The Globe and Mail, Report on Business
Published May 1, 2010

Burgundy Asset Management sent a letter to its clients this week announcing changes to its management structure. Two years from now CEO Tony Arrell will step down and hand the reins over to the current Chief Investment Officer, Richard Rooney.

In terms of succession planning in our business, this is a biggie. Mr. Arrell is a large shareholder in a firm that manages almost $9-billion in assets. He is a commanding and thoughtful presence both inside and outside of Burgundy’s Bay Street office. And his vision and drive to build a top tier Global firm have shaped who the firm has hired and how it’s grown. While other investment managers concentrate on Canadian stocks and Canadian clients, two-thirds of Burgundy’s research staff is focused on foreign markets and the firm has had success winning institutional clients in the U.S. and elsewhere.

Planning for succession is a bit like picking stocks. You can do the preparation and make all the right moves, but at the end of the day, there are a slew of uncontrollable variables that will determine how well it plays out with clients and business partners. When a new management team is establishing its credentials, there is no doubt that it helps to have a little luck in terms of industry trends and short-term performance.

My former partner Bob Hager always said the time to make a change is when the performance numbers are turning up after being poor. The clients are more open to change, having been through a tough period, and the odds are better that the new team will be shown in a positive light (i.e. improving returns). It gives the firm the best chance of selling the changes internally and externally.

Bob’s strategy speaks to the fact that new CEOs, in any industry, are often given undue credit, or subjected to unfair criticism, based on what happens in the near term. Hockey coaches and finance ministers suffer from a similar fate. The reality is, near-term results are determined by random market forces and strategies put in place by the previous team. The new boss may become a hero by doing nothing more than giving the predecessor’s ‘failed’ strategy a little more time.

For clients of a larger firm, movement at the top is important, but it doesn’t require action the same way changes to the investment team do. When a long-standing portfolio manager steps aside, there is a direct and immediate impact on the portfolio. Holdings change and the investment approach will be different going forward, sometimes quite significantly. The client has to take a close look when there is a new person pulling the trigger.

Changes in the corner office will also have an impact, but they take longer to play out. The incoming team will influence new product directions, the ability to hire top people, the ownership structure and the overall investing culture of the firm, all of which translate into client returns over time.

Some transitions can be categorized as ‘more of the same’, while others portend radical change. In the latter category, AIC’s change of leadership (and ownership) will mean a total overhaul of its investment platform and the new masters at Saxon Financial (Mackenzie Financial) and Phillips, Hager & North (Royal Bank) are moving in new directions. In the pension arena, some public funds are going through profound shifts as a result of changes at the top. The Caisse de Depot (with new CEO Michael Sabia) and AIMCo in Edmonton (Leo de Bever) are examples of this.

I’ve been on both sides of the succession process and have known success and failure. From what I can tell, Burgundy has covered all the bases. The changes are deliberate, transparent and evolutionary. And they’re being made for the right reasons. Even though the “plan is to work for a very long time,” Mr. Arrell is 65 years old and has recognized the need to provide visibility to his partners and the firm’s clients.

Mr. Rooney isn’t a conventional CEO in terms of his overt marketing and people skills, but he has the most important attribute for a firm like Burgundy – he is a respected investment person.

For counselling firms that are all about investing first and marketing second, this is a requirement. It’s part of the DNA and it helps distinguish them from the mega firms that are increasingly being run by marketing and sales executives. In this regard, Mr. Rooney’s credentials were reinforced by how he and his investment team handled the downturn – the Burgundy portfolios held up better than most and they didn’t blink when the uncomfortable buying opportunities presented themselves.

Taking over for a successful, iconic leader is always a tough row to hoe. Fortunately, the post-Arrell team has the benefit of a stable client base, established research team and employee ownership. As for luck, perhaps it will come in the form of better returns from foreign markets, which plays to the firm’s research strength.