May 13, 2007
Family Control of Newspapers
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.
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.