The war against family control

By James E. Barrett

Public debate about the two-class stock structure at the New York Times Co. and other family firms centers on strategy, value and control. Rarely mentioned is envy, contempt or bias against controlling families.

Since 2005, Hassan Elmasry, an investment manager with Morgan Stanley, has been engaged in a hostile effort to weaken family control of The New York Times Company. He is angry that Times management has not responded to his suggestions for managing the business and increasing the stock price. And he is furious that the organization and ownership structure of the Times protects management from his efforts to force changes.

Elmasry, using the funds of investors whose money he manages, has bought a lot of Times Co. stock. He wants to have one vote for each share so he can influence the election of company directors. The chief executive reports to those directors and can be ordered by them to make changes to the company.

However, the Times, like many family-controlled firms, long ago structured itself so that the family could maintain control even after it opened ownership to others. In this case, two classes of common stock are involved. The A class, for most shareholders, has the one-vote-per-share value the opponent favors. Family members own 19% of these Class A shares. But holders of Class B shares have most of the votes; 88% of these shares are owned by the controlling family. What’s more, Class B voters have the right to elect nine directors, while Class A voters can elect only four directors. Six of the eight family members in the family trust must approve any change in this arrangement. Times CEO Arthur Sulzberger Jr., a great-grandson of founder Adolph Ochs, told the Wall Street Journal, “we are unanimous in our commitment to retain this.”

At the Times Co.’s 2006 annual meeting, nearly 30% of Class A shareholders withheld votes for directors. The company heard this message from several vocal shareholders led by Morgan Stanley’s man. Early in 2007, the company substantially increased its dividend. Several major assets, including a group of television stations, have been sold. So directors and the family listened and responded.

But as the 2007 annual meeting approached, the hostile campaign continued. When it was over, 42% of shares had been withheld in the election of directors. Several large shareholders withheld their votes for the second year in a row. However, Wall Street opinion is split, with strong management supporters in evidence also.

Control is always a primary issue in family firms. It’s a very noisy, public issue when other people’s money is involved. Recently the focus has been on family-controlled, publicly owned newspapers (the New York Times, Wall Street Journal, Chicago Tribune, Los Angeles Times and Washington Post), with investors complaining that two-class ownership is unfair.

The dual-class stock structure is a long-established approach that dates to the late 19th century and possibly earlier. One class concentrates control among a favored few while the second class represents ownership interest with much less power and no ability to control the company’s destiny.

The smaller group with power dominates the board, management, strategic planning and major decisions about the future. The (usually) larger group, with less powerful shares, is expected to be passive. It’s likely that a majority of the equity capital in family businesses is subject to these setups. (See Exhibit A for ownership options.)


EXHIBIT A: Capitalizing a company

When a firm is first organized, decisions are made on who should control the firm, how much equity capital it should have, how much debt is needed and available, and how much risk investors will accept in return for potential rewards. As time passes and circumstances change, adjustments are made to these early decisions.

People willing to assume the least risk lend a company debt. Most of the commercial bank debt a company owes is at lowest risk. It gets paid first after taxes and payrolls, which have higher priority by law.

A bit riskier is loans subordinated to other debt. That sets three ahead of them. Usually the tradeoff is that the company pays somewhat higher interest rates and fees and may accept restrictions on management. Guaranteed loans transfer repayment responsibility from the company borrowing funds to the guarantors. Preferred stock has priority over common.


Name Category Comment
Voting common
Stock shares
Equity This is the generic type that is most common. It is sometimes bundled in packages of several types of equity, debt, warrants or options.
Equity A favorite in family firms as a gift to family members or sale to others (employees, etc.). Does not dilute control but allows growth in value.
Voting common
Equity Each share is allotted a multiple of common votes. Example: A share may equal 10 or 20 regular common voting shares and/or have greater power to elect members of the board.
Preferred stock
Non-voting with
a fixed dividend
Equity Stock has no voting power but usually has a fixed dividend (perhaps 10%). If dividend is not paid, stock acquires voting power until arrears are paid.
Trust shares Equity
Arrangement to assist in estate planning.
ESOP Equity Employee Stock Ownership Program purchases some or all shares from controlling owners. Uses tax-friendly heavy debt. As debt retires stock ownership is vested with employees, with several ways to do it.
Guaranteed debt Debt Key owners accept personal liability.
Subordinated debt Debt Lender agrees another lender will be paid first. Often receives higher interest rate or concessions.


Among the arguments that the two-class structure best serves the company are that this arrangement fosters a firm commitment to the business, a long-term view, a better focus on serving customers and staff, and the freedom to take business risks that may lower profits briefly. Opponents counter that such managements are free from market discipline, focus too much on other stakeholders rather than investors, and become entrenched and flabby as competitors.

Many larger family-controlled firms have publicly traded shares overseen by the U.S. Securities & Exchange Commission. Shares are sold by brokers or included in mutual funds. These companies have long histories as successful businesses. Most family firms eventually evolve out of family control, but the number that have survived and continue operating under family control usually is quite a surprise to average citizens.

The key charge against the Times management is that the share price is too low because company executives are not creating the value that the money managers think management should. Some analysts believe a family-controlled firm’s shares always are lower than they might be because the folks in control have other interests not necessarily in concert with those of pure financial owners. They’re right, of course, but many, many things affect the value (share price) of every company. (See Exhibit B.)


EXHIBIT B: What is a share worth?

Factors in the value of a family business


Value consideration Comments
Public market value Broker will quote the most recent price.
Shares listed on a
major stock market
Between the time of that quote and execution of the order to sell, the price could rise or fall owing to demand for the shares.
Shares listed on a
lesser market
These shares will have a bid and ask price. The shares issued will be fewer and generally have more owned by long-term holders. Thus fewer shares are actively available and it is harder to find buyers and sellers. It’s called a “thin float” stock.
Privately held shares Comments
Book value Shareholder equity on the recent balance sheet divided by the number of shares.
Formula value multiples Nearly every kind of business has a known formula, or several, for rough valuation of a firm in that industry. Multiples of annual sales, cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization) are common examples.
Ratios Sales to debt; current assets to debt; inventory turnover to sales; investment to number of employees. There are dozens of ratios used by veterans of various industries.
Appraised value An independent appraiser can be hired to study the company and provide an opinion on its value. That value often will be less than a strategic buyer may be willing to pay and more than a financial buyer finds attractive.

This may stir up dissatisfaction among minority shareowners who were told of a lower appraised value. Appraisals for estate planning usually are lower, with different assumptions and purposes.

to value
Control premium A block of shares that will deliver control of the company to a buyer is worth more than shares that will not. Buyers pay a premium for these.
Minority haircut Shares that won’t deliver control lose some value. But minority shares that would help others achieve a control block have a substantial premium.
Thin market (float) Family firms may have shares held in trusts by people who promised someone that they wouldn’t sell or be affected by family feuds. Of 100,000 shares, it may turn out that only 5,000 are for sale.
Strategic buyer Comments
Horizontal advantage Usually an organization in the same business or an allied field (horizontal growth). The buyer will foresee advantages to itself greater than the basic value of the business. The advantage may be access to products or customers, to patents or other intellectual property, to manufacturing capacity or to employees’ technical know-how.
Vertical advantage A strategic buyer may wish to move up the chain closer to its customers. The vertical expansion may involve acquiring its distributors or wholesalers to gain greater control andcost efficiencies.

The vertical move could also be down the chain to take over key suppliers. The gain, again, is in control of important suppliers or processes and in expanded cost efficiencies.

Financial buyer Comments
Operations tightener Some financial buyers are in the same business. Their specialty is efficient, lean operations. They look at a firm and see opportunities to expand earnings by new practices or procedures or through carefully planned investment the family didn’t do.

They give cash and earnings higher priority and usually demand, and get, tighter management. They often have spotted cost reduction and pricing opportunities. They also may have synergy options with similar firms they now own or control.

Asset strippers
(financial engineers)
These buyers plan to reshape the company, strengthen it and probably sell it. They will have searched carefully for hidden financial opportunities. There may be undervalued real estate that can be sold or developed. There may be non-core businesses or products to sell off.

On the balance sheet there may be good credit ratings with large unused borrowing capacity. They will be able to recapture much of their purchase price by increasing the debt. Such prospective large returns may make them willing to pay a much higher price, whereas the operations tightener will not.

Family situation Comments
Need to sell Some buyers search high and low for evidence of fear, anger, greed, revenge or hatred among family members. They may even promote it. All buyers will be alert to this. It is legitimate for them to want to understand the needs of the sellers. Holding this information inside is important. Competitive pressures on the company, unhappy demand trends for company products or services and near-term needs for large capital investment all are visible to outsiders.

Also very public are regulatory pressures or unhappy incidents like product recalls, labor troubles, fire or floods, and public misbehavior by managers.

All of these raise a question. Has the family had enough? Would a majority of the shares be for sale?

No need to sell If the firm is doing well there may not be any need or reason to sell. Even if there is not a family successor to run the company, the family can switch to an ownership-only role and have it operated by a cadre of professionals.

But a united family is essential for this. Those who own shares should want to own them. Those who want out (of jobs or ownership) should be out—and on good terms.

Crucial is my long-time message: Release the prisoners! Hostile takeovers are supported by shareholders who feel trapped, shut out or mistreated. That is very preventable.


Anti-family bias

The public arguments center on the issues of business strategy, value, financial details and control. Rarely mentioned in public circles is the envy, contempt or negative bias that many financial professionals have toward controlling families. The assumption is that family successors, especially in third and later generations, lack the competence, motivation, common sense and business judgment to run a company, especially a huge one.

Most of society’s biases have been addressed: Race, religion, gender, ethnic origin, disabilities, etc. are recognized as areas in which unfair negative bias existed and created damage and loss. It will be quite a while before much sympathy is mustered for executives who began with silver spoons and have had every advantage for their entire lives. Still, it is unfair to assume automatically that they’re not up to the job. My experience, after three decades in management succession, is that most rise to the occasion when given the top job. Those who can’t, or won’t, generally have gone into another career track either voluntarily or with assistance.

In the Times situation, the company is in an industry facing fierce competition, declining revenues, huge technology changes and a changing world in general. Most newspaper managements—public or private, family or not —feel under attack.

In the mid-1950s the Times was similarly embattled. Television was growing and suburban newspapers, many free “shoppers,” and other new competition for advertising were beginning to flourish. Circulation numbers were falling. In the quarter-century from 1930 to 1955, the number of New York City dailies dropped from 12 to six. (By 1980 only the Times, New York Daily News and New York Post survived.)

Organized labor was at its peak of power. The unions, truckers and others had a vise-like grip on daily operations. Typesetters had a contractual right to set every line of type. When national advertisers found it cheaper to provide their copy all ready to go on the press, the typesetters fought. The compromise first was that they would set the type but it would not be used. This was called “bogus” type: prepared, then destroyed.

The Times’ then-CEO, an earlier Ochs-Sulzberger family member, used the same tactic that U.S. military commander General Norman Schwarzkopf used in the 1991 Gulf War. He did not attack the front directly. He outflanked them.

Recognizing that the unions had the power to bleed him to death with strikes and sabotage, he made enough short-term concessions to keep things going and began a major business diversification. He knew that technological advances in the pipeline would weaken the union position. Also, long-time Times competitors—the Herald Tribune, World-Telegram and Daily Mirror—were in poor shape. They were not recouping their depreciation and would be too weak to finance modernization when it became necessary.

So the Times acquired radio and television properties outside New York, purchased and launched magazines and book lines, and grew much larger. A decade later the Times could survive a very long strike if necessary. The union caved gradually.

Later, with globalization a growing consideration, the Times and the Washington Post each bought a third of the International Herald Tribune when the New York paper folded.

Taking on the unions was good preparation for taking on the government. In the early 1970s, the Times was given a copy of the “Pentagon Papers” —an internal study of the Vietnam War that had been commissioned by the U.S. Department of Defense. The feds were furious and demanded that the study not be published.

Fierce pressure and threats were exerted, but the Times CEO went ahead with his commitment to “All the News That’s Fit to Print.” The Washington Post did, too. The folks who hold the view that family firm successors are flabby competitors ignore the fact that these are the things that were discussed at dinner when today’s family leaders were teenagers. At that time, Katharine Graham was the new, inexperienced CEO of the Washington Post Company. Make sure all the women in your family are encouraged to read her autobiography.

New business models

In recent years the rise of the Internet and global markets have forced publishers into new business models. The Wall Street Journal (Bancroft family) launched editions in Europe and Asia. The Washington Post (Graham family) and Los Angeles Times (Chandler family) began a joint venture pooling coverage and producing features for others. Then the Chandlers sold the Los Angeles Times properties to the Chicago Tribune. Many other families sold to Gannett or Knight-Ridder. Recently News Corp. chairman Rupert Murdoch, publisher of the New York Post, won control of the Wall Street Journal. He courted the controlling Bancroft family, offered a huge price premium and successfully divided the family and trustees of their shares.

Money managers, armed with the power to buy and sell for others, tend to speak forcefully of their conclusions and visions. Older heads on Wall Street also talk of the huge numbers of mistakes these folks make. The Chicago Tribune deal came apart a few years later. Knight-Ridder was wrecked by its acquisitions.

Does the fourth-generation leader of the Times have the stomach to see this through? Well, the Times now has complete ownership of the International Herald Tribune. The Washington Post had no plans to sell its share to its partner, but the deal was done a couple of years back. As they say in Washington: “on his watch.”

In the past, really dissatisfied investors were advised to sell their shares. And they did. More recently, Wall Streeters have worked to persuade managements. Many succeeded and the losers usually sold their shares. Self-appointed groups attempt to bully managers and use legislation, the courts, demonstrations and adverse publicity. Most of them fail.

Morgan Stanley’s man declared war. He and his allies won significant concessions but were blocked effectively from the victory they sought. The latest is a psychological approach by Business Week columnist Jon Fine (“Guarding the Gray Lady,” Aug. 6, 2007). Using an understanding and solicitous tone, he lays out options, predicts that the publisher can win, hints at Pyrrhic victory and recommends taking the firm private. His pitch is to publisher ego and legacy, with a carefully veiled allusion to sufficiency of testosterone levels.

A controlling family and the money managers are like the two-house legislature in U.S. government. The family, like the Senate, is around for a long time, takes a longer view and is protected by votes or tenure from sudden surges of temper, enthusiasm or fads. The investor representatives, like House members, reflect the immediate feelings, impulses and needs of their constituents. That balance was established thoughtfully and has worked well.

If a CEO, abetted by family control, pursues a strategy that is not sustainable, it will end. There can be strong arguments for a strategy, pro or con. But if it truly is unsustainable, it won’t continue. The CEO either will realize the error and change or will lose the necessary support. And if it turns out the CEO was right all along, serious error will have been prevented. I like that system.

James E. Barrett ( heads the family business practice of Cresheim Inc. in Philadelphia.

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Autumn 2007

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