Rebalancing Putnam

May 30, 2006
Kevin Divney needed to let off steam. It had been a tough few months at his company, Putnam Investments.

    Weeks earlier, on October 28, 2003, Massachusetts Secretary of State William Galvin and the Securities and Exchange Commission each had filed civil complaints against the Boston-based fund company. They alleged that Putnam had allowed portfolio managers to skirt corporate policies by rapidly trading its funds and allowing certain clients to do the same.

    In the days that followed, the company’s CEO of 18 years, Lawrence Lasser, was forced out along with several portfolio managers. Even though the new CEO, Charles "Ed" Haldeman, was working on a settlement with regulators, states and large companies with pensions that Putnam managed were pulling money out hand over fist.

    By November 10, 11 states, including Massachusetts, which Putnam called home, had yanked $6 billion from the firm.

    To get his mind off things, Divney, managing director and chief investment officer for the midcap growth equity team, decided to duck out during lunch and go to the gym. On his way out, he ran into Haldeman.

    "Here I am sneaking out with my gym bag during lunch and I run smack into the new CEO," Divney recalls. "And he says to me, ‘Kevin, going to the gym? Wish I could go with you.’ "

    Haldeman’s laid-back attitude might have seemed counterintuitive for the new CEO of a company in crisis. But it’s his focus on creating more balance between work and life that is crucial to getting the company back on track, he says.

    "It seemed to me that we should make it less difficult for our employees because this industry is already stressful enough," says Haldeman, 57. Before joining Putnam as co-head of investments in 2002, Haldeman was CEO of Delaware Investments, a Philadelphia-based money management firm.

    The goal of that balance, Haldeman says, is to attract and retain the best people in the industry. Traditionally companies rely on compensation to do that, but Haldeman believes that’s just part of it.

    "It’s more important to have a culture that people want to devote their lives to," he says.

    Many firms respond to breakdowns in ethics by adding more rules and regulations. But under Haldeman, Putnam has dismantled much of the rigid culture that had dominated the company.

    From removing layers of management to adjusting compensation to focus on long-term performance, Putnam has established a work environment that encourages its 3,000 employees, rather than dictating to them.

    In an industry where there’s constant pressure to generate returns, this is no small feat, says Jeff Keil of Keil Fiduciary Strategies, a mutual fund consultant in Littleton, Colorado. "Often in financial services there is a mentality of ‘How big is the fine?’ But Putnam is focusing more on long-term results," he says.

    Three years have passed since the scandal. Total assets at Putnam, a subsidiary of New York-based professional services company Marsh & McLennan, are at $191 billion, $64 billion of which is with institutional clients. On the institutional side, that’s up from $53.7 billion at the end of 2004—a good sign, because institutional clients are often the most cautious investors.

    In October 2004, the Massachusetts Pension Reserves Investment Management Board, one of the first state funds to drop Putnam after the scandal, rehired the company’s small-cap team to manage $800 million.

    "We are convinced that they are much more focused on investment performance," says Michael Travaglini, executive director of the Massachusetts fund.

    After seeing 30 portfolio managers leave from 2003 to 2005, half of whom were forced out, the company’s annual turnover rate has come down to 11 percent, compared with the three-year average of 21 percent.

    And the tainted image of Putnam’s former self has started to fade, says Dan Kreuter, president of DAK Associates, a Conshohocken, Pennsylvania-based financial services recruiter. "There are a lot of good people now that would look at Putnam that would not have considered them a few years ago," he says.

Responding to scandal
    At 7:30 a.m. on Haldeman’s first day as CEO, he began holding 45-minute meetings with groups of employees to discuss what had happened and to answer questions. Later that week, he visited employees at Putnam’s Andover and Franklin, Massachusetts, offices to do the same.

    "The communication was the best I had ever seen in the six years I had been at the company," Divney says. "Rumors didn’t have time to manufacture themselves because you had the information before a rumor even started."

    Communication has become a trademark of Putnam’s new culture under Haldeman. While Lasser held quarterly meetings for the company’s 800 officers, Haldeman opted for all-employee meetings, where he and other executives talk for 15 minutes and then open the session up for questions from employees for 30 minutes.

    Haldeman also began sending out weekly e-mail updates to employees. He continues those e-mails on a biweekly basis.

    "Employees had said that they didn’t feel like there was enough openness and transparency at the company," Haldeman says.

"One Putnam"
    In April 2004, Putnam agreed to pay $110 million to settle accusations leveled by the SEC and Massachusetts regulators. Rapid trading of mutual funds, also known as market timing, refers to the practice of traders jumping in and out of funds in an attempt to take advantage of inefficiency of fund pricing. While not illegal, it causes an increase in fund expenses, which hurts long-term investors, and thus is banned by many fund companies, including Putnam.

Creating more balance between work and life is crucial to getting back on track, CEO Charles "Ed" Halderman says. "... We should make it less difficult for our employees because this industry is already stressful enough."

    As part of its settlement, the fund company agreed to a number of corporate governance measures, including mandating that portfolio managers who buy Putnam funds hold them for at least 12 months, a promise no other major fund company has agreed to make.

    But stepping up compliance was only part of Putnam’s response. Haldeman recognized that there was something in the company’s culture that allowed the trading practice to happen. Because of the firm’s intense focus on short-term gains, the portfolio managers broke Putnam’s market timing rules, and executives allowed it. "It was an extreme type-A culture," Haldeman says.

    Putnam, like most financial services companies, wanted the best and most ambitious and thus ended up with a fiercely competitive environment.

    "When you have an intense environment like that where it’s all about winning and getting the most you can, a small number of people can cross the line," Haldeman says.

    There also was a strong hierarchy to support this culture. In the old Putnam, Lasser and three other top executives ran the company from the 12th floor, where no other employees worked.

    "It was literally cocooned off by doors. The only reason you would go up there is if you were summoned," Haldeman says, "and usually being summoned was a bad thing."

    Lasser had asked Haldeman to join him on the 12th floor when he came on board, but Haldeman refused. And a year later when he became CEO, he stayed in his office, which is in the middle of the investments area.

    Within days of taking over, Haldeman drafted guiding principals for the company. These values, dubbed "One Putnam," include personal integrity, mutual respect and the highest professional standards. Haldeman had managers review the values with their groups, and in January 2005, Putnam introduced an orientation program for new hires that discusses the values.

    Creating "One Putnam" required a flattening of the organization, which meant eliminating several management positions. Under Lasser, there were many people whose jobs were to manage other employees, and Haldeman wanted to change that.

    "To retain and attract the best people, it’s necessary to provide them with autonomy and independence to make decisions," he says. "When people are spending all of their time writing up reports on their activity, we lose a lot of their productivity."

    Within 12 months, Putnam reduced its staff by 11 percent, including 25 of the top 50 highest-paid executives. "We replaced all but two members of our management team," Haldeman says.

    Divney, who used to spend two to six hours a week in meetings, says he and the other team leaders now meet only once a month, and will cancel meetings if there is nothing to talk about.

    "Our stress now is focused on beating the markets," he says.

Reshaping a culture
    The flatter organization has allowed for more collaboration among departments, which was unheard of in earlier years. Putnam, like many fund companies, has three divisions: one dedicated to retail or individual investors; another dedicated to institutional investors; and a third focused on international partnerships.

    "In the past these businesses worked in silos, with their own products and strategies," says Sandra Whiston, head of institutional sales.

    By working together, there now are not only more opportunities to cross-sell products, but employees are increasingly moving into other divisions within the company, she says. In fact, Whiston currently is hiring for a few positions and is in talks with some candidates in the retail division. "That wouldn’t have happened 10 years ago," she says.

    By opening up the organization so that employees can move between departments, Putnam is also able to position itself uniquely when recruiting at colleges and universities, she says. And by stressing the ability to grow within the organization, Putnam is better able to retain talent.

"There are a lot of good people
now that would look at Putnam
that would not have considered
them a few years ago."
--Dan Kreuter, president,
DAK Associates

    To create a more collegial environment, Haldeman got rid of the firm’s formal dress code in favor of business casual.

    "The dress code seemed to create its own hierarchy, in that the highest-level people wore the very good suits with the cuff links," he says. "By implementing business casual, we wanted to send the message that the organization didn’t focus on hierarchy and titles, but rather substance over form." Also, he says, many of the younger employees view business casual as a perk.

    Haldeman also replaced the executive-only dining room with an employee cafeteria. The dining hall, which looks over a park, is reminiscent of a high school cafeteria, with employees joking with one another in one corner and poring over papers and debating investment theories in another.

    Haldeman, who is based in the Boston headquarters, tries to grab a bite there whenever he’s not traveling. He chats with employees and their kids, who often visit. That’s a stark difference from his predecessor, observers say.

    "I have spoken to portfolio managers who said that Lasser didn’t even know their names," says Laura Lutton, an analyst with Chicago-based fund researcher Morning­star.

A new approach to compensation
    One concern that many employees voiced to Haldeman was the lack of transparency in compensation decisions. People said decisions were made by a small group of executives behind closed doors. "Since they didn’t know what formulas were being used, they assumed it was based on politics," Haldeman says.

    Tensions about bonuses were particularly high in the months after the scandal broke. This was understandable, given that for many employees, bonuses make up 90 percent to 95 percent of their compensation.

    To ease stress, Putnam gave out 2003 bonuses two months early, in January of 2004. And the company committed to keeping bonuses at 2003 levels for the next two years.

   Putnam also removed the three-year vesting requirement from the bonus program so that employees could receive their bonuses immediately. "We didn’t want people to feel trapped into staying with the company," Haldeman says.

    Instead of having the top executives decide the bonuses for every employee, Putnam gave its managers ownership of the process.

    By doing this, not only do employees feel more comfortable that their bosses, who know them, are making decisions about their compensation, but it also saves a lot of time, says Richard Tibbetts, head of human resources. The decision-making process for compensation was cut by more than half from 90 days to 30 to 45 days.

    Haldeman also eliminated the huge differentiation between how much senior management makes and what everyone else gets paid. "Today upper management, including myself, gets paid less than half of what the senior management team was paid in 2000," he says. For example, in 2004 Haldeman’s total compensation was $13.6 million, compared with the $35.2 million Lasser made in 2000.

    To prevent portfolio managers from making overly aggressive trades to get their funds’ performance among the top 1 percent for the year, Haldeman established a compensation program that rewarded long-term consistent performance, as opposed to "a home run in a short time," he says.

    Previously there was no set formula—at least not one that was shared with the portfolio managers—about how their compensation was determined. But it was understood that getting their funds’ performance to the top percentage of their peer group was a goal. That meant, for example, that small-cap managers fought to make their funds’ performance among the top 1 percent of all small-cap funds. Under the new program, implemented in 2004, one-year fund performance accounts for 20 percent of a portfolio manager’s total compensation, while three- and five-year performance each account for 40 percent.

    Furthermore, portfolio managers have incentives to get in the top half of their peer group’s performance. "They get nothing more if they are in the top 2 percent," Haldeman says.

    In an industry where making money is paramount, such a long-term approach is almost unheard of, Keil says.

    For Divney, the long-term focus on performance eases the stress. "Now I feel like when we are talking about improving performance, it’s much more consultative and less ‘gotcha,’ " he says.

Performance pressure
    While employees agree that Putnam is a nicer place to work today than it was five years ago, time will tell whether a better culture means better performance.

    So far, the numbers are promising. In 2005, 47 percent of the firm’s funds were in the top half of their peer group, compared with 39 percent in 2003, according to Lipper, a provider of mutual fund research. Twelve percent were in the bottom quarter of their peer group, compared with 25 percent in 2003.

    It’s going to take time, however, before institutional clients will feel comfortable putting money with Putnam, observers say. When looking at five-year annualized returns of Putnam funds, only 36 percent rank in the top half of their peer group, while 32 percent are ranked in the bottom 25th percentile.

    But at least the company’s employees feel like they have their sights set on the right goals.

    "Now the energy we spent competing internally is redirected to compete externally," Divney says. "Like I tell my team: The problem is not inside the building, it’s outside the window."


A recent survey of 1,121 managers and human resources experts from around the world found that pressure to meet unrealistic business objectives is the top reason employees break the rules.
What are the top three factors that are most likely to cause
people to compromise an organization’s ethical standards?
Pressure to meet unrealistic business objectives/deadlines 69.7%
Desire to further one’s career 38.5%
Desire to protect one’s livelihood 33.8%
Working in environment with cynicism or diminished morale 31.1%
Improper training/ignorance that the act was unethical 27.7%
Lack of consequence if caught 24.3%
Need to follow boss’s orders 23.5%
Peer pressure/desire to be a team player 14.9%
Desire to steal from or harm the organization 9.5%
Wanting to help the organization survive 8.7%
Desire to save job 7.9%
A sense of loyalty 6.9%
Source: "The Ethical Enterprise," a survey commissioned by the American Management Association andconducted by the Human Resource Institute

Workforce Management, May 22, 2006, pp. 1, 18-22 -- Subscribe Now!