According to BusinessWeek, the age of the imperial CEO may be over. But it’s still raging in at least one storied blue-chip. This company, which soared in the 1990s, has underperformed the S&P 500 and industry peers for several years. The CEO, at the helm for 14 years, has angered employees by seeking to slash benefits while increasing his own compensation and that of his spouse, who is a senior executive. Meanwhile, the board has just proposed a measure to allow the family that controls the firm to sell more shares while maintaining control. Oh, and its core operation lost money in the most recent quarter.
It’s the sort of story that the Wall Street Journal would splash on its front page. But it won’t, because this one is taking place at Dow Jones, which owns the Journal.
Dow Jones invented financial journalism and still dominates it. The Wall Street Journal contains an appealing mix of great reporting, zeitgeist-tapping consumer reporting, and a rabidly right-wing editorial page. It is at once a remarkable educational tool and a must-read for ultrasophisticated managers and investors. But while the paper is a national treasure, Dow Jones—the company and the stock—has been a turkey for the last several years.
CEO Peter Kann joined the Journal in 1963, made his bones as a swashbuckling Pulitzer Prize-winning foreign correspondent, started the Asian Wall Street Journal, and climbed the managerial ladder. He was named CEO in 1991 and chairman the same year. Kann is married to Karen Elliott House, who joined the Journal in 1974 and also won a Pulitzer. Since 2002, she has been senior vice president and publisher of all the Journal’seditions.
It’s hard to think of a more distinguished husband-and-wife journalistic team. As business executives, however, Kann and House have been less successful. The Journal was one of the biggest beneficiaries of the late 1990s boom. The two most flush sectors of the New Economy (financial services and technology) are the two most important sectors of its advertising base. But both disappeared after 2000. Advertising volume at the Journal has fallen for four years straight.
Kann and his team have also alienated shellshocked employees. After Sept. 11 hit remarkably close to home, many reporters and editors were relocated—temporarily, they thought—to South Brunswick, N.J. But not all who wanted to were able to resume working in Manhattan. Then Kann’s highhanded approach to contract negotiations in 2003 and 2004 instilled a rare sense of class consciousness among the Journal’s reporters. “When employees hear senior management saying that it needs to spend $12 million or so a year on bonuses, and at the same time needs to slash health care in order to save $4 million or $5 million, employees take that as a slap in the face,” stock market reporter E.S. Browning wrote. Last summer, the union ratified a new agreement. (Here’s how the company and its employees described the outcome. I link, you decide.)
Kann and House have grown wealthy working for the Journal. The most recent proxy shows they own about $27.8 million in Dow Jones stock. In 2004, the two received a combined $3.76 million in compensation, not including the value of stock options, most of which are under water thanks to poor stock performance. (This chart shows Dow Jones compared with both the S&P 500 and the New York Times Co. over the last five years.)
Now, the pay isn’t egregious compared with other companies. And it’s not like Kann, House, & Co. have simply been sitting on their hands as the Journal’s business declined. The company has been building the subscription base to the online version of the Journal,now up to 731,000. Seeking to build a larger online business, in January it bought financial-news Web site MarketWatch. A weekend edition of the Journal is set to launch this September.
But at some level Kann simply doesn’t get it. At Dow Jones, whose publications have done so much to drive home the point that publicly held companies should be run as democracies in which one share equals one vote, there’s a pervasive sense that some shareholders are more equal than others. Members of the Bancroft family control the company through a special class of stock, each of which carries 10 votes. Each share of common stock—the kind you and I and mutual funds can purchase—carries one.
When family members want to raise cash, they can convert their shares—Class B shares—into common shares and sell them. The company’s current rules hold that once the family’s holdings of Class B shares fall below 12 million, all of them convert into common stock, and the family loses voting control. But in the proxy statement issued in March, Kann and the rest of the board advocate lowering the triggering threshold to 7.5 million. In other words, the family could sell an additional 4.5 million shares (worth $152 million in today’s price) and still retain effective control of the company.
The move may fly in the face of equity and shareholder democracy, but Kann and the board are recommending it wholeheartedly. (The great mystery of how he manages to maintain his job is thus solved!) That’s grating to long-suffering shareholders who, unlike the heirs and Kann, ponied up their own cash for their shares. In fact, T. Rowe Price, which owns nearly 15 percent of the common stock, has apparently complained about the move. (The company responded in this letter.)
But more troubling news to shareholders was embedded in last week’s earnings release. Revenues in the print publishing unit—i.e.,the Journal—fell 8.8 percent from the year-ago quarter. Advertising linage at the U.S. Wall Street Journal was down 9.9 percent in March alone. Worse, “Print publishing had an operating loss of $7.1 million in the first quarter.” In other words, the daily diary of the American dream, the paper designed to help you make money, is probably losing money. And as the flagship drifts on, the captain who guided it into becalmed seas remains firmly entrenched at the bridge.