Morningstar Reorganizes, Shifts Phillips
December 18, 2000
Don Phillips, who has been Morningstar's outspoken CEO for the past three years, has been replaced by the company's founder and chairman, Joe Mansueto. The company is also adopting a decentralized organizational structure that will divide the company into seven independent business units, said Mansueto. The move will enable the company to keep track of its sources of revenue and profits more closely, he said. Phillips will now be one of three managing directors responsible for the oversight of the new business units. Mansueto, meanwhile, will resume his day-to-day oversight of the firm, he announced last week.
His re-emergence comes at a time when Internet-based companies are beginning to be held to tighter standards by Wall Street analysts, Mansueto said. Morningstar's heavy investment in the Internet was part of the company's strategy last year, but that strategy has fallen out of favor following the Nasdaq's plunge and analysts are returning to a more "traditional business yardstick" in measuring a company's profitability, he said.
"I'd like to speed our drive to profitability again," he said. "... We went knowingly into the year with this plan, I think like a lot of Internet companies. But the world has changed, as you well know."
In 1999, Morningstar sold a 20 percent stake to Soft Bank of Japan, the largest software distributor in Japan. The $91 million generated by the sale financed Morningstar's Internet initiatives, Mansueto said.
Mansueto will be watching the firm's expenses and working to ensure that revenue grows, he said.
In 1998, Mansueto made Phillips the company's CEO and left the daily oversight of company operations to Phillips, said Margaret Kirch Cohen, a spokesperson for Morningstar. Mansueto has been chairman of the board of directors and set the strategic direction of the company since 1998, she said.
The company should generate $69 million in new revenue this year, up from $51 million last year but still short of the company's original goal for this year of $71 million, Mansueto said. He declined to set a goal for 2001, but said "healthy" double-digit growth is expected.
The firm will do some budget cutting this year, including reducing the marketing expenditures of Morningstar.com, one
of its retail products, Mansueto said. Morningstar.com has 80,000 registered users, 50,000 of whom pay a fee to obtain information on the site, he said.
"We spent a lot this year to acquire all of those registered users and we won't be marketing as aggressively this year as we did last year," Mansueto said. The firm will also eliminate its use of outside consultants to develop some of its Internet-based products, he said.
The decentralized structure favored by Mansueto will mean that each business unit will ultimately be responsible for its own bottom line, he said.
"The idea is... to allow each of the [business unit] heads [to] feel like he or she is running their own business," he said. "So we carved up the business into seven logical businesses. And we pushed a lot of the centralized functions, things like marketing or our compiling of the databases, down to the units that are associated with them, so that all of our costs are linked to a revenue source. It creates both the responsibility and accountability for business results."
Phillips favored a more centralized structure, while Mansueto wanted to decentralize the firm, Mansueto said.
"It's not as if one is wrong and one is right," he said. "People have different philosophies and structures that they are comfortable with. I tend to like a more decentralized structure." Mansueto said he would not characterize Phillips' new role as a demotion.
"I've worked with Don for over 10 years and have a tremendous amount of respect for him," said Mansueto. "I think it's more me wanting to get more involved than finding any fault with Don."
The change of titles was a surprise to Phillips, Mansueto said. "He welcomed me back and said, Let's find a way to make this work and create a structure that will play to each of our strengths.' So, it's addition, not subtraction." Phillips was unavailable for comment.
Still, Mansueto probably could have assumed a more active role in the company without taking the title of CEO away from Phillips, said Roy Weitz, a financial advisor and publisher of FundAlarm.com, a website that tracks management changes in the fund industry. Mansueto's decision to come back in order to oversee the expenses of the company is an unusual step for the founder of a company and raises a lot of questions, he said.
"It's very strange," Weitz said. "[Mansueto] could have come back and taken no title. I think it suggests that he just wasn't very happy with Phillips."
Weitz also said the organizational changes and Mansueto's intentions of placing a new emphasis on the bottom line could threaten the firm's success in creating a work culture that has kept employees happy.
Tim Armour and Tom Florence were named as the two other managing directors. Armour formerly was one of the firm's presidents and Florence was the head of Morningstar's institutional services department. The firm has also added a chief operating officer, a newly-created position.