Different Voting Classes of Shares, and Family Control of Newspapers-BECKER

The market for corporate control is sometimes claimed to be more effective at replacing inefficient management when a relatively small number of shareholders-members of particular families in the cases of the Wall Street Journal and New York Times – cannot maintain control over management because their shares have much greater voting rights than shares owned by others. Perhaps in situations where voting rights differ, stockholders who own a small minority of all shares could repel would-be corporate raiders who might improve the operations of a company. I do not believe these fears are justified, I first discuss whether government regulators should permit different voting classes of common stock, and then consider these issues in the context of family-controlled newspapers. Obstacles to the market for corporate control may exist due to different classes of voting shares, but these obstacles are not important in reasonably well-functioning markets for corporate control, like the American one. To be sure, corporations should be required to disclose many aspects of their governance, including whether some classes of shares have greater voting rights than others, in order to give greater information to potential investors in these shares. Once that is done, however, the case for outlawing classes of shares with different voting rights is weak. With information readily available about voting rights, investors could assess the potential effects on corporate performance of control over management by a minority of shareholders who own high-powered voting shares. Those investors who believed that such control might lead to lower profits and entrenchment of inefficient management would only buy low-powered shares if their prices were sufficiently reduced to compensate for such negative effects on profitability. Prices of shares with lower voting rights would then be reduced until investors expect to get the same market risk-adjusted return on these investments as on shares with greater voting rights. In countries, such as Italy, where non-voting stock are common and protection of stockholder interests are weak, voting shares sell for a sizable premium over non-voting shares. In the United States, however, the premium on voting shares is only a few percent. This premium is small presumably because the American market for corporate control operates quite well, even when there are different voting rights. While there is no good case for using government regulation to prevent different classes of shares from having different voting rights, private stock exchanges could have their own rules about voting. The New York Stock Exchange at one time did not allow companies to be listed if some of their shares had no voting rights. In the 1980's after General Motors purchased Hughes aircraft, it issued shares with limited voting rights. GM threatened to leave the NYSE and go to the Nasdaq market if that rule was not changed .The NYSE gave in to GM, and changed its rule about non-voting shares. As Posner indicates, several generations of the same families have controlled major newspapers in the United States, such as The Wall Street Journal and The New York Times. To protect their control, some of these families, such as the Bancrofts who control the Wall Street Journal, issued shares with different voting rights, with the family retaining ownership of the high-powered shares that had much greater voting rights. This system often worked well for several generations; for example, the WSJ was highly profitable and expanded rapidly during the period from 1940 to the 1980's with the Bancroft family in control. But the management of Dow Jones, the owner of the WSJ, made bad investments during the 1990's that led to discontent among family members. The financial problems for all newspapers, not only family-controlled ones, were multiplied many fold by the rapid development of the internet that offers news, weather reports, sports, and information in ways that are much more flexible than the printed media, and is updated over the whole day, and every day. Competition from the Internet has made the newspaper industry a declining industry that has not yet bottomed out. Perhaps most of the major papers will survive, but they will have to place more emphasis on their online versions. Newspapers that have been controlled for several generations by a single family will be more likely to change ownership under this pressure from the Internet because their many descendants would be unable to agree on how to adjust to the new competition. But the generous offer by Rupert Murdoch for the high-powered shares of the Bancroft family that controls the WSJ indicates that shares with different voting rights will not be a major obstacle to a shift of control out of these families. That is a good thing because outsiders will often have much better ideas about how to adjust to the revolutionary effects on the media of the rise of the Internet.

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