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A family trust threatened by marital mistrust

Every entrepreneurial couple is aware (if not acutely, then at least subconsciously) that their mom-and-pop venture could face great risks if Mom and Pop were to divorce. But even a hugely successful conglomerate is not immune to disruptions due to martial discord. Consider the Hearst family, descendants of one of America's most legendary businessmen, whose multibillion-dollar media empire was threatened by the demise of the founder's grandson third marriage.

A recent lengthy article in Fortune recounts the scandalous tale of John Randolph "Bunky" Hearst, and his doomed marriage to Barbara. Bunky, the favorite grandchild of newspaper magnate William Randolph Hearst and a cousin of kidnap victim Patty Hearst, married Barbara in June 1990, about seven months into Bunky's recovery from a severe stroke. According to court documents, the article said, Barbara took over Bunky's finances and had documents drafted that essentially gave her legal ownership of his entire estate.

After they moved into a lavish new home in 1995, Barbara began distancing herself from Bunky. Arguing ensued, and the marriage fell apart. In 2004, during a dinner party hosted by the couple, Barbara served Bunky with divorce papers, saying, "Remember one thing: I am much smarter than you are," the Fortune article reports.

Bunky couldn't allege that Barbara had committed adultery because, for one thing, he had no concrete proof that Barbara had been unfaithful (though he had reason to suspect so, as the article luridly notes) and, for another, he himself had strayed (more lurid details along these lines are given in the report). So in 2006, as the case dragged on, Bunky's lawyers sued Barbara for fraud, alleging that he signed the papers that gave Barbara control of his assets while in a "weakened" and "vulnerable" condition.

Two years later, in August 2008, the Fortune article says:

Barbara's attorneys filed the motion they believed would make Bunky cry uncle and bring the proceedings to a quite favorable settlement: Barbara's attorneys served Hearst Corp. with a subpoena seeking all documents, from the time of Bunky's stroke until Barbara filed for divorce, that reflected Bunky's "actions and involvement" as a member of Hearst's board.... In other words, if Bunky was so incompetent that [Barbara] could commandeer his entire fortune, how could he be leading one of the world's great media corporations into the 21st century? ... That the documents would also reveal the secrets of a famously private company was, to believe Barbara's attorneys, merely a coincidence.

 

The Fortune report notes that according to the terms of William Randolph Hearst's will, Hearst Corp. is owned by the Hearst Family Trust. Five of the 13 seats on the board of trustees are reserved for Hearst's descendants -- currently Bunky and four of his cousins. The remaining eight seats are held by current or former senior company executives. "There are no real outsiders," the article notes.

The 13 trustees also sit on the company's 20-member board of directors. The other seven members, according to Fortune, are "Hearst family members, Hearst Corp. executives, or those who are both, like Stephen T. Hearst, head of the corporation's ranching and timber operations." Fortune reports that Hearst Corp. is "almost certainly the largest company managed by trustees."

Those trustees do not want corporate records released, the article says. After Patty Hearst's kidnapping in 1974, the trustees successfully petitioned the California probate court to seal Hearst's will and trust so they could not be accessed by future potential kidnapers.

Since [1974] the trustees have gone to extraordinary lengths to keep the family business private. Skeptics -- among them some renegade Hearst family members -- have suggested that the trustees' fondness for secrecy has more to do with their fear of being sued and preservation of their own sinecures than with protection of the family.

 

The Fortune article pointed out that if Hearst Corp. released the documents Barbara's attorneys requested, the papers would be available not only to Bunky's estranged wife, but also to the company's competitors, business partners and other very interested parties.

In a September 2008 response to Barbara's motion, Fortune reports, Hearst Corp. offered to stipulate that Bunky was "legally competent" in exchange for not having to turn over legal papers. Barbara's lawyers declined the offer. In December 2008, Bunky agreed to withdraw his fraud action in exchange for a divorce, and agreed to allow Barbara to keep most of the assets he had claimed she had embezzled. In response to Fortune's questions, Hearst Corp.'s attorney insisted the company had not forced Bunky to settle.

In the 58 years since William Randolph Hearst's death, the article notes, Hearst Corp.'s professional managers "have increased the company's value by about 2,500% while paying out multimillion-dollar disbursements." While competitors Conde Nast and Time Inc. are folding titles, Hearst reportedly has $1 billion available for acquisitions. One reason, as University of Delaware governance expert Charles M. Elson told Fortune, is that while Hearst's descendants have a voice, they have no control, since non-family members outnumber family members on the board of directors by a margin of 12-8.

The infighting that marked the Bancroft family's last days as the owners of Dow Jones couldn't happen at Hearst, as the family doesn't have enough votes to, say, quibble over a sale.

 

Fortune notes that the trust "has been sued by Hearsts and their ex-wives for three generations now" yet has remained unscathed -- though it will come to an end, and the company will be divided up, when the last of William Randolph Hearst's grandchildren dies.

[T]he case provided a test of how ironclad the Hearst trust is when compared with, say, the dual-class stock system that the Graham family of the Washington Post or the Sulzbergers of the New York Times use to control their dynasties.

 

Hearst Corp.'s financial success -- which, amazingly, has been achieved without the benefit of outside directors -- speaks for itself. The Hearst family's efforts to keep their dramas private, at least in this case, were somewhat less successful. I have written before about the role family members play in generating publicity, negative as well as positive, for their family and their company.

When structuring their companies, family business owners should consider all possible future ramifications, no matter how far-fetched they might seem. As Fortune wrote of Hearst Corp.:

How the corporation got dragged into the last throes of Bunky's marriage is now a cautionary tale in corporate governance.


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