Family Control of Voting Stock in Newspapers and Other Media Companies--Posner
The recent attempt by Rupert Murdoch to buy Dow Jones, the owner of the Wall Street Journal, and the vocal dissatisfaction of shareholders of the New York Times Company with the company's management, are reminders of the curious ownership structure of these and other media enterprises. (The Washington Post is another example.) They are companies in which a family that has owned the newspaper or other media outlet for a long time continues to own a majority of the voting common stock of the company but has sold a majority of the common stock as a whole to outside investors. In other words, the owners of the company do not control it.
There are two interrelated oddities to be explained and evaluated: why family ownership is so common in the media world (it is common elsewhere as well--in fact about a third of all Fortune 500 companies are family-owned--but seems to be more common among newspapers and magazines--think of the Chandlers, the Hearsts, the Sulzbergers, the Grahams, the Pulitzers, the Irvings, the Bancrofts, the Bradleys, the Peretzes), and why the family owners divide control from ownership, retaining the first. A third question is why this model is under increasing pressure.
The reason the families give for the first two phenomena is that the ownership of a newspaper or other media organ (but for simplicity I confine my discussion to newspapers) is a "public trust" because of the role of the press in a democracy. The idea is that if people unrelated to the founder (or some long-ago acquirer, as in the case of the Wall Street Journal and the New York Times controlled the newspaper, they would manage it with the aim of maximizing profits and thus would give the consumer what he wanted rather than what he needed in order to be an informed citizen. This is not a ridiculous argument, because most people read newspapers in order to be entertained, to read classified advertisements, and to have their opinions, prejudices, and so forth reinforced, rather than to be challenged. People don't like to be challenged and are uncomfortable when they find themselves in a state of doubt. So one can imagine a public-spirited (or simply an opinionated) newspaper owner deciding to reduce the price or increase the quality of his newspaper in order to lure people to read it and be challenged. You might subscribe to the New York Times because it was cheap and had a lot of ads and had useful advice on health in "Science Times," but your eye would stray from time to time to the news articles and editorials and op-eds, and so you would become a better-informed citizen.
The effectiveness of this strategy depends, however, on the aggregative character of a newspaper--on the fact that it contains a hodge-podge of interleaved material, so that you get the editorials even if you just want the classified ads. The rise of the Internet media has resulted in the disaggregation of media components. You can get pretty much any media component (classified ads, health advice, celebrity gossip, sports, food tips, etc.) separately, without having to peruse the news or editorial pages. Newspapers are no longer an effective medium for educating or edifying an uninterested public.
Furthermore, the fact that some ancestral figure, and one of his descendants (such as Mr. Sulzberger), want to answer what they consider the high public calling of controlling a newspaper doesn‚Äôt mean that the other descendants--the rest of the family, who have nothing to do with the newspaper's editorial policy--derive satisfaction from trading their profits for the publisher's continued influence over the product. Why should they? It is not their opinions that are being pushed on the public, but some distant cousin's. With each new generation, the number of slices into which the profit pie is cut grows larger, and each slice thinner, and with the newspapers under tremendous financial pressure from the Internet, family members grow ever more restive.
The separation of ownership and control in large companies is an old story. But it was a story about hired managers' being the imperfect agents of the shareholders (the owners) because the shareholders were too numerous, and their individual stakes in the company too small, to make them effective monitors of the managers, who would therefore have opportunities to pursue their private ends at the expense of the nominal owners. Amputating common stockholders' voting rights is something else. While it is true that the individual shareholder is unlikely to have any effective control over the enterprise, the shareholders as a whole, represented by the board of directors, have a degree of control--less than they are supposed to have, because boards of directors are rarely completely independent of the hired management, but still some. If you take away the right of the majority of the shareholders to control the board of directors, you take away all their control, though they may still have influence, especially if they have some voting rights and can ally with dissident members of the control group (the family, in the case of the family-controlled corporation).
This stripping of control from the majority of the shareholders is awkward because owners of a corporation‚Äôs common stock are the residual risk bearers. They do not have a fixed return, like bondholders. Their fortunes rise and fall with the corporation's profits, and so one might wonder why anyone would own stock in a corporation controlled by a group that justified its control as necessary to avoid maximizing the company's profits! The answer has to be that the company must offer its shares to the public at a discount to compensate them for their lack of control and diminished profit expectations.
The family corporation is a viable enterprise form for the same reason that families are viable social groupings: relations of trust based on intimate knowledge, altruism, reciprocity, and threat of ostracism can be good substitutes for relations based on contract and reputation. The advantages of the family form have to be traded off, however, against the disadvantage, which it shares with hereditary monarchy, that a genetic connection is no guarantor of equality of aptitude or motivation. As a family expands over generations and the founder's genetic endowment becomes increasingly diluted and bonds of altruism fray, the disadvantages of the family enterprise grow relative to the advantages. And when on top of that the family-controlled enterprise is faced with sharp new challenges, as is happening today in the newspaper industry because of the rise of the Internet, the disadvantages of family control become disabling. Probably, therefore, the days of the family-owned newspaper are numbered.