Introduction

Square-Off: Are the SEC's Non-GAAP Rules Too Strict?

Few would argue that public companies shouldn’t be allowed to present any performance metrics not provided for in generally accepted accounting principles (GAAP). Just as few would argue that public companies should have free reign to report any numbers they choose in any manner they choose. But there’s vast middle ground along the spectrum of non-GAAP usage. It’s why the Securities and Exchange Commission last year released a series of compliance and disclosure interpretations offering ..

FMR Corp.’s conversion in October from a corporation to a limited liability company has spurred Moody’s Investors Service to release a report describing its ongoing concerns about the investment company’s governance.

The change doesn’t affect FMR’s credit rating, which continues to be Aa3, the highest among independent asset managers, Matthew Noll, vice president and senior credit officer at Moody’s, told CFO.com. “But other governance issues that have been slowly building up over the past year are relevant to the credit, so this is an opportunity to get out there and say something about them,” he said. “We did go on the offensive a little bit.”

Many other big companies that are, like FMR, privately held and family controlled, have adopted some of the governance best practices required of publicly listed companies, Moody’s noted in its report. But FMR, a holding company that owns Fidelity Investments, “has chosen not to do so,” the rating service lamented.

Moody’s warns that FMR’s board consists solely of current and former FMR executives and Johnson family members, rather than including some independent directors “whose presence would create some confidence that there is some check” on chairman and CEO Edward C. Johnson 3d.

Family members together hold 49 percent of FMR’s voting common stock, with the rest held by a limited number of executive-level managers.

The family’s high degree of control over both strategy and day-to-day operations “heightens leadership transition risk within FMR,” Moody’s said, especially since Johnson is 77.

Moody’s also noted that there’s significant market speculation about whether Johnson will deem his daughter, Abigail Johnson, an executive level manager who has run several major segments of FMR’s business, as best fit to become CEO. Such chatter coincides with some recent changes in the company’s senior management, including both departures and arrivals. Yet the company isn’t providing much clarity about the reasons for the changes or about succession, creating significant uncertainty, according to Moody’s.

Amid all of this, the change in the company’s status gives FMR management even more flexibility in its governance. For example, it’s possible for an LLC’s equity investors and management to agree that management’s and the board’s fiduciary duties to the company will be restricted or eliminated, Moody’s said. An LLC can also be structured so that it’s managed directly by its owners, rather than by a board of managers or directors.

“Prior to the conversion, creditors didn’t have a lot of transparency, the Johnson family controlled everything, and the performance of the company was an issue — and all of those things are still going on now,” said Noll. However, he added, “the movement toward an LLC allows them even more flexibility to conduct business as a private company.”

Thus, despite FMR’s continuing high credit rating, Moody’s has assigned the company a negative outlook. The company’s performance and management strategies “have not adequately defended FMR’s formerly dominant market position in the mutual fund business,” Moody’s opined in its report.

FMR spokesman Vin Loporchio took great issue with the Moody’s report. “We strongly disagree with a majority of the vague views expressed in the report,” he said. “Our position in the financial services and mutual fund marketplaces remains very strong. We have a strong balance sheet, a tremendous customer base, and a strong lineup of top-performing funds. We had record revenues last year and we’re having another strong year this year.”

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