The Tragedy of Public Ownership   

Newspapers have paid a steep price for going public.

The tragedy that has engulfed Knight Ridder, a company with a well-deserved reputation for publishing good newspapers, makes one fact abundantly clear — public ownership of newspaper companies is not good for journalism.

A fundamental problem is that institutional investors, who inevitably wind up owning the vast majority of shares in publicly traded companies, have goals that basically are inimical to the journalistic mission of newspaper publishing. These investing institutions are mainly interested in financial return in the form of growth in profit and share price.

That newspaper companies might have some objective other than enriching shareholders — say, publishing excellent newspapers — is incidental to the concerns of institutional investors, if it is given any consideration at all.

Seeking a good return on investment is not evil. Indeed, it is at the heart of our free-market economy. But pursuit of a robust return to the exclusion of everything else can have evil effects on companies that provide services deemed essential to our democratic government. Newspapers, of course, provide such a service, being the sole type of media that gathers and distributes mass amounts of news to citizens.

How institutional investors' biases insinuate themselves into the appraisal of newspaper companies was illustrated by comments that Christopher H. Browne of Tweedy, Browne Co., a newspaper investor, made to the New York Times about P. Anthony Ridder, Knight Ridder's chairman. "He wasn't a good operator," Browne said. "Look at McClatchy, and it's night and day."

This is both cruel and misinformed. When Ridder ascended to the leadership of Knight Ridder in 1995, he took over a company with 33 dailies in 31 markets. Some of the markets had strong growth, others did not. While Knight Ridder subsequently did discard deeply troubled newspapers in Long Beach, California, and Gary, Indiana, and last year gave up papers in Detroit and Tallahassee to Gannett in exchange for cash and three high-margin Gannett dailies in the Northwest, Ridder mainly tried to keep the company together by publishing quality newspapers.

What Ridder did not do was cut news staffs to the bone in ways that would greatly imperil Knight Ridder's legacy of publishing good newspapers. The company's papers generally had larger news staffs than is typical for the industry, which no doubt contributed to its legacy of quality. Knight Ridder, like other newspaper companies, has reduced staffs in recent years, and Ridder has been chastised in Knight Ridder newsrooms and by media critics. But at least the cuts were not draconian (I recall telling a Philadelphia Inquirer staffer that someday he would look back fondly on Tony Ridder). Ridder also did not sell off other low-performing papers, sentencing them to uncertain fates.

Had he done more of these things, he would have been cheered on by institutional investors, but he would have wound up leading a more profitable company diminished in size and journalistic reputation. Because he did not do these things, he is now losing the company altogether and must suffer ignorant comments about his ability to manage. In fact, he did the best that could be expected with the hand he was dealt.

To extend the comparison with McClatchy, it is true that the Sacramento-based company also has a reputation for publishing fine newspapers, and it is true that McClatchy's financial performance has been much stronger than Knight Ridder's. But McClatchy has been careful to acquire newspapers only in growing markets, where it is far easier both to publish good newspapers and achieve high profits. Gary Pruitt, McClatchy's chief executive, was dealt a far easier hand to play.

Several publicly owned newspaper companies, McClatchy among them, are protected by having two classes of stock, with non-trading stock held by founding families controlling the board of directors. Yet even these protected companies in time become sensitive to the demands of institutional investors and wind up, at least to some degree, dancing to Wall Street's tune. Dow Jones, the New York Times Co. and the Washington Post Co. have all cut newsroom staffs, with an inescapable impact on journalism quality.

Some institutional shareholders of the New York Times Co. recently withheld their votes in a directors' election to protest the company's financial performance. A spokesman for the investment arm of Morgan Stanley vowed to seek elimination of the company's dual-stock structure so that shareholders can demand better management (read: more attention to the bottom line) and higher stock prices.

As for the McClatchy-Knight Ridder deal, it would take only 21 percent of Knight Ridder's shareholders to block the acquisition under the company's bylaws. But with institutions owning more than 90 percent of the shares, and with McClatchy deep in negotiations to sell the 12 Knight Ridder papers in slow-growth markets it does not want, this is not likely to happen.

The tragedy goes on.