Webster's defines integrity as:
- firm adherence to a code of especially moral or artistic values
- an unimpaired condition
- the quality or state of being complete or undivided
Talk about a loaded word. "Firm adherence to a code of especially moral or artistic values?" Which icon of business can we rely on for that? Joe Nachhio? Richard Scrushy? How about ice sculptor Dennis Kozlowski?
Yet managers proclaim integrity constantly. Former Dow Jones (NYSE:DJ) chairman Peter Kann -- an excellent steward, in my view -- is only the most recent.
This week, he praised members of the controlling Bancroft family for declining a $5 billion takeover bid of Dow Jones from News Corp. (NYSE:NWS). Quoting from Kann's letter to the family: "There is a higher calling to what the people of Dow Jones do each day. They are not merely producing and selling products like corn flakes or computer chips."
Kann's stance raises two interesting questions. Does the right of the citizenry to a free press trump the right of shareholders to make a profit? And more importantly, can these apparently conflicting ideas coexist?
23 years in the making
The Bancrofts didn't think so. According to reporting from The Financial Times, Dow Jones, publisher of The Wall Street Journal among others, first proposed splitting its stock into two classes back in 1984, with superior voting rights going to the shares owned by the family.
For then-chairman Warren Phillips, the move was apparently a question of integrity. "The plan is one designed to protect Dow Jones' publications and services against uncertainties that might arise early in the next century," Phillips said at the time.
Fast-forward 23 years. Newspapers are losing subscribers daily, and thanks to Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT) and others like them, print advertising has become more and more unpopular.
A duel over dual share classes
Some large investors have used the awful business climate to force editorial boards to make drastic cuts or, in the case of Knight Ridder, sell everything. (McClatchy Newspapers (NYSE:MNI) acquired the bulk of Knight Ridder assets in 2006.)
Journalism purists like Kann paint this sort of consolidation as the demise of a free press. I'll leave the task of assessing the fairness of that accusation to political writers. Nevertheless, history says that monopolies rarely benefit anyone other than their own investors. Seriously, ask Apple and Sun Microsystems shareholders what they think of Microsoft's heyday.
I know how that sounds. Chill out, professor. I'm aware that there is no media equivalent to Microsoft. Still, News Corp. seems to be within spitting distance most days, and were a deal for Dow Jones completed, the vast majority of U.S. newspapers would be controlled by a shrinking group of conglomerates.
But it won't happen. According to the Journal, the Bancrofts have locked up more than 52% of the voting shares, and that majority opposes a merger. Witness the power of the dual structure at work.
Some investors will undoubtedly see that as unfair; they're being robbed of a chance to earn a potential 60% premium for their holdings. I see it differently. Newspapers are, indeed, a public trust. They produce far more than profit.
As New York Times (NYSE:NYT) publisher Arthur Sulzberger Jr. put it in a prepared speech to shareholders at this year's annual meeting: "The journalism that The New York Times, The Boston Globe, the International Herald Tribune and our other newspapers produce is critical to their communities, to our nation, and to the world. Preserving their journalistic integrity is a fundamental responsibility."
I agree. So, apparently, does Warren Buffett, a large shareholder of Washington Post (NYSE:WPO) via Berkshire Hathaway. Speaking at this year's annual meeting, Buffett said that the dual structure has "no effect on the woes of the newspaper business."
Something smells, and it isn't the ink
I say, let the dual structure be -- but with one really big condition. From now on, Dow Jones, you have to be as transparent as the institutions that you purport to hold to a higher standard. Sadly, you have some work to do.
Check out this 8-K filing with the SEC. Each of Dow Jones' top managers, including relatively new CEO Richard Zannino, received above-targeted bonuses for their performance during 2006. I have no problem with that on principle: Revenue was up in every category, operating income improved, and return on capital inched higher. Few media outlets can claim similar success.
What bothers me is the lack of disclosure. For example, though the 8-K says that the financial measures included in determining bonuses were "earnings per share, return on investment and ... direct operating income of the business units they lead," there's no mention of what the targets were, and by how much they were exceeded.
Worse, 30% to 40% of the bonuses paid were for "the development or implementation of the Company's strategic plan, improving market share, leadership development, creating a high performance culture, improving the Company's use of technology, implementing new products and offerings, and becoming more cost efficient."
Wow, that's great. But how, pray tell, is any of this measured? You won't find an answer in the proxy filing.
Here's my point. As much as Dow Jones appears to be tracking the right metrics, shareholders have no idea what sort of performance management demands of itself. That's entirely unacceptable.
The Foolish bottom line
Newspapers do harbor a sacred trust, and for that, they must be protected. That's why I don't object to the dual-share structure on principle.
But that protection should come with a price. As owners, investors are entitled to know not just what their stewards are being compensated, but also how and why.
That's not happening today, and Dow Jones has a chance to set it right. If you take that chance, Mr. Zannino, you'll show investors that integrity isn't just a word used to justify a comfy cocoon that, so far, has done little more than keep shareholders at arms' length.
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Fool contributor Tim Beyers, ranked 5,385 out of more than 28,500 rated investors in Motley Fool CAPS, reads his local paper, The Denver Post, daily. He's also a fan of the competing Rocky Mountain News. Tim's wife holds Berkshire shares, but he didn't own shares in any of the other companies mentioned in this article at the time of publication. His holdings can be found at Tim's Fool profile. His thoughts on Foolishness and investing may be found in his blog. The Motley Fool's disclosure policy is still out by the pool. Come on in, the water's warm.
