This week wraps up our special mini-series where Matt sits down with the four new Arkansas Business Hall of Fame inductees, continuing with Thomas E. Faust Jr. Tom is the former chairman and chief executive officer of Eaton Vance Corp. and current chairman of Morgan Stanley Investment Management. He chats with Matt about the lessons learned as he pivoted from managing investments to managing an investment company. He also highlights the importance of innovation and mentoring throughout his career. Learn more about the Arkansas Business Hall of Fame or nominate someone for the next class of inductees!
Episode Transcript
Tom Faust 0:02
Find out what's important to you in life. And make sure that you position yourself
for success as you define that.
Matt Waller 0:13
Excellence, professionalism, innovation and collegiality. These are the values the
Sam M. Walton College of Business explores in education, business, and the lives of
people we meet every day. I'm Matt Waller, Dean of the Walton College and welcome
to the Be Epic podcast. I have with me today, Tom Faust. He is chairman of Morgan
Stanley Investment Management and he is being inducted in February into the Arkansas
Business Hall of Fame. Thank you so much, Tom for taking time to visit with me today.
I really appreciate it.
Tom Faust 0:51
Thank you, Matt. It's my pleasure.
Matt Waller 0:34
As I mentioned, you're the chairman of Morgan Stanley Investment Management. And you
grew up in Helena-West Helena, Arkansas. It seems like that's a low-probability outcome.
But congratulations on the tremendous success you've had in your career. So, for those
of you listening, we have a website where we feature videos of each of the inductees
into the Arkansas Business Hall of Fame. There's only four people who are inducted
each year, you have to be over 60 and we have lots of backlog. We keep nominations
for five years. It's very hard to pick people but when they're inducted, there's a
good reason for it. Tom certainly met all the criteria. We have a board of people
who look at the nominations and select who will be inducted, including former inductees
as well. The reason I mentioned it is, if you're interested in Tom's early background
in Helena-West Helena, there will be a video. If you google Arkansas Business Hall
of Fame, you will see all of the videos of everyone who's been inducted since 1999.
I'm going to focus today a little bit more on leadership, strategy, culture and things
around those lines. I will say, for your background − it'll help with some of the
stories we're going to look at − Tom joined Morgan Stanley Investment Management in
2021. He has 36 years of experience. Prior to joining Morgan Stanley, Tom was Chairman,
CEO and President of Eaton Vance Corp. He joined Eaton Vance in 1985 as a research
analyst, served as a portfolio manager, director of equity research and management,
and chief equity investment officer. In 2001, he assumed leadership of all investment
functions of Eaton Vance and was chief investment officer. He became chairman and
CEO November 1, 2007, and now he's with Morgan Stanley. He went from managing investments
to managing an investment firm, there's a big difference there. Would you talk a little
bit about the transition and how you were able to make that transition so effectively?
Tom Faust 3:24
My job initially, when I joined Eaton Vance in 1985, was following all the public
companies in a couple of different industries. One was the paper and forest products
industry and another was healthcare, including pharmaceuticals. My job over more than
a decade was primarily getting to know those companies, getting to know their strategies,
getting to know their leaders, and ultimately making judgments and making conclusions
and making recommendations about: is this a stock I want to own? Our timeframe was
typically 2, 3, 4, 5 years. We really viewed investing as the process of identifying
companies and business plans and leadership teams that we wanted to make a long-term
bet on. And I felt, to be effective in that role, I had to really get inside businesses
− creating models, but also getting to know the people. When I had the opportunity
to transition from an investment role to a leadership role, I found that background
and the lessons I'd learned and the insights I had from following a lot of companies
− some I had a lot of respect for, some I had very little respect for − to be very
helpful in terms of building my own approach to leadership and helping set the strategy
for Eaton Vance going forward.
The particulars of the transition for me started in 1995. I had been with Eaton Vance, about a decade. I got a phone call one morning from Dozier Gardner, who was the president of Eaton Vance. He asked me to come down to his office. When those happen, you don't know whether this is going to be good news or bad news. You try and figure out from the tone of the conversation whether this is one of these "sorry, Tom, you've come to the end of your Eaton Vance career" or if this might be something that's going the other way. I mean, I had a little bit of a hint of this. But fortunately, the phone call led to a conversation in which Dozier said, "we'd like you to be head of the equity group." At that point, I'd been part of this group for 10 years. It was a chance for me to lead a group and to lead a business that I knew pretty well. Though from the perspective of being a part of it, not having had a leadership role before. During the first 10 years of my career at Eaton Vance, I was very much investment focused. I did not supervise − other than an assistant, I didn't supervise anyone. But the pivot point for me in my career started with that phone call and that follow-up meeting where I was given a chance to lead the equity investment team.
Matt Waller 5:58
You know, when you make those kinds of pivots, you wind up having to relate to more
people in a new way. No matter what you do, you relate to people, but it becomes different,
you have to start thinking about gaining alignment amongst people, motivating people,
casting vision, etc, etc. One thing I'd like to talk about: in business, it's been
known for a long time, innovation is one of the most important capabilities of a firm.
And it's challenging. When you think of investment firms, you don't typically think
of innovation right away. Rightly or wrongly, I don't think the average person does.
But you were in a firm that was very much known for innovation. So I'm curious as
to, one, when you made that pivot to leading the firm versus leading investing, how
did you make sure that innovation was a part of what you were going to be doing? And
how did you get other people in the firm to go along with that?
Tom Faust 7:09
Well, when I made the transition from managing money to managing people, I learned
pretty quickly that, in many ways, managing money is a lot easier than managing people.
The lessons of what makes a good investment, many of those carry over to what makes
a good business strategy. But it doesn't really tell you much about how to motivate
people, or how to get other people to do their best work. Helpful in developing some
sense of a leadership style that might work and helpful in a sense of thinking about
strategy and the long-term business implications of particular strategies. But certainly
for me, the leadership of people was mostly learned by doing. Fortunately, I had some
quite strong mentors: Dozier Gardner, who I mentioned previously, had been president
and CEO, and Jim Hawkes, who had hired me to Eaton Vance and became chairman and CEO
in late 1996, about a year and a half after I joined management to head the equity
team. One of the things that, when I became part of leadership, I thought about was:
what is our competitive advantage? How can we be successful in the investment management
business? At the time, our equity business was quite small. I think we managed under
$2 billion of equities.
One of the things that we had had some success with was what we today describe as "tax-managed investing," that is, managing funds and separate accounts for after-tax returns. Recognizing that taxes can take a significant bite out of investment returns and that, managed in a particular way, you can minimize the effect of taxes. Over the first couple of years that I was in a leadership position in Eaton Vance, a big focus of my effort was to introduce and bring to market a series of new products that primarily were focused on tax efficiency as a source of differentiation. We came out with a lineup of Eaton Vance tax-managed funds, where we developed a tagline "mutual funds for people who pay taxes." We talked about how you want to have one type of fund in your 401k plan or your retirement plan account where you're not subject to paying taxes on investment income and gains, but for your money that's managed outside of those things you want to invest in a tax-efficient way.
I certainly felt that my background in engineering helped. Prior to going to business school, I spent two years working for International Paper doing new product development. A very different industry − I was developing new engineered wood products. But in many ways I found that the lessons of how you think about opportunities for new investments it doesn't matter whether it's new structured wood products, or whether it's new mutual funds. It's a similar type of development exercise. One of the things that I found was that not every idea works. Another idea I found was that persistence is incredibly important. But probably most important is that innovation can be contagious. It can become part of how people think about their job. And a very rewarding and fulfilling aspect of a job is the idea that we as a firm compete based in part on our ideas, and that it's everyone's job to help come up with ideas for new products, new strategies, new ways to compete.
Jim Hawkes, maybe not coincidentally, similar to me had an engineering background. For the period when Jim was CEO, which was from 1996 to 2007 − when I took his place − I was functionally the number two under Jim. During that period, we had a real flowering of innovation, a whole series of new products in mutual funds, private funds, individual separate accounts, and closed-end funds, many of them built around this theme of tax-efficient investing, but also varying from that capturing a number of different themes. It was a time when we got out first into the market with a series of ideas − taxes matter − and then used that as a platform to build an array of strategies that, through our distribution network, we were able to push out very effectively into the marketplace.
Matt Waller 11:42
So I would like to follow up a little bit more on the person who hired you and the
person that promoted you. First of all, was innovation important to them? Or is that
something you brought to the firm?
Tom Faust 11:54
Innovation was important throughout the history of Eaton Vance. I would say when Jim
Hawkes took over as CEO in 1996, we took it up a couple of notches. That became much
more important to our − the way in which we compete. But it's interesting, when you
think about Eaton Vance, those that knew the firm's history goes back to 1924. Founded
in Boston, based in Boston throughout its history, some would say an old New England
firm, sometimes described as stodgy at different points in its history.
Interestingly, I wasn't the first person from somewhere else to move into the leadership of Eaton Vance. Dozier Gardner, who was head of Eaton Vance when I joined, is from St. Louis. And Jim Hawkes, who hired me and then was my primary mentor, is from Decatur, Georgia. It was probably helpful to my career, but I think it was also helpful to the growth and success of Eaton Vance that we had a bit of an outsider's perspective where we could both build on and honor this record and reputation of Eaton Vance as a strongly grounded firm dating back to the history of the beginnings of investment management in the United States, in Boston, which is one of the historical homes of investment management in the U.S. But bringing a bit of an outsider's perspective and the ability that different perspective brought us to compete differently and to think differently about products and ultimately to innovate with products and strategies that competitors didn't have in the marketplace.
Matt Waller 13:32
One of the things that we really encourage amongst our students in the business school
is to be mentored and to mentor. In fact, in our MBA program we have a formal mentoring
program where alumni participate in serving as mentors. But I always encourage students,
if you're really serious about moving forward in business, always be mentored and
always be mentoring at the same time. I think you learn a lot about how to be mentored
more effectively when you're mentoring others. Mentoring just seems to be so important.
So I'm really curious, was it important in your career? And how did Jim mentor you?
Tom Faust 14:17
Well, Eaton Vance, when my career was developing, did not have a formal mentorship
program. So it wasn't like I ever had an assigned mentor nor was I assigned to be
someone else's mentor. But working with Jim was, for me, incredibly invaluable and
important to the development of my career. It was three things. One was watching him
and seeing how he led. That was one. Giving me an opportunity to model a leadership
style that was very effective. The second was we did a lot of things together, and
many of the new product successes that we had over the 90s and 2000s were really joint
initiatives where Jim and I were jointly doing those. So it was Jim and I as partners
developing many of the things that became cornerstones of Eaton Vance's long-term
success. And then the third was, Jim just giving me the running room to go do my thing.
So I'd say it's modeling, it's partnering and then giving the opportunity for me to
lead and grow and develop. That's what worked for me. I can't say that in all cases
it's going to work for everyone the same way; I'm sure there are many different models
of effective mentoring. Those were the things that were most important for me.
Matt Waller 15:38
Back to making innovation part of the DNA of Eaton Vance, many firms in many industries
recognize innovation is important. It's important to our economy, one of the best
ways to deal with inflation is through innovation, productivity enhancements, and
so forth. But I'm curious, how did you actually instill that as a part of the DNA?
Tom Faust 16:04
That's an interesting question. I think one of the keys to our success in being innovative
is that we didn't have a new product department; we didn't have some group that was
in charge of innovation. It really became everyone's job. Being an investment firm,
generally speaking, your best ideas are going to be things that have strong investment
merit, which the investment people are going to have the best perspective on. And
things that have current appeal in the marketplace. We have got a large sales and
marketing organization. So it's really having the ability to bridge things that the
investment people get excited about. One of the tests we would use is, would you put
your mother's money in that product? Does it have strong investment merit? Is it timely?
Is it operational? But then connecting that to what the sales and marketing organization
is saying: is this distinctive in the marketplace? And then, do they think, ultimately,
that we'll be able to be successful with this product? But then a big part of it is
just execution, having a firm where the leadership believes and understands that one
of the ways we're going to compete is being quicker to market, more nimble than competitors.
And that if that is a firm-wide shared vision, that this is one of the ways that we
can compete, and that's understood by the legal department, who have an enormously
important role in creating new investment products. But if it's understood by the
investment team, if it's understood by media relations, marketing, all the people
that support the sales effort, if everyone understands that being innovative and being
quick to market with value-added products is one of the keys to our strategy and one
of the key ways in which we compete, that is such an advantage in an industry where
most companies don't think like that. It's really not part of the culture of most
investment firms, at least from what I've seen, in the way it was at Eaton Vance.
Matt Waller 18:07
It's really interesting. Thank you. You mentioned something that caught my attention.
You didn't have a product innovation department. And I remember during the quality
movement in the 80s, there was always debate about do you need a quality management
department or not. And one of the arguments against having it was, everybody's got
to recognize quality is important to them, and to the company. It's not up to some
department that's going to come up with the quality of our product. It seems similar
a little bit.
Tom Faust 18:45
I think that's right. Another analogy I would think of in our business is I was always
resistant, as leader of Eaton Vance, to not naming a chief risk officer. Because I
thought it was important for everyone to understand, we don't have a risk department,
everyone on the investment side is critically engaged in risk management. Everyone
in the leadership of the firm is critically engaged in managing risk.
But it was the same − innovation, risk − these are such core concepts to the management of an investment firm, we didn't want to silo those and make those the special areas of attention for a few people. We wanted to build and maintain a culture and have an organizational structure which understood that that's everyone's responsibility.
Matt Waller 19:32
Such a good example of how organizational structure and strategy are so intertwined.
And many times it can be very subtle in terms of how they're intertwined. Because
a lot of times when people have a new strategy, many times they want to create a new
function for that strategy. But in many cases, as this is an example, that can actually
backfire.
Tom Faust 19:58
I think that's right. I think it's also important to have a bit of a culture of impatience
with bureaucracy and an understanding that we need to make decisions quickly and that
we have to make smart decisions, risk-considered decisions. But if we can get to the
right decision more quickly than competitors, that creates enormous competitive advantage.
Investment management is interesting in that there are very few patented ideas. There are a few, but not many patented ideas. So how do you build and sustain competitive advantage? Obviously, having the smartest people that can produce the best investment returns over time is quite important. But that's hard to sustain, particularly over generations of managers. But if you can have it as part of your culture, that you can move quickly. Very often in investment management, the primary first-mover advantage is that our customers, who are mostly financial advisors, financial intermediaries − what used to be called brokers, now are called wealth advisors. To the extent they connect your firm with a particular investment strategy or a particular investment style. So if they think: okay, I have a client that's interested in investing in a floating-rate mutual fund, who do I use? Well, if Eaton Vance was the first into the market with a floating-rate mutual fund that invests in syndicated bank loans, if we were first into the market, and if we've done a good job over time in managing the money, that creates a sustainable advantage. It's much harder to become the market leader in an investment category if you're the third one in, or the fifth one in or the eighth one in. Being the first doesn't always get rewarded, but often it does. Our focus was trying to build our company by creating a series of franchise businesses. We had about 15. If you look at those franchise businesses, some of them were in areas where it was pure investment performance, some of them were areas where we had an advantage that was based on low cost of implementation. But for many of them, the key advantage we had was first, or among the first, to market.
Matt Waller 22:23
Your company, Eaton Vance was extremely successful. So what led up to you wanting
to, or agreeing to, sell it.
Tom Faust 22:32
The decision that we made ultimately to sell the company to Morgan Stanley, which
was announced in October of 2020 and then the transaction closed in March of 2021,
was actually the culmination of a multi-year strategic review that happened primarily
at the level of our board of directors, but involved also the senior leadership of
the firm. What we noticed was that, while Eaton Vance had many strengths, we also
had certain vulnerabilities. And that some of those vulnerabilities we felt particularly
exposed to, given some changes in the industry that were happening at the time. I'd
say the biggest vulnerability we felt was that our business was selling investment
strategies and services almost exclusively in the United States, and very heavily
through financial intermediaries − through broker-dealers and other wealth managers.
And what we were starting to see was that a number of our leading customers, these
intermediaries, were starting to backward integrate into investment management in
a much more significant way. We were concerned that, somehow, as a mid-sized firm,
we might get squeezed out of market access. So that was one factor. Another concern
was that we were looking at a change in generational leadership of the firm, where
there were a number of key people, myself included, that were facing the end of their
Eaton Vance careers due to pending retirement. No one, including myself, was irreplaceable,
but we knew there was a risk in that transition. We also felt that we had a few key
businesses that were potentially at risk given potential changes in connection with
the election that took place in the U.S. in November of 2020: potential changes in
tax law or a different regulatory environment that might make it harder for us to
innovate or might make it more challenging for some of our strategies to compete in
the same way going forward as they had in the past. So it was really a balancing of
thinking about, with an optimistic lens on, the outlook for continued success of Eaton
Vance as a standalone firm versus the threats that we faced as a relatively small
independent, mid-sized company in a consolidating industry. When we became aware that
Morgan Stanley was interested in acquiring Eaton Vance, we really thought this was
in many ways the perfect marriage for us, because it connected Eaton Vance to a firm
that has a global brand, whereas Eaton Vance was not a global brand. And which has
the strongest financial intermediary wealth advisory network in the U.S., bar none.
With that transaction, we immediately eliminated our biggest worries as an independent
firm, which is really market access in the U.S. and the ability to access customers
outside the United States. Those go away immediately with the close of that transaction.
And because we're part of this much bigger organization, the resources that we thought
we would need to build some of our leading brands − our Parametric brand, which is
a leader in investment implementation − that the ability to shoulder those investments
as part of Morgan Stanley would be much greater than if we were operating on a standalone
basis.
Matt Waller 25:57
In closing, I want to again congratulate you on your upcoming induction into the Arkansas
Business Hall of Fame and your selling of Eaton Vance Corp. But I would love for you
to take a moment, since you're an Arkansan and many of our students are Arkansans
as well, what advice do you have for students going forward?
Tom Faust 26:20
I've got four children. So I've had a little bit of practice in giving advice to students.
That sometimes is not appreciated, but the things that I focus on are, first and foremost,
find out what's important to you in life, and make sure that you position yourself
for success as you define that. For me, I wanted to have a family. Fortunately, I
married a great woman and have had a wonderful family life. But we organized our family
life in such a way that I was able to achieve a successful business career. For those
that are interested in building a successful business career − which I'm assuming
is most of our audience − some of the key lessons that I think about first is: when
I went off to MIT, as a 18 year old from Helena, Arkansas, it was a pretty big and
different world and one of the things I remember hearing from the president of MIT
at the time, a man named Jerome Wiesner, was the advice that there are only two things
of importance that you're going to learn during your MIT career. One of them is how
to work hard. And the other one is how to think clearly. If you want to be successful
in business, or engineering or entrepreneurship, my best advice is, while there may
be shortcuts, the most assured path to success probably involves a fair bit of work.
So find something you care about, and work passionately in pursuit of that. That's
advice number one. Advice number two, think clearly. I've still struggled over the
years what exactly that means. Some days, I think more clearly than others. To me,
it means mostly having an analytical mindset to look at the world of business or investing
as a series of problems to be solved, opportunities to be achieved. And that if you
can think clearly and think quickly, and make decisions decisively, that gives you
such an advantage over most everyone else. There's a lot of fog in the thinking and
the actions of companies. It's just hard to get good decisions, good ideas. In many
ways the idea is the easy part. But taking an idea, and then building that into an
effective business that's successful − that's creating revenues and profits, that's
creating opportunities for clients and business partners, opportunities for investors
in your firm and for your fellow business leaders and employees − that to me was incredibly
gratifying as a way to spend my professional life. But I tie it back to those two
sets of things that I think I learned at MIT: work hard and think clearly. And that's
the best path I know to business success.
Matt Waller 29:12
Well, thank you so much, Tom, for those words of wisdom for our students, really appreciate
it. And I look forward to seeing you in the Walton College later this month for a
visit, and appreciate you and take care.
Tom Faust 29:27
Well, I very much look forward to it. Thanks very much, Matt.
Matt Waller 29:30
On behalf of the Sam M. Walton College of Business. I want to thank everyone for spending
time with us for another engaging conversation. You can subscribe by going to your
favorite podcast service and searching "be epic." B-E-E-P-I-C.
