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’t 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’s 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.

Comments

[dWj]

Related to the "public trust" argument is one that is sometimes made about long-term management, and might be related to a time-inconsistency issue with regard to the consumer; in the short-term, the consumer may prefer something that directly panders to him, but in the long-term he will lose interest in a paper that does that, or, perhaps, in a paper that has acquired a reputation for doing that. It could well be that a paper that would maximize newsstand sales this month would cause long-term damage to the brand -- a brand based as much as anything on the perception the average consumer wants to maintain of himself -- and that this is what close ownership protects.

Another point I see missing from most conversation about this is what the alternative is likely to be. It always seems to be assumed that, if this ownership structure had not been an option, the families would have simply sold shares to the public with full voting rights. If I think instead in terms of a closely held company deciding whether or not to raise capital by selling a claim on the earnings -- if not, then it will be borrowed or the relevant investments simply won't be made -- it's hard for me to see why they should be prevented from doing this on whatever terms are amenable both to the original private owners and to the investors.

[oldtimer1931]

Brings light to the term "insider trading".

[Richard Mason]

It may be worth noting that Rupert Murdoch has himself experimented with different voting classes of shares. From late 1998 to early 2005, shares of Fox Entertainment Group (FOX) traded on the NYSE, but the Class A shares had only (1/100) of the voting power of Class B shares, which were held by News Corp. News Corp (NWS) retained 82.76% of the equity interest and 97.8% of the voting interest. Murdoch is also interested in seeing his children manage his media empire. So if the Bancrofts did sell the WSJ, one hereditary dynasty would merely be exchanged for another.

[Murdoch eventually bought back the FOX shares on terms which meant that they performed similarly to NWS shares from the November 1998 IPO. I don't know why he did this or why he would not demand a discount when buying back these voting-impaired shares.]

[robert]

It is the amorphous conept of a so-called "public trust" that undergirds this phenomeneon. Such a vague concept justifies diluted corporate control by family members on the premise that they know what is in the "public interest" and will act to serve same. However, the "public interest" ends up being merely a pretext for their value judgements. This is one of the reasons which has led to the growth of the Internet as a replacement, coupled with a diminuition in the importance of newspapers and other "old media" organs.

[Lawrence Indyk, University of Kansas School of Law]

It's not necessarily true that family-controlled newspapers must sell their stock at a discount to compensate for a lack of shareholder input. This is especially true if the shareholders themselves derive more utility from the fact that the newspaper maintains a certain "purity" of quality or political bent (at a cost of optimal profitability). This purity is something that would almost certainly not be maintainable in a wide-open public exchange of all voting shares and absent tight individual or family control.

In other words, the price of the stock would only need be discounted if the additional earnings per share of a policy of profit-maximization are greater than the utility-per-share derived from existing shareholders antagonistic to the likely effects of public control. Since this is not necessarily true, neither is the discount - indeed, wouldn't you expect such a die-hard nonvoting shareholder to out-bid a takeover entity if it would mean a dramatic degradation in their favorite paper?

Furthermore, the shareholders of such an enterprise are likely to be self-selective, since they are among a minority of investors likely to be satisfied with both a less-than-maximum return on investment and the newspaper's current leadership and direction. They form a club of like-minded people. These investors become more like college alumni - donating their forsaken dividends for the sake of their favorite news institution.

Also like alumni - these shareholders are probably not really as concerned with forsaken profits as they are with quality and direction - that is, they only really raise a fuss when they believe the values they opted to support (like the success of the basketball team) are being compromised. In the case of a newspaper - one of those values could be the public opinion making (propaganda) potential of the institution, so when readership goes down - so does that potential.

[Patrick R. Sullivan]

IIRC, the idea of different classes of stock was cooked up by Henry Ford's estate planners to keep control of the company in the family after he died. That is, it was a response to the estate tax of that day.

[Richard Rogers]

The main reason for this structure relates to the difference between being an "publisher" (or "owner")and a shareholder. There are many benefits to being the publisher beyond the monetary rewards: social status and notoriety, important jobs for family and friends (what will Bob Jr. do if he doesn't work for the paper?); extraordinary fringe benefits (who controls those sideline tickets?), and extraordinary opportunities (let's make Joe a director of the Bank). Being a publisher is central to the family's identity. These benefits are more significant than money because the owners are already rich and they've always been rich. So the owners structure things so they have their cake and eat it too! [The rich are different.]

[N.E.Hatfield]

NEWS FLASH! - Rupert Murdoch makes unsolicited bid for "Wall Street Urinal"! To quote the man, "News-communicating, news and ideas, I guess-is my passion. Giving people alternatives so that they have two papers to read (and) alternative television channels ..." If the paper does sell out to Murdoch - big deal! It will just be trading one family trust for another family trust.

The modern reality is that, these guys buy and sell newspapers and media conglomerates like you and I buy t-shirts and jeans. Not bad for a "somewhat poor" former Australian born Oxford scholar. Or is that American or Turkish? Just remember, "There is no such thing as a non-partisan press". Or is this the beginning of the end of multiple editorial view points as espoused by a multiple publications "free press"?

[P]

The reason newspapers serve the public trust is not just that they educate citizens through serendipity -- though this is important, and Posner is right to note that the advent of the Internet destroys serendipity.

Family-owned newspapers also serve the public because of their willingness to invest resources in deep, investigative reporting. Because seasoned reporters assigned to such pieces do not produce articles for months, such reporting is extremely expensive. Only newspaper owners not concerned with the short-term will invest in this sort of reporting.

In fact, some of the best investigations in recent years have been conducted by a non-profit organization: the Center for Public Integrity. The founder, former CBS reporter Charles Lewis, has written that he believes investigative journalism cannot survive in for-profit companies.

Family ownership can be seen as an intermediate step between pure shareholder control (like the Tribune company, whose newspapers are much thinner now and have suffered greatly as a result of job cuts -- see the Los Angeles Times, which won five Pulitzers in 2004 and has won none since) and a non-profit like the Center for Public Integrity.

[Anonymous]

thanks all
ÿßÿ®ÿ±ÿßÿ¨

[Anonymous]

thanks
بنت الزلفي

[Anonymous]

شات سعودي

[Anonymous]

العاب
___
ÿ¥ÿßÿ™

[Anonymous]

Thank you, you always get to all new and used it
شات صوتي

[Anonymous]

ÿØÿ±ÿØÿ¥ÿ©
___
صور

[Anonymous]

Good afternoon. What's the earth With all its art, verse, music, worth - Compared with love, found, gained, and kept?
I am from Seychelles and now teach English, give true I wrote the following sentence: "Booking new mexico vacation rental will make you feel relaxed in holidaying town."

Best regards 8-), Scott.

[Anonymous]

Thank you, you always get to all new and used it
ÿ¥ÿßÿ™

دردشه

[Anonymous]

Great site. Good info.

[Anonymous]

Great. Now i can say thank you!

[Anonymous]

Great work, webmaster, nice design!

[Anonymous]

thanks to tell me that,i think thats so usefully----
tiffanys
links of london

[Anonymous]

دردشة برق

دردشة الخليج

[Anonymous]

Great. Now i can say thank you!

[Anonymous]

SseUt6 Beautiful site!

[Anonymous]

If you have to do it, you might as well do it right.