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Aug 12, 2021

Talent, strategy and risk: The new TSR, according to former Vanguard CEO

William McNabb talks stakeholder capitalism, board oversight of ESG and why public companies should be focusing on long-term value creation

Earlier this year, William McNabb, the former CEO and chair of Vanguard, called for a ‘new breed’ of IR professionals to help companies in their transition towards long-term value creation and storytelling.

His new book – co-authored with author Ram Charan and Dennis Karey, vice chair of Korn Ferry – sets out to redefine total shareholder return (TSR) as talent, strategy and risk: the three essential areas that the authors hope boards and executives will prioritize.

IR Magazine caught up with McNabb – who serves on the boards of Axiom, IBM and UnitedHealth Group – earlier this year to discuss stakeholder capitalism, his redefinition of TSR and what the increasing focus on ESG means for IR professionals.

During the last year, I’ve talked to many IR professionals who have described the challenge of emphasizing the company’s long-term story while giving investors short-term performance indicators – often while formal guidance was suspended. How can companies tell a compelling long-term story that also reassures investors that management and the board will be responsive to risks that could have a short-term impact?

The idea of telling a long-term story initially met with a lot of resistance, but we’ve seen some compelling presentations by companies and now both the investor and the IR community are beginning to see value in it. As we write in our book, the long-term story has to show board governance around talent, strategy and risk. You have to talk about how you are going to have the right people in the business going forward, strategically what you’re doing to do and what the risks are that you’re worried about.

The investment community has to have the ability to make judgements as to whether you’re making progress against your long-term goals, because in the early days the fear was that there would be a lot of pretty words and PowerPoints.

To me, it’s never been about short-term versus long-term. As a CEO, you’ve got to do both. Companies can get obsessed with whether they missed earnings by a penny in a quarter, which in the grand scheme of things doesn’t mean anything. What we’re looking for really is long-term value creation and whether you miss or beat earnings by a penny each quarter, it’s not going to matter 10 years later.

There are a lot of IR professionals who feel it’s investors and analysts driving short-term pressures and feel that, relative to their peers, there’s no first-mover advantage to placing a greater onus on long-term storytelling or even stepping back from issuing quarterly guidance. How do you respond to that?

That’s human nature. And from a behavioral standpoint I totally get it. But my point back is to take a look at your shareholder base. If you’re a Fortune 500 company, 20 percent of your shares are owned by Vanguard, BlackRock and State Street and we can’t sell your shares if we don’t like what you’re doing. So we’re essentially permanent capital and the only way we can affect how the company is performing is through governance. We’re going to be maniacally focused on board composition and how the board is interacting with the management team – looking at talent, strategy and risk.

I’ve also made the observation that because of the pressure created by index returns, most active managers – especially in the large cap arena, a little less so in the small cap arena – are going to be holding for longer. They’ve got to cut down on transaction costs. So for me, it’s all converging around more of a shift to long-term. It doesn’t mean it’s all there now – there are plenty of hedge funds, activists, algorithmic traders and so forth. But when you add it up, you’ve got a pretty big part of your shareholder base asking for a greater focus on the long-term.

The Business Roundtable’s Statement on Corporate Purpose and the World Economic Forum’s updated manifesto on stakeholder capitalism raise questions about the standing of shareholders relative to other stakeholders. From a strict IR perspective, it could be argued that a broader group of stakeholders are only meaningful if a company’s investors deem them to be material in some way. What’s your view?  

I think your observation is correct. But, you know, I would tell you that shareholders are beginning to really care about it and care about it in a broad range of ways. At Vanguard, we never forget that this isn’t our money. When we talk about Vanguard having a certain amount of assets under management, it’s not Vanguard’s money. It’s not my money, or the management teams’ money or even the investment teams’ money. We have an absolute clear responsibility to meet our shareholders’ expectations in terms of different funds we’re running and so forth. We never lose sight of that.

On the stakeholder versus shareholder framing, I get it – but I don’t actually think it’s correct. When we were running Vanguard, we talked all the time about how we serve three constituencies: our clients who happen to also be our shareholders, our crew – which is our word for our employees – and our communities. There you have stakeholder capitalism writ large. If you’re going to create long-term value, it’s not an either or, it’s an and.

But from a practical perspective, what does that mean? When companies asked me about how to frame their first sustainability or ESG report, I’d say that you have to frame it in a way that’s linked to your strategy. These activities have to serve the company, why it exists and strategically the direction that the company is heading in. If it’s separate, it’s not going to be successful – it’ll just be a check-box exercise.

When we reported our performance inside the company at Vanguard, two of our metrics were what you’d consider to be very traditional, but next to those very financially driven metrics were employee engagement and client loyalty, as measured by a net promoter score. Everything was inextricably linked. If you think of it that way, it can be very beneficial.  

In your new book, you redefine total shareholder return (TSR) as talent, strategy and risk. How does your redefinition of TSR impact the ways that companies tell their story?

It starts off with a conversation about the board. If you put 10 board members from 10 different companies in a room 10 years ago, gave them truth serum and asked them what they do, most of them would say that they pick the CEO and get out of his or her way. They would say they engage on strategy usually once a year for a day, but then leave the rest to the CEO.

In my humble opinion, that’s no longer sufficient, and I’m not sure it ever was. Given how fast the world changes today and how many exogenous factors even small companies have to deal with, a board’s responsibility is really around this concept of talent, strategy and risk. Governing that aggressively and deeply will lead to a better probability of good long-term value creation on the traditional TSR definition.

On the talent side, it’s more than picking the CEO. It’s looking at the executive team and understanding what the depth is like underneath the executive team. Who are the emerging leaders? Where is the diversity of thought and other measures of diversity? Talent leads to culture and, in my humble opinion, there have been more company failures due to culture than to missed strategy, execution, product rollouts or anything else.

With strategy, it’s ongoing. It’s not a once every three- or five-years thing. Boards need to be engaging and pushing and probing management around strategy. The best companies think about strategy almost like a venture capitalist – they’ve got this big picture of what they’re driving toward but they know that the marketplace will evolve and they’re going to have to adapt and evolve their strategy as a result. Risk is the other side of the strategy coin, if you will.

What does this mean for IR professionals?

I think IR professionals are going to have to get much better at actually explaining this to outside stakeholders – explaining what the board is really engaged in. It also reflects an evolution in the prominence of the buy-side versus the sell-side.

When I first got into the investment management business, the sell-side was dominant. Everybody wanted to make sure the sell-side understood what the short-term results were and the buy-side needed the sell-side in order to see companies. Today, that’s just not true. The sell-side still serves a function, but the buy-side is so much more preeminent.

The best parts of the buy-side are focused on the long term. They’re beginning to pay attention to talent and the company’s long-term strategy. Those are the drivers of returns. IR professionals really need to understand that there’s much greater demand for engagement with the board around these concepts.

Those engagements aren’t just about say-on-pay, which is what dominated for much of the last decade. It’s now about how are you thinking about some of these broad categories of talent, strategy and risk. IR professionals are usually part of those conversations and have to follow-up with board members, independent directors, investors and so forth. These are very rich, deep discussions and call for a different skillset than IR professionals needed to have even five years ago.

The way we think about talent management has evolved significantly during the last decade (there aren’t as many people picking up the company Rolex any more), and may be about to evolve again in response to enforced remote working. What challenges do you think lie ahead for companies in attracting and retaining top talent, and then building and maintaining culture with a dispersed workforce?

Talent beats strategy all day. That doesn’t mean that you can have a lousy strategy, but it you have the right talent you won’t have a lousy strategy. If you have a great leader, a great strategy and less than great talent, you’re at risk of not executing. Talent is so important.

Different companies are going to have different needs in responding to remote working, depending on the industry, sector, the geographic location and so forth. But in general, I think adaptability is going to be key. I really do think that leadership is going to have to evolve. On the boards I sit on, we’ve been talking about what the model is for a return to work and what that’s going to look like going forward. The one question that I keep asking everybody is how is our leadership model evolving? This is going to be a whole new game for us.

In my humble opinion, it’s not going back to the way it was before. What leaders do to respond to that is going to be a whole different way of managing and thinking about talent development, retention and so forth. Leadership teams are going to have to be way more adaptable and flexible than they’ve been in the past and are going to have to be very good at nuanced decision-making around how to create the kind of culture that they want. We’re going to have more people working remotely, at least for a bigger percentage of the time. So, by definition, when you’re in-person, it’s going to be very impactful.

Companies should be thinking about how they’re going to do things differently when they have people together. How do we make the biggest impact on our employees while we have them in person and what do we want to get across in those settings? What can we not get across when we’re doing the virtual thing?

My hope is that companies are going to rethink how their leadership models work to foster this because it’s more complicated. If a team of people come in from nine to five every day, you know they’re there. But if you have three people coming in three days per week, three people coming in two days per week and a couple of people working remotely 80 percent of the time, that’s so much more complicated.

How are we going to equip our leadership to deal with this? We’re going to have to double down there. If we don’t see evolution, companies will have a real employee turnover issue.

The capital markets are quite rapidly redefining materiality for a whole host of ESG topics and the buy-side, sell-side and corporates are all on similar journeys to enhance reporting and integration of ESG quickly. But that change doesn’t come quickly enough for everyone. What advice do you have to ensure authenticity in messaging?

The way this has evolved in many organizations is to create a team to have them responsible for ESG. It becomes a siloed team of people who are very passionate. In many organizations that I’ve seen, the ESG work is not linked at all to the corporate strategy. So then the IR professional is going How do I explain this? and the board has no idea what’s going on.

The good news is there’s a real recognition that this doesn’t have to be stakeholders versus shareholders – in the end it’s all about making a link between your ESG activities and your strategy.

There are way too many frameworks right now, but there will be simplification. We’re going to get down to metrics that actually make sense. I think there will be a lot of changes in the next 12-18 months – some of them regulatory. The SEC might come in and say that these are the ESG metrics that we buy into and they’ve got to be part of every report. My hope is that we see frameworks that really tie into strategy.

For example, I’m not an expert on climate change and there are so many metrics out there. But at the end of the day, what investors are going to be really interested in is, if your company has a high carbon footprint, how are you thinking about that going forward in terms of your consumers, how are you thinking about that in terms of attracting the right kind of employees, and how are you thinking about it from a regulatory standpoint?

Investors are asking these questions of boards today and IR teams are really to help figure out how to link all of that [to] the longer-term strategic discussions.


Next week, IR Magazine will publish part two of this interview, in which McNabb discusses the board’s evolving role of ESG in greater detail.

Ben Ashwell

Ben Ashwell was the editor at IR Magazine and Corporate Secretary , covering investor relations, governance, risk and compliance. Prior to this, he was the founder and editor of Executive Talent , the global quarterly magazine from the Association of...