Like a lot of previously family-owned firms, especially in the newspaper industry, the New York Times was incorporated with multiple classes of stock. Public investors own Class A shares, with one vote per share, while the Sulzberger family owns 91% of the Class B shares, which represent only 19% of the company's equity but have effective voting control.
The Sulzberger's management has not been particularly beneficial for the company's other shareholders. In January 2005, for example, Business Week reported that:
NYT Co.'s stock is trading at about 40, down 25% from its high of 53.80 in mid-2002 and has trailed the shares of many other newspaper companies for a good year and a half. "Their numbers in this recovery are bordering on the abysmal," says Douglas Arthur, Morgan Stanley's (MWD ) senior publishing analyst. ... In fact, for much of its history, the Times barely broke even. Recasting the paper into a publicly held corporation capable of pursuing profit as determinedly as Times editors chase Pulitzers was the signal achievement of Arthur Jr.'s father, Arthur O. "Punch" Sulzberger Sr. Still, NYT Co. consistently fails to post the 25% profit margins of such big newspaper combines as Gannett Co. (GCI ) and Knight-Ridder Inc. (KRI ) mainly because of the Times's outsize editorial spending, which the paper does not disclose but which is thought to exceed $300 million a year.
Now Morgan Stanley is trying to upset the apple cart:
Morgan Stanley Investment Management said Tuesday it withheld votes for the Times' director nominees because it believes the company's board and management have become unaccountable to shareholders.
The firm, which says it owns more than 5% of the Times' Class A stock, called for the elimination of the dual-stock structure that leaves control of the board with minority shareholders led by the founding Sulzberger family. ... "MSIM believes that the dual-class voting at The New York Times Company, which is an exception to the general rule of one-share, one-vote, creates special privileges as well as responsibilities," the firm said in a Tuesday-afternoon statement out of London. "MSIM contends that the Board and management at The New York Times Company have failed to fulfill these responsibilities effectively.While it may have at one time been designed to protect the editorial independence and the integrity of the news franchise, the dual-class voting structure now fosters a lack of accountability to all of the company's shareholders."
(For a discussion of the mechanics of electing corporate directors and what it means when a shareholder withholds its votes, see my post Withhold my vote.)
I'm no fan of the Sulzberger's holier-than-thou approach to journalism, but I'm also no fan of shareholder activism. And, in this case, I'm particularly unsympathetic to Morgan Stanley's position.
I wrote about dual class stock in my article The Short Life and Resurrection of SEC Rule 19c-4, in which I explained that dual class stock structures established in an IPO (as was the NYT's) pose few concerns:
Public investors who do not want lesser voting rights stock simply will not buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off the firm offered in recompense.
Morgan Stanley bought Class A shares in the Times knowing that the Sulzbergers were in charge and would remain so by virtue of the dual class stock structure. Morgan Stanley knew or should have known that dual class stock presents a serious agency cost problem because incumbents who cannot be voted out of office are almost impossible to discipline. Morgan Stanley accepted whatever trade-offs the deal entailed as appropriate compensation for that risk.
Now Morgan Stanley wants a second bite at the apple. I say, Morgan Stanley made its bed and now must lie in it.
