Bill McNabb says a focus on the greater good leads to long-term value.
Bill McNabb, the former CEO and chairman of investment behemoth Vanguard Group, believes many people aren’t seeing the ultimate value of a growing movement for corporations to have a social-purpose focus.
“Many pundits and critics have missed an essential element of the principles,” explains McNabb, a director for UnitedHealth Group and chairman of EY’s Independent Audit Quality Committee. The principles, he adds, “are focused on long-term value creation, not short term. As investors, we want to see this longer-term focus.”
The following is a Q&A with McNabb. He discusses the recent Business Rountable’s “purpose” statement and environmental, social and governance issues (ESG):
Should a corporation have a social purpose? What is a corporation’s broader responsibility to society, if any?
I’ve always said that in business, if you do the right thing, you win. A purpose provides a company with a “true north” – a way to ensure any decision made serves a company’s collective goal. Often, a company’s core principles align with an effort to serve a greater good. For example, at Vanguard, that purpose was, and remains, putting people over profits by taking a stand for investors, treating them fairly, and giving them the best chance for investment success.
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The Business Roundtable purpose statement is very similar to a statement the group put out in 1981 calling for a greater focus on all stakeholders, including employees, communities, suppliers, customers, etc. Do you think this time around the signatories will make it happen? Why? What’s your overall take on the Roundtable’s recent statement?
The Business Roundtable statement indeed is similar to that issued in 1981. That doesn’t make it any less important. The principles laid out in the statement reflect what we believe it takes to make a company successful in the long term.
At Vanguard we frequently talk about serving our “three Cs” — clients (our term for customers), crew (our term for employees), and community. We think that by having vibrant communities and a powerful value proposition we can attract great people; and further, by focusing on their development and retention, we will create great customer experiences and more long-term shareholder value for our clients. In our case, our clients also are our owners, so it’s doubly important we do so.
So what is the proof? I would humbly submit our success is very linked to following these principles. We believe all companies wishing to create long-term value would be well served by thinking about other stakeholder groups. Very importantly, this is not an “either/or”proposition. Rather, it’s an “and” proposition. If you successfully take care of your customers and employees, you have a better chance of creating long term shareholder value.
How can ESG initiatives be measured?
That’s the million — or really trillion — dollar question. It’s one that organizations like the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) are dedicated to solving, and investors and companies alike have made great progress in this area. The key is focusing on financially material, sector-specific ESG disclosures, rather than a one-size-fits-all approach. For example, a hotel chain’s ESG efforts and risks are going to be markedly different from those of an oil company. ESG issues are nuanced, and we are all working to provide standard guidelines that take into account how ESG risks affect each sector differently.
Should management be compensated and incented on ESG performance?
Investors should evaluate company board and management teams on their ability to deliver long-term shareholder value. Creating sustainable long-term value means not taking short cuts in the near term to inflate stock prices. While Vanguard is not in the practice of telling individual companies how to design compensation plans, Vanguard and other long-term investors look for executive compensation to be tied to sustainable long-term value creation.
What is the role of institutional investors?
Institutional investors have a responsibility to stand up for the best interests of the shareholders they represent. Institutions like Vanguard represent millions of individuals who have worked hard to save and invest their money. It is imperative that institutional investors advocate, engage, and vote on those investors’ behalf. It is their responsibility to ensure the boards and management teams of companies they invest in are well equipped to manage, disclose and mitigate ESG risks that are material to a company’s long-term success.
Will ESG need government intervention to assure compliance?
Most companies understand the importance of ESG matters to both their investors and their bottom line. The current corporate governance ecosystem is well-equipped to ensure companies act in the best interest of shareholders. The checks and balances currently in place encourage a company’s growth and success and provide shareholders with rights and protections to effect change if needed.
How should boards monitor and report their ESG initiatives?
ESG risk oversight is a key responsibility of a company’s board. Boards should understand and own ESG risks that may have material impact to the long-term success of a company’s business. They must also oversee the disclosure, management, and mitigation of those risks in partnership with a company’s management team.
What are the human capital risks and opportunities of an ESG focus?
I don’t view human capital management as simply an ESG focus. The best boards and leaders view talent, strategy and risk as the three things they must get right for their companies to create lasting value.
You are a board member for Chief Executives for Corporate Purpose, and in the group’s Strategic Investor Initiative’s letter that you signed it included the question: How do you manage your future human capital requirements over the long term and how do you communicate your future human capital management to your investors? SEC Chair Jay Clayton told me in an interview that his agency is considering new human capital risk disclosures and he’s recently announced the agency is evaluating new disclosure requirements. Why do you think this is so important? Also, should directors be thinking about such risk and corporate culture overall?
I think the focus on human capital is appropriate and applaud that Chairman Clayton and his SEC colleagues are looking at the issue of disclosure in this regard. In our humble opinion, talent trumps strategy most of the time, and getting the people part of the equation correct is the hardest job of management.
Often we see companies fail because of lack of execution rather than misguided strategy and these execution failures almost always tie to talent issues. Therefore, we would like to see companies do a better job describing their long-term talent strategy.