The Question Behind Jay Harris’ Resignation

Does Wall Street

Have to Trump Main Street?

Analysis by John McManus

You can easily imagine former San Jose Mercury News publisher Jay T. Harris’ chagrin.

Last year, newspaper analyst John Morton estimates, the Mercury earned a profit of better than 30 percent of sales. Not only is that four times higher than the national average for an American firm, but it’s multiplied by a huge sales volume. According to SEC (the federal Securities and Exchange Commission) filings, advertisers and subscribers spent $341,400,000 last year on the Mercury. That creates a pre-tax profit of more than $102 million.

That’s enough to employ 2,000 more journalists than the current staff of about 400. And Harris was asked to sacrifice people to protect the profit. Instead, he resigned in protest.

“Much greater priority is given today to the business aspects of our enterprise than is given to fulfilling our public trust,” Harris wrote his superiors. “I fear as well that we no longer sense the same level of ‘moral obligation’ to ‘excel in all that we do’ and that our founders’ commitment to publishing ‘high-quality’ newspapers is no longer the powerful drive in the company that it once was.”

Harris is not the first respected publisher to resign after complaining of Knight Ridder CEO P. Anthony Ridder’s profit-demands. The legendary Gene Roberts preceded him in Philadelphia and David Lawrence in Miami.

Harris’ resignation raises the most important question facing journalism in an era when most major news corporations are owned by investors: Do the interests of shareholders trump those of the reading (or viewing) public? Put another way, must publicly-traded news media put private profit above public service?

From an economic perspective the answer is simple and unequivocal: Yes!

P. Anthony Ridder

It’s the shareholders’ money, not Tony Ridder’s

Hersh Shefrin, the Mario O. Belotti Professor of Finance at Santa Clara University, explains: “All the money that a public-owned company makes is the shareholders’ money. It’s not Tony Ridder’s money.” Mr. Ridder has a legal duty to make as much money as he can for his shareholders, short of breaking the law.

“If you’re going to do something that benefits the public at large that hurts your shareholders, why should they pay?” asks Prof. Shefrin. Those shareholders include not just the rich, but many average people whose retirements depend on stock funds.

What if Mr. Ridder just said ‘no’ to Wall Street?

From a practical standpoint, he continues, if Mr. Ridder were to take a stand on journalism principle and tell Wall Street that it would let investors rather than the communities Knight Ridder serves absorb economic bumps, stock prices probably would fall at least as much as the percentage drop in profitability.

Across all of Knight Ridder’s 32 newspapers, last year’s profits totaled almost 21 percent of gross sales of $3.2 billion, according to SEC records. If economic turbulence were severe, Mr. Ridder’s pursuit of journalistic excellence might lower profits to 14 %--still double the national average. Under such a scenario, Professor Shefrin would expect stock to lose at least 26 percent of its value. (That’s the percent decline from a profit of 19% to 14%.).That would deprive the company of a substantial reservoir of cash.

Stock values, of course, are unpredictable. If investors flee a bear market, Knight Ridder’s stock might fall, regardless of profitability.

Short-term vs. long-term stock value

Were Knight Ridder to invest in journalism the long-term value of the company and its stock might rise. Professor Stephen Lacy, a media economist and director of the School of Journalism at Michigan State University, has been studying this question: “Preliminary indications are that the higher the [profit] margins [newspaper corporations earned], the higher the loss of circulation in the 1990s.” In other words, when newspaper chains have tried to wring all of the profit they could out their “properties,” they lost more readers than less profit-minded companies. (Overall newspaper readership has been declining as a proportion of the American population since the 1950’s.)

“Newspaper companies,” Prof. Lacy continues, “must readjust their profit demands or they will run themselves out of business, as Thompson [a defunct newspaper chain] did.”

Effects on journalism of a decline in stock price

Newspaper Analyst John Morton, who has followed the business for decades, speculates about what it might mean for Knight Ridder if Mr. Ridder drew a line in the dollars and resisted Wall Street’s demands for steadily increasing profits. “It would improve [newspaper] morale dramatically,” he says. On the negative side, a drop in stock prices would also affect the corporation’s ability to borrow money. “But newspapers are such heavy cash flow businesses even in hard times, that they wouldn’t be cut off from capital formation--even if their stock price fell.”

Unlike dot.coms that rely on investors’ dollars to operate, newspapers generate their own profits on a scale few industries can match. Newspaper profits rose last year, Mr. Morton points out, even as their stock prices declined.

A fall in stock price would limit the value of stock options Knight Ridder might offer as executive incentives, Mr. Morton adds. But “Knight Ridder tends not to hire people who are only interested in making money.” The company “has great management depth…so I don’t think that would have an impact on Knight Ridder management.”

Is a hostile take-over likely?

KR Vice President for News, Jerry Ceppos raised the specter of a hostile take-over if the company doesn’t keep profits high: “I don’t want anyone buying the Mercury News and cutting the staff in half.”

Mr. Morton responds: “Historically, newspaper companies don’t launch unfriendly tender offers for another newspaper company. It’s too collegial a business for that.” How about a take-over by a non-newspaper company? Mr. Morton says corporations with no newspaper experience rarely attempt to take over newspaper companies.

Knight Ridder cannot completely discount a take-over threat, the analyst adds, because a majority of its shares are not held by members of the original owning families or current KR executives. Some chains, notably the New York Times and the Washington Post have created two classes of stock, restricting shares with voting privileges for insiders. These companies are less susceptible to market vagaries, says Mr. Morton. “Don Graham (CEO of the Washington Post) has refused to dance to Wall Street’s beat.”

Knight Ridder’s profits were below 15 percent in four of the first six years of the 1990’s, according to SEC filings, and avoided a buy-out.

Would Mr. Ridder lose his job?

Might Mr. Ridder lose his job as CEO if he were willing to stand up to Wall Street? Mr. Morton thinks not. “Tony Ridder would survive at 12-15 % margins. He’s family and he has the support of the corporation executives. It’s hard to imagine that he wouldn’t.”

Would shareholders win a suit?

What of the economists’ argument that executives like Mr. Ridder owe their first allegiance to their shareholders?

Two responses. First, were Mr. Ridder to maintain a commitment to high quality journalism, he would be protecting the long-term interests of KR shareholders. It’s hard to imagine a court convicting a publisher of quality journalism in a share-holder lawsuit.

Private profit vs. public good

The second response is based on economic theory. As long as customers are rational, self-interested, able to distinguish high from low quality goods, enjoy choices, and those choices don’t harm society (effects economists call “externalities”) it may be reasonable--even a moral duty--for executives to maximize shareholder profits.

But all but a handful of American daily newspapers command monopolies in their core market. And the popularity of junk journalism, junk food, cigarettes, binge drinking, illegal drug use, and a host of other free consumer choices shows that many of us, at least some of the time, are irrational and not even self-protective much less self-interested. (Even hard-core economists have begun to question this keystone assumption.) 

Finally, what happens to society if news execs try to generate the largest possible audience at the lowest reporting cost? Certainly major shareholders in KR stock--who, like Mr. Ridder, are the decision-makers here-- will come out ahead in the short-term. But most of us will lose in the long run. As one newspaper CEO--Joseph Pulitzer--said in 1904: “Our republic and its press will rise or fall together. A cynical mercenary press will produce in time a people as base as itself.”   

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