Charles E. "Ed" Haldeman manages money the way he plays tennis. Putnam Investments' lanky new chief executive doesn't hit hard, keeps the ball in play, avoids mistakes, and wears down opponents by staying on court a long time.
That's just as well. With the Boston mutual-fund giant still hemorrhaging $3 billion of assets a month in the wake of trading scandals, he's in a game of survival. Haldeman is grappling with the worst crisis in the old-line firm's 67-year history. Investors have rushed to pull out more than $70 billion of their money. That's a massive 26% of the assets Putnam had on Sept. 30, just before two managers were implicated in the rapid buying and selling of their own funds to the detriment of shareholders. Putnam is also in a knock-down-drag-out row with the Securities & Exchange Commission over potential fines of $138 million as well as an undetermined amount of restitution to shareholders. To compound Haldeman's problems, Massachusetts Commonwealth Secretary William F. Galvin is probing whether Putnam paid improper rebates to some retirement funds, which the firm argues were legitimate. And former Chief Executive Lawrence J. Lasser, who ran Putnam for 18 years before being ousted last Nov. 3, is fighting for tens of millions in pay he claims he is owed.
How Haldeman handles the crisis will have a major impact on the $7.5 trillion mutual-fund industry. Enforcers seem intent on using the Putnam case as a lever to make big changes in the way mutual funds are run in the future. In a partial settlement announced on Nov. 13, the SEC imposed on Putnam rules that the industry has fought for years.
The SEC ordered Putnam to ensure that 75% of fund directors are independent and reelected every five years. Also it set strict limits on employee trading -- and ruled that any illicit trading in the future must be reported directly to fund boards. Other controversial measures may be part of a final settlement, insiders say, including controls on so-called soft dollars -- rebates of brokerage commissions to fund companies, with which they buy research or equipment such as computers -- and incentive payments to intermediaries who sell mutual funds. Unless Putnam and the SEC reach a settlement by Apr. 19, an administrative law judge will fix the penalties. Says Jeff Keil, vice-president for global fiduciary review at fund rater Lipper Inc.: "The SEC seems to be pulling out all the stops to make an example out of Putnam."
The cleanup could transform the industry. Fees of all sorts will be a lot more transparent. Haldeman, for example, is now telling investors exactly how much they're paying in dollars and cents for fees and services. Fund expenses may head lower, though an end to soft-dollar rebates could limit the fall. And fund directors will come under pressure to do a better job in protecting fund shareholders' interests. Putnam directors say they were never told there was a problem -- an excuse that won't fly in the future.
Fallout from the scandal is changing the balance of power in the industry as the big winners and losers emerge. Nowhere is that clearer than in the $2 trillion business that fund families have of managing pension fund and 401(k) retirement money. Putnam, owned by the $12 billion Marsh & McLennan Cos. insurance brokerage and financial-services giant, is still a major player, with $70 billion in assets from institutions, about a third of all those it manages. But now most fund groups touched by scandal, especially Putnam, Strong, and Alliance, are suffering big outflows, just as record amounts of new money -- about $130 billion in the first quarter -- are gushing into untainted firms such as Fidelity Investments, Vanguard Group, and American Funds.
The reason is simple: The pros who place money with fund managers have a fiduciary duty to pensioners and investors, and they're not willing to take any chances. Unlike small investors, who are more fickle, pension-fund managers tend to stick with the funds they select for years on end. Once they bolt, they don't return for a long time, meaning it may take years for Haldeman's turnaround efforts to pay off. Consider Florida's state-pension funds, which pulled $1 billion out of Putnam in February. Says Coleman Stipanovich, executive director of the state's board of administration: "We would certainly not be doing business with Putnam anytime in the near future."
`STRAIGHT ARROW'. Putnam's business model of selling funds exclusively through brokers and financial advisers is under siege. These days, as much as 87% of all mutual funds are sold that way -- including even those of fund families such as Vanguard that don't charge investors the steep loads, or sales fees, that Putnam and others use to compensate advisers. Winning back advisers may prove to be difficult. Says Mitchell G. Rubin, a certified financial planner in Coral Gables, Fla., with more than $1 million of client money at Putnam: "The problem Haldeman has is with folks like me. I'm going to punish them by not doing new business with them."
Can Haldeman save Putnam against such odds? If personal probity were the sole determining factor, the answer would be a resounding yes. Haldeman, 55, an investment manager for 30 years, is widely admired in the industry for his commitment to investors and high ethical standards. Says Philadelphia-based fund consultant Burton J. Greenwald: "He's an absolutely straight arrow. There's no question about his integrity and character." Adds Vanguard Group founder and Haldeman friend John C. Bogle: "If anyone can [fix Putnam], he's the one. But it's not going to be easy."
Probably Haldeman's biggest challenge is to root out the cowboy culture that ran amok during the autocratic Lasser's 18-year reign. The three top goals were: sell, sell, sell. Says Bedda Emous, a certified financial planner with Fiduciary Solutions in Andover, Mass., who hasn't recommended a Putnam fund since 1998: "It was patently obvious that Putnam was a marketing company and not a money management company." Former Putnam salespeople concluded that winning new accounts mattered more than good investment returns. Lasser encouraged a "gotcha" culture. When portfolio managers' returns started to lag, he would send "Lassergrams" -- terse letters on gray paper -- that bred paranoia and resentment. Worse, it encouraged some managers to gamble by taking big risks in the hope of making big returns.
Now, instead of swinging for the fences as Putnam's leadership did in the go-go days of the 1990s, Haldeman has ordered managers to aim for reliable returns over the long haul. Haldeman wants each of Putnam's 54 funds to rank in the top half of its category every year. (On an asset-weighted basis fewer than half the equity funds did in the year through Mar. 31.) In the future, managers will earn bonuses by achieving just that -- and not get a penny more for edging their funds into the top 10%, as they once did. His new goal may sound modest, but mathematically, says Haldeman, it will be enough to push his funds into the top third of comparable funds over three and five years as competitors fall lower. To ram his message home, Haldeman wrote up his "guiding beliefs" on laminated cards that now hang on the walls of managers' offices.
Haldeman's strategy is to hark back to Putnam's roots as a consistent, conservative performer. He has ordained that each Putnam fund must stick closely to its announced mandate -- for example, as a growth or value fund or small-cap specialist. Already, Haldeman has cut his funds' initial fees by 8.7% from 5.75% to 5.25% -- lower than the average of rival load funds -- and promises that expenses for each fund will be kept below the average of competitors. He has banished flavor-of-the-month funds that jump on hot sectors or the latest investing fads. And he has stopped focusing Putnam's ten of millions of annual advertising on its top-performing funds. Says Haldeman: "Our No. 1 mission is to take care of our client's money in a prudent manner. If we do that long enough, people will want to work with us."
At the same time, Haldeman has been putting his own stamp on the firm with a thorough housecleaning of its top echelons. On Apr. 5, Haldeman hired Francis J. McNamara III from rival Boston fund firm State Street Research & Management Co. as general counsel, reporting directly to himself. All told, 10 of Putnam's 20 highest-ranking managers have left in the past year. Haldeman let many of them go, including fund managers Justin M. Scott and Omid Kamshad, who were implicated by enforcers in illicit trading. Lawyers for Scott and Kamshad declined to comment. Others chose to go. In addition, Putnam has shed 13 employees for alleged abusive trading. Says Haldeman: "Several of our senior people had violated a fiduciary trust, and they needed to leave."
Fixing lax internal governance was high on Haldeman's agenda. On becoming CEO, he ordered a review of the trading records of the 12,700 people who had worked at Putnam since 1998. And because most of the abuses arose from the fast buying and selling of Putnam's funds, Haldeman immediately banned employees from selling any fund within 90 days of buying, and a year for funds on which they work. In January, he promised to publish the size of holdings that managers and directors have in Putnam funds.
That same month, he promoted Tony Ruys de Perez to be chief compliance officer, responsible for making sure that employees and clients follow securities laws. The new appointee will report directly to Haldeman and have an office near him in Putnam's downtown Boston headquarters. Compliance duties were previously spread around the firm: The human-resources department kept an eye on employee trading, the trading operation had its own compliance team, and General Counsel William H. Woolverton oversaw some areas. But Woolverton didn't report directly to Lasser and didn't even have an office in the same building. Says an astounded Haldeman: "Legal and compliance were in a Class B building across the street." Fund board Chairman John A. Hill blames the dispersal of compliance responsibility for Putnam's problems. "You've got to have it all in one spot. That could have prevented this," he says.
MISSING THE POINT? The breakdown in enforcement under the former management goes a long way toward explaining why authorities are giving Haldeman and Putnam such a rough ride. A shocking report by Putnam fund directors, published on Mar. 25, alleges that three top execs, including Lasser, had known about illicit trading by fund managers as early as 2000. Putnam told the offenders to stop and laid on an ethics course for employees but took no disciplinary action. In an SEC filing, Marsh Mac said Lasser never told its board, on which he sat, about the problems either. Lasser declined to comment.
For years, Marsh Mac was content to rake in the profits -- $3.7 billion in operating profits over the past five years -- that Lasser garnered at Putnam. Now, some critics say Marsh Mac has failed to give Haldeman the backing he needs. For example, Putnam insiders say Haldeman has been pleading privately with Marsh Mac to settle with the SEC quickly, whatever the cost. In a written statement to BusinessWeek, Marsh Mac said though it might have been more visible at the peak of the crisis, it works with Haldeman "to set the firm's direction, to oversee progress, and to render direct assistance where necessary and appropriate."
Settlement talks with the SEC were bogged down for months because Skadden, Arps, Slate, Meagher & Flom, lawyers representing both Putnam and Marsh Mac, were discussing penalties for alleged irregularities by fund managers, while fund directors were handling talks on how much restitution should be paid to shareholders. Since the end of March, Marsh Mac and Skadden Arps have been handling all the negotiations, aiming to beat the Apr. 19 deadline.
Putnam officials -- including Haldeman -- haven't helped their cause by insisting the damage caused to shareholders by illicit trades was minor compared with other mutual-fund families. Putnam puts identifiable investor losses at just $500,000 and has suggested penalties should be no more than $3 million. Critics say that misses the point. "At Putnam, what was bad is that the managers were trading," says Don Phillips, managing director of fund research firm Morningstar Inc. "The real problem is that they didn't come clean about it at the time." The SEC makes no bones about why it wants a hefty fine. In a Mar. 15 brief, the agency argued: "The need for deterrence compels a substantial penalty in this case."
`HARD-NOSED'. Despite the protracted negotiations, some early signs suggest that Haldeman's strategy may work. After urging investors in November to refrain from putting new money at Putnam, Morningstar changed its advice on Feb. 27 to a cautious buy. Besides, Haldeman has one rescue job under his belt already. In just two years, he turned around the lackluster funds of Delaware Investments -- a Philadelphia mutual-fund outfit with $100 billion in assets, where he was CEO before joining Putnam. When he arrived at Delaware, only 29% of its funds were in the top half of their peer group. When he left, 60% were -- and still are.
Haldeman was originally hired by Putnam in October, 2002, as co-head of investments, with a mission to replicate the sparkling performance he achieved at Delaware. Now his job is to push managers to deliver good, steady returns on the $227 billion of investments that Putnam still handles. So far, the results are mixed. In the year through Mar. 31, some 56% of Putnam's funds were in the top half of their peer group. Bond funds, however, account for most of that performance: Only 36% of Putnam's equity funds topped the halfway point. Says George Putnam, the 77-year-old son of Putnam's founder who formerly chaired the fund boards: "We've had good performance in value and bonds, but it's spectacularly weak in our [once] high-flying funds."
All the same, many observers think Haldeman is making the right moves and has a reasonable chance of success. Says William Sahlman, a professor of business administration at Harvard Business School: "He's managing expectations and going about the business of trying to outdeliver relative to the reasonable expectations he sets." Equally important, says Sahlman, is the "sensible, hard-nosed work of dealing with a crisis" by reassuring nervous staff and communicating what he's doing to change the firm's organization and culture.
Certainly, Haldeman has wrought big changes in the culture he inherited. He says its class system and mind-numbing rules shocked him the most when he arrived at Putnam. Now, Haldeman works from a small, plain office on the same floor as his portfolio managers, not the luxurious space hung with paintings by the likes of Roy Lichtenstein that Lasser occupied in a 12th-floor executive suite. Lunching recently with a group of twentysomethings, he introduced himself as "Ed" -- though he didn't pay their tab.
In fact, lunch and who pays for it used to be sore point with most of Putnam's 5,300 employees. Now, anyone can eat in the eighth-floor executive dining room, provided they pay. Before, Lasser applied a rigid class system. Top execs, many earning millions, enjoyed free lunches every day. Those on the next rung down had two weekly freebies. But lesser mortals ate elsewhere -- and on their own dime. And top female execs got 12 weeks of paid maternity leave, twice as much as other female workers. Now, all get 12 weeks.
Under Haldeman, a myriad of other rules that governed even the most petty items have been swept away. For instance, a senior exec's magazine subscription once required six signatures, including the chief financial officer's. Haldeman plans to suspend the dress code -- suits for men and dresses or pantsuits for women -- for the summer.
Lasser used to hold quarterly meetings for the top 800 officers; Haldeman now opens them to all employees. Rather than read a speech detailing the quarter's highlights, he presides over a more freewheeling give-and-take. At the first confab in January, employees asked whether massive layoffs were ahead (hopefully not, he replied) and whether bonuses could come earlier than the usual end-of-March payout (yes). Indeed, Haldeman guaranteed 2003 bonuses for investment managers at the 2002 level. Bonuses should have been cut because, although the stock market did well last year, Putnam did lousy. (Its 2003 operating income of $503 million was down 10% from 2002 and half of the 2000 record.) The managers were mighty pleased. Lasser would defer large chunks of bonuses for several years to keep employees from leaving. Says Haldeman: "We've done everything we can to remove the hierarchy, policies, and rules, and to trust people more."
Those values were grounded in Haldeman's middle-class family in Philadelphia. His late father owned an auto-tag business that helps get drivers their license plates. His brother now runs it, and his 79-year-old mother still works there six days a week. Always a quick study, Haldeman went to public schools before earning an economics degree from Dartmouth College and then both an MBA and a law degree from Harvard University.
FACE TIME. In contrast to Lasser's imperial command-and-control style, Haldeman delegates a lot. As a manager, he's uncluttered -- his desk doesn't have a single sheet of paper on it. Nor is he the type to pull all-nighters. He didn't do that even at the gravest moments of Putnam's crisis because he believes people aren't productive when they're tired. Try to reach him in the office after 6 p.m. now, and he's likely to be gone.
Still, Haldeman appears to be getting his message across that Putnam fund managers must take care of other people's money rather than rake in riches for themselves. Says Rick Schoff, president of Retirement Plan Advisory Group in Philadelphia, a 401(k) adviser: "You never heard people at Putnam say that before."
Haldeman often refers to Putnam's history when he talks with investors, insisting that the firm is returning to its roots. He shows clients a short video of the founder's son George extolling the virtues of consistency. New TV and print ads feature a portrait of the George Putnam who founded the company with one fund in 1937, three years before Congress enacted the legislation that created the modern mutual-fund industry. Putnam competed against the likes of Wellington and MFS Investment Management then by stressing its balanced approach to investing, symbolized by a logo showing a scale. The Putnam philosophy reaches back even further, to 1830, when founder George's great-great-grandfather, Massachusetts Supreme Court Justice Samuel Putnam, established the prudent man rule -- enjoining money managers to handle investors' money as they would their own -- that still has legal force today.
So far, Haldeman has handled the transition well, confounding early critics who doubted he had enough experience to run the nation's sixth-largest mutual-fund group. He has racked up thousands of air and road miles over the past five months, calling on one large institutional customer after another -- clients such as the state of Washington, the California Public Employees' Retirement System, and the state of Connecticut. Although the meetings were friendly, almost all of the institutions called afterward to say thanks but no thanks. He did have one success, however: Connecticut agreed to keep its money with Putnam in exchange for fees linked to performance.
All the same, Haldeman hopes a bigger payoff will come later. "[The meetings with investors were] worthwhile because we explained to people what went wrong, what we were doing to fix it, and hopefully left on good terms so they'd take our calls in the future and be open to dealing with us," he says. Institutional investors remain guarded. Rhode Island General Treasurer Paul Tavares, for one, says he wants to see stability in Putnam's investment teams, internal safeguards to prevent wrongdoing, and improved performance before he'll put money at Putnam again.
Clearly, Haldeman faces some tricky times. "It's not going to be a lot of fun around here for the next couple of years," says fund board Chairman Hill. Haldeman thinks he can score by serving up better fund returns. Maybe so. But winning back a tarnished reputation is going to take years.
By Faith Arner in Boston, with Lauren Young in New York