Critics bash fund company on corporate governance

After taking a public flogging for loading up on dot-com stinkers during the late 1990s, Janus now faces mounting concern about its corporate-governance record.

Recently, Janus Capital Group Inc. has confronted harsh criticism from an analyst and from its largest shareholder for not disclosing what it pays top executives.

The shareholder, hedge fund Highfields Capital Management LP, blasted the Denver-based mutual fund company for, among other things, not being forthright with shareholders, and the recent selection of Janus’ former chief investment officer as chairman of a new corporate-governance committee.

As Janus prepares to face shareholders at its annual meeting Thursday, others are also starting to denounce the company for being too secretive, if not downright cagey.

The same arrogance that once allowed Janus managers to justify huge bets on technology stocks may also be at play when it comes to balancing its own interests against those of its shareholders, critics say.

“They still feel they are above it all,” says Rachel Barnard, a stock analyst at Morningstar Inc. in Chicago. “Janus just hasn’t gotten to the point where they realize they are no longer `special’ and that they are subject to all the rules of regular companies.”

Ms. Barnard ruffled feathers at Janus two weeks ago when she issued a report that questioned new chief executive Mark Whiston’s ability to turn the company around. The report also criticized the company for being more interested in preserving fat paychecks for its star managers than increasing shareholder value.

“With a load of debt, a struggling fund lineup, sky-high compensation and milquetoast management, we think it’s the Janus managers, not the shareholders or fund holders, who are in fat city,” she wrote.

Defending its record

Based on the fact that Janus paid $353 million in compensation in 2002 and that 5% of employees are on the investment team, Ms. Barnard estimated that the average paycheck for a Janus portfolio manager was $4 million. That is “far above their peers, who make an average of $400,000” a year, she wrote.

Loren Starr, Janus’ chief financial officer, says Ms. Barnard’s $4 million estimate is “just wrong,” and suggests that the average “investment manager” at Janus earns about $240,000 a year. But Mr. Starr’s definition of investment manager includes lower-paid research analysts and traders, not just portfolio managers.

Furthermore, Mr. Starr says Janus’ record on corporate governance is above reproach. Janus, he says, is being asked to adhere to a higher standard of corporate governance than other fund companies.

“If the regulations of the industry say we need to start disclosing portfolio manager compensation, we will be the first to comply,” Mr. Starr says. “But we don’t see any need to put ourselves in a competitive problem by disclosing information that nobody else does.”

Highfields Capital of Boston, which owns a 9.1% stake in Janus, disagrees with the company’s self-assessment. In letters last month to Janus chairman Landon Rowland, Highfields Capital managing director Jonathon S. Jacobson took the company to task.

Mr. Jacobson accused Janus of “artful manipulation” of documentation and dates, and “linguistic trickery” to “provide shareholders with the least information it believes possible under SEC rules, even if counter to the principles of full and fair disclosure underpinning those rules.”

Specifically, Mr. Jacobson criticized Janus for not divulging details about last year’s paychecks for Mr. Whiston, among others, saying the executives ranked among the highest-paid individuals in the company and had been openly running the company since last September.

Janus says it didn’t come clean with the information because Mr. Whiston didn’t officially assume his post until 2003.

Highfields Capital also questions the selection of Jim Craig, Janus’ former chief investment officer, as independent chairman of a new corporate-governance committee, as well as his position on the board’s nominating committee.

Mr. Craig left Janus in September 2000 to start a charitable foundation but joined the board when the company merged at the start of the year with parent Stilwell Financial Inc. of Kansas City, Mo.

Janus, however, insists that Mr. Craig’s selection meets the current rules of the New York Stock Exchange, and that his past employment isn’t a threat to independence.

“Of course we are going to comply with the rules, but there is a rules-over-substance issue at some point where we’ve got to do what is right,” Mr. Starr says.

“Jim is one of our most independent-minded individuals and has been adding a huge amount of value to our board.”

Taking advantage?

Still, Mr. Jacobson wrote that Janus is taking advantage of a loophole in the NYSE’s rules that allows it to delay implementing the five-year employment disqualification that would otherwise apply.

Geoffrey Bobroff, a mutual fund consultant in East Greenwich, R.I., isn’t convinced Janus’ record on corporate governance is worse than that of its rivals.

“Many times, these interloper-type buyers hope for some type of quick change that allows them to exit the stock,” Mr. Bobroff says.

Mr. Jacobson didn’t return a phone call seeking comment.

Still, doubts about the quality of corporate governance come at a crucial time for Janus.

Janus had $14.2 billion in outflows last year, compared with $11.8 billion in 2001, according to Financial Research Corp. in Boston. During the first quarter of this year, investors yanked $1.9 billion from the company’s stock and bond funds, versus $3 billion during the first quarter of 2002, says FRC.

If growth investing, which remains synonymous with Janus, doesn’t make a comeback, the company is sure to see more outflows.

Janus also has about $855 million in long-term debt, which is high relative to that of other asset managers. That debt is due to the $1.6 billion Janus had to cough up when founder Tom Bailey cashed out in 2001.

The top credit rating services, such as Moody’s Investors Service and Standard & Poor’s, have given Janus until the end of the year to reduce the amount of debt on its books or face a lower credit rating.

Mr. Starr says the company is working to reduce its debt load. Last week, Janus said it was discussing a potential tax-free transaction with DST Systems Inc. – a Kansas City, Mo., data-processing company it partially owns – that could result in DST’s acquiring all or a portion of DST stock owned by Janus.

Janus is also trying to reduce is compensation costs.

For example, it doesn’t intend to make an annual stock option award to its employees this year as it has in past years.

The company will, however, award a limited number of options to top performers, as well as use them to attract top talent.

Still, the clock is ticking.

“If we are still having discussions like this in 2005 or 2006, Janus may be gone,” Mr. Bobroff says. “I don’t know how long the analysts and portfolio managers will stay as they are watching the basic business erode.”