Franklin's Succession Plans May Overshadow
(Adds closing stock price.)
San Mateo, California, April 23 (Bloomberg) -- Franklin
Resources Inc. investors searching for clues about who will
succeed Chairman and Chief Executive Charles B. Johnson, 70, might
study the bronze statue in company headquarters of Benjamin
Franklin reading a book. The pages are blank.
Ever since Johnson's eldest son, Charles E. Johnson, 46,
resigned after his arrest in September on domestic violence
charges, the future leadership of the U.S.'s fourth-biggest mutual
fund company has been unsettled. Johnson's other son, Greg
Johnson, 41, is co-president of Franklin.
The succession issue risks overshadowing earnings that are
outperforming rivals. Analysts expect Franklin to report fiscal
second-quarter earnings of 44 cents a share, according to Thomson
Financial. The anticipated 4 percent decline in profit compares
with about a 30 percent drop at rival T. Rowe Price Group Inc.
``The Johnson family has placed sons in executive positions
and I don't think that's a positive for shareholders,'' said
Christopher Bonavico, manager of the $84 million Transamerica
Premier Growth Opportunities Fund, who doesn't hold Franklin
shares. He instead owns shares of competitors Legg Mason Inc. and
Franklin's board of directors has no timetable for making a
decision, said Martin Flanagan, 42, who's co-president with Greg
Johnson, in an interview.
``They're making sure we have a deep bench and things seem to
be working well for us,'' Flanagan said. ``At some point, Charlie
and the board will resolve that.''
Franklin, the largest U.S. manager of municipal bond funds,
has done better than most competitors because of the San Mateo,
California-based company's emphasis on tax-free bonds and stock
funds that buy beaten down shares.
Between 2000 and 2002, shares of Franklin gained 6.3 percent
as the Standard & Poor's 500 Index slumped 40 percent and the
Putnam Lovell NBF U.S. Asset Manager Index fell 7 percent.
Franklin's assets under management increased 10 percent to
$258 billion in the three years ended Dec. 31. By contrast, assets
industrywide declined 6.7 percent. Franklin's assets included
$52.1 billion of municipal bond funds and $81.4 billion of
international stock funds, mostly invested at Franklin's Templeton
Asset Management unit bought in 1992 for $913 million.
Shares of Franklin are up 4.9 percent this year, compared
with the 4.5 percent gain in the S&P 500. The shares lost 18 cents
to $35.75 in composite trading on the New York Stock Exchange
Succession ``is absolutely a concern,'' said Bill Katz, the
head of equity research at Putnam Lovell NBF Securities. Johnson,
who's the son of the company's founder, turned 70 in January. He's
three years younger than Fidelity Investments Chairman Ned
Johnson, who's no relation to the Franklin Johnsons.
Charles B. Johnson gave up his day-to-day operational role
three years ago and created an Office of the President comprised
of his two sons, Flanagan, who was chief financial officer, and
Chief Information Officer Allen Gula. The Johnson family owns
about 32 percent of Franklin.
The office lost half its occupants last year. Charles E.
Johnson is scheduled to appear for a May 21 preliminary hearing on
felony charges of domestic violence, battery and false
imprisonment and one misdemeanor count of child endangerment, and
faces 10 years in prison if convicted on all charges. Gula, 48,
resigned after his wife fell ill.
That's left Greg Johnson and Flanagan handling day-to-day
affairs under what they describe as a ``formal understanding'' to
consult on major decisions like hiring and capital spending.
``I think we're in a pretty good position right now with the
existing structure,'' Greg Johnson said in a joint interview with
Flanagan. ``There is accountability with the two of us.''
The heads of all units report to Flanagan or Johnson except
Vice Chairman Anne Tatlock, 64, who ran Fiduciary Trust before
Franklin bought it in 2001 and still oversees the sales effort to
wealthy individuals. She reports to Charles B. Johnson.
Flanagan and Greg Johnson also spend time together outside of
the office. Johnson's son and Flanagan's daughter are on the same
Hillsborough little league baseball team.
Each received an almost identical $2 million in total
compensation last year, although Greg Johnson's salary is $4
higher than Flanagan's. CEO Johnson received $562,107 in
compensation and use of a corporate jet valued at almost $130,000.
In the fiscal year ended Sept. 30, total expenses climbed 5
percent to $1.9 billion. Revenue rose 7 percent to $2.5 billion.
Compensation-related expenses increased 5 percent to $645
million in fiscal 2002. Technology-related spending gained 12
percent to $294 million because of a 2001 outsourcing agreement
with International Business Machines Corp.
Franklin is trying to renegotiate fees in the contract to
account for the lack of growth in his company's funds and the
slower pace of business transactions, Flanagan said.
``It's a very fixed-cost structure,'' he said. ``It's
difficult to react to in a volatile revenue environment. I don't
think anybody foresaw how the business would go.''
--Aaron Pressman in the Boston newsroom (617) 338-5822 or
apressman@Bloomberg.net. Editors: Pickering, Quinson.