Why being publicly-held is best
The implosion of a privately owned California newspaper shows why publicly traded outfits are better at reconciling the conflicts between owners, employees and customers.
By Justin Fox, Fortune editor-at-large

NEW YORK (Fortune) -- Now that Wendy McCaw has driven away most of the editors from the newspaper she owns, the Santa Barbara News-Press, a lot of people in journalism are beginning to question what had become accepted wisdom in the past year or so - that independent, local ownership is the salvation of the ailing newspaper industry.

This is a discussion of interest to more than just media junkies. Denouncing the American corporate model of rule by Wall Street has become a national pastime. Private ownership, cooperative ownership, European-style stakeholder capitalism - anything is better than the myopia of the stock market and the meddling of the SEC.

You'll get no argument here with the claim that many public corporations are run in a deeply flawed manner. But as the Santa Barbara newspaper brouhaha shows, so are lots of private companies.

Here's the story so far: McCaw is the ex-wife of cell-phone zillionaire Craig McCaw and a resident of the lovely California coastal city of Santa Barbara. She bought the local paper in 2000 when the New York Times Co. (Charts), which had owned it since 1985, decided to bail out in order to "sharpen the Company's strategic focus."

In her first few years in charge, McCaw appears to have been a mostly benign force. Yeah, the News-Press editorial page became an outlet for her impassioned views about animal rights and the need to keep people off the beach in front of her house. But news coverage remained mostly untainted.

Then, in the past few weeks, according to accounts in the Los Angeles Times and Santa Barbara Independent, McCaw went ballistic on her staff for reporting actor Rob Lowe's address in a story about a zoning dispute, and for writing about the editorial page editor's drunk driving arrest.

Last week, editor Jerry Roberts and several other top staffers decided they'd had enough and quit. "When you have one owner who is very wealthy and used to getting their way," Roberts told Editor & Publisher, "you have this conflict between the audience of the paper and the audience of one - the owner."

Of course, when a newspaper's owners are a bunch of mutual funds and hedge funds, that brings conflicts with readers and employees, too. That's what everybody in the business has been complaining about lately, as Wall Street forced first the diminishing of journalistic ambitions at once-great newspaper chain Knight-Ridder, then its dismantling. Now similar pressures are buffeting Tribune Co. (Charts)

There are also conflicts when employees own a paper (is it there to serve readers, or to provide safe jobs?), and even more when government does. Simply put, there are no large organizations immune from being tugged in several different directions at once.

And here's the thing: If you had to pick the one governance model best equipped to reconcile the conflicting priorities of owners, employees and customers over time, it is that of the publicly traded corporation.

That's because, at a publicly traded company, legions of sharp-eyed, independent observers (a.k.a. investors and potential investors) are constantly investigating the business, weighing short-term against long-term rewards, comparing performance with that of similar companies. They don't always do a good job of it, and can be maddeningly fickle slaves to fashion. It's a good thing that there are alternatives to the public-corporation model, so there's a place to turn when market values are particularly out of whack. But it's not clear that any of those alternatives really work out better over the long run.

Consider the publicly-traded corporation where members of the founding family retain most of the voting shares. There are several such entities in the newspaper business, among them Dow Jones & Co. (Charts), the New York Times Co., and the Washington Post Co. (Charts), and this hybrid model is often lauded as a way to mix the discipline of the market with the steadiness and long-term focus of private ownership.

Maybe so. But a 2004 study by Paul Gompers and Joy Ishii of Harvard and Andrew Metrick of the University of Pennsylvania found that corporations where insiders control the votes are less likely to make capital expenditures, invest in R&D, and experience sales growth than other public companies.

A common complaint among people who work in the newspaper business right now is that Wall Street is forcing layoffs and other cutbacks even though profit margins remain among the highest in American business.

Maybe this is evidence of the greedy, myopic nature of the average investor. Or maybe it's that astute investors, looking at what's happened in Web-obsessed places like San Francisco and Seattle, can see that newspapers' classified ad business is about to disappear into the maw of Craigslist and are calling for retrenchment and repositioning now before it's too late.

I don't know if that's true. I do know that, as an employee of a publicly traded media company with its share of problems, I'd rather have Wall Street calling the shots than Wendy McCaw. Top of page

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