How To Ensure That Innovation is in the DNA of Your Company with Thomas E. Faust Jr.

Tom Faust: 00:00:02

Find out what's important to you in life. And make sure that you position yourself for success as you define that.

Matt Waller: 00:00:13

Excellence, professionalism, innovation and collegiality. These are the values the Sam 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.

Matt Waller: 00:00:34

As I mentioned, you're the chairman of Morgan Stanley Investment Management. And you grew up and 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. So 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 if you're interested in Tom's early background, 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. But I will say for your background, it'll help with some of the stories we're gonna look at. Tom joined Morgan Stanley Investment Management in 2021. He has 36 years of experience and 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, 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 one 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: 00:00:51

Thank you, Matt. It's my pleasure.

Tom Faust: 00:03:24

So my job initially, when I joined Eaton Vance in 1985, was following all the public companies in a couple of different industries. The one was the paper and forest parks industry, and other was was healthcare, including pharmaceuticals. And so 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. So we really viewed investing as the process of identifying companies and business plans and leadership teams that we made 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. And when I had the opportunity to transition from an investment role to a leadership role. I found that background and the lessons I've 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 and I got a phone call one morning from Dozier Gardner who was the president of Eaton Vance and asked me to come down to his office. And when those happen, you don't know whether your this is going to be good news or bad news, you try and figure out from the tone of the conversation whether, you know, this is one of these sorry, time you've come to the end of your eight man's career, or 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 was 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, I 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 and during the first 10 years of my career at Eaton Vance, 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: 00:05:58

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. So 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. And 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 are going to be doing? And how did you get other people in the firm to go along with that.

Tom Faust: 00:07:09

Well when I made that 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 and the lessons of what makes a good investment, many of those carryover 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 Gartner, who I mentioned previously had been president CEO, Jim Hawkes, who had hired me to Eaton Vance became chairman and CEO in late 1996. So about a year and a half, after I joined to head the equity team. But one of the things that when I became part of leadership, I thought about was what is our competitive advantage? And 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. And 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. And so 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. And so we we came out with a lineup of Eaton Vance tax managed funds, where we, we developed a tagline mutual funds for people who pay taxes, and we talked about, you want to have one type of funds 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. Prior to going to business school, I spent two years working for International Paper doing new product development, very different industry. I was developing new engineered wood products, but in many ways I found 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. And 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. And 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. And Jim Hawkes, maybe not coincidentally, similar to me had an engineering background. And I, 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. And during that period, we had a real flowering of innovation, a whole series of new product, and mutual funds and private funds and individual separate accounts, enclosed in 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 use 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: 00:11:42

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: 00:11:54

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 notches, and 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 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 in its history. Interestingly, I wasn't the first person from somewhere else to move into the leadership of Easton Vance, Dozier Gardener, 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, this record and reputation of Eaton Vance as a strongly grounded firm dating back to the history of the beginnings of our investment management in the United States, in Boston, which is one of the historical homes of investment management in the US. 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 to innovate with products and strategies that competitors didn't have in the marketplace.

Matt Waller: 00:13:32

One of the things that we really encourage amongst our students in the business school is to be mentored, and to mentor. In fact, our MBA program we have, 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: 00:14:17

Well, Eaton Vance, when my career was developing, did not have a formal mentorship program. So it wasn't like I ever had a assigned mentor nor was I anyone else's 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 so given me an opportunity to model 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 the 90s In 2000, we're really joined 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 all cases, it's gonna, it's gonna 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: 00:15:38

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: 00:16:04

That's an interesting question, I think one of the ways that 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. And 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 appeal in the marketplace, we got up large sales and marketing organization. So it's, it's really having the ability to bridge things that the investment will get excited about, yeah, one of the tests we would use would, would you put your mother's money in that product? So does it have strong investment merit? Is it timely, is it operationally, 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 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 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, most companies don't think like that. It's really not part of the of the culture of most investment firms, at least from what I've seen in the way it was at Eaton Vance.

Matt Waller: 00:18:07

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, you know, 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 qualities 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. seems similar a little bit

Tom Faust: 00:18:45

I think that's right. And I guess 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 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 investment firm, we didn't want to silo those and make those the special areas of attention for a few people. We want to build and maintain a culture and have an organizational structure, which understood that that's everyone's responsibility.

Matt Waller: 00:19:32

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: 00:19:58

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, risks considered decisions. But if we can get to the right decision more quickly than competitors, that creates enormous competitive advantage because 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 the smartest people that can produce the best investment returns over time is quite important. But that's hard to sustain, typically 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 were 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, 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 invest in and 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 event, much harder to become the market leader in an investment category, if you're the third one, and or the fifth one, 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. So 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 was areas where we had an advantage that was based on low cost of implementation. But for many of them, the key advantage we have was first or among the first to market.

Matt Waller: 00:22:23

Your company, Eaton Vance was extremely successful. So what led up to you wanting to, or agreeing to sell it.

Tom Faust: 00:22:32

So the decision that 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. And what 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. And we were concerned that somehow as a mid sized firm, we might get squeezed out of market access. So that was sort of 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 US in November of 2020. potential changes in tax law or 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 part of a relatively small independent company, midsize company, in a consolidated industry. When we became aware that Morgan Stanley was interested in acquiring Eaton Vance, we really thought this was in many ways the perfect marriages 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 US, bar none. And so with that transaction, we immediately eliminated our biggest worries as an independent firm, which is really market access in the US and 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: 00:25:57

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 core. 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: 00:26:20

So I've got four children. So I've had a little bit of practice in, in giving advice to students that sometimes is not appreciated, but the things that I focused on are maybe 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, 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 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 sort of 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 or 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 of the actions of companies. It's just hard to get good decisions, good ideas, the main ways that 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 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 those two sets of things that I think I learned that MIT, work hard and think clearly. And that's the best path I know, to business success.

Matt Waller: 00:29:12

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: 00:29:27

Well, very much look forward to thanks very much, Matt.