GUEST BLOG
Internal auditors are always on the lookout for people to emulate and to learn from. Here’s one to study: John C. (Jack) Bogle.
Jack Bogle, the late founder of the mutual fund company Vanguard Group, has been an American investor, business magnate, financial innovator, and philanthropist, and is famously credited with creating the first index fund. Investment giant Warren Buffet once said that Bogle, “did more for the individual investor than anyone else in history.” Yet his contributions to the business world don’t end with the investment community. He was a man of great character and, in my opinion, a person who offers some great lessons for internal auditors.
Why is the Bogle legacy important to internal auditors? To me, his story is all about integrity. It is all about the courage to take action and stand up for what is right. He preached about always putting customers’ interests first and pointed out what is deceptive and wrong in business. These are principles internal auditors need to live by, and Bogle had them in spades.
Bogle, who died in January at the age of 89, counts many accolades and achievements during his long, successful career, including being named by Time magazine as one of the world’s “100 most powerful and influential people” in 2004. But it is his writing that serves as a roadmap for internal auditors to act with courage when under fire and to stand up for their beliefs.
Good Reads
I have been an admirer of Jack Bogle for many years (full disclosure, I am an investor in the Vanguard funds) and his numerous books helped me to become a better internal auditor. He wrote twelve books in his lifetime; the first was published in 1993, Bogle on Mutual Funds: New Perspectives For The Intelligent Investor, and his final book, Stay the Course: The Story of Vanguard and the Index Revolution, was published in 2018. I have read several, but my favorites are The Battle for the Soul of Capitalism (2005) and Enough (2008).
All of Bogle’s books tell, to some degree, the remarkable story of his family, his early years and education, and, of course, the events surrounding Bogle’s founding of Vanguard and the creation and innovation of index funds. Each book describes Bogle’s philosophy of investing and provides considerable data and research (constantly updated from book to book) to support his approach. The books also come with several business and life lessons that he collected along the way, many of which are relevant to internal audit. Particularly enlightening are those he learned as he worked to innovate the mutual fund industry and from when he went against convention and ruffled some feathers.
“Everybody really thought he was crazy, but he was tough enough not to care what everybody thought,” Burton Malkiel, author of A Random Walk Down Wall Street, once said of Bogle.
Bogle’s interest in investing and the investment industry began as a student at Princeton. He majored in Economics, with math as one of his strengths. He became interested in the investment industry after reading an article in Fortune in 1949. He selected the topic: “The Economic Role of the Investment Company” for his senior thesis and proceeded to research what was later to become known as the mutual fund industry. His thesis conclusions, based on his research, were that mutual funds “can make no claim to superiority” over long-term market averages, that the fees associated with investing only negatively impact investor returns, and that investment companies should be more focused on serving the interests of investors.
Going Against the Grain
Bogle began his career in 1951 at investment firm Wellington Management Co., and for many years he experienced firsthand the difficulties of actively managing and beating the benchmark index averages. Later in his career, in 1974, when he was preparing to propose the creation of a true “mutual fund” company that placed investors’ interests first, he once again researched fund performance data, this time scrutinizing market returns from 1945 to 1974. The data showed that the annual return of the S&P 500 Index typically exceeded the returns of most actively managed mutual funds.
“Everybody really thought he was crazy, but he was tough enough not to care what everybody thought.”
—Burton Malkiel, author of A Random Walk Down Wall Street
The updated data, published by Bogle and others ever since, reinforced the conclusion that passive (index) funds consistently beat managed funds over the long-term. While it was a controversial assertion at the time, that conclusion is widely accepted by the investment community today. One recent report indicated that “over 90 percent of actively managed funds underperformed their benchmark indexes over the 15-year period ending in 2017.”
Bogle came to believe the “fundamental truth” (contrary to the muddled message then and now of mutual fund companies) that “the returns earned by investors as a group precisely equal the returns of the market itself.” He further explained the “irrefutable fact” that the only way the average investor can maximize their share of the returns is to minimize investing costs. Both concepts destroyed the myth that “professional money managers as a group would enhance the returns of… investors.”
You could say that Bogle was the “grandfather of auditing” in the mutual fund industry. He knew the industry inside and out; he gathered the data, he evaluated and assessed the conduct of mutual fund companies; and he communicated his findings through his books, articles, and speeches. In a way, his mission was not so different than that of today’s internal auditors.
What Bogle Teaches Us
I believe the following “lessons” that Bogle exhibited throughout his career at Vanguard (and after) would serve internal auditors well (and all others, for that matter).
1. Ensure conclusions are based on data and facts
Bogle founded Vanguard based on an index-based investment strategy that itself was based on facts and research. He conducted investment returns research before proposing the index investment strategy, continually conducted research while at Vanguard, and after his tenure there ended he continued to conduct research of market returns through his Financial Markets Research Center, founded in 2000.
Bottom line: All of Bogle’s opinions were well founded in extensive investment industry research.
The lesson: Internal Auditors, first and foremost, must be fact driven. They must base their opinions on facts and analysis, as well as knowledge of the businesses and processes that they audit. There is no room for unfounded opinions.
2. Use common sense
Bogle was driven by several common-sense principles (supported by facts), throughout his career in the mutual fund industry. One of those principles was that active investment management failed to achieve benchmark results over the long term. Another was that the higher the costs, fees, or commissions, the lower the net investment returns. In Bogle’s research, he also came to the conclusion that past investment manager performance was not correlated with future results, contrary to the advertising messages of the mutual fund industry. He came to all of these conclusions by testing hypothesis he developed using his keen instincts and common sense.
Bogle also counseled investors to beware of complex financial instruments that they don’t understand (not common sense). For example, he pointed to the financial crisis as a case of creating products that were misunderstood and, therefore, poorly audited.
The lesson: Internal auditors must trust their instincts and be professionally skeptical about complex concepts or dealings that no one understands. They should not pretend to understand them or “audit” them without the proper understanding of how they work. There is no room for fake auditing.
3. Integrity is everything
Jack Bogle did not want to work in an investment business that claimed to work in the best interests of investors, when it actually worked in the best interests of the investment managers, sales people, and traders. The typical investment firm achieved performance short of benchmark returns and at the same time charged ever increasing fees and commissions.
He was a contrarian in his industry, and built his life and career on character, ethics, integrity, and honesty.
The lesson: Internal auditors must have unwavering character and integrity, and they must speak the truth no matter how unpopular or disruptive it may be in the environment. They must also be prepared to be contrarians when the data and analysis require it.
4. Be courageous
Bogle liked to tell the story of a meeting in 1974 he had with the head of the Investment Company Institute (ICI), the leading association of member mutual funds companies. At the time, Bogle was planning to start Vanguard, which would be owned by fund shareholders, with a primary focus on investor interests, rather than the interests of fund managers. The head of ICI told Bogle: “If you create a mutual structure, you will destroy this industry.”
Bogle had the courage of his convictions that customers were best served by index funds that assured they received the average market return. He also believed that minimal fees were also consistent with serving investor interests. And, of course, Bogle backed up his strategy with the data and facts, as mentioned above.
The lesson: When internal auditors investigate risks, controls, and operations to determine if the strategy and objectives truly meet stakeholder interests and a determination is made that they do not, they must have the courage to disclose the findings, regardless of if the recommendations conflict with short-term or short-sighted plans of the organization.
5. Put customers first
The Vanguard history and evolution of index funds is interesting itself, but the overall message is the dramatic change in focus of an investment company that actually put the interests of investors ahead of the interest of the organization and its managers. I say “actually” because history tells us the investment community has always said that investors’ interests come first, yet Bogle was the first person to demonstrate that the industry as a whole did not put investors’ interests first.
Bogle’s constant guidance at Vanguard was: “Any conflicts between the profession of investing and the business of investing be reconciled in favor of the client.”
The lesson: Internal auditors should be professionally skeptical of financial or other innovations that are self-serving to managers or the organization and provide no value (or detract from the value) to customers.
6. Follow professional standards of conduct and stewardship
Bogle believed in true professionalism, meaningful stewardship, trusteeship, and fiduciary responsibility for all actions, and he always looked out for the best interests of clients. He has written that with or without government requirements, “the fiduciary standard should apply to any person or any firm that touches other people’s money.”
It is all about professional conduct, not business conduct.
The lesson: Internal auditors should promote the concept that everyone should think and act like a trustee, fiduciary, and a true professional with real professional standards, no matter the industry. Internal auditors, as a general rule, should apply the concept to everything they do and encourage others to do likewise, even though it may not be a legal requirement.
7. Stay the course
Bogle’s last book published in 2018 was titled, Stay the Course. It describes Bogle and Vanguard’s persistence and continuity in delivering the index fund approach to customers. Throughout his career, Bogle succeeded with his willingness to follow the data, to push back on tradition, to speak up constantly, and to put his customers first.
In spite of the constant drumbeat that actively managed investment strategies can beat the market and justify high fees and commission, Vanguard and others with a passive investment strategy and low fees are winning. The percent of actively managed funds are declining steadily as the percent of passive index funds increases, and fees over the past twenty years have been cut nearly in half.
The lesson: Internal auditors must “stay the course” in their advocacy of constant process improvement, better tone at the top, and highlighting of aspects of culture that increase risk and put the company in danger. Be persistent and be Bogle-esque.
High Standards
Bogle proved overwhelmingly that you can succeed if you rely on data and facts, use common sense, exhibit character and integrity in all actions, have the courage of your convictions, put customers’ interests first, and act according to professional conduct and stewardship always, and, finally, don’t waver from those principles. As an internal auditor, you are perfectly positioned within your organization to deliver the Bogle message and implement the Bogle lessons in everything you do.
Bogle set the standards high, as he changed the culture of the mutual fund industry forever. Internal auditors should work towards changing their legacy. They should commit to impacting their organizations and to driving cultural change, if needed. Internal auditors should also set their standards high.
I, for one, will miss the consistent, thoughtful, value-driven, fearless ways of Jack Bogle, but look forward to applying his legacy and lessons to everything I do. 
(AP Photo/Mark Lennihan, File, used under license)
Amanda “Jo” Erven, is president and founder of Audit. Consulting. Education. LLC, a firm specializing in progressive internal auditing, management consulting, and continuing professional education. She is also author of the recently published book and accompanying workbook titled, Total Quality Auditing: How a Total Quality Mindset Can Help Internal Auditors Add Real Value.