Enough : A Speech delivered by John Bogle
I first learned about John Bogle last year when, while listening to an interview with him, I decided to get his book Battle for the Soul of Capitalism. It is stunning to me how much of what has happened regarding the economy was predicted by John Bogle in this book. His voice is one that should be listened to. His message is one worth taking seriously.
John C. Bogle, 77, is Founder of The Vanguard Group, Inc., and President of Vanguard's Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as Chairman and Chief Executive Officer until 1996 and Senior Chairman until 2000. He had been associated with a predecessor company since 1951, immediately following his graduation from Princeton University, magna cum laude in Economics. He is a graduate of Blair Academy, class of 1947.
In 2004, TIME magazine named Mr. Bogle as one of the world's 100 most powerful and influential people, and Institutional Investor presented him with its Lifetime Achievement Award. In 1999, Fortune designated him as one of the investment industry's four "Giants of the 20 th Century." In the same year, he received the Woodrow Wilson Award from Princeton University for "distinguished achievement in the Nation's service." In 1997, he was named one of the "Financial Leaders of the 20 th Century" in Leadership in Financial Services (Macmillan Press Ltd., 1997). In 1998, Mr. Bogle was presented the Award for Professional Excellence from the Association for Investment Management and Research, and in 1999 he was inducted into the Hall of Fame of the Fixed Income Analysts Society, Inc.
MBA Graduates of the McDonough School of Business
May 18, 2007
Here's how I recall the wonderful story that sets the theme for my remarks today: At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, "Yes, but I have something he will never have . . . Enough."
Enough. I was stunned by its simple eloquence, to say nothing of its relevance to some of the vital issues arising in American society today. Many of them revolve around money- yes, money -increasingly, in our "bottom line" society, the Great God of prestige, the Great Measure of the Man (and Woman). So this morning I have the temerity to ask you soon-to-be-minted MBA graduates, most of whom will enter the world of commerce, to consider with me the role of "enough" in business and entrepreneurship in our society, "enough" in the dominant role of the financial system in our economy, and "enough" in the values you will bring to the fields you choose for your careers.
Kurt Vonnegut loved to speak to college students. He believed, if I may paraphrase here, that "we should catch young people before they become CEOs, investment bankers, consultants, and money managers (and especially hedge fund managers), and do our best to poison their minds with humanity." And in my remarks this morning, I'll try to poison your minds with a little bit of that humanity.
BILL MOYERS TALKS WITH JOHN BOGLE
BILL MOYERS: Welcome to the JOURNAL.
Every week we hear of another publicly traded company being bought by a private equity firm. Some of those investment firms — like Blackstone, the Carlyle Group, and Cerebrus — have become almost as well known as the brand-name companies they've been snapping up, from Chrysler to Dunkin' Donuts to Toys R Us. But private equity firms have no real interest in toys, cars, or baked goods. What they are after is big and quick returns on their capital. To get it, they buy a company and cut the wages, pensions and health benefits of the employees who work there.
Take a look at this front page story in Sunday's NEW YORK TIMES for a glimpse of how this kind of capitalism works. Thousands of nursing homes have been bought up by private equity firms like Warburg Pincus and Carlyle. Profits were increased by reducing costs, then investors quickly resold the facilities for a big profit Ð leaving and I quote- "residents at those nursing homes worse off, on average, than they were under previous owners."
Exhibit #1: Habana Health Care Center in Tampa, Florida, purchased by a group of private equity firms in 2002. "Within months, the number of clinical registered nurses at the home was half of what it had been a year earlier...budgets for nursing supplies, resident activities and other services also fell..." "When regulators visited, they found malfunctioning fire doors, unhygienic kitchens, and a resident using a leg brace that was broken..."
Basing its report on state government data, the TIMES says 15 at Habana died from what their families contend was negligent care. But when families sue, they often can't find out even who owns the nursing homes because of the complex corporate structures private equity firms have created to cover their tracks.
It's this kind of capitalism that drives John Bogle up the wall, as you're about to learn. John Bogle believes owners should be in charge — and accountable. He's known and respected world-wide as the father of index funds and the founder of The Vanguard Group, one of the largest mutual funds anywhere, with over a trillion dollars in assets.
FORTUNE magazine named him one of the four giants of the 20th century in the investment industry. TIME magazine called him one of the world's 100 most powerful and influential people. Among his six books is this one THE BATTLE FOR THE SOUL OF CAPITALISM and more recently THE LITTLE BOOK OF COMMON SENSE INVESTING. In the current issue of DAEDALUS, the Journal of the American Academy of Arts and Sciences, he has a blockbuster of an essay on democracy in corporate America. You'll find it on our Web site at pbs.org. I talked with John Bogle when he was in town earlier this week.
BILL MOYERS: Thanks for joining me.
JOHN BOGLE: My pleasure.
BILL MOYERS: This story in THE NEW YORK TIMES this week. What do you think when you read a story like that?
JOHN BOGLE: Well, first, it's a national disgrace. Simply put. And there are some things that must be entrusted to government and some things that must be entrusted to private enterprise. And what we see there, at least in my judgment, is that we've taken medical care, healthcare and going from making it a profession in which the patient is the object of the game — preserving the patient "first do no harm" as Hippocrates would say or would have said and turn that into a business. And so, it's a bottom line. I've often said we're in a bottom line society. We're measuring the wrong bottom line.
BILL MOYERS: What does it say to you that the real owners of the nursing home, the private investors have created this maze of smoke and mirrors that make it virtually impossible to find out who the owners really are?
JOHN BOGLE: Well, that's so typical of much that's going on in American finance, the way we...
Over the past two centuries, our nation has moved from being an agricultural economy, to a manufacturing economy, to a service economy, and now to a predominantly financial economy. But our financial economy, by definition, subtracts from the value created by our productive businesses. Think about it: while the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates, those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted. Thus, while investing in American business is a winner's game, beating the stock market before those costs is a zero-sum game. But after intermediation costs are deducted, beating the market-for all of us as a group-becomes a loser's game.
Yes, the more that our financial system takes, the less our investors make. Yet the financial field is where the money is made in modern-day America, the breeding ground for the wealthiest of our citizens. (If you made less than $140 million dollars last year, you didn't make enough to rank among the 25 highest-paid hedge fund managers.) When we add up all those hedge fund fees, all those mutual fund management fees and operating expenses; all those commissions to brokerage firms and fees to financial advisors; investment banking and legal fees for all those mergers and IPOs; and the enormous marketing and advertising expenses entailed in the distribution of financial products, we're talking about some $500 billion dollars per year. That sum, extracted from whatever returns the stock and bond markets are generous enough to deliver to investors, is surely enough, if you will, to seriously undermine the odds in favor of success for our citizens who are accumulating savings for retirement.
Yet the fact is that the finance sector has become by far our nation's largest generator of corporate profits, larger even than the combined profits of our huge energy and health care sectors, and almost three times as much as either manufacturing or information technology.1 Twenty-five years ago, financials accounted for only about 6 percent of the earnings of the 500 giant corporations that compose the Standard & Poor's 500 Stock Index. Ten years ago, the financial sector share had risen to 20 percent. And last year, the financial sector profits had soared to an all-time high of 27 percent. If we add the earnings of the financial affiliates of our giant manufacturers (think General Electric Capital, for example, or the auto financing arms of General Motors and Ford) to this total, financial earnings now likely exceed 33 percent of the earnings of the S&P 500. While that share may or may not be enough, it seems likely to continue to grow, at least for a while.
We're moving, or so it seems, to a world where we're no longer making anything in this country; we're merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. We're also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks are being built into our financial system. "When enterprise becomes a mere bubble on a whirlpool of speculation," as the great British economist John Maynard Keynes warned us 70 years ago, the consequences may be dire. "When the capital development of a country becomes a by-product of the activities of a casino, the job of capitalism is likely to be ill-done."
Once a profession in which business was subservient, the field of money management and Wall Street has become a business in which the profession is subservient. Harvard Business School Professor Rakesh Khurana was right when he defined the conduct of a true professional with these words: "I will create value for society, rather than extract it." And yet money management, by definition, extracts value from the returns earned by our business enterprises. Warren Buffett's wise partner Charlie Munger lays it on the line:
"Most money-making activity contains profoundly antisocial effects . . . As high-cost modalities become ever more popular . . . the activity exacerbates the current harmful trend in which ever more of the nation's ethical young brain-power is attracted into lucrative money-management and its attendant modern frictions, as distinguished from work providing much more value to others."
But I'm not telling you not to go into the highly-profitable field of managing money. Rather, I present three caveats:
- One, if you do enter this field, do so with your eyes wide open, recognizing that any endeavor that extracts value from its clients may, in times more troubled than these, find that it has been hoist by its own petard. It is said on Wall Street, correctly, that "money has no conscience," but don't allow that truism to let you ignore your own conscience, nor to alter your own conduct and character.
- Two, when you begin to invest so that you will have enough for your own retirement many decades hence, do so in a way that minimizes the extraction by the financial community of the returns generated by business. This is, yes, a sort of self-serving2 recommendation to invest in low-cost all-U.S.-and global-stock market index funds, the only way to guarantee your fair share of whatever returns our financial markets are generous enough to provide.
- Three, no matter what career you choose, do your best to hold high its traditional professional values, now swiftly eroding, in which serving the client is always the highest priority. And don't ignore the greater good of your community, your nation, and your world. After William Penn, "we pass through this world but once, so do now any good you can do, and show now any kindness you can show, for we shall not pass this way again."
Most commencement speakers like to sum up by citing some eminent philosopher to endorse his message. I'm no exception. So I now offer to you new Masters of Business Administration these words from Socrates, spoken 2500 years ago, as he challenged the citizens of Athens.
"I honor and love you: but why do you who are citizens of this great and mighty nation care so much about laying up the greatest amount of money and honor and reputation, and so little about wisdom and truth and the greatest improvement of the soul. Are you not ashamed of this? . . . I do nothing but go about persuading you all, not to take thought for your persons and your properties, but first and chiefly to care about the greatest improvement of the soul. I tell you that virtue is not given by money, but that from virtue comes money and every other good of man."
I close by returning to Kurt Vonnegut's story, which, when I finally tracked it down, turned out to be a poem. It's delightful; even better, it's only 92 words long:
True story, Word of Honor:
Joseph Heller, an important and funny writer
and I were at a party given by a billionaire
on Shelter Island.
I said, "Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel 'Catch-22'
has earned in its entire history?"
And Joe said, "I've got something he can never have."
And I said, "What on earth could that be, Joe?"
And Joe said, "The knowledge that I've got enough."
Not bad! Rest in Peace!
But it's not time for any of you to rest in peace, or to rest in any other way. Bright futures lie before you. There's the world's work to be done, and there are never enough citizens with determined hearts, courageous character, intelligent minds, and idealistic souls to do it. Yes, our world already has quite enough guns, political platitudes, arrogance, disingenuousness, self-interest, snobbishness, superficiality, war, and the certainty that God is on one side or the other. But it never has enough conscience, nor enough tolerance, idealism, justice, compassion, wisdom, humility, self-sacrifice for the greater good, integrity, courtesy, poetry, laughter, and generosity of substance and spirit. It is these elements that I urge you to carry into your careers, and remember that the great game of life is not about money; it is about doing your best to build the world anew.
And that's enough . . . at least for today.