporate intrinsic value, Wall Street concentrates on the quick payoffs from short-term speculation. But this short-termism is not sustainable. As Economics Nobel Laureate Joseph E. Stiglitz says, “successful growth has to be based on long-term investment.” It is in this very prosperity—for investors, yes, but even more for the financial system—that we find much of the reason for the decline in the ethical standards of finance. Money, like power, corrupts. And absolute money corrupts absolutely. This is not just hearsay. During my long career, I’ve witnessed great deterioration in our standards of conduct.

have been better compliance with existing insider trading regulations and with the “full disclosure” requirements of SEC regulation FD? (Look, I know a bit about human nature, and fully understand that the illegal and unethical practices that arise from greed will be impossible to eliminate—mitigate, yes; eliminate, no.)  Wouldn’t a requirement that banks retain on their own books a portion of the mortgage loans they were divesting through securitizations in the form of CDOs have precluded their disinterest in evaluating the creditworthiness of the homeowners for whom they underwrote mortgages? (Remember the NINJAs—home buyers with No Income, No Job, and No Assets?) Alas, the most recent news from the Dodd-Frank front is the elimination of the requirement that mortgage originators retain some of the risk of their mortgages. How could that happen? (Clue: powerful lobbyists.) On this occasion, I’ll ignore the structure and incentives of our rating agencies, paid huge sums by issuers seeking that coveted AAA rating!  Finally, the new capital structure of our investment banking firms—from private partnerships to public corporations, from unlimited liability (“Be cautious and be conservative”) to limited liability (“Don’t worry much about leveraging the balance sheet. A 25-to-1 debt-to-equity ratio is just dandy.”) Under that new structure, it was all too easy to disregard, even to ignore, the risks of high leverage.

But grossly excessive risk and superficial quality standards, finally, came home to roost. (See: Bear Stearns and Lehman Brothers, both now gone.)3 Yes, structural flaws in finance have been a major contributing factor to the deterioration of the industry’s values, ethics, and professional conduct. When we think of professionals, we usually think of physicians, lawyers, engineers, architects, and—at least in the ideal—the trustees of other people’s money. Yet, profession by profession, the traditional values of serving clients and the broader society responsibly, selflessly, and wisely have been undermined by what I’ve called our now-dominant “bottom- line society.” Unchecked market forces have, in too many cases, substantially crowded out the original values of professionalism. 3 I have no solution to the Madoff structure built on bare-faced lies. As long as investors are blind and greedy, and fund “managers-of-managers” utterly fail to exercise due diligence, Ponzis schemes and Madoff schemes will arise to capitalize on the base instincts of investors to “get rich quick.”

that one simply does not do,” has changed to a new standard: “If everyone else is doing it, I can do it too.” In short, our ethical foundation has changed from moral absolutism to moral relativism. That change has taken our society a long way from the principal attribute of professional conduct—a commitment to the interests of clients, a commitment to serve responsibly, selflessly, and wisely . . . and to establish an inherently ethical relationship between the professional and the general society.3 “No Man Can Serve Two Masters” We see this change of course, not only in our burgeoning financial sector, but in many other segments of our society as well. Professional relationships with clients have been increasingly recast as business relationships with customers. Think about trends in medicine; in journalism; in law; in accounting; in architecture; and, yes, in the mutual fund industry—a gradual shift away from trusted professionals serving the interests of the community toward commercial enterprises seeking competitive advantage and maximizing their own wealth, with the human beings who rely on these services being the losers. In a world where every user of services is seen as a customer, every provider of services became a seller, and the broader perspective of the professional falls by the wayside. As it is said, “When the provider becomes a hammer, every customer is seen as a nail.

” Such a trend has been reflected in the sea-change in finance and money management—from a profession of fiduciary duty and trusteeship to a business of marketing and salesmanship. The mutual fund industry itself has much to answer for. Its enormous growth—from $2 ½ billion when I started in the industry in 1951 to $15 trillion today—led to the expansion of what was mostly a small profession into a giant business. Its investment focus moved from the long term to the short term, with annual portfolio turnover soaring from 22% when I entered the field to 85% currently—a five-year average holding period for a portfolio stock has fallen to a holding period of only fourteen months. Product proliferation—a fund for every imaginable purpose—has crowded out the fund industry’s traditional focus on portfolios dominated by “blue-chip” stocks—a “complete investment program in one security.” In the most baneful change of all, the small private fund management companies of yore have been largely replaced by giant public companies. Today, 40 of the 50 largest mutual fund firms are owned and controlled by financial conglomerates or other outside shareholders. As this new set of masters sought 3 These ideas were inspired by articles in the Summer, 2005 issue of Daedalus, the Journal of the American Academy of Arts & Sciences, including “The Professions in America Today: Crucial but Fragile” by Howard Gardner and Lee Schulman.

When our proudest professions shift their balance away from trustworthy service to the community and toward becoming commercial enterprises that seek competitive advantage and aimed at making money, the human beings in our society who rely on those services are the losers. Vanguard – The Story of a New Structure Ironically, while my concerns about our financial system began early in my career, I was able to resolve my dilemma by departing from the flawed structure that developed in the mutual fund industry. It all began in the mid-1960s, now a half-century ago. Then, the public ownership structure of institutional money managers that would come to overwhelm the earlier private ownership structure was just beginning. At the same time, the so-called “Go-Go Era” in the stock market was also just beginning. That dynamic (in the worst sense) combination changed the once-sound character of the mutual fund industry—then largely composed of middle-of-the- road equity funds investing for the long-term, holding portfolios of “blue chip” stocks. (Total fund assets in 1965 were but $35 billion.) Those near-contemporaneous changes in fund management structure and in fund investment strategy combined to seriously erode the industry’s founding values and traditional ethics of trusteeship.

As one prominent observer of the Go-Go Era put it, “short-term investing may actually be safer than long- term investing sometimes, and the price action of the stocks may be more important than the ‘fundamentals’ on which most research is based … portfolio managers buy stocks, they do not ‘invest’ in corporations.” (Ugh!) Traditional “investment quality” was out. “Modern concepts, imagination, creativity, flexibility, and aggressively seeking rewards” were in.4 Entrepreneurs, speculators, even financial buccaneers came roaring into an industry that had previously been dominated by experienced, fairly staid, cautious, and conservative investors. I saw it all happen. For I was the new, young leader of Wellington Management Company and Chairman of the Investment Company Institute during 1969 and 1970. It’s fair to say that I was then considered the consummate mutual fund “insider,” the new face of the new industry. 4 Alas, these were the words used in Wellington Fund’s 1967 Annual Report, penned by a new portfolio manager to describe the “modern concepts and opportunities” on which the fund’s future investment strategy would be based.

first the return on their own capital, and only second the return on the capital invested by the funds’ shareholders, we forgot the Biblical admonition that “no man can serve two masters” (Matthew 6:24).4 In 1776, the great Scottish economist and philosopher Adam Smith warned investors to be careful, for “. . . the managers of other people’s money [rarely] watch over it with the same anxious vigilance with which . . . they watch over their own. . . . Like the stewards of a rich man, they very easily give themselves a dispensation. Negligence and profusion therefore must always prevail.” And there’s more bad news, highlighted by these three examples: One, despite the industry’s huge growth, the expense ratios of the major funds5 have risen from 0.62% in 1951 and 1.15% in 2013— almost double!—meaning that the huge economies of scale available in the management of other people’s money has been arrogated by the managers to themselves, rather than being enjoyed by the shareholders. Two, the “time-zone” trading scandals unearthed by then-New York Attorney General Eliot Spitzer revealed a conspiracy between many giant mutual fund managers and hedge fund managers to defraud the long-term shareholders of the mutual funds. Third, the purported oversight of the funds by their so-called “independent” directors has accomplished little, as the fund chairman (usually also the chairman of the fund’s manager) dominates board decisions. He too is serving “two masters!

Yes, events—perhaps even wisdom—were soon to reinforce my view of the appropriate structure for the fund industry, and to do something about it. First, I jumped on the Go-Go bandwagon, merging Philadelphia’s Wellington Management with a hot new fund manager from Boston. That horrible misjudgment was a monument to my sheer stupidity; to my naiveté; to my eagerness, even willingness, to ignore the lessons of financial history; to my (now-long-gone) focus on marketing; and in candor, to my interest in increasing the earnings and market value of then publicly held Wellington Management Company—largely owned by founder Walter Morgan, who had named me his successor in 1967. I was the Fund’s chief executive, and I had made an awful mistake . . . and paid for it. On January 23, 1974, I was fired by my new Go-Go partners of Wellington Management Company, adviser to the mutual funds we had ostensibly controlled. Strategy Follows Structure But the separate and largely independent boards of the Wellington mutual funds decided to keep me on as their chief. After a bitter struggle that lasted for eight months, the funds declared their independence from Wellington Management, and Vanguard was created. As I’ve often said, “strategy follows structure.” Vanguard’s unique, client-owned, truly mutual structure naturally led to—even demanded—a strategy that held the costs of investing to the bare minimum and allowed investors to keep their fair share of the market’s return.

” Flash Boys But no, the temptation to speculate will never be stamped out. During the second century B.C.(!) the Roman orator Cato warned about speculation by investors, but it remains with us to this day . . . only far more widespread. You’re doubtless familiar with the most recent and surely the most prominent example of the problem, presented in Michael Lewis’s new best-seller Flash Boys, with its powerful public- relations onslaught. The book’s remarkable success reaffirms that well-written polemics by proven authors fly off the shelves, while balanced studies of controversial subjects rarely sell books. Despite Flash Boy’s scathing (and partially accurate) criticisms, high frequency trading (HFT) of stocks is not going away. To be sure, much is required to ensure that HFT operates fairly and in the public interest—timely and full reporting of all stock trades; regular financial statements from those new HFT exchanges; regulatory enforcement against insider trading and front-running, new rules against playing games by entering transaction orders and quickly cancelling them. But HFT is not all bad. It has helped shrink 4 Please forgive my mixing of the sacred and the profane. In this talk, I’ll cite the Bible three more times. 5 Here I exclude the Vanguard funds, whose expense ratios plummeted from 0.55% to 0.17%, down almost 70%.

transaction costs to a bare minimum; produced greater liquidity, and improved (perhaps only slightly) price discovery and greater market efficiency for professional investors. That’s all to the good. But the huge risks of a technology breakdown in our increasingly computerized stock market remains hidden out there, beyond the horizon. In our data-intensive, speed-driven society, yes, HFT is here to stay. ETF Toys I find it both astonishing and deeply discouraging that index funds have become one more example of the apparently irresistible impulse of investors to speculate. Imagine! In 1975, Vanguard created the world’s first index mutual fund, following this elemental strategy: (1) buy and hold all of the stocks in the Standard & Poor’s 500 Index; (2) operate at rock-bottom cost; and (3) attract long-term investors who wish to hold the stock market portfolio, well, forever. Those original sensible strategies of indexing have reshaped investing in a highly positive way for long-term investors. But the exchange-traded index fund (ETF) is the antithesis of that third key to index success—holding the market forever. Formed in 1991,6 the first ETF was also based on the S&P 500, but with the added “feature”—embodied in its advertising slogan—that its shares could be “traded all day long, in real time.” (I’m not making this up!) With $160 billion of assets, the so-called “SPY” is now the world’s largest ETF.

Here, of course, I’m speaking of the world’s first index mutual fund—Vanguard’s disruptive innovation that would ultimately reshape the mutual fund industry. We had tough going at first. Vanguard suffered huge net cash outflows in each of our first four years of existence, and the IPO of that first index fund was virtually ignored—not even raising enough money to buy round lots of each stock in the S&P 500. But investors eventually took notice and came around to the Vanguard way of investing. Today, our asset base is dominated by index funds (71% ,but another 25% is composed of virtual index funds) which, while “actively managed,” are designed to deliver returns that are closely linked to their relevant market sectors. (Together, that’s 96% of our asset base.) When Vanguard was founded in 1974, we supervised just $1.4 billion of OPM. Today, we manage over $3 trillion worldwide.in

the U.S. was less than 6% at the outset. It has now grown to over 18% today—a dominant level, one without precedent in the industry. Introspection, the Crucial Ingredient I lack many of the talents (and resources!) of today’s financial leaders. They are often sharp businessmen, focused, laser-like, to produce ever higher revenues and profits; driven to achieve dominant market shares in the products and services that they offer; stereotypically desperate to be rewarded with higher compensation than their peer chief executives; too often imperious and demanding; extroverted and self-confident. (I’m sure that most of you here have observed this paradigmatic model of the “CEO.”) That just isn’t me. Pity! Yes, when I led Vanguard, I led with an iron hand (sometimes with, sometimes without, a velvet glove). But I knew that I had “ENOUGH!” (the title of my sixth book). I don’t like to spend money (especially our shareholders’ money!) I revel in being with our crew (up from 28 in 1974 to 16,000 forty years later), and find no greater reward then when we roll up our sleeves together, work like blazes, and celebrate our achievements with joy. But I have—or believe that I have—one quality that my peers may lack, or at least keep deeply hidden: Introspection.

It is also the most widely traded stock in the world, averaging more than $20 billion of trading volume every day! Compared to 290 traditional index funds (TIFs),7 there are now 1,500 ETF index funds. With $2.1 trillion of assets, U.S. ETFs are now actually a tad larger than their TIF progenitors, and more of these new toys for investor speculation are created every week. The lesson: Never underestimate the power of a hot new marketing innovation (or, here, one-half an innovation). Paraphrasing H. L. Mencken, “no fund marketer ever went broke by underestimating the intelligence of the American investor.” You will hardly be surprised to know that when index funds are designed and used for short-term speculation, I am not amused. 6 The late Nathan Most was the creator of the first ETF. In 1991, he came to my office with an offer to partner with Vanguard in implementing his new concept. I declined the offer. Despite the SPY’s remarkable growth, I have zero regrets about that decision. 7 I created this acronym to simplify the distinction between the two types of index funds.

Let’s Hear From Some Other Critics Let me be clear here. While my voice may be strident, and my criticism of the field in which I’ve plied my long career is a distinct rarity among my colleagues in finance, I am not quite alone. Indeed, one of the most respected voices in finance, William C. Dudley, now president of the Federal Reserve Bank of New York, shares my concern. “There is evidence of deep-seated cultural and ethical failures at many large financial institutions.” Dudley added, “the trust issue faced by our nation’s giant banks, is one of their own doing—they have done it to themselves.” As a partner of Goldman Sachs before he became Fed president, Mr. Dudley would seem singularly qualified to comment on the ethical failures in finance that have been so rife. Another objective observer of the financial world is New York Times columnist David Brooks (my favorite opinion page writer). Here’s his overview, from a column that he wrote in 2008 entitled “The Great Seduction”: “The people who created this country built a moral structure around money. The Puritan legacy inhibited luxury and self-indulgence. Benjamin Franklin spread a practical gospel that emphasized hard work, temperance, and frugality. Millions of parents, preachers, newspaper editors, and teachers expounded the message. The result was quite remarkable. The United States has been an affluent nation since its founding. But the country was, by and large, not corrupted by wealth.

According to the definition in Volume VIII of the Oxford English Dictionary—all 18 volumes of which repose a few steps from my office—introspection is “the action of looking into, or under the surface of things, especially with the mind . . . self-examination . . .” In my view, introspection is looking at a business structure and thinking, shouldn’t the structure fit the business? Shouldn’t the strategy follow the structure? Shouldn’t the firm serve its clients? Shouldn’t it serve society? Isn’t there a better way to accomplish the mission? Those were among many questions that I asked myself, and Vanguard was my answer. Few have described these issues better than Philipp Hildebrand, vice-chairman of BlackRock and former head of the Swiss National Bank. As a speaker on a distinguished panel at the “Future of Finance” conference held by the International Monetary Fund on October 12, 2014,5 he faulted “our collective 5 In addition to Philipp Hildebrand, the distinguished panel included Mark Carney, Governor of the Bank of England; Christine Lagarde, Managing Director of the IMF; Kok-Song Ng, Chair of Global Investments for the Government of Singapore Investment Corporation; and Reverend Justin Welby, Archbishop of Canterbury.

For centuries, it remained industrious, ambitious, and frugal . . . Over the past 30 years, much of that has been shredded. The social norms and institutions that encouraged frugality and spending what you earn have been undermined. The country’s moral guardians are forever looking for decadence out of Hollywood and reality TV. But the most rampant decadence today is financial decadence, the trampling of decent norms about how to use and harness money.” You can see this change all through finance. We focus on numbers, numbers, numbers—all easily manipulated—and lose sight of our fiduciary responsibility to serve investors, (as I have so long said) “honest-to-God, down-to-earth human beings, each with their own hopes, fears, and financial goals.” A sign in Albert Einstein’s office read: “Not everything that counts can be counted, and not everything that can be counted counts.” Yet today the traditional investment standards and ethical values that truly count have been overwhelmed by the dominance of our, yes, “bottom-line” society.

failure to see the serious flaws in today’s structure of finance.” What’s to be done? Here are Mr. Hildebrand’s thoughts: 1) Incentives in finance matter a great deal, so we need to focus, not a complex regulatory system, but on getting the basic incentives right in order to get the right outcomes. 2) The personal behavior of leaders counts. We need a form of personal transformation in the leadership of finance. 3) If the financial industry does not adopt the right incentive structure, which would lead to the right business model, which would lead to personal transformation, these changes will likely be imposed on the industry by regulators in a way that is counterproductive to the creation of wealth and prosperity. That none of these goals will be easy to achieve is self-evident. But they should represent the major criteria on which we focus as we contemplate the future of finance. Public-Private Partnerships Now let me close with some thoughts about public-private partnerships. The basic strategy of P3s has already been fairly well established. Outside the U.S., some 1,300 are said to be operating now with present capital of $250 billion. The U.S., however, lags far behind, despite the needs of rural America, solar energy, and military housing, to say nothing of the massive rehabilitation of our nation’s deteriorating infrastructure. There it’s estimated that we need an additional investment of $1.

6 trillion to do the necessary maintenance and upgrading of our roadways, bridges, railroads, ports, and airports, some of which are described as “structurally deficient or obsolete.” As the incipient development of P3s builds in the U.S., we must give our close attention to assuring that these partnerships serve the interests of the taxpayers, the state and local governments that finance them, and the interests of the private contractors that do the work of building, maintaining, and managing these projects. This means honest bidding, honest delivery, and honest disclosure—both by municipalities and contractors.with

Whatever else these trends may mean, the interest of consumers—the fund shareholders who entrust their hard-earned dollars to our industry’s care—have too often been given short shrift by the producers of investment services—the fund industry’s managers and marketers. This orientation flies in the face of some more wisdom from Adam Smith, who summed it up in his Wealth of Nations in 1776: The interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it . . . The interest of the consumer . . . must be the ultimate end and object of all industry and commerce. In the long-run, faithful service to investors is good ethics, and good ethics is good business. That’s a lesson that today’s stock traders and fund managers should take to heart. If you find yourself a tad depressed by the trends I’ve described this evening, so am I. But all this speculation, truth told, only matters to short-term speculators. It should have little impact—indeed no impact—on long-term investors. For, I repeat, the entire long-term return earned in the stock market is derived, not from short-term speculation, but from long-term investment.

Further, for the long-term investor who wakes up and smells the roses, there are options among mutual funds that have themselves defied these baneful trends toward excessive portfolio turnover and investment advisory fees and other mutual fund marketing and operating costs that have reached confiscatory levels. A Few Words About Vanguard Vanguard was created way back in 1974 —long before the ascendance of the trends I have described—and decried—this evening. Vanguard was designed to serve the consumer, just as Adam Smith demanded. Now, with some reluctance on my part, I’ll now “talk my own book,” as the saying goes, with a few comments on Vanguard’s role in our financial system. In every line of endeavor, I believe, we need at least one firm that says, in effect, “we see what you’re doing, and we think that we can do it better, and serve the customer with better products and better services, at lower prices, and with greater efficiency.” The net result is that our shockingly disruptive innovations—Quaker-like in their Thrift and Simplicity—revolutionized the field of finance, to the benefit of investors.

political favoritism and contractors who submit low bids knowing full well that the inevitable changes in specifications leave the door wide open for huge increases in costs.6 It also means that states and local governments must develop the technical capacity and expertise to enter the P3 arena, and to protect the public interest. “Hell hath no fury like a taxpayer whose interests are not placed front-and-center.” What is the optimal structure for implementing these contractual agreements between governments and the private sector to design, build, operate, maintain, and finance the coming tsunami of essential improvements in infrastructure? As I have often said about Vanguard’s structure and strategy, “ideas are a dime a dozen; implementation is everything.” And so it is with public-private partnerships. I would go far beyond my own experience and expertise in a field distinctly different ffrom my own to speculate on the optimal means of implementing the complex arrangements that characterize P3s, while at the same time fully protecting the public interest. But in my earlier remarks, I’ve done my best to set forth the issues surrounding the professional ethics and values that are essential to my own area of expertise, the financial sector in which I have spent my entire career.

We became the first client-owned, truly mutual mutual fund firm, with our non-traditional structure—a structure yet to be copied by our rivals. Why mutual? While I didn’t come across this biblical message in John 10 until many years after we began, it sets forth our defining principle: the shepherd takes better care of the sheep that he owns than the hired hand. Paraphrasing John: “when the hired hand sees the wolf coming and flees, the wolf snatches the sheep, for he cares nothing for them.” Similarly, Vanguard’s shareholders actually own their fund management company, rather than hiring an outside firm and ceding control of their assets. Therein lies a world of difference. (No, the Vanguard structure is not perfect—just the best I could do at the time.) Quaker Values Our very structure led to the obvious: a primary focus on the principles of thrift and simplicity, designed to reduce to the practical minimum the costs of investing for our shareholders. As to thrift, we soon became the low-cost provider in an industry in which cost is everything. (Our 1977 decision to eliminate all sales loads and brokerage commissions—which allowed those who sought “a better mousetrap” to beat a path to our doors—was a product of that same thrift-oriented attitude.) As to simplicity, our creation of the world’s first stock-market-index mutual fund in 1975, and the first defined-maturity series of bond mutual funds in 1977 (long-term, short-term, intermediate-term . . .

Here, I close by reaffirming the ideas expressed by Professor Jordan in her summary of this conference: “Values and ethics should guide these new forms of relations emerging between the public and private sector.” (I underscore that both parties have this obligation.) Professor Jordan also asks us to be aware that “finance (being reliant on the quest for gain) concerns other people’s money, which often opens the pathway for misconduct.” She continues: Is this a question of honesty and morality? Yes, in part, but more importantly it is a question of a structural flaw in finance which includes the compensation structure of firms, organizational pressures to engage in unethical activities, culture, incentives, and conflicts of interest. Therefore, it is not only about individual conduct, but also of organizational and systemic factors. Professor Jordan also shares my concern about “innovative financial products” and the perils of “complexity and opacity.” So as we consider the optimal means for organizing public-private partnerships 6 The cost of the “Big Dig” in downtown Boston was originally estimated at $2.8 billion. Final cost: $14.6 billion.

to meet our nation’s compelling infrastructure needs, and the optimal means to finance them, let’s keep the relationship between structure and strategy on the one hand, and ethics and values on the other, at the forefront of our thinking. Yes, the structure and values of our financial sector have set a bad example. But the cheapest way to learn is to learn from the mistakes of others. We must embrace the illuminating glow of sunlight that will inspire us to realize a brighter future, rather than the flicker of light from the fire in the cave that until now has transfixed us and dominated our values and perspectives.7 Build your own bank of information. Form your own opinions. Stress test all models. Calculate all risks. Challenge, well, everything. As I say at Vanguard, “for God’s sake, give judgment at least a fighting chance to triumph over process.” Think through your work with the deepest introspection that you can command. 7 Those of you who are familiar with Plato’s “Allegory of the Cave” will know exactly what I’m talking about.

investors choose whichever meets their needs) reflect not only Thrift, but Simplicity. We built into our structure the priceless value of Thoreau-like simplicity: the broadest possible diversification, the lowest possible portfolio turnover, and (of course) a minimum of financial complexity. We recognized even then, well before its time, the reality that in the mutual fund industry, investors as a group do not get what they pay for; they get precisely what they don’t pay for. Therefore, if they pay (almost) nothing, they get (almost) everything. Despite that obvious (and winning) strategy, it took a decade of disappointments, setbacks, and failures to fully engage the trust—and attract the assets—of investors. Not until the late 1980s did the turn finally come. The increasing momentum that followed would, by 2009, make Vanguard the largest firm in our field. (That is hardly bragging on my part. I remain nervous about our giant size and the challenges of managing $2 ½ trillion of Other People’s Money.) Driven largely by our index funds and funds with index-like investment strategies, our growth still leads the field. While about 20 percent of mutual fund investors hold Vanguard fund shares, in recent years we have accounted for some 40 percent of the total net cash flows into the entire mutual fund industry.

I’ll make one final comment about indexing, and yet one more biblical reference. In her sermon several weeks ago, Bryn Mawr Presbyterian Church pastor Dr. Agnes Norfleet cited one of my favorite Biblical passages, from Psalm 118 (repeated in Matthew 21, Mark 12, and Luke 20). “The stone which the builders rejected has become the chief cornerstone.” Similarly, in the field of finance, the index fund—originally scorned, derogated, and rejected by Wall Street as “un-American” and worse (try “Bogle’s Folly”)—has become our industry’s chief cornerstone. Index funds now account for more than one-third(!) of the assets of all U.S. equity mutual funds. The triumph of the index fund has even broader implications for corporate governance, at least as profound as their implications for investing. Today, the dominance of index funds belies the old “Wall Street Rule”—“if you don’t like the management, sell the stock.” A new “Index Fund Rule” is emerging. Since index funds can’t sell the stock (if it’s in the index, it stays in the fund, no matter what), the new mantra must become, “if you don’t like the management, fix the management.” This is a truism for permanent investors in each corporation’s shares. While it is yet to be honored, that sound principle will, sooner or later, alter profoundly the relationship between Financial America and Corporate America, and ultimately, I fervently hope, re-establish a proper relationship between business and our society.

Financial America and Corporate America With the growth in finance and investment, our institutional managers now hold absolute voting control over the corporations in their clients’ portfolios. The mutual fund industry alone holds some 32 percent of all U.S. stocks. Their pension-manager affiliates hold another 20 percent of the total. All told, 52 percent of all U.S. equity shares are held by these money management giants. Yes, that is absolute voting control. Since our institutional money managers now hold the controlling interest in U.S. corporations, we are living in a new and different world. The relationship between Corporate America and Financial America is deeper than ever before. As the interdependence of finance and business grows closer, the times demand that the money managers play an ever more active role in corporate governance. This new factor in governance will ultimately change our ideas about the role of the corporation in our society . . . for the better. To be sure, a tacit link between financial firms and corporate businesses has always existed.profit-driven

demands of business leaders and individual investors, but also as a result of the profit-seeking entrepreneurial spirit of financial firms . . . Since finance and industrial development are in a symbiotic relationship, financial evolution plays a crucial role in the dynamic patterns of the economy.” But today that link has gotten even more potent. Why? Simply because, as noted earlier, Financial America controls (or holds potential control) over Corporate America. The result is our unprecedented “Double-Agency Society”—corporate CEOs and directors are agents who too often place their own interests ahead of the interests of their shareholders, coupled with CEOs and directors of institutional money managers, who, similarly, are agents who too often place their own interests ahead of the fund shareholders (or pension beneficiaries) whom they are duty bound to serve. Economists have been concerned about this “agency problem” that has permeated our society, well, forever. But to have two sets of powerful agents whose financial interests are so often at odds with the fiduciary duty that both sets of managements owe to their principals is indeed “something new under the sun.” The Failure of the Corporate Governance System Let’s not kid ourselves. There are fundamental ways in which our mutual funds and other institutional money managers—our “producers”—have failed to serve the interests of fund shareholders and pension beneficiaries—our “consumers.

” Question: how do these fund managers actually use their power? Answer: very sparingly. Fund managers have demonstrated little appetite for action on corporate governance issues. Indeed, the mutual fund industry fought a proposed SEC regulation that would require fund managers to even disclose to their fund shareholders how their corporate proxy votes were cast. (The good news: their effort failed.) Let me touch briefly on some of the vital corporate governance issues on which mutual funds have been largely silent: ∑ Executive compensation. One word: Appalling. Seemingly limitless amounts are paid to corporate CEOs. An important contributing factor is that compensation consultants that recommend pay cuts aren’t long in business. A recent New York Times article entitled “Executive Pay: Invasion of the Supersalaries” pointed out that the median compensation for CEOs of major corporations in 2013 was $13.9 million(!), a nine percent increase over 2012.of

the skyrocketing “supersalaries” bestowed upon “supermanagers” (who as a group, of course, prove to be average). ∑ Accounting standards. As corporate profit and loss statements become increasingly self-serving and opaque, the gap between reported earnings of the companies in the S&P 500 Index—before taking into account the negative impact of failed business ventures and management errors (euphemistically called “non-recurring events)—have been fully 20% higher than reported earnings under GAAP accounting principles. That amazing improvement over fiscal reality has been created by illusion, financial legerdemain, and “window dressing.” ∑ Corporate political contributions. Don’t get me going on this one! In the wake of the ghastly 2011 Supreme Court decision in the Citizens United case, corporate money has poured into our nation’s political campaigns—money that belongs to the shareholders, but is handed-out to politicians by Corporate America. Those shareholders should have a say in how their assets are expended. In 2011, I wrote an op-ed for the New York Times arguing that corporate proxy statements should include a resolution precluding political contributions unless at least 75 percent of shares voted to approve such a policy.8 ∑ The looming retirement crisis. Beginning in the 1980s, there has been a massive transfer of the investment risk and longevity risk associated with retirement planning from employers to employees.

In order to reduce their pension costs, companies have increasingly replaced traditional Defined Benefit (DB) retirement plans with Defined Contribution (DC) thrift plans, which are now the dominant form of retirement planning in the U.S. But most workers lack the specialized knowledge and experience needed to successfully manage their own investments. In 2012, New York Times columnist Joe Nocera wrote a piece in which he described how the losses in his high-risk-oriented retirement plan, plus his later divorce, depleted his retirement account to the point where there is no way he can retire. He concluded, “most human beings lack the skill and emotional wherewithal to be good investors. Linking investing and retirement has turned out to be a recipe for disaster.” 8 My longtime friend and neighbor, James Mackie, read my op-ed and, without any assistance, took it upon himself to have that resolution inserted into the proxy statement of Johnson & Johnson. Management opposed, and the resolution failed to pass. But Jim continues his work again this year. I believe that this harbinger of shareholder democracy has great potential to serve society.

∑ Nomination of directors. Even if our money manager/agents wanted to do the right thing in honoring the needs of the shareholders they represent by striking a blow at excessive compensation, retirement plans, corporate accounting standards, and political contributions, they rarely have the proxy access they need to do so. Yes, mutual funds have the latent power to nominate directors to corporate boards. But they do essentially nothing. I know of no significant example of a mutual fund nominating director candidates. To put a spin on an old idiom, “the flesh is strong, but the spirit is unwilling.” “Capitalism without Owners Will Fail” America’s institutional money managers must focus on owning companies that create long-term intrinsic value for the owners of their shares, rather than short-term market prices for the renters of their shares. Only then can Corporate America remain the prime engine of our nation’s growth and prosperity. But too many of our money managers have abdicated their responsibilities to long-term investors. Robert A. G. Monks, founder of Institutional Shareholder Services, writes in his 2011 essay Capture that “corporations have effectively captured the United States: its judiciary, its political system, and its national wealth, without assuming any of the responsibilities of domination.” He too cites executive compensation, describing it as “the smoking gun . . .

an expression of concentrated power—of enterprise power concentrated in the chief executive and of national power concentrated in corporations.” That power must be curbed, and the fair balance between the corporation and the government must be re- established. That is an uphill battle that will take a great deal of time and effort. A Federal Standard of Fiduciary Duty My preferred solution to this issue is the creation of a federal standard of fiduciary duty for all of those who manage Other People’s Money. (Since our corporations are chartered by the states, we also need a model standard of fiduciary duty shared by those states.)and

distributors.” But that’s just not happening. Today fiduciary duty and corporate governance issues are near the bottom of the priority list for most fund managers.9 Surely passivity by the financial institutions that control Corporate America is unacceptable. Distinguished NYU professors Ralph Gomory and Richard Sylla agree, “There is a need to find ways of inducing corporations to act in ways that produce better social outcomes . . . [this] is not the first time in history that people have wondered whether ours is a government of the people, or of, by, and for the corporations.”10 They cite Theodore Roosevelt’s first annual message to Congress in 1901: “Great corporations exist only because they are created and safeguarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with those institutions.” Roosevelt spoke those words more than a century ago, yet those kinds of challenges still plague our society today. What’s to be done? The first step is building public awareness. That’s what I’m striving to do—to shine light on these issues in my books and speeches, including my words to you this evening. And, while I may one day slow down my busy pace, now is not the moment to slacken my efforts nor to vitiate my passion for building a better financial system. I’m no hero in my own industry, but, as I was long ago warned, “a prophet is without honor in his own country.” (Yes, Mark 6 and Matthew 13, my final biblical reference!)

It’s a lonely task, but I find common cause with many independent thinkers, including many, if not most, of our nation’s leading academics. So that’s what I do. What can you do? The answer does not come easily, for if you own individual stocks, you are among a definite minority, being dwarfed by the voting power of those giant money managers. But if you own mutual funds, get out your pen and paper, and write to their CEOs and their independent directors, demanding that they step up to the plate on corporate governance issues. It is with our huge mutual funds that battle of bringing the spirit of fiduciary duty to today’s double-agency society must begin. Paraphrasing Doris Kearns Goodwin’s words in her recent best-seller The Bully Pulpit: Theodore Roosevelt, William Howard Taft, and the Golden Age of Journalism, I hope that my remarks this evening 9 In a sign of impending change, Laurence D. Fink, the Chairman and CEO of BlackRock (the nation’s largest holder of corporate stock—about 7% of every company—recently wrote to the CEOs of all 500 companies in the S&P 500 Index, condemning the focus on short-term stock prices. “[Our] mission,” Fink writes, “is to earn the trust of our clients by helping them meet their long-term investment goals. . . . We share those concerns [about the short-term demands of the capital markets], and believe it is our collective role to challenge that trend.” 10 “The American Corporation,” Daedalus, 142 (2), Spring 2013.

“will guide you through your own process of discovery toward a better understanding of what it takes to summon investors to demand the actions necessary to bringing the financial system of our nation closer to its ancient ideals.” Margaret Mead said it even more simply: “Never doubt that a small group of thoughtful, committed citizens can change the world. Indeed, it is the only thing that ever has.” Thank you for your attention, and for coming out this evening.

Decision — Initiated Credit Acceptance — “favourite” buyback-compounding case. Context: H1-14 + H1-22 letters. Outcome (known): 9–18% position held through Q2 2025 (18.01% of US sleeve).

Decision — Post-Nomad pivot: philanthropy (IGY Foundation) and school governance. Context: He “has not entirely left investing” (postamble). Outcome (known): IGY is now the authorized home of the letters.