Bridgeway Capital Management has been making waves in the investment industry for more than 20 years by giving 50% of its profits to charity and capping top salaries.
It’s part of a down-to-earth strategy designed by Bridgeway’s founder and chief investment officer, John Montgomery. He encountered plenty of resistance when he first set up his firm and people called his ideas “crazy” — but those same ideas and values have helped attract top talent and investors to his firm.
In an interview with Katherine Klein, vice dean of Wharton’s Social Impact Initiative, Montgomery discusses his core values and the evolution of Bridgeway Capital Management over the past two decades.
An edited transcript of their conversation appears below.
Katherine Klein: John, you founded Bridgeway Capital Management 22 years ago and your firm grew to manage billions in assets. Many people are drawn to your firm because you are values-driven, and your website says your core values are: ‘integrity, performance, efficiency, and service’. What does it mean to live these values?
John Montgomery: Well, 22 years ago I took a lot of time to write a mission statement for Bridgeway. I took a lot more time than most people take in starting a venture. I really put a lot of thought into these values.
Klein: So this was baked in from the beginning.
Montgomery: It was baked in from the beginning. Our mission statement has been tweaked a bit — some words are different and the wording has been improved — but the four business values are unchanged, and they’re still in that specific order.
Integrity is at the top of the list. We like to say integrity trumps the other values. But it’s probably the hardest to measure and the hardest to track. For example, in a service industry there are some ways to measure service, including interviewing your clients and looking at metrics. And there are clear metrics to measure investment performance. But integrity is different. It means we don’t lie, cheat and steal. That’s a good start. But, then again, almost everybody in every industry walks around thinking they’re a good person. So we often think about this, making sure ‘integrity’ is not just a word on a piece of paper.
“We like to say integrity trumps the other values. But it’s probably the hardest to measure and the hardest to track.”
Let me describe a couple of ways in which we work to maintain our integrity. First of all, there is the hiring process. If you want your company to have integrity, hiring is key.
Klein: So you’re not just asking people, “Are you honest?”
Montgomery: That’s right. A simple answer isn’t sufficient here.
During the hiring process we also use role-play to understand the integrity of a potential hire. The role-play is intended to paint people into a corner of either telling a white lie or being disloyal to the company. You can see people get really nervous as they do this role-play, thinking, “Uh-oh. Now what do I do? If I’m disloyal to the company I’m probably not going to get this job. But it’s just a little white lie.” At Bridgeway, our standard is you don’t lie. Being true to your word is very, very important. We’re continually trying to move towards the highest possible standards of integrity.
Additionally, we want to ensure integrity is integrated into our business operations, so we have an internal slogan: “What’s in the best long-term interest of current investors at Bridgeway?” Every word in that sentence is very specific. We want to focus on the long-term, but sometimes you can lose out on revenue-generating opportunities when you are serious about the long-term. We also focus on current investors, not the new ones that we hope to get. So that question helps us focus our time and efforts. We want our investors to know that when they’re not in the room, we’re still thinking about their best interests.
When we make operational decisions, we’ll sometimes write the four business values on the board and ask ourselves, “How does this inform our decision?” Or we ask, “Is there any way in which our slogan is being compromised by entering into this operation?”
Klein: Your firm has some strong, defining and distinctive practices that reflect your values. First, Bridgeway donates 50% of its profits to support charitable and non-profit causes and organizations every year. Second, you maintain a seven-to-one salary ratio for all full-time employees. That means the top employees are making seven times what your lowest paid full-time employee is making. But, I just used the word “employees”. You never use the word employees. Right? You refer to the people who work at Bridgeway as “partners,” not employees, because the root of the word “employee” actually suggests that people are being used.
Montgomery: That would be a third distinctive practice at our firm. That’s three.
Klein: Tell us about those decisions to donate 50% of your profits, have a seven-to-one salary ratio and avoid using the word “employee.” How do these practices reflect your values and create a distinctive Bridgeway culture?
“… We ask, ‘Is there any way in which our slogan is being compromised by entering into this operation?’
Montgomery: In terms of donating 50% of our profits, frankly, it was a very naive idea from the beginning. I had been thinking about leaving my secure job in another industry to start an investment advisory firm in an industry I’d never worked in before. Most people don’t make that kind of transition. But I thought I had some investment skills and I had been doing it personally for six years and I had reason to believe using quantitative investment methods would be a good idea. It’s a low-cost way to invest, and if you have lower costs, then you have very strong profits.
As I was considering the structure of this new company, I thought, “This should be a very profitable company. What will we do with that money?” My wife and I were 37 at the time and I believed we had already achieved ‘the American dream’, living a life beyond what we had aspired to when we were courting in college. We had a house, we had a car, we had children and we were on our way to saving enough money for their college education. We were on track. But I had some reservation about having too much. Too much isn’t always a good thing.
Klein: I’m surprised to hear an investment manager say that, but there you go!
Montgomery: That’s true. You’re right. It’s unusual. So I had this dilemma and conversation with my wife and we reasoned that if we gave half the profits away, there would be less money, and it wouldn’t become a big problem.
That was our thought process. It wasn’t any more complicated than that. I didn’t go out and do surveys, like I do for some things. It was just a thought that became woven into the fabric of Bridgeway. At the time, I was in the process of writing my mission statement and this idea of giving back was very powerful. I believed it would attract people to our organization with similar values.
At the time, I thought I had 12 good ideas when I started Bridgeway. Nine of them probably weren’t marketable, but two of them were and so we’re here today. The one concept of giving back is a pretty naive idea, but it’s powerful. It’s ten times more powerful than I believed at the time.
Klein: Why has this action of giving back been so powerful?
Montgomery: Sometimes I think if more businesspeople could get inside my head and see how powerful it is and how fun it is, corporate philanthropy would skyrocket.
It’s great for business because we are able to attract more people to work with us. We know from research that the millennial generation is more attuned to this idea of wanting to make a difference. We tell these people, “If you want to make a seven-figure salary, you can do that in our industry. But you can’t do that at Bridgeway because we have a seven-to-one cap on salaries. But you share in the profits through our stock ownership plan.” This profit-sharing plan applies to all the full-time partners at Bridgeway. This attracts people and then we keep them longer.
We’re not trying to create golden handcuffs to keep people in place. We’re trying to create an amazing place to work where people can provide investment advisory services and give back at the same time. On my team — the investment advisory team — we’ve lost one portfolio manager or researcher in 20 years.
Klein: Amazing. So despite this seven-to-one cap — or maybe because of this cap — you’re still able to attract great talent.
Montgomery: Unequivocally. In the early years, people told me I was crazy and I would lose employees. But we haven’t lost anybody at Bridgeway over this issue. We’ve had people move away for family reasons or other reasons, but turnover is quite low.
Klein: How do you think the seven-to-one salary ratio affects the dynamics within your company and relationships among your partners?
“‘No’ is an important word in life. Why would you not take time to focus on what you’re really good at and what you’re passionate about?”
Montgomery: It sends a signal that we’re about something else. Information about my salary is publicly available — it’s easy to live off and nobody’s going to cry about it. But it’s lower than others in the industry.
The president of our company could easily make twice as much at another place. But could he have the same quality of life? Would he have the opportunities to give and time to serve on boards? Potable water is an issue he’s passionate about. He’s done some amazing things in this area.
We also hear stories from Bridgeway spouses about what this firm has meant to their lives. It makes you realize you’re onto something good.
Klein: You have a passion and a deep commitment to ending genocide. But that’s not the only kind of work that you’re funding through the Bridgeway Foundation. So how do your partners influence your philanthropy?
Montgomery: It’s a creative process at Bridgeway that’s still evolving. We are very happy to borrow ideas from other people.
We have something called a “designation,” which is a certain amount of money that every partner has to give away. We send that money into their donor-advised funds. In the early years at Bridgeway, this was problematic because there are certain things we wouldn’t want to support. But we trust these people enough to have them as partners at Bridgeway. So the donor-advised funds provide a way to give money and then the partners control where the money goes. We also have affinity groups and committees at Bridgeway that allow groups of partners to get together to focus on certain issues, including microfinance, water and education. These are areas that partners are particularly interested in.
My personal area of passion is peace-making and ending genocide. This is a life-calling and it’s a big deal for me. I’m very passionate about it and the other partners support this. But everybody can focus on different areas based on their own life experiences. It took us about 10 years to figure this out and get partners more involved in the process. The money is part of it, but it’s also about volunteering and serving on boards.
Klein: Many people may hear your words and think that these ideas and values sound great. But then they may think that they’re too busy for these kinds of initiatives. What do you say to those who may be attracted to what you’re doing, but simultaneously think that it’s too difficult and time consuming?
Montgomery: I think about it in terms of life stages. At 20, you think you’re too young, too inexperienced, people won’t listen to you and you have student loans to pay off. At 40, you think you have a big mortgage, kids to pay for and lots of other demands. At 80, you think you’re too old and people won’t listen to you.
Essentially, there is no time in life or situation where you either can or can’t do the right thing. It’s a decision that you make about how you spend your life. At any stage, you should live your life fully. Focus on something important and if you’re too busy, make the decision to reduce that busy-ness.
At 37, I had a kind of breakthrough where I was too busy and it became clear I was too busy. I took some dramatic steps to withdraw from certain commitments. You can’t say an authentic “yes” if there’s no possibility of a “no”. So “no” is an important word in life. Why would you not take time to focus on what you’re really good at and what you’re passionate about?
People think they’re trapped in. You’re not trapped in. And you don’t have to be rich. You don’t need a lot of resources to make those transitions.