Unfair, but a Good Thing   

Two-tier stock structures have benefited the Times Co. and other media companies. Fri., November 30, 2012.

I first met Punch Sulzberger in the early 1970s, when he approached me and other securities analysts in a corridor near his office on the New York Times Co.'s executive floor. He was giggling, palming what appeared to be a miniature Slinky. I wondered: Could this really be the chief executive of this important, prestigious company?

Well, yes, he was. Sulzberger, who died in September, not only had a down-to-earth personality that could appreciate a toy, he possessed that most important ability of a boss — to hire exceptional people to run a company and then not mess with them. That he was able to do this, and thereby preserve the journalistic heritage of a company acquired by his family in 1896, is owed wholly to an unfair capital structure in which the Sulzberger family owns the super-voting stock that controls the enterprise. Everybody else, from individual investors to major financial institutions, owns weak-voting stock bought in the public market. Despite their holdings, they essentially have no say about how the company is run.

Just how important the family's power and journalistic resolve were became apparent in the mid-1970s, when the flagship New York Times appeared headed for unprofitability because of declining circulation and advertising and rapidly rising costs. Rather than slash and burn, the company — counterintuitively — began investing heavily in the Times' journalism, adding sections devoted to business, the weekend, food, living and a variety of special interests that the hard-news oriented Times had long ignored. In time, circulation and advertising began to rise.

Had the company been conventionally organized, with one class of stock, it is highly likely that shareholders would have revolted at the prospect of heavy spending in the face of adversity; they may well have voted out management. That, at least, would be the typical reaction of shareholders, who are usually more interested in return on investment than the nebulous future benefits of spending big on editorial quality. Or disgruntled shareholders might have been open to selling to corporate raiders, who are always eager to acquire companies and plunder their assets. Instead, then-Managing Editor Abe Rosenthal, who received most of the credit for the newspaper's transformation, had the unwavering backing of Punch and the rest of the Sulzberger family owners.

I dwell on the experience of the Times company and its dual stock classes because it turned out so well and as an introduction to an ownership structure that has been adopted by many other newspaper companies (publicly owned as well as private) as a means to perpetuate family control, for good or ill.

Dual stock classes did not originate with newspaper companies. The first examples appeared at other family-controlled firms around the beginning of the 20th century, and they have always been controversial. Indeed, the New York Stock Exchange for most of the last century refused to list companies with unequal-voting common stock, initially forcing the Times Co. and others to seek listings on the American Stock Exchange or take to the over-the-counter market. The NYSE finally gave in during the late 1980s. That was around the time Dow Jones, owner of the Wall Street Journal, sought to convert to two classes when the Bancroft family's controlling share of the single stock dropped to 56 percent and appeared likely to plummet more.

The reason so many newspaper companies chose dual classes of stock was the same as for other family companies early in the last century — over time, family ownership is inevitably diminished by sales of stock to outsiders, either by disgruntled family shareholders or trustees of family estates seeking a higher price than offered by the company. Always looming in such cases is fear of a takeover.

Some newspaper companies did not choose two-tier stock structures, figuring the family share would always be large enough to ward off raiders (Times Mirror, Tribune, Knight Ridder) or, where family control was not at work (Gannett), shareholders happy about the company's high margins would protect current management. Dow Jones eventually went to two classes, but lack of cohesion among the owning Bancroft family eventually led to a takeover by News Corp. anyway.

Of the newspaper companies that chose two-tier structures, those still operating include, in addition to the Times Co., the Washington Post Co., Journal Communications (Milwaukee Journal-Sentinel and other properties), McClatchy and Scripps Howard. Lee Enterprises recently reverted to one class when its super-voting shares expired by contract.

Six years ago, the Times Co. fended off an assault on its two-tier structure by Morgan Stanley. But despite the criticism they have attracted, dual classes often have benefited journalism. If unfair to some shareholders, the structure generally has not been imposed on them. They bought their shares with their eyes wide open.