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American Journalism Review
Business As Usual  | American Journalism Review
 AJR  Features
From AJR,   October 2002

Business As Usual   

While news organizations have energetically uncovered corporate abuses and editorialized for reforms, their parent companies have been less than enthusiastic in applying the new standards to their own operations.

By Miles Maguire
Miles Maguire is an assistant professor of journalism at the University of Wisconsin Oshkosh.     

In 1905 oil baron John D. Rockefeller sensed that the attacks he had suffered from muckraking reporters and crusading journals like Joseph Pulitzer's New York World were about to subside. As newspapers became more and more profitable, Rockefeller reasoned, their proprietors would be less inclined to focus on corporate misdeeds and more likely to play by the same rules as the other captains of industry. "The owner of the World is also a large owner of property, and I presume that, in common with other newspaper owners who are possessed of wealth, his eyes are beginning to be opened to the fact that he is like Samson, taking the initiative to pull the building down upon his head," Rockefeller wrote in a letter to an associate.

Nearly a century later Rockefeller's words ring truer than he could have imagined. In recent years, newspapers and other media operations have posted profit margins that he would have envied. And in recent months, they have covered the country's corporate accounting and governance scandals in a way that he could have appreciated.

While they have duly reported on some of the most egregious examples of corporate wrongdoing, America's news organizations have regularly omitted or glossed over the shortcomings of some of the most powerful businesses in the country: their own. Media companies have also shown a willingness to ignore the advice of their editorial writers and columnists on the subject of stock options--an issue that has created a split within the industry and that appears to have surprisingly large consequences for at least some media firms.

To be sure, publicly traded companies in the news business do not deserve to be tarred with the same brush of criminality that has been applied to the likes of Enron, and the acknowledged federal investigations into General Electric's compensation disclosures and AOL Time Warner's accounting appear to be limited in scope. Many media companies can argue, with some credibility, that they have clean records. But a review of filings with the Securities and Exchange Commission shows that all of them have engaged--to one degree or another--in the kind of questionable activities that have been much in the news this year. For example:

The newspaper company that today bears Pulitzer's name and is run by his heirs disclosed earlier this year that it has paid its independent accounting firm to serve as an internal auditor as well--the kind of arrangement that also existed between Enron and Arthur Andersen and one that has been likened to putting a fox on special retainer to guard the henhouse. Pulitzer says that it began using this setup as an efficiency measure but abandoned it in early 2001, before the Enron scandal erupted.

At Belo, Knight Ridder, Lee Enterprises, McGraw-Hill and Media General, executives or other insiders failed to file reports last year about stock transactions by the deadline required under federal law--the same kind of infraction for which President Bush has been criticized. The missed deadlines appear to be isolated cases, and companies downplayed their significance. Media General said its violation was "inadvertent." McGraw-Hill blamed "an administrative oversight," and Knight Ridder said its mistake occurred when the husbands of two corporate officers took 401(k) distributions without filling out the necessary paperwork.

Some news organizations have stocked their boards of directors with senior managers or outside executives with whom they do business. Boards like these, critics of the current state of corporate governance say, have a stronger incentive to serve as rubber stamps of CEO initiatives than to exercise independent oversight.

All of the publicly traded media firms have engaged their independent accountants to handle tasks that go far beyond the auditing of books--a practice that will be curbed by the Sarbanes-Oxley law, the federal corporate reform legislation that took effect this summer, because of its potential for creating conflicts of interest.

Writing in the New York Times in July, renowned investor Warren Buffett, himself a board member and major investor at the Washington Post, said the most serious accounting problems he sees relate to stock options and pension plan assets. He charged that companies were guilty of "the most flagrant deceptions" in how they handled these numbers and that "the aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom."

Buffett didn't point a finger at them, but many media companies could be said to be part of such deceptions. The news industry improved its collective bottom line last year by about $2.4 billion because of the way that it accounted for stock options paid to executives. Similarly, it's not uncommon in the industry for firms to take advantage of accounting rules that allow them to record projected gains in their pension plan assets as profit--even when the value of those assets has actually fallen.

Some media companies have taken the recent accountability issues to heart. NBC parent General Electric and the Washington Post, for example, have announced plans to treat options as expenses, though they expect only a minimal impact. Companies that are still reviewing the situation have potentially more at stake. If they don't expense options, publicly traded firms are required to describe in a footnote to their annual reports what their net income would have been if stock options were treated as costs, such as salaries or health insurance. In some cases, the differences are substantial. For example, Gannett said for 2001 its earnings per share would have been 14 cents lower if its stock options had been counted as expenses, decreasing its net income by about 4.5 percent. At Knight Ridder, the difference would have been 8 percent, at the New York Times Co. almost 11 percent and at Tribune a whopping 64 percent. For all companies, the figures refer to fully diluted earnings per share, a measure that takes into account both actual shares and options that could be converted into shares.

Newspapers owned by Gannett, the Times Co. and Tribune have been among the voices calling for stock options to be classified as expenses. But the corporate parents aren't taking their editorial writers' advice.

"The only logical process, and the one that best serves good journalism and good business, is to have each side [business and editorial] reach its own independent conclusion," says Catherine Mathis, vice president for corporate communications at the New York Times Co. "That is the only way in which readers can be best assured that they are getting as objective and 'pure' opinion from the editorial page as is possible. In other words, they don't have to worry that this editorial was dictated by the business side or the corporation or that the editorial reflects a judgment which was reached with one eye on 'the truth' and the other eye on 'what's best for our corporate well-being.' "

"Tribune is currently monitoring this complicated issue, which has many pros and cons," says company spokeswoman Christine Hennessey. "It's not that we ignore our editorial writers, but it's a tough issue."

Phil Haslanger, managing editor of the Capital Times in Madison, Wisconsin, and president of the National Conference of Editorial Writers, says media companies shouldn't turn a deaf ear to the editorial pages. "Newspaper corporations would be a lot better off if they listened to their editorial writers, but they don't," he says. Haslanger, who says he is speaking for himself and not NCEW, notes that editorial writers can influence opinion over time even if their positions are not adopted right away. "You hope that your argument may cause someone or some group to rethink what they're doing, but it's unlikely that any single editorial will change their mind. Editorial writers are part of an ongoing dialogue on all manner of issues."

In the news and business pages, the media have not been reluctant to cover the issue of corporate accountability--they just haven't said much about how they themselves fit into the picture. In its August 12 issue, Fortune magazine published a 1,500-word article calling for companies to reduce their reported earnings by the value of the stock options they grant to executives. But nowhere did the article mention that this proposal would have diminished the income of the magazine's parent, AOL Time Warner, by about $1.4 billion in 2001 alone.

In February BusinessWeek was out front on the pension accounting story. An accompanying chart showed that Ford Motor Co. could see a 29.2 percent drop in income if it reduced its projections for a 9.5 percent annual return on pension assets to 8.5 percent. What the magazine didn't say was that its parent company, McGraw-Hill, had used the same 9.5 percent projection as Ford for 2001, which allowed it to boost its 2001 profits by $52 million for a year when the pension plan actually lost $105 million.

But again, some executives don't draw a connection between news stories and their own practices. "All of our newspapers are free to editorialize without any being bound in any way, shape or form by corporate business policies," Mathis says. "Indeed, they are actively encouraged to do exactly that--express their views 'without fear or favor,' " she says, alluding to the credo written by Times Co. founder Adolph Ochs.

But others aren't sure that this kind of laissez-faire attitude is quite so harmless. "It matters what news media corporations do at the executive and corporate level," says Bob Steele, who heads the ethics group at the Poynter Institute. "The news media should be held accountable in the same way we hold power companies and insurance companies, the Catholic Church, brokerage houses and other institutions accountable. If we don't scrutinize ourselves with at least the same vigor that we use on power companies and insurance companies, then we run great risks of undermining our credibility. If we show favoritism to our company and our own industry, then our currency and believability in the public sphere can very well be diminished, and therefore the impact of reporting can be undermined."

"The greater the power a person or institution wields, the greater the scrutiny ethical journalism demands," says John McManus, a former reporter and journalism professor who directs a media watchdog project in the San Francisco area called "It doesn't matter whether that power is exercised by government or the private sector. In most American cities the daily paper is a monopoly and enormously influential. For its own good as well as the public's, it needs consistent and critical coverage."

But with only a handful of exceptions, "I don't think news providers cover each other very well," he adds. "It's difficult to imagine the CEO of the Tribune Co. or Knight Ridder siccing its reporters on the other. I suspect they'd dismiss such an investigation as an invasion of corporate privacy."

Business reporters and editors have a different perspective because they, not surprisingly, tend to focus on the financial aspects of a company rather than its political or social influence. By some standards the media cover themselves too much, says Chuck Jaffe, personal finance columnist for the Boston Globe and president of the Society of American Business Editors and Writers. Particularly on the Web, "you can find every least little tidbit about this person or that person," he says. "We do a much worse job of covering the financial statements."

By purely financial standards, he says, reporters may be inclined to overlook news outlets because they are "mature companies and relatively boring ones."

An option is the right, but not the obligation, to buy a share of stock at some set price. In a typical scenario, a company whose stock is trading at, say, $25 a share will give its executives options to buy shares in the future at $30. If the executives do a good job and the market price shoots to $50 a share, they can use their options to buy in at $30 and sell out simultaneously at $50, pocketing the difference.

Options became particularly popular among high-tech startups because they are a way for cash-starved companies to pay executives and other employees. As long as companies don't have to show the cost of issuing options as an expense, they can use their funds for other purposes and report higher profits to investors. During the bull market of the 1990s, companies in many industries made wide use of options, partly to provide competitive compensation packages and partly out of a belief that share prices were the best way to estimate a company's value--a notion that has fallen from favor as many once-high-flying stocks have proven to

Using options, some media firms argue, benefits both shareholders and employees. "The Times Co. has widened its use of options over the past few years because we do believe that it is one of a number of ways that we can effectively align the interests of employees and shareholders," says Mathis. Stock options and an employee stock-purchase plan have "helped us to increase our shareholders' return on their investments by 140 percent since 1996. In other words, a win/win situation."

The argument in favor of counting options as an expense has two dimensions. The first is that companies are allowed to deduct the cost of stock options on their tax returns, which means they are already getting a benefit from the U.S. Treasury (and despite their complaints about the difficulty of putting a precise value on stock options, they are already doing so). The second is that stock options can distort management's perspective and give it incentives to take shortcuts that can inflate share prices in the short term but damage the company in the long run. By contrast, if stock options are treated as an expense and reported to shareholders, companies will use them more judiciously--and executive compensation will be tied more closely to actual financial results rather than the whims of the stock market.

News companies reject the idea that they should be leading the charge to clean up corporate America by changing their own accounting practices--in particular, the way they account for options. "We have no problem with expensing stock options as long as the method is established and consistent," says Tom Chapple, Gannett's general counsel. "What's happening now is that different companies are using different methods, and that does not lead to good disclosure."

Lou Anne Nabhan, spokeswoman for Media General, agrees. "Our position [on whether stock options should be shown as an explicit expense in the income statement] is that comparability is the more important factor," she says. "We think it's important that a process be established that all companies follow so there is comparability for the benefit of investors."

Gary Pruitt, chairman and CEO of McClatchy Co., says counting options as an expense is not that simple. "You have to come up with a reliable valuation," he says. Similarly, he adds, "pension accounting is very complex," because it is based on a series of interrelated assumptions about the future that require actuarial analysis.

His firm has lowered its estimates about future pension earnings since it issued its annual report early this year. The projection is one of the ways to assess how aggressive a company may be in using pension assets to boost its bottom line. The higher the projected rate of return, the greater the chance the company is booking profits that will never materialize. Some industry firms started the year with projections as high as 10 percent, but GE dropped its estimate to 8.5 percent and the Post to 7.5 percent.

Many factors come into play when estimating pension funding needs, including how much companies expect to pay their employees in the future. Based on their own investing experience and the mix of assets in which they are investing, some companies argue that double-digit returns are reasonable given the long-term nature of pension administration. On the other hand, Buffett, perhaps the most successful long-term investor of the modern era, has reduced the expected rate of return for the pension plan at his company, Berkshire Hathaway, to 6.5 percent, from 8.3 percent.

Small percentage changes in projected pension earnings can have huge ramifications. For example, GE said its more conservative approach will cost it $780 million in pretax earnings this year, and the Post pegged its hit at $22 million. Many pension experts believe that most other firms will have to follow this lead and reduce reported profits--or reduce the value of their retirement benefits.

Aside from option and pension accounting, the other key issues that have been raised by scandals such as the Enron and WorldCom bankruptcies have to do with the independence of outside auditors and the oversight exercised by boards of directors. In 2001 most media firms paid their auditors far more for other services than for examining their books. For example, Dow Jones & Co. paid PricewaterhouseCoopers $1.2 million for auditing and nearly three times that amount for other services, including tax work and management consulting. The New York Times Co. paid Deloitte & Touche $1.2 million for auditing and $2.4 million for other services.

Concerned that accountants would fudge their audits in order to hold onto their contracts for additional work, Congress voted this summer to outlaw practices like Pulitzer's use of an outside accountant for internal auditing. It also put limits on other kinds of services that independent auditors can provide and required corporate audit committees to approve outside accountants for projects like tax preparation. Most media companies will have little trouble complying with the new rules.

As for corporate boards, tighter regulation has already had an effect at Disney, which owns ABC and has long been criticized as an example of corporate cronyism. In an ideal world, top managers have a limited presence on the board and nonexecutive board members are able to provide independent advice and oversight. But conflicts arise when board members have financial ties to the company. Such is the case at Disney, which paid $1.3 million to the law firm of one of its directors, former Sen. George J. Mitchell. In August the company disclosed that four of its other independent directors had relatives employed at Disney, a situation that will be more problematic under new rules from the New York Stock Exchange and the Securities and Exchange Commission. In light of the new regulations on board members, Disney said it will shrink and reorganize its board.

Other media companies are not likely to feel much pressure to reshuffle their boards, however. It's not unusual for media firms to have boards that include several inside executives as well as representatives of law firms or other companies that they do business with. But such companies can still meet the new requirements, the most important elements of which are that a majority of directors be independent and that certain committees have only independent board members. Even this requirement is relaxed for businesses (such as many newspaper companies) that have two-tier stock ownership, where family members or trusts control the corporation through one class of stock and outside shareholders can only invest in a class that offers limited influence.

Board compensation is another matter that won't likely change. Directors at media companies can receive more than $100,000 a year and often have a strong incentive to please Wall Street, since a significant part of their compensation comes in the form of stock options. The size and form of director pay have not been a major part of the debate over corporate behavior, although some watchdog groups say that highly compensated board members can be overly deferential to a company's executives.

Reporters who write about financial issues say they do not feel pressure to leave their companies out of the story, and they question how important it is to include them. Justin Fox, the Fortune writer who called for stock options to be universally counted as expenses, points out that in a previous article he had described how much it would have hurt AOL Time Warner to include the cost of options in its income statement.

"It's the role of a publication to take an editorial position that has nothing to do with the interests of the corporate parent," he says. "But it's not the role of the journalist to berate their companies. To some extent, the sins are the same" for all corporations.

"I don't want to insert us into stories where news judgment tells you we are not a factor," says David Henry, the lead writer on BusinessWeek's pension accounting article. "If you know your company is doing something that your story is about, yes, you need to write about that. To what extent you should go looking to investigate your company to see if it fits in as an example, I think my inclination is to go where I've always gone, follow your nose for news judgment."

Business writers should write about their own companies when they meet the tests of consequence and prominence, he says. "Otherwise you're making yourself seem more important than you really are."

McManus argues media companies may actually deserve more attention than their financial profiles might suggest simply because of the influence they exert in setting political and social agendas. But when it comes to covering the media industry, reporters often are discouraged by institutional forces.

"It's not an easy thing to do because reporters can be paid by the people in the counting house who may be the subject of a reporter's investigation," says Poynter's Steele. "This is where the principle of journalistic independence applies. Editors and reporters should not be unduly influenced by real or perceived pressure by executives who would deter meaningful, substantive reporting on their own company."

News organizations are also prickly about how they are portrayed. "I have been writing about newspaper and news executives for basically all of my adult life," says David M. Cole, who publishes a newsletter on the newspaper business called NewsInc. "Newspaper people are a lot more thin-skinned, more sensitive and take greater umbrage than people in the general populace."

Ultimately the biggest obstacle to coverage of the news business may be neglect, benign or otherwise.

Although news organizations have increased their emphasis on business topics in the last 15 years and expanded their expertise in this area, it's one of the many specialized subjects where coverage isn't as thorough or as skeptical as it could be. "There is a tremendous need to train people who are trying to cover companies to make sure they understand how to read a balance sheet," says SABEW's Jaffe. "Fundamentally, we don't ask enough questions because we don't want to look stupid." He sees the lack of knowledgeable, aggressive reporting as a problem that extends through much of journalism. "I don't know if there's ever been enough critical questioning."



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