Parker Mitchell: So, Bill is the former CEO and chairman of Vanguard. And Bill's also been a close follower of Valence for the past five years and has been an extraordinarily valued board member for the past three years. And I thought we'd begin, Bill. I mean, when we were first being introduced to Vanguard, I know we, you know, dressed up nice and tried to pretend that we were a big company, but I think you saw through it a little bit.

Tell us a little bit about why Vanguard decided to take a bet on what you call a garage startup. 

Bill McNabb: Well, you were a garage startup. So, well, it's good to be here, Parker. Thank you for having me. It's actually even more than five years ago now, which is really remarkable. One of my former colleagues had met Parker and had come away impressed with some of the ideas Parker talked about and Parker and his team talked about in terms of making teams more effective.

And you have to understand, you know, the two most impactful experiences I had sort of before, you know, getting to a place like Vanguard were, one, I was a competitive rower, so team orientation was sort of, you know, became part of my DNA. And second, I was a teacher. And so the whole teaching, coaching thing became really interesting to me.

And at Vanguard, we had done a lot of work pretty—you know, we're investors, so we think about everything, it comes down to an ROI calculation. And we were struggling with the amount of money we were spending on development, not because we thought it was a bad thing to do, but we couldn't figure out why there was, like, big drop-offs after someone did the initial training and workshops we ran.

And the idea of having a team-based platform that actually reinforced some of the concepts we were trying to teach really hit home hard. And then, of course, as you've evolved the business to the coaching model, that, to me, was the big gap that was missing. So it's been really exciting to watch it evolve.

Parker: That's terrific. And you're also on boards. So you are seeing this not just, you know, from the stories you're hearing from Vanguard about the day-to-day challenges. But I imagine that 90% of board meetings are about AI. Can you share, maybe, what are the differences in the tenor of conversations from 12 months ago to now at the board level?

Bill: Yeah, so, and you know what's really interesting is, you know, I have the privilege of serving on two very large public company boards. But what's really interesting is I also sit on boards of several startups and sort of smaller-cap companies.

And we're having the same discussions. And I would say the big tensions, if you will, are how fast to go and where to sort of put your bets. And, you know, in most of the discussions, at least that I'm involved in, what we as board members are doing is really encouraging companies to not talk about it forever, but actually go do something and find use cases that really make sense for their particular business and go try something.

It's interesting, and the larger companies in particular, there's becoming a little bit more of a tension between the business leads who want to go try things and the chief technology officers who are like let us build it for you. And one of the things we're doing, at least again in the boardrooms I'm in, is we're saying to the CTOs, “yeah, great, you guys go develop this.”

But we're also encouraging the business to go experiment with people who are maybe a little deeper on particular topics. So, you know, Vanguard is an example. And again, I'm not on the board at Vanguard anymore. But I know, you know, talking to my former colleagues, they're very early adopters of Valence.

Love it. It's deployed through probably about 80% of the company at this point. 

Parker: We checked, 16,000 users. 

Bill: Yes. So 16,000 out of 20,000 employees. So pretty remarkable adoption. We have a company called Writer, which is a startup in there doing content creation, and the CTO has four or five big, you know, projects that he's driving the development for. And, again, for the companies with those kind of resources, I love that kind of approach.

You know, for smaller companies, I think it's fine people like Valence who can really solve a specific problem for you really quickly and give you experience with AI. That's what really makes a lot of sense. 

Parker: I've heard other people talk about that. The sort of portfolio approach, some internal, some external, some existing vendors, some new vendors.

If you were giving advice to a leadership team, how would you give advice to navigate that over the next couple of years? Because there'll be tensions between different groups wanting one thing or promising something else. 

Bill: You know, I actually wouldn't overthink it. You have a certain amount of—every company has a certain amount of capital to deploy.

And some companies, it's a large amount. Some companies, it's really small and, you know, really tightly controlled. I think the thing is to make sure that you actually do have a balance. The one thing I'm pretty convinced of, unless you're a deep, deep tech company yourself, no matter how good your engineering team is—so, again, let me just step back. You know, at Vanguard, 35% of our employees are software engineers. Most people don't think that. They think you're an investment firm. We're an investment firm with 35% of our population are engineers and our engineering team is good. Like, they're really good, and they think they're even better than really good.

And you know, the truth of the matter is we can't be as nimble and agile on things like an AI coach development as a company that's designed to do it. And I think, as business leaders, the advice I would have is just make sure whatever the capital allocation you have for these kinds of experiments, you've got a piece where you can pick a couple of firms and go really deep with them, because it's not that expensive. And I think you're going to get insights that you won't get from your own teams. 

Parker: Are there any interesting results from experiments that have floated up to the board level at either of your two public companies? 

Bill: Yeah. Less on the coaching side, more on the content side.

But the company I mentioned earlier, Writer, has gotten, you know, in one of the companies, it's like, whoa, these guys are really good. Like, we're able to do things from a content perspective that we never thought possible before. I think there are also a couple of players out there who are really, very deep in helping build out customer service, just automating in a much more intelligent way how customer service reps respond to calls in particular. And if you can make those folks more accurate, more efficient, overall more effective, again, huge amount of savings, but also a huge jump in quality. 

Parker: One of the things that you and I have talked about is your belief in not just the value of leaders, but the importance of investing in leaders, and that's been a through line throughout your career.

Can you share a little bit about how that showed up for you at Vanguard, the investments that you made in the pre-AI world, and then we'll talk about post AI? 

Bill: Yeah, I mean, you know, one of the things, I was talking to somebody before we started here, and I had the great privilege of joining Vanguard when we were just a little beyond the startup phase, a few years into our history, and our founder, Jack Bogle.

And Jack was, you know, for those of you not in the financial services world, he's really an iconic founder. Visionary is sometimes a word that's used too often, but in Jack's case, it was true, and he completely disrupted investment management with our approach. But Jack also had this instinct around people and that, you know, he had a saying, “even one person can make a difference.” And no matter how big we got, he kept repeating that mantra.

So, I was lucky to grow up like that. And then Jack's successor basically took it another step further, and he was like, we've had this amazing founder who's a visionary and, you know, pretty directive in terms of how we built the company. That's not going to scale. We'd gotten to a hundred billion dollars doing that, from a startup of one and a half billion, but if we wanted to go to a trillion, we were going to need to have a much more team-oriented culture.

And so he really installed the ethos that, at the senior level, a high-performing team was the way we wanted to build the business, not like one visionary leader, you know, sort of directing everybody where to go. And then, as you know, I was our third CEO. And one of the things that we began to see is, while the high-performing team at the senior level was working really well, farther down the organization, there was a little less engagement than maybe we wanted.

And we had seen, just from a business-case standpoint, a direct correlation between employee engagement, and we used Gallup at the time, versus net promoter score of those particular client groups. The higher the engagement, the higher the net promoter scores. Again for this audience, that's probably like, yes, of course. You all know that. But I would say, this was the early 2000s. People didn't—it didn't come to them naturally. And so we actually pivoted and changed the whole way we thought about attracting and developing leaders and made that the central part of what we do.

And you know, the way I like to think about it, we did a lot of work with Jim Collins. And so those of you who are familiar with his “good to great” concept, we built a flywheel. Like, here's the business model that we want to have and what the different components of that flywheel were. I won't bother you with all those details.

But at the heart of it was high-performing people, and that was like the axle upon which the flywheel would spin. And so, we started talking about this, and we had the, again, really good luck in that one of our neighboring companies was run by a guy named Doug Conant, who runs the ConantLeadership center now.

And Doug was the CEO at Campbell’s, and some of you are probably familiar with his work on engagement, but Doug came to us and said, “how are you going to know if you're successful?” And some of our people were asking. So we had four numbers that we focused on at Vanguard.

One was investment performance. You would expect that. One was client loyalty, so net promoter score. You would expect that. One was our version of profitability, which was, you know, what expense ratio we charged our clients. Doug came in and said, “you need to have a people component to that, and it needs to be first.”

And we actually did that. We used an engagement ratio that we calculated from Gallup engaged to disengaged. And that was our number-one number. So when we would report out to the company how we were doing and what our aspirations were, we always started with employee engagement. And if you're going to get great employee engagement, you've got to have great leadership.

And so, that's where the work really began. It's actually what led us to you guys originally, was how can we take that to an even higher level? And I remain convinced, you know, at Vanguard, and again, you're always a captive of your own experience. But when you ask people—I sat with a lot of our competitors at industry trade associations or whatever.

And, you know, people would say, “oh yeah, Vanguard, they're really, you know, they pioneered that indexing thing,” which most of our competitors hated. They're really low cost. Most of our competitors hated that because it cut margins. No one ever talked about our people. And so we didn't really brag about it a whole lot because we didn't want them to know.

We thought that, actually, of course, we had advantages structurally that helped us with the cost, and we had the indexing idea. But what really turbo-charged our growth was when we doubled down on people engagement among the employees and leadership, among, you know, frontline leaders all the way to the top.

And you can see a company that was growing at a pretty good clip, then went into hyper-growth drive when we got better at the people side, and it was just direct, you know, it was just math at the end of the day. You could then take that to the company, and you could take it to your board, and you could say, “see, all these investments we're making on the talent side, look what's happening to the business side.”

Parker: And when you have that straight line, that correlation, causation equation, That's incredibly powerful, because then as people see the number go up, they understand why the investments are being made. If we turn our eyes to the future, the next three, five years, there's a world in which there'll be quite a bit of disruption on the people's side.

How would you suggest that CHROs or CEOs who might be like-minded to you, that they think about that? 

Bill: Yeah, you know, and again, it's really hard to know ahead of time exactly where it's all going to come, but you get some clues just by watching what's happening even today. 

What we did, and again, whether it's applicable across the board or not, we went through a very early period of reskilling our people. So, you know, I said 35% of our workforce were software engineers. Every major financial—every major legacy system in investment management was, you know, essentially built on COBOL code with DB2 relational databases.

Like, that was it. And so we had all these engineers, that's what they knew how to do. Well, imagine what happened when all of a sudden workstations came around and then the internet came around. We actually reskilled most of our engineers. And we had really aggressive programs to teach them new languages, new ways of coding.

We move from a waterfall-developments approach to an agile approach. You know, I think we probably started that move almost 20 years ago now. And obviously, today, I'm sure they've gone way beyond anything I can imagine. But the commitment to reskilling people, again, we were fortunate; we were a really successful organization.

So we had the resources to do that. But I'll tell you, I can't prove it, but we had much lower turnover than our competitors and much better performance as a company as a result. So here's a correlation. Whether there's causation, I can't really prove it. I believe there is. And I believe very strongly there is, but that's how we did it.

And it wasn't just—I use the software engineering group as an example, but in all of our other major areas, similar things happened. Our processing groups had to change what they do. And again, we tried to reskill as much as we could, and, look, you know, we had people who resisted the reskilling, and they usually ended up taking themselves out of the equation.

We never had a riff through my tenure. So for the first 40 years of the company, and I think a lot of it was because we got out in front of some of these issues. 

Parker: And I'll add that I think you took over as CEO the week after the financial crisis or the week before the financial crisis, 2008.

Bill: Two weeks before. So, I had two weeks.

Parker: One of the things you and I have talked about is sort of the only wrong answer is doing nothing. Can we just end on sort of advice that you would give to someone who's struggling to convince their team on, you know, why they need to take action today?

Bill: You know, so I'm a huge fan of Clay Christensen's work on The Innovator’s Dilemma. And again, in this audience, I know most of you are familiar with that. And, you know, as soon as you feel like, okay, we can't do something new because it's going to disrupt what we've been doing, and we've been really successful.

It's the beginning of the end. You know, Jack Bogle, our founder, was actually a fan of Clay Christensen's deep predecessor, a guy named Schumpeter who was an economist, an Austrian economist, and he talked about creative destruction. And you know, my observation is creative destruction is actually one of the most important elements of capitalism.

And companies that are, you know, if you can imagine something could happen, somebody's already doing it, and they're coming at you from a competitive landscape. So I actually think this isn't like you get to choose. I think you have to do this. And, again, I don't know exactly where AI is going to end up, none of us do, or maybe a couple of our later speakers do—we've got some real gurus here. But I think the biggest sin anybody could do here is not do something, because I think this is coming.

And the more experience, the more testing, the more, you know, pivoting from lessons learned that we do at this phase, the more likely we are to not only succeed, but actually seize opportunities as businesses, you know, from this new technology. But I'm completely convinced that this will be as disruptive as the internet was.

And, you know, obviously the internet was as disruptive in many ways as the original industrial revolution. And if you sort of play that out, you want to be part of it. You don't want to be a victim. 

Parker: And there's a learning curve, so I think it's important to get started early. I just want to say thank you.

It's wonderful to have these conversations. I know you're joining us en route from Philadelphia to almost the Canadian border, but we really appreciate you making the time today. Thank you.

Bill: Well, it's a privilege to be here, and I'll just say, having known this guy since he literally started the company, I am not unbiased when I say this, but as an investor in the company and as a fan of what Valence is doing, it's really exciting for us to see all of you here, because we're going to learn from you, and, hopefully, it's going to make us a better company as well. 

Parker: Absolutely. Thank you, Bill.