Stock Shares' Ongoing Class Struggle

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Who would give in first, the Fords or the Bancrofts? The members of the automobile dynasty and the clan behind The Wall Street Journal control their respective companies through supervoting, which in theory gives them iron-clad control while ordinary investors have to make do with reduced voting power. But recent developments, including Rupert Murdoch's whopping $60-per-share offer for Dow Jones (DJ) and press reports that some Ford family members want to sell off part of their stake in troubled Ford Motor (F), raise the question: Is the dual-class structure going the way of the dodo? [The Ford family has denied the report.]



The headlines have put a fresh spotlight on the perils of a dual-class voting structure for shareholders. Typically in these cases, a few people, such as company insiders or founding family members, have voting power far exceeding their financial stake in the company. This somewhat archaic structure--a frequent target of criticism from corporate governance experts and investors--continues to affect how deals transpire on Wall Street.



The Ford news, reported by Bloomberg on May 14, follows after Rupert Murdoch's News Corp. (NWS) made an astronomical $60-per-share bid for Dow Jones when the stock was trading at around $36 [see BusinessWeek, 5/14/07, "Crazy Like a Fox"]. Both Dow Jones and News Corp., have similar stock structures, but the headlines continue to focus on Dow Jones because the controlling Bancroft family has declined to sell its stake to Murdoch for fear of how the owner of the New York Post and the racy British tabloid The Sun would change the esteemed business newspaper.



Indie Media Champions

Wealthy families, like everyone else, can generally be counted on to look after their own interests. But the phenomenon of supervoting class B shares has gained special prominence among those families who own leading newspapers, such as the Bancrofts, The Washington Post's (WPO) Grahams, and The New York Times' (NYT) Sulzbergers.



In these cases, the families see themselves as custodians of the "public trust" in an independent media, says James Walden, a media analyst at Morningstar (MORN). In addition to protecting the family fortune, they may also see themselves as serving freedom of the press, which may conflict with Wall Street's demand for constant growth. In a case like Ford or another dual-class company such as Wrigley (WWY), there may be less conflict between the priorities of insiders and normal investors, as the focus tends to stay on plain old profit and loss.



Dual-class share structure is not limited to old-line dynasties. Take search giant Google (GOOG), which decided before its 2004 initial public offering to allow insiders a larger degree of control over the company. While the company has argued that the dual-class shares provide a degree of immunity from Wall Street's demand for growth, S&P analyst Scott Kessler says it's an "open question" to what degree Google owes its remarkable financial performance to this freedom. [S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies (MHP), a media company with only one class of shares. The founding McGraw family has an extensive stake in the company.]



Regarding Google, Kessler says: "I would submit that the dual-class structure has had a minimal impact" on the company's success. Furthermore, he adds that it hasn't pleased investors, who have seen a flat share price since January, 2006.



Mushy Premise?

Even so, Google insiders haven't had to endure the pressures weighing on The New York Times. In addition to growing concerns over the viability of newspapers in the digital age, the Sulzbergers have had to face off against activist investors who stepped up their complaints about the family's detachment from the demands of its shareholders. Investors have seen the value of their stock fall below $25, from almost $50 in 2004. But like the Bancrofts, the Sulzbergers haven't budged from their position.



However, speculation that the Bancrofts could sell to Murdoch, for $60 per share or perhaps more, throws into question the relevance today of having two classes of voting stock. On one hand, not selling will have investors braying that the company isn't maximizing the worth of its shares. "The fact that they haven't sold shows you how relevant [the structure] is," says Charles Elson, a corporate-governance expert and a professor at the University of Delaware. Elson adds that the structure is based on a mushy premise that "assumes the everlasting wisdom of those holding the voting control."



Knowing the Ropes

Elson says that for a company, the "responsibility for accepting public funding is to give each shareholder a vote commensurate with their interest." And he cites the rancor against The New York Times as an example that the tide may be shifting to his point of view.



Nonetheless, stock market players shouldn't expect an immediate sea change. First of all, investors know that when they place their money in companies with supervoting B shares, they're giving up a degree of control in exchange for what they hope will be attractive gains.



"If things are going well, it's a situation lots of people are willing to accept," says Claudia Allen, chair of the corporate governance practice group at Chicago law firm Neal, Gerber & Eisenberg. Shareholders will undoubtedly continue to gripe, but in a capitalist system, says Allen, "you generally can't force someone to sell something." For now, the Bs can tell Wall Street-- and the rest of the world--to buzz off.