Attention Fidelity investors

By MARK JEWELL
AP Business Writer

BOSTON (AP) — Moody’s Investors Service on Wednesday maintained a high credit rating for Fidelity Investments, but also suggested the closely held company is overdue for governance reform and needs to answer questions about leadership succession.

The credit rating agency said in an investor report that it has “growing concerns” about the control that 77-year-old Edward C. “Ned” Johnson III holds over the nation’s largest mutual fund company as chairman and chief executive, and the control that members of his company-founding family hold. The Johnsons hold 49 percent of the Boston-based firm’s voting stock, with key managers controlling the rest, and with the company’s governing board consisting solely of current or former company executives and Johnson family members.

While other family controlled companies have recently adopted more open governance practices similar to those of publicly listed companies, Fidelity’s parent company, an entity called FMR LLC, “has chosen not to do so,” Moody’s noted. The Johnsons’ control “is a concern because several strategic courses set by senior management including Mr. Johnson have not adequately defended FMR’s formerly dominant market position in the mutual fund business,”
Moody’s said.

“In the current circumstances, we believe that the firm will continue to be challenged in responding more rapidly to the increasingly competitive environment and corporate under-performance.” Moody’s also said the Johnsons’ role in running Fidelity “heightens leadership transition risk within FMR, particularly given that Mr. Johnson is aged 77.”

Uncertainty about whether his 45-year-old daughter, vice chairwoman Abigail Johnson, or someone else will replace him, combined with recent high turnover in several high-level executive posts, “hamper FMR’s ability to defend its position in an increasingly dynamic and complex industry,” Moody’s said. The Johnsons have
run Fidelity since its founding in 1946, and Ned Johnson has given no indication when he’ll step down from the leadership posts he’s held since 1977. Fidelity has a huge presence on Wall Street, with $1.5 trillion in managed assets.

While the 46,000-employee company has recently diversified into areas such as individual retirement planning and employee benefit management, Fidelity has seen only middling returns in recent years from key mutual funds that fueled its growth in the late 1980s and early ‘90s. Meanwhile, rivals such as The Vanguard Group and Capital Group’s American Funds have gained ground in attracting investor money. Moody’s on Wednesday left unchanged its “Aa3” rating on Fidelity’s senior debt, the fourth-highest level of investment-grade debt.

But Moody’s assigned a “negative” outlook to the rating, which means the rating could be cut later. Moody’s said the overall rating was based on Fidelity’s “leading positions in three distinct business segments: mutual fund management, retail brokerage services, and workplace services administration.” Fidelity spokeswoman Anne Crowley called some of Moody’s conclusions “very misleading,” particularly on governance issues. “Mr. Johnson and the Fidelity board have succeeded over the years in creating one of the most successful and fast-growing
financial services companies in the world,” Crowley said.

“He has been a leader and a visionary, and is widely recognized for that. The company he has built is enormously successful.” Moody’s report was issued partly in response to a recent legal conversion by Fidelity’s parent — formerly known as FMR Corp. — from a corporation to a limited liability company. Moody’s said the structural change, which has potential implications for Fidelity’s tax obligations, “does not have a material impact” on the company’s debt rating.