Paper Tigers

by Roger Lowenstein | May 21, 2007

IT WOULD BE hard to find three families who have supported democratic principles around the world with more resolve than the Sulzbergers, the Grahams, and the Bancrofts. The first two scarcely need introduction. The Sulzbergers, of course, control The New York Times Company; Arthur Sulzberger Jr., the family’s current sovereign, is both chairman of the board and publisher of its most prized asset, The New York Times. The Grahams own The Washington Post Company, now run by Donald Graham; his late mother, Katharine, famously stood up to Richard Nixon in the Watergate era and blazed a trail for female corporate executives. But, until this month, few outside the world of journalism could have identified the Bancrofts. In 1902, their ancestor bought Dow Jones & Company, publisher of The Wall Street Journal, for the tidy sum of $130,000. Though uninvolved in the editorial operations, the family, now a diverse clan whose members are scattered from Hawaii to Rome, has quietly controlled it ever since.

I say “controlled” rather than “owned” because Bancroft descendants own only 24.7 percent of the shares. The rest of the stock—that isto say, the majority of it—is held by the public and trades on the New York Stock Exchange. If Dow Jones were structured like most public companies, the Bancrofts’ “control” would be tenuous at best. But it isn’t. Since 1986, Dow Jones has had two classes of stock. The “B” stock, owned by the Bancrofts and anyone else who invested prior to 1986, carries ten votes per share. Stockholders who invested since then (including the vast majority of the public shareholders) own the “A” shares, which get one vote apiece. This patently undemocratic arrangement has lofted the Bancrofts’ control to a decisive 64 percent. To paraphrase George Orwell, all of Dow Jones’s investors are equal, but some are decidedly more equal.

Both the Times and Post companies went public with similar, antidemocratic structures—and for a similar reason. The controlling families in each wanted to raise public capital but were unwilling to make the customary tradeoff this entails: that investors would be entitled to a proportionate vote in elections for directors and other matters—proposed takeovers, for instance—that might come before the stockholders. All three earnestly believe in their role as guardians of public institutions; indeed, this spring, when a Wall Street money manager called on the Times Company to abandon its undemocratic system, Graham took to the op-ed page published by the Bancrofts to defend the Sulzbergers, arguing that “to eliminate the company’s two-tiered stock structure is to run crazy risks with the future of its most important asset, the New York Times.” But this overlooks an important point: The three families are playing not just with their own dough but with the public’s, too. Each has often warned in their coverage of other public corporations that the interests of shareholders, whatever the high intentions of management, are paramount.

 

NOW THERE IS revolution stirring among the oppressed masses, or at least class “A” shareholders. At the Times Company’s annual meeting in late April, 42 percent of investors withheld votes for family-supported directors—a highly unusual show of disapproval. Of course, since the voters who really counted were in management’s corner, the rebellion was merely symbolic.

But the shot that followed it, barely a week later, was not. Rupert Murdoch, the international media baron, offered through the aegis of News Corp to buy Dow Jones for $5 billion, or $60 a share—a cool 65 percent above the most recently quoted price. Dow Jones stock immediately soared to $56 (up about $20). After the briefest of intervals, the Bancrofts replied through their chosen intermediaries—lawyers and trustees—that family members comprising a slim majority of the votes were opposed to a sale. Dow Jones’s board promptly rubber-stamped this decision and said it would take no action on Murdoch’s bid.

Though Murdoch, like the Journal’s editorial page, is famously right-wing, News Corp and Dow Jones have vastly different cultures. (Full disclosure: I reported for the Journal for 17 years, and I still write for SmartMoney, a sister Dow Jones publication, as well as for The New York Times Magazine.) Murdoch relishes involving himself in editorial matters, even in the news pages; the Bancrofts are invisible, and neither they nor their proxies in management meddle with the news. Perhaps more importantly, while Murdoch has not been shy about sensationalizing his journalism, Dow Jones is an almost quaint paragon of traditional values. Judging from its scolding editorials, the Journal’s editors have yet to get over the sexual revolution of the 1960s. The Bancrofts’ rejection thus has echoes of Edith Wharton: a five-generation-old dynasty, its best days (in a financial sense) behind it, snubbing the tasteless and arriviste Murdoch—who happens to be the most successful media titan of the last 50 years.

No doubt, Murdoch would bring change. But, thanks to the mass exodus of advertisers and readers to the Web, change, most often in the form of cost-cutting, has already hit the industry like a sledgehammer—including at Dow Jones, which recently shrank the Journal’s physical size. And it is extremely doubtful that, afterspending $5 billion to acquire Dow Jones, Murdoch would take action to weaken the Journal’s value, which derives from its position as the respected authority on U.S. business.

In any case, what the Bancrofts want and what the employees want leaves out a critical voice—that of the other owners. And they have fared miserably. Previous to Murdoch’s bid, Dow Jones was trading at $36.33, a level unchanged from 1983. That’s an incredible dry spell considering the bountiful fortunes reaped in the stock market over the past quarter-century.

And blaming the stock’s poor showing on the industry’s woes will not quite fly. The Post’s stock rose nine times over that span; the Times’ quadrupled. Dow Jones—which, from 1991 through last year, was run by a former prize-winning journalist, Peter Kann—badly mismanaged the transition to electronic news dissemination, allowing Bloomberg (another dastardly newcomer) to steal its thunder. And, despite an early start, it failed to leverage its brand overseas and establish anything like the preeminence it has at home. Kann was smarter than most when it came to distributing on the Internet, where the Journal is building a hefty paid circulation. Nonetheless, he and his predecessor built no enduring value over a full generation—an irretrievable loss of opportunity.

Public capitalism has a marvelous cure for such failings. When assets are under-utilized, sooner or later an entrepreneur who thinks he can better exploit them ponies up and offers a premium. The process is dynamic and unpredictable and, in an industry rife with change, often convulsive for those involved. But a shibboleth of free enterprise, and of Journal editorials in particular, is that an optimal result emerges when rival players with differing ideas are allowed to joust in a competitive market. Think of the improvement in phone service since the bust-up of Ma Bell or indomestically made autos since the arrival of Toyota. This is why protection ultimately harms the businesses it seeks to “protect”: It insulates management from the consequences of failure and thus from the impetus to change. For the Journal and other newspapers shaken by the emergence of the Internet, the best protection isn’t a charity owner shielded from the market, but one who figures out how to prosper in it.

 

IT'S POSSIBLE that Murdoch, for all the crassness he has displayed in down-market papers, might be that owner. At least, his ideas for strengthening Dow Jones are intriguing. He wants to invest more resources in news, in particular to strengthen the Journal’s brand in Europe and Asia, where the paper had been retrenching. And hewants to end the company’s policy of paying out most of its profits in dividends and reinvest in the business instead. In short, he seems willing to take on an expensive and long-term project to resuscitate a great American enterprise. Reportedly, Richard Zannino, who succeeded Kann and who boasts a background in business rather than in news, is favorably disposed. Perhaps he thinks Murdoch represents the best hope for long-suffering shareholders. And perhaps, if Murdoch’s bid were honestly considered, other investors with different ideas would surface.

The real question is, who should be allowed to decide—the majority shareholders, or a family that long indulged ineffective managers and let the business’s competitive position decline while milking it for dividends?

Granted, it’s unhealthy for companies to be held hostage to the stock market’s daily whims, but 24 years of a flat stock testifies to a sustained problem, not a whim. And the problem is intimately tied to Dow Jones’s lack of democracy. One little-noted side effect is that, since the Bancrofts have been wary of using their stock for acquisitions (which would dilute their control), Dow Jones has never been a visible player in the market for media properties. This is not to say that dual shares necessarily mean failure. The Post has performed marvelously, as has Google, which also sports two classes of stock. The problem is that, should they stumble,they will be insulated from the stock market pressures that usually work to bring about improvement. That the Grahams have been model stewards does not justify the dual structure any more than a benevolent king justifies the institution of dictatorship. Someday the Post Company will have a new CEO, who may not be as able as the present one.

There are two routes to reform. One is to renounce the dual-share structure. The other is to sell or to go private with the help of afriendly investor. Newspapers don’t have to be publicly owned, and even the most prominent ones are relatively small and eminently affordable. (The Times Company, like Dow Jones before the Murdoch bid, trades for less than $4 billion.) There are plenty of individuals, as well as corporations—Warren Buffett, General Electric—who could provide long-term, stable ownership. But, as long as the country’s media barons enjoy public capital, the public should have a voice—and a vote. The Bancrofts and their ilk have too long espoused democracy everywhere but at home.

Roger Lowenstein is a contributing writer for The New York Times Magazine and a columnist for SmartMoney. This article appeared in the May 21, 2007 issue of the magazine.

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