Book Corporate Governance PDF

ROBERT G. PICARD (ed.
Corporate Governance
of Media Companies
Media Management and Transformation Centre
Jönköping International Business School
Jönkoping International Business School
P.O. Bos 1026
SE-551 11 Jönköping
Sweden
Tel. + 46 36 15 77 00
E-mail: info@jibs.hj.se
www.jibs.se
Corporate Governance of Media Companies

JIBS Research Report Series No. 2005-1
© 2005 Robert G. Picard and Jönköping International Business School Ltd.
ISSN 1403-0462
ISBN 91-89164- 56-3
Printed by ARK-Tryckaren AB, 2005
ii
Contents
Foreword v
Corporate Governance : Issues and Challenges 1

Robert G. Picard
The Effects of Interlocking Directorates on the Financial Performance 11

of Publicly Traded Newspaper Companies: A Longitudinal Approach
Soontae An and Hyun Seung Jin
Hidden Costs and Hidden Dangers: Stock Options at 29

U.S. Newspaper Companies
Miles Maguire
The Effects of Governance Structure on Reinvestment Strategies 47

of Media Conglomerates
Dan Shaver and Mary Alice Shaver
Taking Stock Redux: Corporate Ownership and 59

Journalism of Publicly Traded Newspaper Companies
John Soloski
Corporate Governance and News Governance in 77

Economic and Financial Media
Angel Arrese
Corporate Governance, Ownership Structures, and Corporate Strategy 127

of Media Companies: The German Experience
Elmar Gerum and Nils Stieglitz
Risky Business: Rupert Murdoch and 147

BSkyB’s Architecture of Accountability
Ian Weber
The Pain of the Obdurate Rump: Conrad Black and 165

the Flouting of Corporate Governance
Marc Edge
Michael Eisner was Framed: Newspaper Narrative of 183

Corporate Conflict
Angela Powers and Robert Alan Brookey
Contributors 203
iii
iv
Foreword
Corporate governance issues and challenges are rising in contemporary society

because the size and complexity of firms is increasing, because the separation
between ownership and control has increased, and because millions of investors
have been harmed in recent years by aberrant and criminal behavior in large
companies in North America and Europe.
This book focuses governance in media firms contains chapters based on
selected papers from the workshop, “Corporate Governance of Media
Companies,” sponsored by the Media Management and Transformation Centre
of Jönköping International Business School in 1-2 October 2004. The purpose
of the workshop was to raise awareness and knowledge about corporate
governance issues in media firms, to direct attention to the breadth and depth
of the issue, and to spark new research on the issues involved.
The Media Management and Transformation Centre offers doctoral studies
and research fellowships, provides research stipends to scholars studying
relevant issues, and hosts conferences and workshops for researchers and media
personnel that are designed to improve knowledge and understanding of media
business issues.
Presentations at the workshop addressed questions central to corporate
governance such as who are the owners of media companies and what are the
structures of that ownership, what are the structures of governance in
companies based in different legal and business environment, what are the roles
of management in the governance processes, how are issues of management
accountability and compensation handled in media firms, what types of persons
are involved in corporate governance and management, and what can happen
when there are problems in corporate government processes and performance.
Ultimately these questions were linked to issues of corporate strategy and
behavior, company performance, corporate citizenship, and content influences.
The chapters in this volume reveal a great deal about governance issues in
media firms and provide evidence that media firms—which are often critical of
governance of firms in other industries—need to put their own houses in order
regarding such issues. The research shows that structures and processes of
governance and accountability have significant impact on the behavior of media
firms and their effects on their content, other firms, and the public.
Prof. Robert G. Picard, Director

Media Management and Transformation Centre
v
vi
Corporate Governance: Issues and Challenges
Corporate Governance:
Issues and Challenges
Robert G. Picard
Corporate governance issues have risen to prominence in recent years as a result

of corporate scandals and misbehavior of executives. Firms, board members,
and executives have been subject to criminal and civil actions over hidden debt,
inflated earnings, insider trading, tax evasion, misuse of funds, and breaches of
fiduciary duties. Companies such as Enron, WorldCom, and Tyco became well
known because of massive failures in governance.
Serious governance problems have also been evident in media firms as well.
The U.S. cable TV operator Adelphia was driven into bankruptcy in 2002 and
its controlling family forced out of the company following disclosures of
questionable financial transactions between the company and family members.
The French firm Vivendi Universal in 2003 paid $50 million in fines for
misrepresenting its condition in accounting and financial statements. Time
Warner in 2004 agreed to pay $510 million in fines to settle charges of
securities fraud involving accounting irregularities in AOL. Shareholder lawsuits
charging boards and executives at media companies with ignoring interests of
shareholders have been filed against most major media companies in recent
years, including Bertelsmann, Walt Disney Co., CanWest, and Belo Corp.
Such developments have focused attention on the need for transparency and
trust between firms, investors, and the public. They have raised governance
issues related to representation on boards of directors, authority and
responsibilities of directors, independence of directors, independence of
financial auditors, clarity and independence in determining executive
compensation, and relations between boards and executives.
Debates over corporate governance are fundamentally related to concepts of
capital, ownership, control, and management and the importance of governance
issues are increased when companies offer shares on stock markets. This chapter
lays out the context of governance, its relevance to media firms, and principles
associated with good governance. Subsequent chapters explore specific issues
relating to governance and cases in which serious governance issues have
emerged in media companies.
The Context of Corporate Governance

Debates about company performance, managerial behavior, and corporate
governance structures and mechanisms have existed since the development of
1
the corporations (Chandler & Daems, 1980; Seavoy, 1982; Mickelwait &
Wooldridge, 2003), the emergence of the theory of the firm (Coase, 1937;
Cyert & Marsh, 1963; Williamson, 1964), and the separation of ownership
from control and management in firms (Berle Jr. & Means, 1932; Jenson &
Meckling, 1976).
The progression of business ownership and management during the past
three centuries from entrepreneurial capitalism to family capitalism to
management capitalism has meant that owners have been progressively
separated from business activities in many firms and today tend to rely upon
hired agents (chief executive officers, chief operating officers, chief financial
officers, and others) to provide management for the firms. As a result of such
changes, choices made in firms are more complex than merely profit and value
maximization and the choices are influenced by managers who do not own the
firms (Cyert & March, 1963).
Corporate governance is concerned with the owner and management
relationships, distribution of power, and accountability in corporations.
Governance structures and processes are inextricably linked to the environments
in which corporations are created and operate. Corporations are legally created
entities with specific rights and responsibilities, and these differ depending
upon the nation in which they were established, their structures, and whether
shares are privately held or publicly traded. Publicly traded firms typically have
more significant corporate governance responsibilities under law and in
regulations established by the stock markets on which their shares are traded.
Governance is thus a function directed by the integrated principles and
requirements in corporate law, securities law, stock market rules, and accepted
accounting standards.
The contexts in which governance takes place thus differ and emphases may
be placed on different factors depending on the context (Hopt & Wymeersch,
1997; Clark, 2004). If one considers differences in North American and
European contexts, for example, there is an Anglo-American tradition in which
a strong shareholder orientation influences governance structures and processes.
In continental Europe, however, many nations have a different stakeholder
orientation in which the interests of communities, labor, and social
organizations in governance are often recognized.
In some countries and legal traditions, companies are governed by a single
board of directors, whereas in others there is a dual board that splits strategic
and operational activities from supervisory functions such as financial
monitoring and other fiduciary responsibilities. In some countries there are no
requirements for board membership; in others there are specific educational and
competence requirements. When one considers corporate governance issues,
then, one must be cognizant of the specific environment in which a firm
operates because it influences the structures and strength of governance and the
conditions under which ownership and management influences take place.
2
Agency theory has emerged to explain tensions and conflicts that result from
this form of management. It recognizes that agents and owners can have
different and conflicting goals, risk preferences, information asymmetry, and
needs to maximize certain factors at the expense of others (Eisenhardt, 1989).
In the traditional view of agency theory, diffusion of ownership is seen as
leading to less control over management, which can result in inefficiency and
declining performance (Berle Jr. & Means, 1933). Contemporary uses of the
theory, however, recognize that there are times in which the diffusion of shares
can be advantageous, by reducing the cost of capital, increasing market value, or
overcoming regulatory barriers (Demsetz & Lehn, 1985).
A corporate governance school of thought has emerged based on the idea
that owners are supposed to act and influence firms, to pressure and influence
management, and to protect their interests as owners. Shareholders thus should
engage in active ownership and large owners who are active over time are seen
as adding value to the firm (Carlsson, 2001).
The range of interests represented by corporate stakeholders is critical to
what choices are made by firms and to the locations of power to make those
choices within the firms. Power and strategic control can be in the hands of the
board of directors or the CEO depending upon their nature and personalities,
upon power-sharing arrangements between them, and upon the activism of
directors and major investors. If too much strength is given to either the
directors or the CEO, strategic and operational difficulties and—sometimes—
practices that ignore interests of shareholders can develop. If there is too much
activism and influence by major investors, it can lead to diminished attention to
the interests of other investors and managers.
Contemporary corporate governance discussions revolve around desires to
achieve an appropriate balance of power and flow of information between
owners, boards, and management. Concerns over corporate governance
mechanisms and effectiveness have been heightened in recent years because of
corporate scandals, changes in governance at state-owned companies,
internationalization of capital, increased importance of institutional investors,
and desires to promote economic growth (OECD 2003).
Struggles over strategic decisions and corporate governance structures in
major media firms—such as Disney and AOL Time Warner (now Time
Warner)—and claims of illicit and corrupt practices in firms such as Hollinger
Inc., have also led to increased discussions of corporate governance and the
balance of power within media firms.
The Rise of Publicly Owned Media Firms

Shares in nearly every major media company in the developed world are now
traded on one or more stock markets. Few large media firms have sufficient
access to capital to keep them from becoming public. Wave of initial public
offerings for media companies occurred in the 1960 and 1980s (Picard, 1994
3
and 2002), but the growth of the largest firms occurred in the 1990s, primarily
as a result of mergers and acquisitions.
As with many large firms in other industries, large globalized media firms
are well known to investors. Firms such as TimeWarner, Vivendi Universal,
Viacom, and News Corp. are nearly household names.
Studies of media firms have shown that media firms pursue different
managerial goals when they are publicly owned. Blankenburg & Ozanich
(1993), for example, found that the degree of public ownership and outside
control affects financial performance of companies, that they had more short-
term financial aims and concentrated on higher return on equity and earning
than privately owned papers. These findings were later supported by Lacy,
Shaver & St. Cyr (1996) and Chang & Zeldes (2002).
As public ownership increased, Compaine (1982) revealed the rising
significance of institutional investors in media firm ownership and research
related to concerns about their investment strategies and influence began to
emerge (Meyer & Wearden, 1984; Blankenburg & Ozanich, 1992; Picard,
1994; Cranberg, Bezanson & Soloski, 2001).
Many observers believe that public ownership of media has led to companies
to adopt strategies designed to meet short-term interests of investors (Meyer &
Wearden, 1992; Blankenburg & Ozanich, 1992; Picard, 1994; Cranberg,
Bezanson & Soloski, 2001) and that these can lead to practices damaging to
media integrity and quality. However, Maguire (2003) has shown that many
institutional investors in newspaper companies take a long-term rather than
short-term view. That can also be problematic, according to Maguire, because
“some long-term investors may seek to impose their will in a way that can be
viewed as detrimental to executives or employees of newspaper companies” (p.
263).
With the rise of publicly owned media firms and the appearance of
governance concerns and conflicts—and because of the media’s social and
political functions—issues of corporate governance in media firms are growing
in importance.
Principles of Good Governance

During the past decade, campaigns, lobbying, and research promoted by desires
to stabilize capital markets, protect investors, and promote higher financial,
social, and ethical standards have emerged. Dozens of organizations now
represent institutional and individual investors, social advocacy groups,
corporate officers and directors, and company auditors. Their activities have
spawned advocacy centers, research centers, consultants, and newsletters,
magazines, and journals devoted to corporate governance. These groups, as well
as stock exchanges, chambers of commerce, and regulatory organizations have
issued guidelines and regulations to promote practices of good corporate
governance.
4
An investor that has been particularly active in promoting good corporate

governance practices for many years is the California Public Employees
Retirement System (CalPERS), one of the world’s largest institutional investors.
It has been particularly active in setting out both U.S. and international
corporate guidelines and other principles and practices for effective governance
(CalPERS, 2004).
The Organization for Economic Co-Operation and Development identified
12 key standards as principles of corporate governance five years ago (OECD,
1999) and recently revised and clarified principles in response to contemporary
events and comments by relevant parties (OECD, 2004). OECD is comprised
of 30 member countries from developed market economies in Europe, North
America, and Asia.
In the wake of accounting and corporate governance scandals, the U.S.
Congress enacted the Sarbanes-Oxley Act (2002) that required changes in
public disclosure and independence of audit committees and auditors.
Approaches to governance have traditionally been diverse in national law
among developed nations and there have been differences in Anglo, Anglo-
American, Latin, and Germanic approaches relating to shareholder primacy,
board structure, director duties, and takeover protections.
If one considers the range of views represented by investors, managers,
regulators, and advocacy groups, however, there is general consensus on some
basic principles of good corporate governance. These include the desire that
companies have clear corporate governance principles or guidelines of their
own, that there be appropriate internal and external audit functions and that
auditors be independent, that transparency about governance processes and
decisions be evident, that conflicts of interests are controlled, that shareholders
have equitable rights, that there should be members of boards of directors that
are independent from the management, and that compensation choices of
managers be recommended by a committee with independence from the
management.
Media and Good Governance Principles

Public demands for attention to corporate governance have led a number of the
leading media companies to create and disseminate guidelines and policies
about governance in recent years, but their existence is still not common among
media firms. The adoption of such statements by companies can be seen as
evidence of discussion of governance issues and recognition of the importance
of governance processes to accountability and integrity within the firm. The
absence of such policies may indicate that governance is not a significant agenda
item for many media companies. To date, however, no research has focused on
the characteristics and differences among governance guidelines in media firms
or sought to determine whether the existence or non-existence of such policies
5
is related to better financial performance or fewer or increased governance

conflicts.
A particular governance challenge involves the equality of voting shares.
Where shareholders have equal voting rights, a balance of power exists within
firms. Executives and board members must pay attention to the interests of
other shareholders because voting rights proportionally split the equity in the
firm, thus providing proportionally equal rights in voting for directors and
officers, making changes in the company charter, approving new stock issues,
and setting company strategy.
Some firms, however, use classified stock that proportionally splits the
equity in the firm, but limits or removes voting rights in one or more categories
of stock. A large number of media firms have taken explicit action to diminish
the influence of ownership by reducing outsiders’ voting power through
classified stock, including News Corp., Reuters, Tribune Co., New York Times
Co., Liberty Media, and Viacom. This unequal division of power is typically
seen as evidence of poor corporate governance because a small number of
investors hold the most powerful shares (usually not publicly traded) and can
act in opposition to the majority. Owners of stronger shares in media
companies sometimes argue that it provides independence from capital that is
necessary to maintain the social, cultural, and political independence. However,
the extent to which the separation is beneficial to editorial performance and
company financial performance remains scientifically uninvestigated at this
point.
Efforts to obtain outside advice by having directors who are not executives
of the company are made in many companies. This occurs because when boards
of directors are comprised solely of company officers, they are unable to offer
perspectives and views not present in management meetings and do not
necessarily reflect outside interests or owners’ views. If boards are comprised of
non-management directors they are able to provide more oversight than if they
are officers. However, the outsiders selected to be on boards may have interests
related to the company’s activities and this may interfere with their objectivity.
Interlocking directorates in which board members on one company sit on the
boards of competing or related companies and board members from companies
or organizations that do business with a company may also keep outsiders from
providing disinterested advice. It is not uncommon for media companies to
have board members who work for major advertisers and financial institutions
or are linked to government and social institutions. The extent to which these
factors affect company strategies and policies, financial performance, and
editorial independence has not yet received significant research attention.
Just as having a truly independent accounting firm conducting audits is
important to ensure fiscal oversight, to promote good financial practices, and to
identify strategic financial issues, a company needs effective board members
who study these audits and make their own inquires into the company’s
financial activities to ensure good governance. If the audit committees of boards
6
of directors are comprised of company officers, they are interested parties and
the auditing lacks independence. Thus the ratio of independent directors to the
total number of directors on the committee is important. Although a
requirement for independence is now included in U.S. securities laws and
trading rules, it does not apply universally to media companies in the U.S. and
abroad. Although such requirements are arguably desirable on their face,
evidence has not yet been offered that such independence actually affects
financial or other performance of firms.
The makeup of board members who set compensation for officers is also a
concern of those seeking good corporate governance. If compensation
committees (sometimes called remuneration, personnel, or human relations
committees) of boards of directors are comprised of company officers, they are
interested parties and the determination of compensation lacks independence.
The ratio of independent directors to the total number of directors on the
committee is thus also important. Improvements in independence have resulted
from new requirements in securities and trading laws, but these rules are not
international and are not universally applicable. As with the case of auditing
committees, evidence has not yet been put forward that there are differences in
choices between committees in which independence exists or does not exist and
how these affect company performance.
Summary
The issues and challenges of corporate governance in media companies present
critical questions that need attention from business and media scholars. The
effects of the development of governance principles and practices create a clear
research agenda on which to focus scholarly inquiry.
This volume adds to that effort by looking at a variety of issues related to
governance, including issues of board composition, executive compensation,
and the influences of governance on strategic choices and company behavior. It
also explores three significant disputes over corporate governance in media firms
that have been played out in the media and courtrooms. As the chapters in the
book reveal, corporate governance in media companies is not merely important
as a business issue but because of its effects the content of media and the ability
of media firms to carry out their social functions.
7
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Effects of Interlocking Directorates
The Effects of Interlocking Directorates on the

Financial Performance of Publicly Traded
Newspaper Companies: A Longitudinal
Approach
Soontae An and Hyun Seung Jin
Corporate governance research has identified a variety of factors associated with

a firm’s financial performance. The board composition has been one of the
most frequently studied governance mechanisms (Zahra & Pearce, 1989;
Dalton, Daily, Ellstrand &Johnson, 1998). Advocates for outsider-dominated
boards contend that outside directors play a crucial role in facilitating resource
acquisition so as to reduce operating uncertainty and to increase profitability. In
fact, major investors consider the ratio of outside directors as a key concern. For
example, TIAA-CREF, one of the largest institutional investors in the U. S.
stated that it will not own the stock of firms that do not have a majority of
outsiders on their boards of directors (Scism, 1993; TIAA-CREF, 1993).
Consistent with this viewpoint, some academic researchers have found that
outside director representation was positively associated with profitability
(Baysinger & Butler, 1985; Schellenger, Wood & Tashakori, 1989; Rosenstein
& Wyatt, 1990; Pearce & Zahra, 1992; Ezzamel & Watson, 1993).
In particular, ties to financial institutions have received much of scholarly
attention. The presence of such an interlock is believed to provide critical
financial and informational resources. Although this strategic alliance has been
considered as a prevalent corporate governance strategy, the issue of
interlocking in the newspaper industry has been viewed with more caution.
Critics have long argued about the possible adverse effects on news content
driven by profit motive. Dreier and Weinberg noted that “such ties may have
adverse journalistic consequences. Some of these may be subtle. . . In other
cases, the consequences have been manifest—reporters pressured, stories
unassigned, or killed when written…The concern centers on the flow of
information and vitality of journalism…” (Dreier & Weinberg, 1979: 53).
Although there has been much research on corporate interlocks among other
U.S. companies, few studies have been conducted to examine the consequences
of those ties in the news media. A few studies are available, but they provide
either anecdotal evidence of the interlocking or the causes of the formation
(Dreier & Weinberg, 1979; Han, 1988; An & Jin, 2004). For example, An and
Jin’s (2004) longitudinal study found financial dependency as an antecedent to
the appointment of directors from capital sources in that companies with
11
increased financial dependency were more likely to appoint representatives of

the capital sources to their boards. Then, how do those boards of directors
influence corporate financial performance? It remains unanswered whether such
ties enhance newspaper companies’ financial performance and to what extent.
The purpose of this study is to examine the effects of interlocking
directorates on the financial performance of publicly traded newspaper
companies. Selznick’s seminal work defined interlocking as co-optation which is
“the process of absorbing new elements into the leadership or policy-
determining structure of an organization as a means of averting threats to its
stability or existence” (Selznick, 1949: 13). Does this co-optation work? This
study examines whether the newspaper companies with co-opted sources of
environmental uncertainty report higher levels of performance. Two types of
interlocks are investigated: ties to financial institutions and leading advertisers.
Ties to leading advertisers merit special scholarly attention, given that
advertising is a unique source of capital in the media business.
Board Composition and Financial Performance

The effect of board composition has been studied from a variety of theoretical
perspectives, which have produced a number of competing theories concerning
corporate governance. Numerous governance theories include agency theory,
stewardship theory, and resource dependence theory to list some of the most
dominant theoretical perspectives. With the explosion of research on inter-
organizational relations, research on board composition, especially interlocking
directorates, has became very prominent in the 1990s (Mizruchi, 1996) and the
issue has been actively investigated outside the United States, confirming it as
one of the prevalent features of capitalism across cultures (Whitley, 1990;
Windolf & Bayer, 1996; Bianco & Pagnoni, 1997; Maman, 1999; Murray,
2001).
Agency theory is built on the notion that separation of ownership and
control leads to self-interested actions by those in control- managers (Jensen &
Meckling, 1976; Eisenhardt, 1989). Those managers may pursue objectives that
may conflict with the goals of owners, which necessitates monitoring
mechanisms designed to protect owners. One of the primary duties of the board
of directors is this monitoring role (Waldo, 1985; Fleischer, Hazard & Klipper
1988). Within this context, the board of directors is seen as the ultimate
mechanism of corporate control. Agency theory promotes boards which are
comprised of outside directors because these outside directors are believed to
maximize the critical function of monitoring, independent from the firm’s
management. From this perspective, outside directors or interlocking with
financial sources provide superior performance benefits to the firm.
An alternative approach is stewardship theory. It posits that managers are
inherently trustworthy and not prone to misappropriate corporate resources
(Donaldson, 1990; Donaldson & Davis, 1991 and 1994). Proponents of this
12
perspective contend that superior corporate performance will be linked to a

majority of inside directors as they work to maximize benefit for shareholders
and owners. Stewardship theory suggests that corporate control should be
centralized with more inside directors who understand the business better than
outside directors.
In line with conflicting theoretical viewpoints, empirical research findings
have been mixed. Ezzamel and Watson (1993) found that outside director
representation was positively associated with profitability among a sample of
U.K. firms. Baysinger and Bulter (1985) examined 266 U. S. corporations and
found that firms with more outside board members showed higher return on
equity. Several other studies also found a positive relationship between outside
director representation and firm performance (Schellenger, Wood & Tashakori,
1989; Rosenstein & Wyatt, 1990; Pearce & Zahra, 1992).
However, some studies noted the benefits of inside directors (Hill & Snell,
1988; Baysinger & Hoskisson, 1990; Baysinger, Kosnik & Turk, 1991; Boyd,
1994; Hoskisson, Johnson & Moesel, 1994). Consistent with stewardship
theory, some studies have found a positive association between the inside
director representation and corporate profitability (Vance, 1964 and 1978;
Kesner, 1987). In addition, there are studies which found no significant
relationship between board composition and firm performance (Chaganti,
Mahajan & Sharma, 1985; Kesner, Victor & Lamont, 1986; Zahra & Stanton,
1988; Daily & Dalton, 1992 and 1993).
Focusing on financial interlocking and profitability, the studies also
produced a wide range of findings. Some U.S. studies found generally positive
but slight association between financial interlocking and profitability (Pennings,
1980; Burt, 1983). A study based on firms in the Netherlands and Belgium also
found positive associations between ties to financial institutions and corporate
performance (Meeusen & Cuyvers, 1985). Fligstein and Brantley (1992),
however, found a negative association between financial interlocks and
profitability for US firms.
The mixed findings, in part, reflect the ambiguous nature over the causal
order of the interlock-profitability relationship (Mizruchi, 1996). Most cross-
sectional studies suffer from what Palmer, Friedland, and Singh (1986) called
“initiation logic.” That is, an assumption of cross-sectional approaches is that a
firm’s financial performance at a particular point is a result of factors peculiar to
the firm at that time rather than the situation faced by the firm in previous
years. A firm’s financial performance is a result of earlier financial decisions and
situations so that an earlier financial situation as well as key decisions such as
the formation of interlocks should be used as predictor variables. This calls for a
longitudinal study design.
The conflicting empirical findings are also indicative of two contrasting
theoretical perspectives to explain the relationship between the interlocking
with financial sources and profitability. The resource dependence perspective
(Selznick, 1949; Pffeffer & Salancik, 1978; Burt, 1983) views interlocking as a
13
critical link to the external environment. Along with agency theory, the
resource dependency theory contends that financial interlocking will provide
access to critical resources and information and facilitate inter-firm
commitments which in turn enhance a firms’ profitability. Interlocking
directorates not only improves access to critical information and resources, but
also reduces transaction costs by ensuring a favorable transaction environment.
Financial control theory, however, holds a very different view on
interlocking with financial institutions. It begins with the assumption that
financial institutions seek to profit from debt financing, which leads bank-
controlled companies to carry heavy debt loads. In order to protect these loans,
financial institutions require those corporations to operate more conservatively
and thus less profitably (Fitch & Oppenheimer, 1970; Kotz, 1978; Norich,
1980). Viewing the degree of interlocking with financial institutions as an
indicator of financial control, such a presence is expected to be negatively
associated with a firm’s profitability (Mariolis, 1975).
In the case of newspaper companies, there are two types of capital sources:
financing and advertising. Newspaper companies may utilize these two capital
sources differently. An and Jin’s (2004) study revealed different effects of long-
term debt and debt-to-equity ratio on the appointment of directors from
financial institutions or leading advertisers. Companies tended to have more
directors from financial institutions when the companies’ debt-to-equity ratio
increased. A high debt-to-equity ratio indicates that the company may have
been overleveraged, constraining the company’s ability to further finance. That
is, as companies become overleveraged, their desire to create strategic alliance
with the sources of financing increases, leading to the increased presence of
directors from financial institutions.
However, how much debt the company carried over a long period was not
related to the ratio of financial directors; rather, the long-term debt was
positively associated with the ratio of directors from leading advertisers (An &
Jin, 2004). Considering that long-term debt generally increases when a
company expands or diversifies, the appointment of leading advertisers appears
to work as a safety net to secure cash flow. That is, as the long-term debt
increases, companies become short of working capital due to heavy interest
payments, which in turn may create greater desire to secure cash flow.
Considering the differential effects of debt-to-equity ratio and long-term
debt related to the board composition, this study hypothesizes different effects
of interlocking with financial institutions and leading advertisers. Reflecting the
unique media industry financing structure, these two capitals and ties to these
sources will function differently in terms of a firm’s profitability. First, ties to
leading advertisers are expected to increase a firm’s profitability. Having a vital
connection to the source of cash, interlocking with leading advertisers will
provide crucial financial and informational assets, as predicted by resource
dependence theory. It secures communication networks to the advertisers,
14
which can enhance cash flow by obtaining greater opportunity for advertising
revenue, leading to higher profitability.
However, ties to financial institutions may affect a different aspect of firm’s
ability: decision to borrow. A board member who is affiliated with a financial
institution is a source of financial advice and information. Such directors often
sit on the firm’s finance committee (Bearden, 1986). As the resource
dependence theory explains, newspaper companies may decide to establish a
relationship with a financial institution to facilitate access to external funding
(Pfeffer & Salancik, 1978; Burt, 1983). Also, to the extent that financial
institutions are able to monitor their loans, they will be more willing to lend
money to a firm (Mizruchi & Stearns, 1994). Mizruchi and Stearns’ (1994)
longitudinal study confirmed that one of the strongest predictors of borrowing
was the presence of a representative of a financial institution on the firm’s
board.
Appointments of bankers to a firm’s board tend to follow periods of
declining performance (Richardson, 1987; Mizruchi & Stearns, 1988). Having
representatives from financial institutions on companies’ boards not only
increases debt-financing, but also protects the ownership interests of the
financial institutions. Those directors from financial institutions want to run
the company very conservatively, which leads to lower profitability (Fitch &
Oppenheimer, 1970; Kotz, 1978; Norich, 1980). Those financial institutions
often intervene in the affairs of the borrowing corporations “in an attempt to
maintain constant capital dependency” (Mintz & Schwartz, 1985: 73).
Financial control theorists contend that financial institutions attempt to
manage the details of loan activity through interlocking directorates (Mintz &
Schwartz, 1985). This study hypothesizes a negative relationship between ties to
financial institutions and profitability.
Newspaper Public Ownership and Financial Performance

Concerning the financial performance of newspaper companies, the effects of
public ownership itself has generated extensive debate among scholars (Meyers
& Wearden, 1984; Demers, 1991; Blankenburg & Ozanich, 1993; Lacy,
Shaver & St. Cyr, 1996). Berkowitz stated that there are “tradeoffs between
journalistic judgment and the imperatives from the business side of a media
organization” (Berkowitz, 1993: 67). Corporate newspapers tend to emphasize
profits (Demers & Merskin, 2000), as top editors and newsroom managers
agree (Gade, 2000).
However, not all public companies are the same in terms of profit pressure
and corporate governance strategy. Blankenburg and Ozanich stated that
“companies with strong insider control, even though publicly traded, will
resemble the traditional closely held companies” (1993: 71). Studies found that
the proportion of outside ownership was related to financial performance of the
newspaper companies (Blankenburg & Ozanich, 1993; Lacy, Shaver & St. Cyr,
15
1996; Chang & Zeldes, 2002). The more public the newspaper company, the
greater the need and pressure to manage the company in a profit-oriented way.
Along with a greater desire to form a strategic alliance with the sources of the
capital, the degree of pubic ownership has been found to be positively
correlated with a firm’s financial performance (Blankenburg & Ozanich, 1993;
Lacy, Shaver & St. Cyr, 1996; Chang & Zeldes, 2002). However, the degree of
inside control or institutional ownership as indicators of public ownership
changes over time. Cross-sectional studies have a limitation in explaining the
nature of causal order between the public ownership and profitability. A
longitudinal approach can more properly address the relationship, considering
the previous years’ financial conditions as well as general economic situation.
This study includes the degree of public ownership as an independent
variable to predict firms’ profitability. Picard (1994) analyzed ownership data of
17 publicly traded newspaper companies and found that the primary owners of
major newspaper companies were institutional investors including commercial
banks, state pensions, and other government investment funds. The study
stressed their potential influence on the decision-making process, particularly
involving short-term, profit-driven decisions. The present study used the level
of insider ownership, defined as the percent of stock held by officers and
directors of the company, as an indicator of the degree of public ownership.
This study hypothesizes that companies with a high percentage of inside
ownership will be less likely to show high profitability.
Data and Measurement

This study examined the board composition of 13 publicly traded newspaper
companies from 1988 to 2000: A.H. Belo Corp.; Dow Jones & Co.; E.W.
Scripps.; Gannett Co.; Knight-Ridder, Inc.; Lee Enterprises, Inc.; McClatchy
Newspapers, Inc.; Media General, Inc.; The New York Times Co.; Pulitzer
Publishing Co.; The Times Mirror Co.; Tribune Co.; and Washington Post
Co. These are publicly traded newspaper companies whose core business is
newspaper publishing and who went public before 1989. Because this study
focuses on longitudinal data, those who went public after 1989 were not
included. This sample of companies accounts for 45% of the daily circulation
in the United States.
The dependent variable is the firm’s profitability. To measure profitability,
two account-based indicators were used: return on assets (ROA) and return on
equity (ROE). Return on assets measures a firm’s efficiency in utilizing its assets
and return on equity is a conventional measure of shareholder’s gain. Return on
assets was obtained by dividing the net profits over total assets, and return on
equity was calculated by dividing net profits over shareholder equity. To control
for firm size, total assets were included.
Financial interlocking was defined as directors whose principal affiliations at
the time of appointment were with financial institutions. Financial institutions
16
include banks, insurance companies, investment companies, and diversified

financial companies. Government organizations involving economic decisions,
such as the Federal Reserve Bank and Securities and Exchanges Commission,
were included because ties to those institutions provide valuable financial
information as a function of interlocking. The ratio was calculated by dividing
the number of directors from financial institutions by the total number of
board members.
Leading advertiser representatives were defined as directors whose principal
affiliations at the time of appointment were with any of the 100 leading
advertisers. The names of the top 100 leading advertisers varied from year to
year. Since most of these diversified companies operate TV, cable, and radio
stations as well as newspapers and magazines, the list of 100 leading advertisers
across media was used instead of 100 leading newspaper advertisers to measure
their reliance on the advertising resource in general. Financial ties and advertiser
ties were considered as separate variables in that some companies, American
Express for example, were counted as both a financial institution and as a
leading advertiser.
General economic environment affects newspaper companies’ profitability.
Interest rate and total advertising expenditure were used. Two indicators
explain the availability of two capital sources: financing and advertising. Interest
rates were measured as the average prime rate for a given year. The aggregate
spending on advertising should indicate the advertisers’ demand for their ad
space, which directly relates to revenue for newspaper companies.
Information about companies’ financial conditions was obtained from
annual reports and 10-K forms filed with the U.S. Securities and Exchange
Commission. Moody’s and Standard and Poor’s Directory of Executives were used
to obtain data about the principal affiliations of outside directors. In addition,
Leading National Advertisers’ (LNA) Multi-Media Report and Advertising Age
magazine were used to collect data on the names of the 100 leading advertisers
and the total U.S. advertising spending for a given year.
Analysis and Results

The data set consists of a 13-year time series for 13 newspaper companies. The
most efficient approach is a pooled cross-sectional time series regression
technique. The pooled cross-sectional time series analysis can be a very robust
research design by incorporating both space and time into the analysis
(Stimson, 1985). Major statistical concerns are autocorrelation and
heteroscedasticity, stemming from correlation between time points and unique
company effects, respectively (Menard, 2002).
Heteroscedasticity is likely to arise when comparing different companies.
We expect this problem to be minimal because we are analyzing a relatively
homogeneous group—newspaper companies. Nonetheless, the unique
company effect is likely to produce heteroscedastic errors because it is not
17
plausible to assume that the variance over the full pool is constant. To correct
for heterogeneity bias, we included dummy variables for 12 of the 13
1
companies, excluding a reference category. The omitted category comprises
observations from Pulitzer. These fit separate intercepts for each company.
The financial performance of a company is likely to be heavily dependent on
the ratio of prior years. This autocorrelation error can produce biased regression
coefficients. To correct for autocorrelation between time points, a lagged value
of the dependent variable was used as a predictor in the regression equation.
Inclusion of a lagged variable not only corrects for autocorrelation between time
points, but also yields valuable substantive information about the dynamics of
2
the model. After these specifications, models are amenable to ordinary least
square estimation. We also looked for outliers or other unduly influential data
points by examining the residual statistics, but all cases behaved well,
confirming that our findings are stable and robust.
The analysis used a lag interval of two years for the lag-dependent variable
and other independent variables on financial conditions. Therefore, in the
model, firms’ profitability at Time 3 was predicted from financial conditions
and board composition at Time 1, two years earlier. Because it takes times for
changes in board and ownership to influence firm’s financial performance, a lag
interval of two years seems reasonable to examine the association. Annual
reports for the previous year are filed with the SEC in the spring, along with the
appointment of the board of directors for the upcoming year. In general,
directors hold office until the next spring meeting so that they oversee and
participate in the decision making process of corporate policy for that period.
Table 1 shows financial institutions that had board representation of at least
one year on publicly-traded newspaper companies from the 1988 to 2000
financial year. Times Mirror and Knight Ridder had relatively high
representation of financial institutions on their boards. McClatchy and A.H.
Belo had relatively few directors from financial institutions.
Table 2 shows board with advertiser representation from 1988 to 2000. The
New York Times had the highest representation of 100 leading advertisers,
followed by Tribune. In contrast, McClatchy and Media General had relatively
few leading advertisers on their boards. E.W. Scripps, Lee, and Pulitzer did not
have any directors affiliated with leading advertisers during this period.
1
Dummy variables were coded 1 for the specific company, 0 for the other 12 companies. This
specification, so-called Least Squares with Dummy variables (LSDV) model, is one of the best
ways to manage non-constant variance in a pool. See Sayrs (1989: 26).
2
WGLS estimators that are typically used to address many of these problems raise as many
problems as they solve. Inclusion of a lagged dependent variable corrects for AR1 autocorrelation
as well as, or better than, weighting on the lagged residuals and yields valuable substantive
information about the dynamics of the model. See Beck and Katz (1995).
18
Table 1. Representation of Financial Institutions from 1988 to 2000
Company Financial Institutions on the Board

A.H. Belo Goldman Sachs & Co., Asso. Co. of North America, Federal Reserve
Bank, Nations Bank Texas Co., Scudder Kemper Investments.
Dow Jones Bankers Trust New York Co., BancOne Co., Bank Of East Asia, Capital
Income Builder, Chemical Banking Co., Seligman Mutual Fund
Investment Co., American Express, Hartford Financial Services Group
E.W. Scripps First National Cincinnati Co., Union Central Life Insurance Co., First
Boston Co., Investment Advisor & Manager Family Trust and Estates,
Ohio National Financial Services, Great American Financial Resources,
Inc.
Gannett American Security Bank, Bank of Hawaii, Prudential Global Genesis
Fund, National Security Bank of Chicago, Larchmont Federal Savings &
Loan Asso., Crestar Financial Services, Goldman Sachs & Co., Prudential
Mutual Funds
Knight Ridder Vanguard Group of Investment Co., Citibank, State Street Capital Fund,
Goldman, Sachs & Co, First American Bank Shares, Southern National
Bank, Northern Trust Bank of Florida, Dreyfus Third Century Fund,
J.P. Morgan, Employees Stock Purchase Plan, Barclays Bank,
BankAmerica Co., MAS Funds
Lee New America Fund, Michum Management Co., Stifel Financial Co.,
Pacific Stock Exchange, Inc., Boatmans Bancshares and Sigma-Aldrich
Co., Pitney Bowes, Inc, Cairnwood Cooperative, Park Avenue Equity
Partners
McClatchy Matson Navigation Co., Alpine Partners, PacTel Co. California Chamber
of Commerce
Media General Goldmans Sachs & Co, Crestar Financial Co., First Florida Banks,
Wachovia Bank & Trust Company, Davenport &Co, Federal Reserve
Bank
New York Times American Express, New York Life Insurance, First Boston Inc.,
Ameribanc, Inc., Bankers Life of Iowa Insurance, Morgan Guarantee
Trustee Co., Federal Reserve Bank, Metropolitan Life Insurance, Chase
Manhattan Bank
Pulitzer Commerce Bank, A.G. Edwards & Sons
Times Mirror Chandis Security Company, Federal Reserve Bank, PVT Investor,
Industrial Bank First Interstate Bankcorp, Paden & Rygel, Securities and
Exchanges Commission, and Chandler Trusts
Tribune First National Bank of Chicago, Prudential-Bache Global Fund, Lake
Shore National Bank, Fifth Third Bankcorp., First Chicago NBD Co,
Schlumberger Information Solution, Washington Mutual Inc., and
Morgan Stanley Dean Witter
Washington Post General Electric Investment Co., Southeast Banking Co., Bankers Trust
New York Co., Prudential Insurance Co. of America., Bank of New
York, Ruanne Cunniff & Co., Riggs National Bank of Washington,
D.C., and Morgan Stanley & Co.
19
Table 2. Representation of 100 Leading Advertisers from 1988 to 2000
Company Leading Advertisers on the Board

A.H. Belo Kimberly Clark, PepsiCo, Circuit City
Dow Jones J. C. Penny, American Express, Sprint, SBC Communications
E.W. Scripps None
Gannett UAL Co., Kellogg, S C Johnson & Son, Coca Cola, American
Express
Knight Ridder Seagrams Co., AT & T
Lee None
McClatchy SBC Communications
Media General RJR Nabisco
New York Times IBM, American Express, Bristol-Meyers, Consolidated Edison,
United Telecommunication, Campbell Soup, Sears, Seagrams Co.,
Schering Plough Co., Johnson & Johnson
Pulitzer None
Times Mirror Proctor & Gamble, Nestle
Tribune PepsiCo, UAL Co., K-Mart, PepsiCo, Sara Lee, McDonalds, Helene
Curtis, Sears
Washington Post Coca Cola, H.J. Heinz, Johnson & Johnson, General Electric
Results of the regressions in Table 3 report the strength of association as well as

the level of statistical significance. Although statistical significance is not strictly
relevant with a non-probability convenience sample, the inference levels are
reported for comparison with future studies. This current sample includes the
majority of publicly traded newspaper companies.
First, the lagged dependent variable, return on assets, explained about 5% of
the total variance, although it was not statistically significant (ß=-.014, p > .80).
The second block indicated unique company effects. Company dummy
variables allowed each company to have a different intercept to reflect firm
specific profitability. Media General showed significantly high ROA (ß=.488, p
< .01). Times Mirror also indicated relatively high ROA (ß=.296, p > .15),
although it was not statistically significant. These two blocks of variables, lagged
dependent variable and company effects, explained about 25% of the total
variance. General economic context added about 3% of explanatory power,
2
increasing R from .247 to .278. However, the relative strengths of interest rate
and total ad spending were small and they were not statistically significant (ß=-
.060, p >.45; ß=.049, p > .68, respectively).
As hypothesized, the ratio of directors from financial institutions was
negatively correlated with a firm’s profitability. Confirming financial control
theory, when companies had more outside directors affiliated with financial
institutions, their profitability measured by ROA tended to decrease (ß= -.383,
p < .01). The results also support the hypothesized relationship between the
ratio of directors from leading advertisers and a firm’s profitability. Increased
interlocking with leading advertisers led to higher profitability, measured by
20
Table 3 Hierarchical Regressions on Profitability
Effects 1) ROA 2) ROE

Lagged dependent variable: -.014
Return on Assets -.154
Return on Equity
2
R .052 .001
Company Effects:
Washington Post -.142 .027
Times Mirror .296 .452*
New York Times -.090 -.008
Gannett -.141 .184
Knight Ridder .043 .152
Lee .126 .095
A.H. Belo -.128 -.050
Media General .488*** .027
McClatchy -.110 -.142
Tribune -.360 -.001
E.W. Scripps .104 .095
Dow Jones -.179 -.321
R2 .247 .202
Economic Context variables:
Interest rate -.060 -.024
Total U.S. ad spending .049 .151
R2 .278 .222
Firm specific variables:
Total assets .117 -.089
Inside ownership .007 .011
Ratio of financial directors -.383*** -.255
Ratio of advertising directors .573*** .149
Total R2 .368 .244
Notes:
1. Values are standardized regression coefficients.
2. Dependent variables: 1) Return on Assets (ROA) 2) Return on Equity (ROE)
3. All independent variables were a lag of two years
4. * p < .10 ** p < .05 *** p < .01
ROA (ß=.573, p < .01). However, the degree of public ownership, measured by
the level of inside ownership, did not turn out to be a significant factor. The
relative strength of the effect was minimal (ß=.007, p >.90). This final block of
2
variables increased R from .278 to .368.
In the second regression predicting firm’s ROE, the lagged dependent
variable explained very minimal variance, as shown in Table 1. Unique
company effects were observed. Times Mirror showed relatively high ROE
(ß=.452, p > .06). These two blocks of variables accounted for 20% of the total
variation in a firm’s ROE. General economic context contributed an additional
2
2%, increasing R from .202 to .222. The final block of variables moderately
2
increased R from .222 to .244. None of the predictors turned out to be
statistically significant. However, the same pattern which was found in the
regression with ROA was observed. The ratio of directors from financial
21
institutions was negatively related to a firm’s profitability, while the ratio of

directors from leading advertisers was positively associated with a firm’s
profitability. The level of inside ownership was not a significant factor, either
2
(ß=.011, p >.90). The total R was quite lower than the first model predicting
2 2
ROA (R =.37, R =.24, respectively).
Discussion
Whatever the explanations over the causes of interlocks, a frequently raised
question is “So what?” This study attempts to answer the consequences of
interlocking in terms of the firm’s financial performance. The results of our
longitudinal analysis showed that the representation of outside directors from
financial institutions and leading advertisers predicted firm’s profitability, but
somewhat differently. It was interesting to find that the ratio of financial
directors was negatively correlated with a firm’s ROA, while the ratio of
advertising directors was positively associated with a firm’s ROA. However,
based on the analysis with ROE, no significant results were obtained.
In line with the financial control theory perspective, companies with more
outside directors from financial institutions showed decreased profitability. The
financial control theory perspective contends that interlocking with financial
institutions produces a tendency toward conservatism to protect loans, which
affects a firms’ profitability. The significant effect of ROA implies this
relationship: ties to financial institutions may have led to more debt financing,
which may have lowered firms’ ROA due to the increased size of assets.
Although ties to financial institutions did not increase firms’ profitability,
the formation of the alliance may have served an important corporate
governance function, securing further financing or ensuring favorable
transactions. A close look at how and to what extent those directors from
financial institutions shape firms’ financing strategy will benefit future studies.
This study revealed a unique media industry characteristic in terms of the
role of ties to leading advertisers. This non-financial, but critical source of the
capital in the media industry appears to fulfill the goal of reducing operational
uncertainty as well as securing the capital. More study is needed to see whether
this strategic alliance works as a valuable communication network or as a direct
conduit to ad revenue. That is, whether and to what extent advertising revenue
comes from the companies where those directors are affiliated would provide a
clearer answer on the role of those directors.
This study only quantified newspaper interlocking with financial
institutions and leading advertisers, which does not provide the whole picture
of the behavioral motives of the companies. In-depth interviews with newspaper
executives could add further insight on the content of interlock ties, such as the
value of direct communication between directors in reducing environmental
ambiguity. Especially, the different effects of ties to financial institutions and
leading advertisers need to be closely investigated.
22
Also, this study only examined direct ties between newspaper companies and
financial resources. Because indirect ties between companies can strongly
3
condition the effects of direct ties between companies, future studies should
examine the moderating effects of indirect ties to financial institutions and
leading advertisers. This study examined firms’ profitability using accounting-
based indicators, ROA and ROE. However, marketing measures such as market
value (MV) or market-to-book (MB) may bring a different result. That is,
although increased ties to financial institutions lower firms’ ROA, the increased
strategic alliance can cause a positive effect on marketing measures.
There is a belief that companies would perform better if their board of
directors were to be made up of independent outsiders, especially those
affiliated with financial institutions. Research to date sometimes contradicts
that idea (Donaldson & Davis, 1994). This study contributes to the literature
by showing an example of publicly-traded newspaper companies. Reflecting the
unique characteristic of the media industry, ties to leading advertisers increased
corporate financial performance, while ties to financial institutions did not.
Along with the mixed results of the effects of interlocking directorates in other
disciplines, the results of this study indicate that the nature of the interlocking
should receive more scholarly attention than the mere quantity of the
interlocking. Some interlocks are aimed at increasing cash flow, while others are
to ensure a favorable transaction environment or to secure further financing.
Greater attention to the nature of interlocking directorates in the newspaper
industry would seem appropriate, which will help us address the long time
concern over the adverse effect on the content of media, if any.
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28
Hidden Costs and Hidden Dangers
Hidden Costs and Hidden Dangers:

Stock Options at U.S. Newspaper Companies
Miles Maguire
During the five years from 1999 to 2003, U.S. newspaper companies hid more
than $1 billion in expenses in plain sight on their financial statements, thanks
to favorable accounting rules on stock options. These rules, which require the
footnote disclosure of the costs but not their deduction from reported income,
have been under attack and are expected to be replaced in the near future with
requirements that companies incorporate an expense for stock options in the
calculation of net profit. This change in accounting and compensation practices
creates an opportunity for newspapers to rethink their approaches to paying and
motivating executives and other employees, and some have already begun this
process. This chapter reviews the recent usage of stock options by the U.S.
newspaper industry, examines in detail how some individual companies have
applied them, and outlines ways in which newspapers might be able to
capitalize on the current situation to address certain governance and
management issues.
The chapter begins with a background discussion and historical review of
the use of options by U.S. corporations. It next presents descriptive statistics
about the use of options by U.S. newspaper companies and analyzes their
relation to the financial performance of those companies. The next section
looks at three pairs of companies, comparing and contrasting their use of
options in the context of their overall compensation policies. Finally the chapter
sets forth some ways that U.S. newspaper companies could change their
compensation practices to achieve what is their stated goal, namely to align the
interests of executives with those of shareowners, particularly in light of
competitive threats enabled by new technology and innovative business
methods.
Background and Literature Review

Stock options have commonly been used to compensate U.S. corporate
executives since the 1950s, but their usage greatly expanded in the 1990s, partly
as an unintended consequence of tax law changes passed in 1993. These
changes were designed to place limits on executive salaries but ended up setting
off an explosion in compensation by encouraging the use of options as a way of
tying pay to performance (Delves, 2004). Over the last three decades numerous
researchers have noted that the theory behind the granting of options is that
29
they represent a solution to the agency problem caused by the split between
passive shareholders and professional managers who control the activities of the
corporation (starting with Jensen & Meckling, 1976, and continuing, for
example, with Ofek & Yermack, 2000, and Bebchuk & Fried, 2003). But many
problems have arisen with stock options, and their use appears to be waning,
although they are likely to remain a significant part of executive compensation
(McGeehan, 2004).
Stock options are intended to align the interests of executives with those of
shareholders by rewarding executives for implementing strategies that increase
the value of a company’s stock. But since the value of stock can fluctuate
independently of an executive’s actions, options can also reward executives for
the good fortune of running a company during a bull market or under favorable
economic conditions (Bertrand and Mullainathan, 2001). Another reason why
the owner-manager alignment is difficult to achieve is that the valuation of
options is intrinsically uncertain and subject to various estimates and
assumptions that lead to ambiguity about their true worth (Abowd & Kaplan,
1999). Meulbroek (2001) showed that options impose a cost on executives by
reducing diversification in their personal investment portfolio, which leads to
option recipients placing a lower value on those options than the market does.
At the same time, companies that grant options are likely to underestimate their
true economic cost because of current accounting conventions (Murphy 2002).
Despite these problems stock options have proven to be extremely popular
in corporate America. Among S&P 500 companies their usage expanded by
more than tenfold from 1992 to 2000 (Hall and Murphy, 2003). Their usage
declined in each of the following three years but still amounted to $42 billion
in grant date value in 2003 (Waters, 2004). The use of incentive compensation
such as options has been associated with various indicators of strong corporate
governance, including outside directors and institutional ownership (Hartzell &
Starks, 2003; Harvey & Shrieves, 2001). But more recently a very high degree
of option use has been found to be associated with a greater likelihood of
accounting irregularities (Bromiley & Harris, 2004).
In the U.S. media industry, executive compensation was criticized as
excessive even before the 1990s option boom. Crystal (1993) found high levels
of pay in the industry despite relatively poor stock market performance.
Looking at the disparity of compensation levels among chief executives, he
could find no correlation between pay and performance. U.S. newspaper
companies have been challenged on their practice of tying incentive
compensation almost entirely to financial performance with few firms including
factors such as circulation growth or editorial quality (Cranberg, Bezanson &
Soloski, 2001). The sensitivity of newspaper boards to the effect of high
executive compensation on worker morale and corporate image has been
questioned (Shephard, 2001), and it has been noted that several newspaper
companies have chosen to ignore the advice of their editorial writers on the use
of and accounting for stock options (Maguire, 2002).
30
Based on purely financial considerations, newspaper boards may see little

need to alter compensation practices except to the extent that changes in
accounting rules force the recognition of currently obscured costs. But there are
other trends that should be worrisome to those who are responsible for
overseeing the direction of newspaper companies, and it is possible that the
appropriate response to these trends would involve a reshaping of newspaper
corporate culture in a way that would put less emphasis on financial goals and
performance. The first of these is the continuing erosion of public confidence.
According to the Project for Excellence in Journalism, “Americans think
journalists are sloppier, less professional, less moral, less caring, more biased, less
honest about their mistakes and generally more harmful to democracy than they
did in the 1980s.” This decline in trust is linked to a sense that newspapers are
overly concerned with profits and has been accompanied by a decline in
circulation. Further it is increasingly unlikely that newspapers can continue to
maintain their recent high levels of financial performance. A whole range of
factors, from demographics to technology, are conspiring against the industry’s
continued economic strength, leading investors such as Warren Buffett to
project an ongoing decline in circulation and advertising (Zweig, 2004). A
growing body of scholarship suggests that newspaper financial returns are a
derivative of investments in social relationships with employees, readers and
communities (for example Meyer, 2004, and Rosenstiel & Mitchell, 2004). But
as long as executive performance is measured largely in monetary terms and
rewarded in a similar fashion, then newspaper companies are unlikely to
redirect their focus and therefore unlikely to avoid a long-term fade toward the
obsolescence of their traditional products. The role of executive compensation
generally, and stock options more particularly, needs careful consideration at
this time when newspapers companies are, as Picard describes it, facing a choice
between further commercialization or increased corporate responsibility (Picard,
2004). Although option compensation has gotten relatively little attention in
the literature relating to the business of news, it has been frequently cited as
central to most recent boom-and-bust cycle on Wall Street, which led to an
implosion of share prices, the bankruptcy of once high-flying companies, and
criminal investigations into corporate executives. One critic went so far as to
call the conventional stock option incentive program “the period’s original sin”
(Lowenstein, 2004).
Option Use by U.S. Newspaper Companies

This study focuses on 13 publicly traded firms whose primary business is
publishing newspapers in the United States. These firms are: Belo Corp., Dow
Jones & Co. Inc., E.W. Scripps Co., Gannett Inc., Journal Register Co.,
Knight Ridder Inc., Lee Enterprises Inc., Media General Inc., McClatchy
Newspapers Inc., New York Times Co., Pulitzer Inc., Tribune Co., and
Washington Post Co. (It excludes another public company, Journal
31
Communications Inc., because its stock has been widely traded for only a short
period of time.) Under the rules of the U.S. Securities and Exchange
Commission, these companies must make certain disclosures about their use of
stock options, both as they apply to the five most highly compensated executive
officers and as they apply to the company overall. The information as it applies
to individually named officers is included in the proxy statement while a
footnote to the financial statements in the annual reports gives an indication of
the total value of options issued throughout the entire company. Under current
accounting rules, companies are required to show how their net income would
have been reduced if they had recognized the fair-value cost of options at their
grant date, but they do not have to reduce their reported earnings by this
amount. Companies are allowed to include options in their calculations of
operating expenses that reduce net income, but only two of the newspaper
companies, Lee and Post, have decided to do so.
Table 1. Indicated Cost of Stock Options at U.S. Newspaper Companies ($

thousands)
5-year % of
2003 2002 2001 2000 1999 total total
Belo Corp., 11793 13521 11018 9059 5993 51384 4.9
Dow Jones & Co. Inc., 4471 1640 3360 9432 5533 24436 2.3
Gannett Inc., 64034 57762 34795 25738 15195 197524 18.8
Journal Register Co., 2685 3307 4227 3605 3046 16870 1.6
Knight Ridder Inc., 14631 15040 21902 25955 10250 87778 8.4
Lee Enterprises Inc., 4628 2145 1758 1628 1373 11532 1.1
McClatchy Newspapers Inc. 4705 3828 2416 2411 1848 15208 1.5
Media General Inc., 4450 4458 2527 1700 1200 14335 1.4
New York Times Co., 48403 48977 47193 44213 30370 219156 20.9
Pulitzer Inc., 4949 5136 4865 2360 2627 19937 1.9
E.W. Scripps Co., 19639 20228 15358 8253 6422 69900 6.7
Tribune Co., 75826 85500 55670 49835 36378 303209 28.9
Washington Post Co. 3159 3617 4309 3800 1900 16785 1.6
TOTAL 263373 265159 209398 187989 122135 1048054 100.0
Source: Company 10-K reports
As shown in Table 1, the usage of stock options varies widely in the U.S.
newspaper industry, with just three of the 13 companies accounting for almost
70 percent of the imputed value of stock options issued over the last five years.
32
Two of those companies are industry giants Gannett and Tribune while the
third is the family-controlled Times. Option usage by newspaper companies
appears to have peaked later than it did in other U.S. industries, with the
highest costs reported in 2002 and a 2.5 percent decline shown for 2003. But
even in 2002 most newspaper companies showed less of an inclination to issue
options than did other U.S. businesses. For example Standard & Poor’s
estimated that the earnings per share of the companies in the S&P 500 would
have dropped by 19.2 percent for 2002 if they had expensed their stock
options. As shown in Table 2, only one U.S. newspaper company, Tribune,
would have had that large of an effect. The average reduction in earnings per
share for the 13 companies would have been just 8 percent. For 2003 the
estimated reduction would have been 6.3 percent. By contrast Cisco Systems
Inc., a very large user of options in the technology industry, where option usage
has been concentrated, reported that its earnings per share would have been cut
by 80 percent in fiscal 2002 and 36 percent in fiscal 2003 if it had expensed
stock options.
Table 2. Reduction in 2000 EPS if Options were Expensed
2002 Earnings Per Share

As reported Pro forma % reduction
Belo Corp., 1.15 1.05 8.7
Dow Jones & Co. Inc., 2.4 2.2 8.3
Gannett Inc., 4.31 4.11 4.6
Journal Register Co., 1.16 1.09 6
Knight Ridder Inc., 3.04 2.86 5.9
Lee Enterprises Inc., 1.83 1.78 2.7
McClatchy Newspapers Inc., 2.84 2.76 2.8
Media General Inc., -3.14 -3.33 6.1
New York Times Co., 1.94 1.63 16
Pulitzer Inc., 1.62 1.4 13.6
E.W. Scripps Co., 2.34 2.16 7.7
Tribune Co., 1.3 1.04 20
Washington Post Co. 21.34 20.96 1.8
S&P 500 27.59 22.28 19.2
Although the theory behind stock options is that they provide incentives for
employees to improve firm performance, researchers have sought in vain to find
links between option grants and company performance (Hall and Murphy,
2003). Thus it is no surprise that in the newspaper industry, option granting
does not appear to be tied to company performance. One of the conceptual
problems in making the connection between option issuance and performance
33
is identifying when the incentivizing effects would occur. In other words, in any
given year is the firm’s performance reflecting the effect of options granted one,
two, three, or more years prior? Without more information than is typically
disclosed by corporations, this is a nearly impossible question to answer. Since
options typically have a life of 10 years and vest in stages, executives have
flexibility in terms of choosing when to exercise their options, which will
fluctuate in value with the value of the underlying stock. One way to minimize
the ambiguity of timing is to look at option costs and performance over a
longer period, assuming that at least some of the incentives will have taken
hold. In correlation testing for option expense and total returns at the 13
newspaper companies for the five years from 1999 to 2003, r was found to be
0.187, indicating no relationship between the (unrecognized) cost of options
and shareholder gains. As shown in Table 3, McClatchy, which had by far the
best stock market performance during that period, had the third smallest use of
options. Knight Ridder and Tribune, which provided nearly identical total
returns to shareholders, were far apart in their use of options. Tribune put
about three and a half times more into options than did Knight Ridder even
though it is only about twice as large.
Table 3. Option Use and Total Returns, 1999-2003
Option Value Total Return

Belo Corp., $51,384 53.2
Dow Jones & Co. Inc., 24,436 14.2
Gannett Inc., 197,524 47.6
Journal Register Co., 16,870 38.3
Knight Ridder Inc., 87,778 64.7
Lee Enterprises Inc., 11,532 53.9
McClatchy Newspapers Inc., 15,208 103.8
Media General Inc., 14,335 31.3
New York Times Co., 219,156 46.3
Pulitzer Inc., 19,937 n/a
E.W. Scripps Co., 69,900 98.5
Tribune Co., 303,209 64.0
Washington Post Co. 16,875 43.6
Option Value in thousands; Total Return in percent
More specific information about company option use can be found in the proxy
statement, where companies are required to provide certain disclosures on
executive compensation, including detailed data on the five most highly
compensated employees of the firm. One trend that emerges over the last five
years is the increasing value of options granted to newspaper CEOs even though
34
options as a percentage of total compensation have declined. The average value

of CEO options in 2003 was $3.3 million, a 65.5 percent increase from the $2
million average grant in 1998. As a percentage of total compensation, however,
options last year averaged 42 percent of total pay, down from 48.7 percent in
the peak year of 2001.
The proxy statements also show the degree to which a company views
options as primarily a tool for compensating executives or as a way of providing
motivation at other levels of the organization. For some companies, about half
of all options granted were given to the five most highly paid executives in
2003. These include Journal Register (52.6 percent), Lee (50.5 percent), and
Pulitzer (47 percent). Other companies spread options to lower levels of the
company and provide much smaller percentages to the top five executives.
These include the three companies that are the biggest options users: Times
(9.7 percent to top executives), Tribune (12.7 percent) and Gannett (13.2). At
Post, only one of the top five executives received options, and she received 18
percent of all options issued by the company.
Over time the granting of options is intended to lead to executives owning
sizable stakes in the companies they run. This effect appears to be occurring at
U.S. newspaper companies and raises a key question about compensation
policy. Because senior newspaper executives own so many shares, fluctuations in
the stock market can have a far greater effect on their personal wealth than their
total annual compensation package. Table 4 shows the total compensation for
CEOs for 2003 and the apparent change in the value of their company stock.
The change in the value of the stock was calculated by starting with the number
of shares and options exercisable within 60 days as reported in the 2004 proxy
statement, what the SEC calls beneficial ownership. This number was
multiplied by the difference between 52-week highs and lows for a yearlong
period ending in mid-July 2004. In every case, the annual fluctuation in
portfolio value dwarfed the amount of annual salary and bonus. In 10 cases out
of 13, the portfolio value change also exceeded the total amount of
compensation, including long-term compensation such as stock options.
For years media critics have argued that faceless shareholders exert great
pressure on corporate executives at news companies. Those critics have generally
overlooked the fact that those executives have a great deal at stake themselves in
the short-term fluctuations of their company’s shares. I have argued elsewhere
that the role of institutional shareholders in corporate decision making at
newspaper companies has been greatly exaggerated. These figures suggest that
researchers should take a closer look at how stock holdings of CEOs and other
top managers may coincide with corporate actions such as layoffs of journalists
and reductions in news budgets. The personal stock holdings of CEOs are
clearly substantial, but they need not be the driving factor in their actions. For
example, Post CEO Donald Graham draws what can only be described as a
minuscule salary for a company of that size and has far more at stake in terms of
his holdings of company stock and in the sizable dividends he receives. Of all
35
Table 4. Stock Value Change in Personal Holdings Compared to Annual

Compensation for Newspaper CEOs
Stock Value
2003 2003 Change/
2003 2003 Longterm Total 52-Week Total
Salary Bonus Comp. Comp. Mkt. Change Comp.
Belo Corp. 855,000 45,800 1,442,000 2,671,112 10,900,711 4.1
Dow Jones & Co. Inc. 930,000 540,000 5,079,822 6,719,473 4,645,647 0.7
Gannett Inc. 1,600,0002,250,000 8,692,000 12,739,673 27,919,467 2.2
Journal Register Co. 950,000 300,000 4,095,765 5,412,408 8,733,584 1.6
Knight Ridder Inc. 972,405 455,637 4,699,645 6,144,485 18,986,172 3.1
Lee Enterprises Inc. 700,000 950,000 2,259,500 4,116,100 2,566,285 0.6
McClatchy Newspapers
Inc. 900,000 825,000 1,395,418 3,133,686 5,903,614 1.9
Media General Inc. 875,000 427,302 3,253,959 7,224,792 21,562,142 3.0
New York Times Co. 995,000 743,265 1,014,300 2,790,043 4,128,760 1.5
Pulitzer Inc. 738,288 653,181 9,094,963 10,567,708 82,175,488 7.8
E.W. Scripps Co. 925,000 804,232 23,359,018 25,118,395 20,792,337 0.8
Tribune Co. 850,000 1,200,000 5,189,989 7,364,694 10,125,454 1.4
Washington Post Co. 400,000 0 400,000 810,658 655,952,830 809.2
newspaper CEOs, however, he has been the most disdainful of concerns about
short-term fluctuations in the price of his firm’s stock. One explanation may be
that he is so wealthy that he has gotten used to and can afford to ignore market
shifts, even the sizable ones that affect his portfolio.
Company Comparisons
While it is possible to make general observations about the newspaper industry,
newspaper companies differ widely in their histories, ownership structures,
strategies, properties, and major markets. This section attempts to focus more
closely on three pairs of newspaper companies that have a certain degree of
commonality. The firms in the first pair, McClatchy and Knight Ridder, are
“pure” newspaper plays, with essentially all of their revenues coming from
newspapers and related Web sites. The second pair is made up of two family-
controlled firms whose corporate names reflect the traditions and pride of their
flagship newspapers, The New York Times and The Washington Post. The final
pair consists of two national newspaper chains that have significant broadcast
operations, Gannett and Tribune. For each set of companies, several items were
reviewed: the overall level of CEO compensation including options, the
company’s compensation philosophy and methods, company-specific measures
36
of executive performance, recent performance, and recent changes in

compensation plans.
McClatchy/Knight-Ridder
If pay were truly dependent on performance, then Gary Pruitt would have to be
considered the most underpaid CEO in the newspaper industry. From 1999
through 2003, his company, McClatchy, has had a compound annual growth
rate of 15.3 percent and a total return of 103.8 percent. For this he was paid
just $3.1 million in 2003, including options worth $1.3 million. By contrast
Knight Ridder, with returns about two-thirds as large, paid its CEO, Anthony
Ridder, about twice as much: $6.1 million, including options worth $2.5
million. Ridder’s higher pay could be arguably justified on the basis of scale, as
his company had 2003 revenues of $2.9 billion, compared to McClatchy’s $1.1
billion.
Both companies use similar language to describe their compensation
philosophies with one critical difference. While Knight Ridder lists as its first
goal aligning the “interests of executives with the long-term interests of
shareholders through awards whose value over time depends upon the
performance of the Company’s common stock,” McClatchy makes no specific
reference to shareholders. Both firms say their goals include attracting and
retaining executives, motivating them, and encouraging them to own company
stock.
The companies follow standard practice in using outside compensation
consultants to survey pay rates for executives, but Knight Ridder is paying its
executives at a comparatively higher level, with salaries between the 50th and
75th percentile of executives at peer companies. McClatchy says it targets the
median of peer companies. The companies compensate their executives in a
combination of ways, including base salary, short-term incentives, and long-
term incentives. McClatchy’s compensation package includes the annual base
salary, an annual cash bonus, cash compensation under a long-term incentive
plan, and stock options. The company is modifying its stock incentive plan to
supplement stock options with restricted stock grants, unrestricted stock grants,
stock appreciation rights, and restricted stock units. Knight Ridder’s executives
are compensated through base salary, annual bonus, long-term incentive
awards, and stock options.
It appears from reading McClatchy’s proxy statement that the company
underpaid its CEO on his annual bonus. The company said it set a formula of
paying him a bonus equal to “.005 times McClatchy’s operating cash flow
(operating income plus depreciation and amortization) for the fiscal year, with a
target payout of 75% of Mr. Pruitt’s annual base pay.” This implies that the
company expected to pay him a bonus of $675,000 based on a forecast
operating cash flow of $135 million. Instead the company’s operating cash flow
came in at about $214 million, which according to the formula would have
meant a bonus of more than $1 million. In the end the company paid him a
37
bonus of $825,000, based in part on the company achieving its 19th

consecutive year of circulation increases.
One of the most significant differences between the two companies’
compensation programs is the firms that they select as peers by which to
measure their performance. McClatchy uses the 12 other publicly traded
newspaper companies that are included in this study. Knight Ridder, by
contrast, refers to a “comparison group” of companies in the newspaper
industry but does not specify which ones they are. Elsewhere in its proxy
statement it compares its performance to that of the companies in the S&P
Publishing Index, which includes two magazine publishers and excludes several
high-performing newspaper companies, such as McClatchy. In 2003 Knight
Ridder’s CEO received a long-term incentive payment of $2.2 million based on
the company’s ability to generate a greater total shareholder return than any of
its comparison companies, although its not clear exactly which companies those
are.
Times/Post
The Post and Times companies publish highly influential flagship papers that
compete head to head in the sphere of national affairs and that are frequent
winners of awards for journalistic excellence. Both companies have two classes
of stock, one of which is designed to retain operating control within a family,
the extended Sulzberger clan in the case of the Times and the Grahams in the
case of the Post. But the companies have evolved in distinct ways in terms of
their operations. The Times describes itself as “a diversified media company
including newspapers, television and radio stations, Internet businesses, and
forest products and other investments.” The Post also has diversified publishing
and television businesses but has recently expanded into educational services,
which are expected in 2004 to become its largest single source of revenue. The
companies are roughly equal in size, with the Post taking in $2.8 million in
2003 revenues and the Times $3.2 billion.
One of the most striking differences between the two companies is the way
they compensate their chief executives. At the Post, Donald Graham earned a
base salary of just $400,000 in 2003, the same amount that he was paid when
he was promoted to his current job a dozen years ago. He also waived his right
to earn an annual bonus. His total compensation came to a little over $800,000
thanks to a long-term incentive payment worth $400,000. He receives no stock
options, in part because he already controls close to 90 percent of the
company’s Class A stock. Over at the Times, CEO Russell T. Lewis earned
more in base salary alone, $995,000, and his total compensation came to $2.8
million, including more than $1 million in options.
Both companies use multi-year performance cycles to assess and reward
executive efforts. The Times made no long-term performance payments for the
three-year cycle that ended in 2003. Such payments are based on a comparison
of the company’s stock to that of peer companies, mostly newspaper companies,
38
including high-performing ones such as McClatchy. The Post uses a more

complicated set of factors, including divisional goals, total shareholder return,
and efforts toward long-term growth of the company. Its peer companies for
assessing performance are those in the S&P Publishing Index. Both firms look
to a broader range of companies when assessing competitive compensation
practices.
The Post has the more restrictive policy on options, and only one of its five
most highly compensated employees received an option grant in 2003. In its
proxy statement, the Times argues the importance of options as part of its
overall compensation policy. But in anticipation of changing accounting policy,
it reduced the number of options grants to each executive by 40 percent in
2003.
Gannett/Tribune
The final pair of comparison companies was selected because they both operate
national newspaper chains and have significant television and Internet
operations. They are roughly equal in size and have similar stock performance
records over the last five years. A major difference is that Gannett—in addition
to owning the country’s largest circulation daily newspaper—has more, smaller
operations while Tribune tends to have operations in a smaller number of larger
cities, where it owns both newspapers and broadcast outlets.
Gannett’s CEO, Douglas H. McCorkindale, receives the largest base salary
in the newspaper industry, which at $1.6 million is four times the size what the
Post pays its CEO. For 2003 he also received options worth $8.7 million. As a
matter of policy, Gannett says that its goal is to pay its executives above the
median of pay at comparison companies, those in the S&P Publishing Index:
“The Committee believes that the Company should compensate its executives
better than its competitors in order to continue attracting and retaining the
most talented people.” At Tribune, CEO Dennis Fitzsimons did not earn
nearly as much, just $850,000 in base salary and options worth $5.2 million.
In its compensation philosophy, Gannett stresses the importance of pay for
performance. The company “believes substantial portions of total compensation
should be at risk. Likewise, outstanding performance should lead to substantial
increases in compensation.” It may be for that reason that Gannett shows no
sign of decreasing its use of stock options as a compensation mechanism.
Tribune, by contrast, is adopting several changes in its option policies,
including sharply lowering the amount that it issues. In 2003 it cut the number
of options by 8 percent, and in 2004 reduced that number by 38 percent. It
also asked shareholders to approve a new incentive plan, which among other
things will include new methods of long-term compensation, such as stock
appreciation rights, restricted stock, and restricted stock units.
Gannett’s measures of executive performance are essentially financial ones:
“earnings per share, operating income as a percentage of sales, return on assets,
return on equity, operating cash flow, stock price, and market value.” Tribune
39
uses a broader set of measures including both financial and nonfinancial gauges:
“cash flow or operating cash flow, shareholder value added, earnings per share,
earnings before interest, taxes, depreciation and amortization, return on equity,
return on capital, return on assets or net assets, revenue growth, income or net
income, cost control, operating income or net operating income, operating
profit or net operating profit, operating margin, return on operating revenue,
market share or circulation, customer or employee satisfaction survey results,
employee retention and goals related to acquisitions and divestitures.”
Discussion
This examination of the use of stock options and broader compensation policy
issues at U.S. newspaper companies leads to several specific observations. The
first one is readily apparent, but no less true for its obviousness: There is no best
practice for the use of options in the newspaper industry. All of the companies
say that they want to attract, retain, and reward talented executives, but they
vary markedly in the extent to which they use options for these purposes. A
second observation is that there is a wide gap between the theory and reality of
whether options lead to better management decisions and stock market
performance. Some firms with relatively little use of options have shown strong
financial results while some firms with extensive use of options have also
performed well. Finally, and perhaps most importantly, this analysis shows that
over time the granting of options allows executives to acquire substantial stakes
in the companies that they run, stakes that are so large that they may play a
larger motivating role than annual compensation packages. As a result,
newspaper CEOs may have reason to focus excessively on stock performance as
opposed to other measures of corporate activity and success.
Companies often stress the importance of aligning the interests of executives
with those of shareholders, but this formulation raises two important questions.
What are, in fact, the interests of shareholders? And assuming that shareholders
are only focused on financial returns, should managers therefore disregard all
other nonfinancial indicators? In answer to the first question, one has to
recognize that not all shareholders have the same time horizons, appetite for
risk, tax and estate considerations, income needs, or analytical capability, all of
which means that “interests of shareholders” is a fairly meaningless term.
Different shareholders will have different financial goals and interests, as some
may desire short-term gains paid out in dividends while others may wish to see
profits reduced in the near term by investments that will yield large returns in
five or 10 years. Furthermore, investors may well be motivated by nonfinancial
considerations. A motorcycle enthusiast could invest in a company like Harley-
Davidson, Inc.; someone with a sick relative could invest in a biotech startup
that promises a cure; a concerned citizen could invest in a newspaper in the
quaint and largely misplaced belief that the paper exists to enrich society. Peter
Lynch (1989), the esteemed stock picker who once ran the largest mutual fund
40
in the U.S., often urged investors to “buy what they know,” and so it should
seem perfectly reasonable that some investors would invest in the company that
publishes a product they see every day, a daily newspaper.
All of these complicating factors may be too hard to track, and so let’s
assume it’s best for corporate managers to simplify things to the point where all
they care about are the purely financial investors, the ones who are only
interested in profits and stock returns. If that’s the case, then to be aligned with
the interests of shareholders would mean to focus only on profits and stock
returns. Unfortunately, this may not be the best strategy. Collins and Porras
(1994) have shown that companies that have proven highly successful over long
periods of time do not focus solely on such things as net income or maximizing
shareholder wealth. Instead, firms that focus on profits as well as additional core
values and a sense of purpose “make more money than the purely profit-driven
… companies.”
In this context, it may be seen that the focus on stock market returns and
the use of compensation strategies that emphasize stock market returns may be
leading U.S. newspaper companies into a cul-de-sac from which they cannot
easily emerge. While those companies can take steps to maintain, and even
build, their already generous profit margins, they are unlikely to be able to
achieve strong stock price appreciation for the simple reason that investors have
already priced into the market an expectation of high margins. As a
consequence, there is likely to be little additional reward for maintaining high
returns.
More ominously, while the companies are focusing on margins and stock
returns without maintaining franchise value, they are opening themselves up to
competitors that can use innovative technology and business models to gain the
attention of consumers and capture advertising dollars. Ebay and craigslist are
two example of companies that are enjoying broad market acceptance and
collecting revenues that would have once gone to the coffers of newspaper
companies. Significantly these companies are using what’s been called a “peer-
to-peer production” system, which like open source software can create great
value at little cost to individual users and in a way that traditional providers
cannot easily compete against.
Under these circumstances, those responsible for the governance and
operations of newspaper companies need to reconsider their current business
strategies. Their current inclination to privilege the economic over the social
aspects of journalism may be appropriate in a purely capitalist system but is
unlikely to serve them so well in the emerging economy built on networked
relationships and more importantly on an open source business philosophy.
Simultaneously with their strategy review, newspaper leaders need to rethink
compensation policies and go beyond the kind of tinkering that, for example,
replaces stock options with stock appreciation rights. The ideal compensation
program for newspaper executives would be one that strengthens the
newspaper’s core franchise, includes a range of measures beyond financial ones,
41
and provides incentives that encourage efforts to promote both economic and
social value. The first two elements of this plan would be addressed through
new performance measures and the third by new forms of compensation.
The current laundry list of performance measurements used by newspaper
companies consists of items like the following (taken from McClatchy’s 2004
incentive plan): “operating cash flow; operating cash flow as a percentage of
revenue; revenue; operating income; operating income as a percentage of
revenue; pretax income; pretax income as a percentage of net income; net
income as a percentage of revenue and/or circulation; total shareholder return;
such total shareholder return as compared to total return (on a comparable
basis) of a publicly available index such as, but not limited to, the Standard &
Poor’s 500 Stock Index; earnings per share; pretax earnings per share; return on
equity; return on capital; return on investment; working capital; ratio of debt to
shareholders’ equity.”
Such measures naturally direct executives’ attention toward financial
matters. They should be supplemented with such things as:
• Circulation growth.
• Advertiser satisfaction.
• Accuracy and credibility.
• Employee satisfaction and diversity.
• Reader experience, perhaps as described by McCauley and Nesbitt of
the Readership Institute.
While moving toward this kind of balanced scorecard approach with a mix of
goals would be a good first step, its effect would be limited as long as the reward
continued to be mostly in the form of financial payouts. An executive who is
going to be rewarded with restricted stock based on employee satisfaction will
be sorely tempted to make decisions in a way that will maximize the value of
the stock over time, even at the expense of some employee satisfaction. Thus
unless the rewards are also altered, a change in performance measures may not
do much to change the financial focus of executives.
Some compensation practitioners have come to exactly this conclusion. In a
2002 article called “Has pay for performance had its day?,” three consultants at
McKinsey & Company warned that current pay practices could make it
difficult for firms to foster a culture of innovation. Even Jensen, who is credited
with providing the theoretical basis for companies greatly expanding their use of
stock option compensation with a 1990 article (with Murphy) in the Harvard
Business Review, has come to believe that corporate management can be too
closely attuned to Wall Street’s urgings. In 2002 he co-authored an article
(with Fuller) whose title says it all: “Just say no to Wall Street.” In it he warned
how stock options in particular can make “the preservation or enhancement of
short-term stock prices … a personal (and damaging) priority for many a CEO
and CFO.”
42
Journalism has long attracted bright ambitious people who were not
motivated (at least not initially) solely by money, and so it might well be
possible to offer rewards in ways that are not purely financial or tied to the
stock market. (Naturally, the cash savings that would result would be paid out
to shareholders.) Some possibilities for new style incentives might include
sabbatical leaves, financial support for innovative “pet” projects,
commemorative awards programs, and endowment funds to be used to support
charitable causes. Such rewards would certainly attract a different kind of
executive to the upper echelons of the U.S. newspaper industry, and that may
not be a bad thing.
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46
Governance and Reinvestment Strategies
The Effects of Governance Structure on

Reinvestment Strategies of
Media Conglomerates
Dan Shaver and Mary Alice Shaver
Ownership consolidation and the search for economic synergies have resulted in
the emergence of national and multi-national conglomerates with business units
in many media—and non-media—segments. This study examines the
relationship between the diversity of business lines and the composition of the
boards of directors—in terms of internal/external representation, singular or
dual CEO role, and backgrounds—and reinvestment allocation decisions.
The board of directors is fundamental to the long-term direction and
development of the segments of the company they govern. They hire and fire
the chief executive, approve long-term strategy, and approve both operating and
capital reinvestment of corporate cash (Rutledge, 1996).
As traditionally stand-alone media businesses become segments of
corporations with business segments in multiple media—and non-media—
lines, their ability to grow and seize market opportunities depends on their
ability to compete successfully for that portion of the corporation’s total cash
flow devoted to operating and capital reinvestment.
If they are successful, they may be accorded opportunities for growth that
exceed the potential of their segment-only cash flow. If they are unsuccessful,
there may be a reduction in their potential as free cash flow is used to support
other segments viewed by management as having superior potential for return
on investment.
Boards are created to supply governance/oversight to the CEO in the
management of the overall enterprise and to provide balance between the
interests of various stakeholders in the company (Lashgari, 2004). Outside
directors are ideally chosen for their ability to bring wisdom, experience,
resources and contacts to the company. As the variety of business segments
grows, the range of expertise needed in an effective board expands, potentially
impacting the size and range of specialties required (Lear, 2000).
Many private owners of media, particularly of those media associated with
the delivery of news and information, have traditionally accepted the notion
that owners must sometimes make negative financial decisions in the interest of
serving a greater public obligation. Shaver and Shaver (2003) suggested that one
effect of increased intra-industry concentration is the removal of the decision
maker from the traditional industry/community context and norms that
emphasize certain levels of public responsibility for the media. Corporate
47
directors of companies with diversified business segments, seeking to balance

financial goals, placate management, and maintain stock prices, may not
operate from traditional priorities. Their first priority is often the cash flow and
payback implications of any investment (Darazsdi, 1999; Rutledge, 1996).
A critical issue lies in reinvestment decisions. Here, reinvestment is used in
the sense of “a discretionary application of the corporation’s resources to the
support or development of a particular media business opportunity.” Capital
expenditures in support of strategic objectives involve an irreversible
commitment of corporate resources (Weaver, 1984). The unspoken implication
of this definition is that, since corporate resources are always finite and the
demands are nearly infinite, allocating resources to one project or activity means
that resources cannot be used for another project.
Although considerable attention has been focused on governance issues since
the WorldCom, Enron, and other corporate debacles of the recent past, most of
the attention has focused on ethics, balancing the conflicting demands of
stakeholders, supervision of management and the more the practical matters of
accounting decisions affecting the management of earnings. The issue of how
investment decisions may affect the development of media operations does not
appear to have yet entered the literature.
The essential reasons for a business to reinvest in its operations are to expand
capacity and/or markets, reduce costs, or to replace exhausted resources to
maintain the capabilities required to preserve current markets or revenue
streams (Leighton, 1990). Reinvestment can take the form of capital
investment—the direct purchase of land, buildings, licenses, patents, or major
equipment—or of operating investments. Operating investments occur when
an organization continues to invest in a product or service even though costs are
increasing more rapidly than profits.
Although the notion of operating investments is somewhat different than
traditional investment language, it reflects the reality of the decision process.
Faced with unexpected newsprint increases, for example, a publisher has
choices. The news hole can be reduced—negatively impacting the quality of the
paper but preserving the projected profit budget—or, the publisher may elect to
absorb the additional expense in the short run in the belief that maintaining the
quality of the newspaper ultimately best serves his or her readers by helping
maintain reader loyalty—reinvesting in the product.
Since corporate boards are the gatekeepers of reinvestment resources,
understanding issues affecting their decisions is necessary to predict the
direction of media development. The allocation process takes place at the
intersection of competing values and interests as illustrated in Figure 1.
48
Figure 1: Competing Values and Interests in the Allocation Process
The model suggests several possible issues related to corporate boards and
reinvestment allocations. These inform our research questions:
R1: Does the makeup of boards of directors vary according to the

composition of the lines of business that form the overall company? It would
seem likely that board composition would vary as the variety of business
segments increases to reflect a broader variety of expertise and that these
differences might impact corporate reinvestment decisions.
R2: Does the total number of business segments in which the company is
engaged affect board composition?
R3: Does the composition of the board, measured in terms of background

and competencies, change as the range of business segments increases?
R4: What drives allocation decisions in companies with business segments in

multiple industries or media? Do resources flow primarily to segments with
the greatest margins/returns, or are they allocated on some other basis?
49
R5: Does the background/expertise of those serving on boards of companies

with significant media assets affect the decisions that are made regarding
reinvestment of resources?
This study is an effort to improve our understanding of how this process affects
allocation of reinvestment resources in public companies operating in one or
more media segments by examining the kinds of decisions that have been made
before.
Methods
Because the study was to focus on companies with considerable media power,
the initial sample was drawn from Compaine’s list of leading firms in Who
Owns the Media? After reviewing the list to eliminate firms that no longer exist,
that have exited their media niche or are privately held, the following 22 firms
were selected for review. Table 1 identifies the companies, their number of total
business segments and their number of media-related business segments. Table
2 identifies the range of business segments across media industries.
Table 1: Media and Non-Media Business Segments
Company Total Business Segments* Media Segments

Belo 4 2
Bertelsmann 7 4
Clear Channel 3 1
Comcast 5 1
Disney 4 2
Emmis 1 1
Gannett 2 2
General Electric 11 1
Knight-Ridder 2 1
McClatchy 1 1
McGraw-Hill 3 2
Media News 1 1
Meredith 2 2
New York Times Co. 3 2
News Corp. 7 4
Primedia 1 1
Scripps 5 2
Sony 6 2
Spanish Broadcasting 1 1
Time Warner 6 4
Tribune Co. 2 2
Viacom 6 3
*Business segments are based on the reporting categories in each firm’s annual report.
50
Table 2: Distribution of Company Media Business Segments by Industry
Newspaper Magazine TV Radio Cable Film Music Books

Net
Belo X X
Bertlesmann X X X
Clear Channel X
Comcast X
Disney X X
Emmis X
Gannett X X
G.E. X
Knight-Ridder X
McClatchy X
McGraw-Hill X
Media News X
Meredith X X
NYT X X
News Corp. X X X X X X
Primedia X
Scripps X X
Sony X X
Span. Broad. X
Tribune X X X
Time Warner X X
Viacom X X X X X
Data regarding the firms’ histories and boards of directors were gathered from
company web sites, Annual Reports, 10-Ks and other SEC filings. Information
collected about the boards of directors included:
• How many directors did the board contain during each of the years
examined?
• How many directors are “insiders,” managers of the company? How
many are independent?
• Are the Chairman of the Board and CEO positions held by the same
individual or by separate individuals?
• What are the backgrounds of the independent directors? Directors were
classified into one of five categories were based on their employment or
backgrounds:
− Lawyer
− Finance (including accounting, banking, insurance, venture capital
and economics backgrounds)
− Consumer (including consumer goods companies, retailing,
advertising and similar backgrounds)
51
− Service/Industry (including non-retail businesses, utilities, technical

and manufacturing)
− Academic (including professors with specialties unrelated to the
business and college presidents and other officials)
− Other (all directors who did not fit into one of the other categories)
• Since research indicates a negative correlation between excessive tenure
and board effectiveness (Directors & Boards, 2004), a longevity measure
was designed to reflect how slowly or quickly membership changes on
each board. The longevity measure was calculated by subtracting the
year in which the person joined the board from the year in which each
meeting was held and then averaging all the scores for all attendees.
While many companies report longevity information in their annual
report or proxy statements, some do not. The information was not
available for Gannett and Bertelsmann and the data for Time Warner
were of limited utility because all directors have a 2001 board start date
as a result of the merger with AOL.
Because the focus of the study is the impact on traditional stand-alone media
that are now segments of a conglomerate as a result of intra-industry
concentration, several categories identified by Compaine were not included.
Excluded categories were Cable MSO, DBS, Film Exhibition, Book Selling,
and Electronic Information Services/New Media. Reinvestment activities
involving these segments were included with investment activities for non-
media segments. Newspapers, Magazines, Broadcast TV, Cable Networks,
Radio, Film Production and Distribution, Recorded Music and Book
Publishing were included. Inclusion/exclusion of categories was based on
whether the segment contributed to media content or merely served as a
distribution channel.
Information was gathered on each business segment regarding economic
performance (revenues, costs, and EBTIA), capital expenditures, and
acquisitions and sales of assets. From this information, standardized
comparisons in terms of percentage changes and segment percentages of the
parent firm’s consolidated report were calculated. Percentages were used to
minimize the influence of currency fluctuations resulting from corporations
based and reporting from different monetary systems.
The measure of operating investment was calculated by subtracting the
percentage increase (or decrease) in EBITA from the percentage increase (or
decrease) in expenses. While unexpected events may impact a single year before
management can react, an overall trend indicates the presence or absence of an
operating subsidy. In periods of more than 12 months, managers and boards
have the ability to either consciously continue investing in the business segment
or of taking other actions to eliminate the problem.
Company data for the 22 firms ranged from 12 years to five years. (Five
years appears to be the length of time for which comparable data is available for
52
Time Warner due to the effects of the merger. In other cases, shifts in
accounting principles or changes in the fiscal year resulted in incompatible data
before the 10-year target range could be achieved.)
Findings
To address the first research question, the relationship between the presence of
media business lines and the composition of boards of directors, several analyses
were conducted. The findings were:
• Companies in which media segments figure prominently in the

portfolio are less likely to have a greater proportion of directors who are
also officers of the company. The correlation between the proportion
of media segments in the portfolios of the companies studied and the
proportion of their boards consisting of outside directors was negative
(r = -.206, p=.005, n=185). The correlation between total revenues and
insider board members was not significant ( r = -.607, p= .368, n=
185).
• Correlations between media representation in the portfolio and

whether the board of directors’ chair and the firm’s CEO roles are
likely to be concentrated in a single executive showed no significant
relationship (r = .029, p=.696, n=185).
These two sets of findings suggest that while some of the preference for inside
directors may be driven by size alone, some additional factors appear to be
related to the presence of media operations.
• Another board related issue involves the question of whether the

inclusion of media segments in the portfolio impacts the composition
of qualifications sought on the board. Significant relationships between
board composition and the percentage of media segments in the firm’s
overall portfolio were identified in the following categories:
Correlation P Value N
Director Background
Finance -.493 p<.001 n=179
Consumer -.187 p=.021 n=153
Industry -.224 P=.002 n=181
Academics -.267 p=.001 n=159
• To assess the degree to which these changes might be a function of size

rather than the inclusion of media segments, the total number of
53
segments was correlated with directors’ backgrounds. The significant

relationships were:
Correlation P Value N
Director Background
Finance -.493 p=.001 n=179
Consumer -.187 p=.021 n=153
Industry/Service -.224 p=.002 n=181
Academic -.267 p=.001 n=159
Board size, the total number of directors, appears to be a function more of the
total number of segments in which the firm operates than of the proportion of
those segments that are media enterprises. The number of total segments was
more strongly correlated with board size (r = .598, p<.001, n=185) than was the
relative proportion of media segments to other business lines (r = .332, p<.001,
n=185).
Clearly, the inclusion of media segments in a firm’s portfolio affects the
composition of the board, but the composition of the board also has
implications for decisions about reinvestment strategies affecting the media
businesses.
When capital expenditures for media segments were correlated with director
characteristics, the following relationships emerged:
Correlation P-Value N Industry

Background
Law -.534 p=.015 n=20 Magazines
.845 p= .017 n= 7 Cable Network
-.983 p= <.001 n=9 Book Publishing
Finance .569 p=.002 n=28 Radio
.673 p<.001 n= 26 Book Publishing
Consumer .427 p<.001 n=66 Newspaper
-.450 p=.011 n=31 Magazines
-.673 p<.001 n=26 Book Publishing
Industry/Services .449 p=.017 n=28 Radio
.745 p= <.001 n=30 Magazines
.507 P=.008 n=26 Book Publishing
Academic .721 p=.002 n=15 Book Publishing
When media segment reinvestment decisions were correlated with board

longevity, there appears to be evidence that established boards in companies
dominated by non-media business lines invest more heavily than those with 50
percent or more of their operating profits deriving from media holdings (mean
of capital investment as a percentage of operating profit for those with less than
50 percent from media = .641, mean of those with more than 50 percent =
.248, p <.001).
A closer look at capital reinvestment decisions shows that radio (r = .597,
p=.001, n=30) and film (r = .592, p<.001, n=30) tend to benefit as they
54
become increasing portions of the firm’s business, but that they tend to suffer
(radio: r = -.924, p<.001, n=30; Magazines: -.730, p<.001, n= 33; Book
Publishing: r = -.903, p<.001, n=28) as the number of competing segments
increases. Film production allocations, on the other hand, appear to increase
with competition (r = .475, p=.003, n=37). The primary driver for these
allocation decisions appears to be the weight of the media segment’s
contribution to the overall profitability of the firm, not operating margins. The
most significant correlations between margins and capital investment and
contribution were:
Positive and significant correlations between media segments and
investment through operating subsidies were identified for Cable Networks (r =
.618, p=.024, n=13) when total business segments were compared to annualized
subsidy data. Positive correlations were also identified between board size and
the Publishing (r = 338, p= .018, n=45) and Broadcast (r = .379, p=.002, n=67)
industries. There appear to be no significant correlations between the board
demographics of background and longevity and operating subsidies.
Differences in capital reinvestment patterns between larger, more diversified
media companies and smaller firms concentrated in two or three media areas
were examined in two approaches: capital investment in media subsidiaries as a
proportion of the total capital budget and capital investment in media as a
percentage of total media revenues.
The average reinvestment levels in media by the more diversified firms were
lower than for the media-concentrated firms. The mean percentage of media
capital investment of the companies overall capital budget was 34.4% for the
more diversified firms and 92.8% for more media-focused enterprises. The
difference is statistically significant (F=7.325, p=.008).
Discussion
Douglas Gomery (Compaine & Gomery, 2000) suggested an institutional
economic model for evaluating communications companies because of the
political and social importance of the products they create, proposing a
combination of economic and normative analysis focused around mass media
public policy issues.
The economic environment in which media content is generated has
changed radically and irrevocably in the last three decades. In the U.S., major
broadcast networks, which once made independent decisions about
reinvestment of the resources they generated, are now minor cogs in corporate
machinery that churns out movies, cruises and toasters, along with television
content. The feisty, family-owned newspapers that dominated the 1940s and
1950s markets have largely slipped into the barns of publicly-held chains. The
local radio station is now—more likely than not—broadcasting content
downloaded via satellite from the parent company’s production site in another
state with only a sleepy engineer to watch the dials. These changes have
55
significant implications for evaluating media company performance in the

broader context proposed by Gomery.
Owners, or at least that subset of the ownership actively engaged in
operating a family- or closely-held media enterprise, often instinctively
recognized Gomery’s point of view and managed accordingly. They often
recognized an obligation to their readers or their communities that required
making choices that were not always in the short-term financial interests of
their company. In part, those decisions were informed by their connectedness
to the community—a place where they likely were born and expected to be
buried. Love of place, knowledge of neighbors, and sometimes just plain fear of
consequences—economic or social—served to temper the sharp edge of
economic greed.
A second factor often affecting the decision-making of owners of closely held
companies might be classified as industry norms or standards. Working in a
media field—and with others similarly committed—tends to foster adoption of
industry values regarding standards, duties and obligations. Finally, except for
media enterprises subject to FCC regulation, local owners were answerable only
to themselves and, perhaps, their families or close investors. If they wanted to
take risks, they could. If they wanted to take losses in the short-run because of a
belief in long-term paybacks, they had the option to do so.
In today’s media food chain, where all the fish are hungry and regulations
restricting ownership and operation are steadily disappearing, the
independent/family owner is becoming as rare as the Yeti and is almost
certainly being vigorously courted by one or two would-be buyers.
What has been done cannot be undone but understanding where these
changes are headed in terms of the forces shaping the evolution of media
organizations—and thus affecting content development--is critical to
anticipating the future. Most major media companies are publicly held,
providing access to capital markets that can be extremely important in
increasingly technologically focused enterprises. Most have multiple business
lines and many firms encompass distinctly non-media segments. Disney, after
all, runs theme parks and cruise ships; The Tribune Co. owns a baseball team,
and General Electric makes coffeepots and military supplies.
The people who manage these media firms are usually “hired hands” whose
roots in the community may be transitory and whose first loyalty is often to the
firm that employed them. After all, the next step up the ladder is in another
community. Additionally, with some limitations, the employee/manager’s
primary loyalty is both legally and morally due to the shareholder. And, the
Board of Directors embodies the shareholder and shareholder’s interests. Thus
the importance of understanding the dynamics of governance and resource
allocation in companies with significant media holdings. In this context, several
findings beg attention:
The analysis indicates that higher levels of media ownership in a company’s
portfolio correlates with greater insider control. Although some of this appears
56
to be an artifact of size, there do seem to be some issues related to the nature of

media ownership as well. From a business perspective, these issues are troubling
since most of those concerned with contemporary corporate governance issues
are advocating an increase in the influence of outside directors and separation of
the powers of the Board Chairman and the CEO.
It is not surprising that, as media segments become an increasingly
important portion of a company’s business, the board of directors has to change
as well. New business segments require new skills. What is surprising is the
direction of change: directors with backgrounds in industry and service (and
thus, with audiences) and academics decrease. More importantly, these are the
people who are now making key policy and reinvestment decisions. They are
not generally linked to the communities served by their media companies. They
seldom have actual experience in working with the media segments about which
they are making resource and policy decisions. Their clear first duty is to the
shareholders. Thus, the decision-making frame has changed in terms of
background, accountability and priorities. Understanding the positive and
negative impacts of these changes on the performance of media organizations
under Gomery’s performance-based paradigm is important.
The allocation of capital is an area of concern. While there was no
correlation between capital allocations and operating efficiencies (margins),
there was a correlation between the relative weight of the organization’s
contribution to the company’s overall profit objective and capital funding. If
this is a continuing trend, large segments are likely to get larger and smaller
segments are likely to scramble for the leftovers.
The findings also hint at interesting connections between the backgrounds
of board members and their positions on funding of some categories of
investment. This issue and, indeed, many more, merit further research.
The findings of this analysis, though intriguing, are somewhat limited by
sample size and the availability of appropriate data. A follow-up study is
planned with an expanded sample and with supplementary information
solicited directly from the firms. Information needed to ensure compatibility of
data across years and additional information about the longevity and personal
backgrounds of directors will be sought.
Additional data about the firms’ non-media business segments should also
be added to the next study. That will make possible the identification of relative
reinvestment priorities and provide the ability to identify sources of resource
shifting.
57
References
Bagdikian, B. H. (2000). The media monopoly, sixth ed. Boston: Beacon Press.
Compaine, B. M. & Gomery, D. (2000). Who owns the media? Competition and
concentration in the mass media industry. Mahwah, NJ: Lawrence Erlbaum
Associates.
Darazsdi, J. J. (1999) Board oversight of capital expenditures, Directors and

Boards, (24) 1, 42-43.
Demers, D. P. (1991). Corporate structure and emphasis on profits and

product quality at U.S. daily newspapers, Journalism Quarterly, 68, 15-26.
Demers, D. (1998). Revisiting corporate newspaper structure and profit-

making, Journal of Media Economics, 11(2), 19-35.
Directors & Boards (2004). Board tenure: How long is too long? Directors &
Boards, W2, 39.
Lashgari, M. (2004). Corporate governance: Theory and practice, Journal of

American Academy of Business, 5, 46-52.
Lear, R. (2000). Devising the perfect board, Chief Executive, 161, 14.
Leighton, D. S. & Thain, D. H. (1990). Capital spending: A director’s view,

Business Quarterly, 54(3), 5.
McChesney, R. W. (1999). Rich media, poor democracy : Communication politics

in dubious times. Urbana : University of Illinois Press.
Picard, R. G. (1996). The rise and fall of communication empires, Journal of

Media Economics, 9(4), 23-40.
Rutledge, J. (1996). Making managers think like owners, Forbes, 157(8), 131-
138.
Shaver, D. & Shaver, M.A. (2003). The impact of concentration and

convergence on managerial efficiencies of time and cost. In A. Albarran & A.
Arrese, eds. Time and Media Markets. Mahwah, N.J. : Lawrence Erlbaum.
Weaver, J. B. (1984). Strategic clearance is not enough--Investment choices are

critical, Industrial Management, 26(5), 1-10.
58
Taking Stock Redux:
Corporate Ownership and Journalism of
Publicly Traded Newspaper Companies
John Soloski
In 2001, my colleagues and I published the results of a detailed study of the

organization and behavior of publicly traded newspaper companies in the
United States (Cranberg, Bezanson & Soloski, 2001). Some of the specific
issues we examined were the influence of stock markets and stock ownership,
revenue policies of newspaper companies, executive compensation and
composition of boards of directors. The companies we examined were A.H.
Belo Corporation, Central Newspapers, Dow Jones & Company, E.W. Scripps
Company, Gannett Company, Grey Communications Systems, Hollinger
International, Journal Register Company, Knight Ridder Inc., Lee Enterprises,
McClatchy Company, Media General, Inc., New York Times Company,
Pulitzer Publishing Company, Times Mirror Company, Tribune Company,
and Washington Post Company.
Our data included:
• Detailed current and historical financial information

• Information about the stock process and performance over time
• Information about the distribution of stock ownership by board
members, management, institutional investors and family members
• Information about the organizational structure, management,
corporate policies, compensation arrangements, and executive officers
of the parent company
• Information on the profitability performance, strategic plans,
circulation, and organization and operation of individual newspapers
• Interviews with more than 100 editors, copy editors, CEOs, and stock
analysts who follow newspaper companies
Among the conclusions we reached, the following are most relevant for this
paper:
• Ownership of publicly traded newspaper companies is widely

distributed in highly competitive and liquid financial markets. The
interest of most owners is primarily financial and whose expectations

are short term.
• The stock market represents the owners of newspaper companies and
dictates the behavior of the companies pervasively and at all levels of
the organization
• Ownership of the companies lies primarily in the hands of passive
investors interested in financial return and not in the quality of
journalism practiced by the companies. This has distorted the historical
role of newspapers to act as “watch dogs.”
• Investors are concerned with revenues, margins, improving profitability
and stock performance. They are largely indifferent to the quality of
news provided to readers.
• Publicly traded newspaper companies have created a reward system for
executives that assure policies, decisions, and corporate behavior
conform to the demands of the security markets.
• Newspaper company executives and members of the board of directors
are directly responsible to the owners and, therefore, to the demands of
the stock market. Both board and executive compensation are tightly
tied to the financial performance of the company. The quality of
journalism practiced at the level of the individual newspaper plays a
very minor or no role in determining financial compensation.
• Publishers, editors and other key members of individual newspapers are
also frequently compensated by a combination of profit- and margin-
based bonuses and stock options, often comprising a third to a half of
the recipient’s annual income.
• Corporate control over its newspapers is rarely focused on news
content; it is instead focused on financial performance.
• The principal objective of newspaper companies is revenue growth and
margin. Circulation often is of secondary consequences, and then only
if it will yield increased margins.
• The most important short-term strategy for increasing margins is
cutting costs, which means cutting personnel. News personnel are
often seen as not contributing to revenues or margins and are therefore
most susceptible for cutting.
• Because publicly traded newspaper companies control such a large
segment of the newspaper industry, their practices, priorities, and
performance are becoming the standards by which all newspapers are
measured.
• Stock market pressures have increased the emphasis placed on revenue,
margins, profits and share price which, in turn, have forced newspaper
companies to emphasize the aspect of their business that directly
produce the required result. This has resulted in lean staffing, low
salaries, efficiency, orientation to advertiser preferences, definition of
60
Taking Stocks Redux
audience in terms of market and advertising yields and de-emphasis on

circulation revenues.
Among the recommendations we offered, the most relevant are:
• Boards of directors should have more than one member who is a retired
or active journalist of high repute and who does not work at the
company. At least one of these journalist members should be on the
compensation committee.
• Bonus and other incentive-based compensation for executives should
be based, in part, on the circulation and journalistic quality of the
newspapers the company owns.
• Editorial management and news personnel of newspapers should not
receive any incentive compensation based on financial performance.
• Reexamination of recent changes in securities laws that allow
institutional investors to have greater communication among
themselves and with executives of newspaper companies and to have
greater access to corporate information not generally available to the
public.
The purpose of this paper is two fold. First, to reexamine the ownership of
publicly traded newspaper companies to ascertain whether the market pressure
newspaper companies are forced to live under has abated, remained the same or
grown more intense. The second is to reexamine the makeup of boards of
directors, especially membership of the executive compensation committee, to
determine whether the quality of the journalism practiced at the newspapers the
company owns is taken into consideration when determining the compensation
of top executives.
Current Status of U.S. Newspaper Industry

To set the stage for an examination of ownership of publicly traded newspaper
companies, it is first necessary to examine current data on key industry
measures. In this paper, I will focus primarily on changes that have occurred in
the industry since 1999. A detailed discussion of the newspaper industry
through 1999 can be found in Taking Stock (Cranberg, Bezanson & Soloski,
2001).
In terms of the number of daily newspapers published in the United States,
the nearly 40-year trend of ever decreasing numbers of dailies has continued.
The number of daily newspapers fell from 1,483 in 1999 to 1,456 in 2003,
representing a nearly 2 percent drop (Table 1). Over the past 30 years, there has
been a significant decline in the number of dailies. Between 1975 and 2003,
61
there has been a 17.1 percent (300 newspapers) decline in the number of daily
newspapers. However, the trend is just the opposite for Sunday newspapers.
Table 1. Number of U.S. Daily Newspapers
Year Morning Evening Total M&E* Sunday

1950 322 1,450 1,772 549
1955 316 1,454 1,760 541
1960 312 1,459 1,763 563
1965 320 1,444 1,751 562
1970 334 1,429 1,748 586
1975 339 1,436 1,756 639
1980 387 1,388 1,745 735
1985 482 1,220 1,676 798
1990 559 1,084 1,611 863
1991 571 1,042 1,586 874
1992 596 995 1,570 891
1993 623 954 1,556 884
1994 635 935 1,548 886
1995 656 891 1,533 888
1996 686 846 1,520 890
1997 705 816 1,509 903
1998 721 781 1,489 897
1999 736 760 1,483 905
2000 766 727 1,480 917
2001 776 704 1,468 913
2002 777 692 1,457 913
2003 787 680 1,456 917
* "All-day" newspapers publish several editions throughout the day. They are listed in both morning and
evening columns but only once in the total.
The number of Sunday newspapers published in 2003 increased by 12 over

1999. More impressive, the number of Sunday newspapers increased by 43.5
percent (278 newspapers) since 1975.
Daily newspaper circulation continues to show a steady decline. Between
1999 and 2003, daily newspaper circulation declined 1.4 percent (Table 2).
Since 1970, daily newspaper circulation dropped by 7.6 million or 12.1
percent. Sunday circulation also showed a drop of 1.4 million subscribers or 2.3
percent. Not surprising, the percentage of adults who read daily newspapers and
Sunday newspapers has declined since 1999. This is in line with the downward
trend in readership since 1970, when 77.6 percent of adults read a daily
newspaper and 72.3 percent read a Sunday newspaper compared to 54.1
percent for daily newspapers and 62.5 percent for Sunday readers in 2003
(Table 3).
62
Taking Stocks Redux
Table 2. U.S. Daily Newspaper Circulation
Year Morning Evening Total M&E Sunday

1960 24,028,788 34,852,958 58,881,746 47,698,651
1965 24,106,776 36,250,787 60,357,563 48,600,090
1970 25,933,783 36,173,744 62,107,527 49,216,602
1975 25,490,186 35,165,245 60,655,431 51,096,393
1980 29,414,036 32,787,804 62,201,840 54,671,755
1985 36,361,561 26,404,671 62,766,232 58,825,978
1990 41,311,167 21,016,795 62,327,962 62,634,512
1991 41,469,756 19,217,369 60,687,125 62,067,820
1992 42,387,813 17,776,686 60,164,499 62,159,971
1993 43,093,866 16,717,737 59,811,594 62,565,574
1994 43,381,578 15,923,865 59,305,436 62,294,799
1995 44,310,252 13,883,145 58,193,397 61,229,296
1996 44,784,812 12,198,486 56,983,290 60,797,814
1997 45,433,888 11,294,021 56,727,902 60,486,463
1998 45,643,495 10,538,603 56,182,092 60,065,892
1999 45,997,367 9,981,971 55,979,332 59,894,381
2000 46,772,497 9,000,350 55,772,847 59,420,999
2001 46,821,480 8,756,566 55,578,046 59,090,364
2002 46,617,163 8,568,994 55,186,157 58,780,299
2003 46,930,215 8,255,136 55,185,351 58,494,695
Source: Editor & Publisher
Table 3. U.S. Daily and Sunday Newspaper Readership Audience
Year Weekday Readers Sunday Readers

Percent of Total Adult* Percent of Total Adult
Population Population
1970 77.6 72.3
1980 66.9 67.4
1985 64.2 65.1
1990 62.4 67.1
1991 62.1 66.9
1992 62.6 68.4
1993 61.7 69.0
1994 61.5 70.4
1995 59.4 68.7
1996 58.4 67.0
1997 58.3 66.3
1998 58.6 68.2
1999 56.9 66.9
2000 55.1 65.1
2001 54.3 63.7
2002 55.4 63.6
2003 54.1 62.5
* Age 18 and over.
Sources: W.R. Simmons & Associates Research Inc. 1970, Simmons Market Research Bureau Inc. 1980-
1997, Scarborough Research, Top 50 Market Report, 1998-2003.
63
The newspaper industry entered the recession of the early 21st Century
ahead of most industries. Not surprising, the data verify a decline in newspaper
advertising revenues between 1999 and 2002 (Table 4). Total newspaper
advertising revenues declined by nearly 5 percent or $2,187 million. However,
this decline was substantially less than the decline in the gross domestic
product, which declined 13.2 percent between 1999 and 2002.
An examination of the breakdown of advertising revenues shows clearly that
classified advertising accounted for the entire decline in newspaper advertising
revenues between 1999 and 2002. Classified advertising revenues dropped
$2,752 million or 14.8 percent between 1999 and 2002. On the other hand,
both national and retail advertising revenues showed modest gains between
1999 and 2002. With the exception of classified advertising, newspaper
advertising revenues showed solid gains between 2002 and 2003.
Table 4. U.S. Daily Newspaper Advertising Expenditures
Year National Retail Classified Total Gross

Advertising Advertising Advertising Newspaper Domestic
(Millions) (Millions) (Millions) Advertising Product
(Millions) (Billions)*
1965 $783 $2,429 $1,214 $4,426 $719
1970 891 3,292 1,521 5,704 1,036
1975 1,109 4,966 2,159 8,234 1,631
1980 1,963 8,609 4,222 14,794 2,754
1985 3,352 13,443 8,375 25,170 4,181
1990 4,122 16,652 11,506 32,280 5,743
1991 3,924 15,839 10,587 30,349 5,917
1992 3,834 16,041 10,764 30,639 6,244
1993 3,853 16,859 11,157 31,869 6,553
1994 4,149 17,496 12,464 34,109 6,936
1995 4,251 18,099 13,742 36,092 7,254
1996 4,667 18,344 15,065 38,075 7,636
1997 5,315 19,242 16,773 41,330 8,111
1998 5,721 20,331 17,873 43,925 8,511
1999 6,732 20,907 18,650 46,289 9,256
2000 7,653 21,409 19,608 48,670 9,319
2001 7,004 20,679 16,622 44,305 9,334
2002 7,210 20,994 15,898 44,102 10,481
2003+ 7,797 21,341 15,801 44,939 10,988
* Current dollars
+ Preliminary data
Sources: NAA, U.S. Department of Commerce
Declining advertising revenue coupled with the ever-present pressure on

publicly traded newspaper companies by investors to make or exceed margins
leads to cost cutting by newspaper companies. Since payroll is the largest
expense of newspaper companies, it is not surprising to see a significant decline
64
Taking Stocks Redux
in newspaper employment (Table 5). Between 1999 and 2002, U.S. newspaper
employment dropped by 8.8 percent. This compares to a 1 percent increase in
Table 5. U.S. Newspaper Employment
Year Total Newspaper Employment Total U.S. Employment

(Thousands) (Thousands)
1970 357.8 71,006
1975 361.5 77,069
1980 402.8 90,528
1985 431.8 97,511
1990 455.7 109,487
1991 440.8 108,374
1992 433.5 108,726
1993 432.8 110,844
1994 430.5 114,291
1995 429.7 117,298
1996 423.4 119,708
1997 423.6 122,776
1998 425.4 125,930
1999 424.5 128,993
2000 422.6 131,785
2001 406.7 131,826
2002* 388.9 130,341
2003 381.3 129.931
*revised data
Source: U.S. Bureau of Labor Statistics, Current Employment Statistics
total U.S. employment between 1999 and 2002. The drop in newspaper
employment declined further in 2003 despite a strengthening of advertising
revenues.
In summary, the last four years have seen a continuation in the shrinkage of
the number of newspapers, circulation and readership. Newspaper revenues
remain flat and newspapers have reacted by eliminating employees. In other
words, the data show the newspaper industry continues to experience a decrease
in the number of subscribers and readers and, most important, advertising
revenues; the industry has responded by eliminating nearly a tenth of its
workforce.
Ownership of Publicly Traded Newspaper Companies

In 1996, Robert G. Picard and I warned about the growing influence
institutional owners have on publicly traded newspaper companies (Soloski &
Picard, 1996). We suggested that changes by the Securities and Exchange
Commission in 1992 made it easier for institutional investors to bring power to
bear on management. Institutional investors, for example, played a pivotal role
65
in removing top management from some of the largest U.S. companies,

including General Motors, IBM, Kodak and Westinghouse.
In Taking Stock, my colleagues and I did a detailed analysis of institutional
ownership of stock in publicly traded newspaper companies. Among our
conclusions were: (1) institutions dominated stock ownership in most
newspaper companies; (2) many, if not most, institutional owners focus on a
company’s short-term performance; (3) institutional owners are not concerned
with the quality of the journalism practiced by the newspaper companies; (4)
institutional owners and stock analysts have a great deal of power to control the
price of stock; and (5) there was a great deal of communication occurring
between institutional investors and stock analysts and top management of
newspaper companies.
Since Taking Stock was published in 2001, the landscape of publicly traded
newspaper companies has changed considerably. Two of the 17 newspaper
companies we examined in our book were bought by other newspaper
companies. The Tribune Company acquired Times Mirror in 2000; Gannett
acquired Central Newspapers the same year.
The history of ownership of most newspaper companies follows a similar
pattern. Most newspaper companies began as family-owned and operated
businesses. Even today, most of the publicly traded newspaper companies
remain controlled to varying degrees by the founding family (Cranberg,
Bezanson & Soloski, 2001: 46) All but three companies (Gannett, Knight
Ridder and Journal Register) have restricted stock that helps to ensure that the
founding family can exercise some control over the company. There are only
two companies (Knight Ridder and Gannett) where all shares are publicly
4
traded.
Table 6 provides a breakdown of the stock ownership in 2004 of the 15
newspaper companies by the percentage of stock owned by insiders and 5
percent owners and the percentage of shares owned by institutions. For Gannett
and Knight Ridder, insiders own less than one percent of the shares. On the
other hand, insiders control a major of the stock in McClatchy, E.W. Scripps,
Journal Register and Pulitzer. For all newspaper companies, institutional
investors own nearly all of the publicly traded stock. In some cases, they also
own restricted stock not available to the public.
Institutions dominate stock ownership of publicly traded companies in the
United States. The ability of institutions to move rapidly from one investment
to another is effectively limited by the large positions they hold. Sale of large
blocks of stock will affect share prices. Furthermore, selling a large block of
stock will likely spur other institutions to sell their stock, which will further
depress share prices. If selling its stock in a company is not a viable option for
an institution, the institution is likely to take a more active role in influencing
the management of a company to act in ways that maximize the goals of the
4
The Journal Register Company is controlled by Warburg, Pincus Capital Company which owns
over half of the stock
66
Taking Stocks Redux
institution. Since institutions are in the business of making money, the pressure
on management will be to follow policies that ensure financial performance is
paramount.
Table 6. Percent of Shares Owned by Insiders and Institutions
Company Symbol % of shares % of shares

owned by insiders owned by institutions
and 5% owners
Gannett GCI 0.98% 99.61%

Knight Ridder KRI 0.94% 120.08%
Dow Jones DJ 41.61% 114.43%
New York Times NYT 10.78% 80.87%
EW Scripps SSP 55.81% 88.87%
McCatchy MNI 78.24% 105.44%
Tribune TRB 39.99% 66.40%
A.H. Belo BLC 9.96% 97.15%
Media General MEG 8.12% 94.36%
Washington Post WPO 34.16% 99.40%
Hollinger HLR 40.13% 102.05%
Lee Enterprises LEE 12.55% 98.59%
Journal Register JRC 62.10% 127.35%
Gray Television GTN 10.32% 139.92%
Pulitzer PTZ 51.42% 57.21%
The situation is further exacerbated by the short term focus most institutional
investors take. Most institutional investors live quarter to quarter and are
unable to take a long-term view of an investment. For many mutual funds,
which compete for investment dollars, quarterly performance is critically
important to their success. Financial publications regularly rate mutual funds
on quarterly performance and, in some cases, even weekly performance. The
rationale being that the higher a fund is rated, the more investors and the more
money it will attract.
Two changes in the regulatory environment of institutional investors have
provided them with greater ability to influence management of the companies
in which they invest. First, the SEC made it easier for institutional investors to
communicate with the management of a company. In the past, institutions
were largely limited to exerting pressure on management through formal
process such as proxy contests and voicing their concerns at annual meetings.
Today, institutions have direct, open and frequent communication with
management of companies.
Second, another change in the regulatory environment is the ability for
institutions to join together and present a united front in dealing with
67
management. In the past, regulations severely limited the ability of large

investors to communicate among themselves. While it would be illegal for
investors to act in concert with one another if they together controlled more
than five percent of the stock in a company, they can nevertheless send
management a clear and loud message about their shared concerns.
The end result is that today, CEOs and CFOs communicate regularly and
frequently with their largest institutional investors. In the newspaper industry,
three formal meetings are held over several days each year where key newspaper
executives discuss their company’s financial outlook with large investors and
key stock analysts.
In addition to institutional investors’ ability to impact stock price, stock
analysts also have tremendous influence on the price of a company’s stock.
Analysts keep tabs on the industry and individual companies; they project
revenues and stay in close touch with key executives. One analyst told us, “I can
get a meeting with senior management of the Tribune any time I want. How
many can do that?” (Cranberg, Bezanson & Soloski, 2001: 46).
How much impact do analysts have on a company’s stock price? A huge
amount. Here is what a few of the analysts we interviewed told us:
• “We have tremendous influence on the companies. More than we

should.” Companies are “very stock-price conscious” and pay close
attention to what analysts say.
• Analysts have “lots of influence” on the direction of stock prices: “some
influence” on company management and their decisions, but “not a
huge influence” on them as companies “don’t live or die” by what
stock analysts say: nonetheless the analysts carry weight with
management.
• Have “fair degree” of influence with investors and “more influence”
with management now than earlier, as management is “trying to drive”
the stock price (Cranberg, Bezanson & Soloski, 2001: 59-60).
Just as consolidation of the newspaper industry has continued unabated since

1999, so, too, has consolidation of stock ownership by institutional investors.
In 1999, institutional investors owned 69.05% of the shares in the 17 publicly
traded newspapers we studied (Cranberg, Bezanson & Soloski, 2001: 47). By
2004, institutional investors substantially increased their positions and now
own 93.16 percent of the stock in the 15 publicly traded newspaper
5
companies.
Table 7 reports the percentage of stock owned by institutional investors in
1999 with the percentage owned by them in 2004. For all of the newspaper
5
Two of the companies that existed in 1999 were bought by other newspaper companies. Times
Mirror and Central Newspapers were bought by the Tribune Company and Gannett,
respectfully.
68
Taking Stocks Redux
companies, there has been a significant increase in the percentage of stock

owned by institutional investors since 1999. With the exception of Pulitzer, the
New York Times, Tribune, and E.W. Scripps, institutional investors now own
90 percent or more of the stock of newspaper companies.
Table 7. Institutional Ownership of Stock, 1999-2004
Company % Owned by % Owned by % Change between

Institutional Investors Institutional Owners 1999-2004
1999 2004
Knight Ridder 84.77% 120.08% 41.65%
Pulitizer 35.68% 57.21% 60.34%
Dow Jones 74.49% 114.43% 53.62%
Gannett 79.50% 99.61% 25.30%
A.H. Belo 69.19% 97.15% 40.41%
New York Times 62.08% 80.87% 30.27%
McClatchy 81.12% 105.44% 29.98%
Media General 64.82% 94.36% 45.57%
Lee Enterprises 68.26% 98.59% 44.43%
Times Mirror 61.70%
Washington Post 65.73% 99.40% 51.22%
Tribune Co. 59.89% 66.40% 10.87%
Central Newspapers 66.52%
E.W. Scripps 48.63% 88.87% 82.75%
Hollinger International 62.57% 102.05% 63.10%
Gray Communications 20.54% 139.92% 581.21%
Journal Register 21.04% 127.35% 505.28%
Table 8 reports the market value of the stock in publicly traded newspaper
companies owned by institutional investors. In 1999, stock owned by
institutional investors had a market value of $43.5 million; in 2004, the market
value was $71.9 million. This increase in market value reflects both an increase
in the amount of stock owned and, for most newspaper companies, an increase
in stock price since 2001. Despite difficult economic times, 11 newspaper
companies were able to increase the price of a share of stock between 1999 and
2004.
69
Company Value of Stock Owned Price per Share Value of Stock Owned Price per Share % Increase in
by Institutional Investors 1999 1999 By Institutional Investors 2004 2004 Stock Value 1999-2004
Knight Ridder $3,533,141,709 $52.87 $5,999,866,726 $86.41 69.82%
Pulitizer $205,755,997 $81.19 $610,859,832 $49.41 196.89%
Dow Jones $2,759,817,637 $52.50 $3,868,205,795 $41.29 40.16%
Gannett $16,046,212,530 $72.25 $22,905,747,026 $86.41 42.75%
A.H. Belo $1,512,983,908 $22.06 $2,524,050,264 $22.60 66.83%
New York Times $3,789,765,592 $34.12 $4,873,147,918 $41.04 28.59%
McClatchy $481,577,149 $36.81 $3,600,730,504 $49.72 647.70%
Media General $880,777,119 $51.62 $1,319,314,722 $58.92 49.79%
Lee Enterprises $648,797,715 $29.00 $2,087,711,869 $46.88 221.78%
Times Mirror $1,727,982,903 $58.94
Washington Post $3,058,399,900 $556.50 $8,704,010,700 $915.00 184.59%
Tribune Co. $5,646,754,671 $78.94 $8,442,949,904 $39.95 49.52%
Central Newspapers $871,172,995 $35.00
E.W. Scripps $1,355,615,610 $47.12 $3,600,730,504 $49.72 165.62%
Hollinger International $820,818,928 $13.87 $1,514,557,522 $17.12 84.52%
Gray Communications $22,196,290 $15.81 $843,467,646 $12.04 3700.04%
Journal Register $172,942,444 $17.37 $1,025,193,607 $19.19 492.79%
Total $43,534,713,097 $71,920,544,539 65.20%
Table 8. Value of Institutional Ownership of Stock, 1999-2004
70
Taking Stocks Redux
Ownership of stock in newspaper companies is attractive because (1)

margins tend to be higher than in most industries, (2) margins do not fluctuate
as much as they do in other industries, and (3) the industry has weathered
economic downturns better than most industries. Table 9 reports the profit and
operating margins for the 15 publicly traded newspaper companies. Profit
margins range from a high of 17.94 percent to a low of -5.20 percent.
Table 9. Profit and Operating Margins of Publicly Traded Newspaper

Companies
Company Profitability Operating

Margin Margin
Gannett 17.94% 29.25%
Knight Ridder 10.43% 19.24%
Dow Jones 7.53% 11.05%
New York Times 9.02% 16.16%
EW Scripps 16.88% 21.18%
McCatchy 13.27% 22.89%
Tribune 12.98% 20.68%
A.H. Belo 9.51% 22.08%
Media General 7.27% 15.11%
Washington Post 8.20% 13.97%
Hollinger -5.20% 4.88%
Lee Enterprises 12.60% 21.37%
Journal Register 17.78% 23.32%
Gray Television 7.84% 28.87%
Pulitzer 10.44% 19.82%
Not only have institutional investors increased the percentage of stock they own
in newspaper companies, those institutions which hold the largest positions
have increased their percentage of stock ownership. In other words, a small
number of institutions today hold very large positions in many newspaper
companies. This provides them with an even larger amount of influence on
management.
In 1999, the 10 largest institutional investors owned, at most, 41.22
percent of the stock in a newspaper company (Table 10). Today, the 10 largest
institutional investors own up to 66.7 percent of a newspaper company’s stock.
Today, more than 40 percent of the stock of seven of the 15 companies is
owned by just 10 institutions. The top five institutional investors own 25
percent or more of the stock in 13 of the 15 companies. The single largest
institutional investor owns more than 10 percent of the stock in nine of the 15
companies.
71
Company % owned by % owned by % owned by % owned by % owned by % owned by
10 largest 10 largest 5 largest 5 largest largest largest
Institutional institutional Institutional Institutional institutional institutional
investors investors investors investors investor investor
1999 2004 1999 2004 1999 2004
Knight Ridder 37.26% 55.42% 26.16% 38.74% 8.58% 11.85%
Pulitizer 24.91% 33.14% 17.45% 25.73% 6.63% 15.46%
Dow Jones 41.22% 39.38% 29.61% 27.62% 9.56% 8.15%
Gannett 22.11% 30.87% 14.24% 18.43% 3.62% 4.38%
A.H. Belo 30.93% 38.89% 21.12% 29.47% 6.82% 14.36%
New York Times 18.85% 36.49% 11.40% 25.37% 3.02% 9.24%
McClatchy 42.63% 30.70% 29.97% 25.76% 8.20% 14.99%
Media General 34.51% 52.54% 26.60% 45.62% 12.58% 17.19%
Lee Enterprises 36.64% 51.16% 28.81% 43.12% 10.95% 16.81%
Times Mirror 29.95% 21.26% 7.63%
Washington Post 41.03% 44.63% 34.55% 34.48% 20.66% 18.05%
Tribune Co. 18.81% 21.85% 11.86% 14.58% 3.48% 4.33%
Central Newspapers 33.45% 23.16% 9.16%
E.W. Scripps 22.50% 30.73% 13.80% 22.37% 3.87% 6.61%
Hollinger International 26.27% 43.63% 15.64% 33.20% 3.82% 14.96%
Gray Communications 15.14% 41.19% 11.44% 24.87% 4.22% 6.15%
Journal Register 13.66% 66.68% 9.78% 49.17% 2.75% 14.98%
Table 10. Percentage of Stock Owned by the Largest Institutional Investors
72
Taking Stocks Redux
To summarize, the dangers we identified in 1999 regarding institutional

investors owning large blocks of stock in newspaper companies have become
even more of a concern. Not only have institutions increased their ownership of
newspaper companies’ stock, the largest investors have substantially increased
their ownership of stock. This means that today a small number of institutional
investors exert a significant amount of influence on management.
Executive Compensation
Our suggestion in Taking Stock that executive compensation be tied directly to
the quality of journalism practiced at the companies’ newspapers did strike a
responsive cord among some very well respected journalists. In 2002, Geneva
Overholser, former editor of the Des Moines Register and former ombudsperson
for the Washington Post, sent a letter to the CEOs and board members of the
fourteen largest publicly traded newspaper companies in the United States. The
letter asked executives and board members to consider the following
recommendations:
1. Board of directors of newspaper companies should have among their

outside directors one or more members with experience on the editorial
side of a news organization. Outside directors with editorial
backgrounds should be represented on board compensation
committees.
2. The board should designate a director to have special responsibility to
monitor the quality of the company’s editorial performance. The
director so designated preferably should be a member of the
compensation committee. As an alternative, a committee on editorial
quality should be established, said committee to work closely with the
compensation committee.
3. Incentive compensation for corporate management should be tied in
significant part to achieving journalistic quality goals. Boards should
establish criteria for judging quality, and these may be both objective
(e.g., circulation, newshole) and subjective criteria, the latter preferably
after consultation with experienced non-employee as well as in-house
journalists. Judgments concerning the extent to which the criteria are
met should take into account the views of journalism professionals and
knowledgeable readers in the relevant communities.
These judgments should figure importantly in the compensation of
local publishers, editors, and key editorial employees. Newsroom
bonuses should be rewarded exclusively for achieving journalism-
related objectives. Stock options should not be part of the
compensation package of editorial employees. Nor should stock
options constitute all or part of directors’ fees (Overholser, 2002).
73
In addition to Overholser, the letter was signed by nine former newspaper

editors: Hodding Carter, Bob Giles, Max King, Bill Kovach, Dave Lawrence,
Jim Naughton, Gene Patterson, and Gene Roberts.
Because my college handled the logistics of the mailing, I was privileged to
see the letters that came in response. The letters were signed by CEOs or other
top executives of companies that own some the very best newspapers in the
country. The responses split between agreeing with the philosophy behind the
ideas to thinking the nine editors were crazy. Overholser wrote about some of
the reactions:
‘Are you guys out of your minds?’ wrote one good friend of journalism.
Board members should play no role in journalistic policy, he said. “They
tend to be financial, legal, technology or business experts who can help a
company make business progress.” Another wrote that he felt his company
would not be well served “by having anyone on our Board of Directors
responsible for monitoring the quality of our journalism. The Board of this
company knows very well that its mandate does not extend into journalism”
(Overholser, 2002: 78).
In this section, I will examine the makeup of the membership of compensation

committees. In 1999, we found that the majority of members of boards of
directors of publicly traded newspaper companies came from the banking and
investment communities and from industry. In 2004, the situation remains
much the same. Boards of directors are largely composed of leaders of industry,
high level executives of banks, large investors and corporate officers. Few board
members have any journalism experience and those that do, tend to have
worked for one of the company’s newspapers. Only a handful of board
members have worked as a journalist at a newspaper or broadcast station not
owned by the company.
Executive compensation committees determine how top executives of
newspaper companies are rewarded. Because of SEC concerns about board
oversight of executive compensation, all of the newspaper companies have
specific bylaws to guide the compensation committee, and most of the
companies limit membership to outside members of the board.
The membership of executive compensation committees is largely composed
of executives and retired executives of non-media companies, executives of
financial institutions, officers of non-profit organizations and, for a few
companies, executive officers of the company. It is very rare for any of the
members of a compensation committee to have any experience in journalism.
However, four of 15 companies do have members on their compensation
committees who have significant journalism experience.
Knight Ridder’s compensation committee includes Pat Mitchell, president
and CEO of Public Broadcasting Service, who worked as a broadcast reporter
and was previously an executive with CNN. Former president and CEO of The
74
Taking Stocks Redux
Associated Press, Louis Boccardi, serves on Gannett’s compensation committee.

Larry Jinks, who worked for Knight Ridder newspapers for more than 37 years,
is on McClatchy’s compensation committee. However, it is the compensation
committee of the Washington Post that is the most interesting. The two-
member compensation committee is staffed by members with significant
journalism experience. John Dotson is former publisher of The Akron Beacon
Journal, which won a Pulitzer Prize for public service in 1994. George Wilson is
publisher and owner of the Concord Monitor, The Valley News, The Monadnock
Ledger, all in New Hampshire and The Greenfield Recorder in Massachusetts.
Upon examination of membership of boards of directors, membership of
executive compensation committees, and company guidelines regarding the
determination of executive compensation, little or no progress has been made in
attempts to have the quality of journalism included in determining
compensation of newspaper company executives.
Conclusion
While concern over consolidation of ownership of newspapers in the hands of a
few large corporations is justified, newspaper companies do provide member
newspapers with editorial autonomy and are committed to providing readers
with quality newspapers. On the other hand, the consolidation of ownership of
publicly traded newspaper companies by institutional investors should be of a
greater concern. Today, institutional investors own nearly all of the publicly
traded stock of a number of newspaper companies. They are, in effect, the real
owners of our newspapers.
Moreover, concentration of stock ownership in the hands of a small number
of institutional investors has increased substantially for most newspaper
companies. Today, the 10 largest institutional investors, and in some cases the
five largest or even the single largest institutional investor own a controlling
interest of the publicly traded shares. The ability of this small group of investors
to communicate among themselves and to share concerns with management
provides them with an inordinate amount of influence on newspaper
companies. Because many institutional investors focus on short-term
performance, the pressure on newspaper management to meet these
expectations is greater today than ever. The situation my colleagues identified
in 2001 regarding the dangers of institutional ownership has grown
substantially worse.
One way to counter the pressure on newspaper companies to meet the
financial expectations of institutional investors is to make journalistic quality a
major component in determining executive compensation. Placing journalistic
quality on par with financial performance in determining executive
compensation is one way to deflect some of the pressure from institutional
investors.
75
However, none of the company bylaws that guide executive compensation

committees includes any measure of journalism quality. Furthermore, a number
of CEOs of newspaper companies strongly oppose having board members
involved in assessing the quality of journalism practiced by their newspapers.
An examination of membership of executive compensation committees shows
that few members have any journalism experience. With a few notable
exceptions, executive compensation committees are composed of board
members who are more comfortable assessing and rewarding financial
performance, leaving any assessment of journalistic performance in the hands of
newspaper company executives. Yet, no board would allow these same
executives to independently evaluate their or their company’s economic
performance. The board serves as an independent body to ensure the accuracy
of the company’s economic performance.
References
the publicly traded newspaper company. Ames, IA: Iowa State University Press.
Overholser, G. (2002). What’s so crazy about a board that knows journalism,

Columbia Journalism Review, July/August, p. 78.
Soloski, J. & Picard, R. (1996). Money; The new media lords; Why
institutional investors call the shots, Columbia Journalism Review,
September/October, p. 11.
76
Governance in Economic and Financial Media
Corporate Governance and News Governance

in Economic and Financial Media
Angel Arrese
The interest in corporate governance of media companies is not a new subject,

although it has acquired special relevance during the last decades, as a result of
the transformations in the schemes of property and management of the
companies. In most cases, those transformations have been analyzed from a
critical perspective, when connecting the changes in the schemes of ownership
and the structures of management with possible negative effects in media
content quality, and therefore, in the achievement of their mission to serve
society. As Demers and Merskin (2000) have commented, precisely referring to
the context of news corporations, few western social institutions have been
object of such intense critics.
This general interest in the ownership of mass media has progressively
acquired multiple dimensions as news companies have become more complex;
particularly since their governance structures and behaviors are on a level with
those prevailing in other sectors of business and economic activities. As a matter
of fact, the coordination of business, professional and social interests together
with those of shareholders around the news it is becoming more and more
difficult, particularly during the last two decades of the twentieth century, after
events such as globalization, concentration and creation of giant multimedia
groups, the dissolution of some media into great industrial corporations and the
crescent “commercialization” of contents (Serrin, 2000; Rowse, 2000; Croteau,
& Hoynes, 2001; Roberts, Kunkel, & Layton, 2001; Roberts, & Kunkel,
2002). The crossroads of interests is even more evident in the most purely
journalistic media—the written press—that is experiencing conflicts that are
difficult to reconcile (Ureneck, 1999). As Picard (2004) has recently indicated,
“economic pressures are becoming the primary forces shaping the behavior of
American newspaper companies. It is increasingly clear that the responses of
some newspaper managers are affecting journalistic quality, producing practices
that diminish the social value of newspaper content and that divert the
attention of newspaper personnel from journalism to activities primarily related
to the business interests of the press” (p. 54).
To be more precise, amongst this set of economic forces that are increasingly
influencing the behavior of newspapers, the analysis of corporate governance
practices has acquired a special significance in recent times and it is certainly
becoming quite trendy after the scandals in other sectors represented by the
Enron, the Worldcom and the Parmalat affaires, among many others. Media
77
have extensively informed and have given their opinion about these questions,
but at the same time they have provoked a kind of introspective exercise about
news companies’ own structure of corporate governance, mainly in the
academic and professional world. In this context, works as Taking Stocks
(Cranberg, Bezanson, & Soloski, 2001) have deepen, for instance, in the
consequences that brings the fact that these companies turn public, and they
become managed from the perspective of the value of their shares. It is in such
cases where the importance of approaching the coordination and defense of the
different legitimate interests, which meet around the journalistic firm, from the
shareholders’ interests to those of the society, through those of the managers
and the professionals, becomes more evident.
Among the governance bodies that are in charge of those duties, the Board
of Directors of the companies has a special role and represents the touchstone of
its corporate governance. As it will be seen through this work, the configuration
of the Boards of Directors of news companies is not a minor subject. Much to
the contrary, it is one of the main areas under discussion when it comes to
approaching many of the challenges that arise around them. This study will also
show how there are not miraculous solutions to organize those governance
bodies, but, instead, a continuous search of the best practices, by means of
identifying actions and principles which could serve as a guide to be adapted to
the particular circumstances of each company. In this sense, this study will try
to prove how the consideration of the nature of the news contents could be a key
factor when it comes to designing effective corporate governance systems, which
deal with the interdependence between corporate management and editorial
management. The case of media companies specialized in economic and
financial news will be used as an example.
In order to achieve the analysis, we will try to justify first of all how in the
case of news companies it seems more suitable to adopt an approach of
corporate governance based on the stakeholders and on the principles of public
governance, rather than other more conventional approaches, which are
exclusively oriented towards the shareholders. In this framework, we will
comment some of the proposals suggested in the last few years to improve the
corporate governance of news companies and more precisely, some referred to
the configuration and functioning of their Boards of Directors, all of them
aimed to improve what we will define as news governance. Subsequently, we will
deepen in some of the peculiarities of economic and financial contents, which
cause problems of special importance within the relationship between corporate
governance and news governance, especially in those companies in which those
contents are the main axis of their activity. Thirdly, we will briefly describe the
situation of this kind of companies in different markets, emphasizing how some
of them—those recognized as the most excellent—face the problems that may
arise between those two spheres of governance. Finally, the analysis will
conclude with a proposal of determined aspects of corporate governance that
78
should be kept especially in mind in the case of companies devoted to the

production and diffusion of this kind of contents.
Corporate Governance and Media Corporate Governance

The implementation of the principles of good corporate governance in media
companies, just like any other corporation, implies the acceptation of certain
practices that ideally do not bring up special problems. Furthermore, in many
cases, the simple acceptation of those generic principles may involve significant
advances in the present way to lead the destinies of many companies of the
sector. However, staying in the minimal formalities does not seem enough to
guarantee that news companies will adequately meet their informative
assignment. For this reason, it is necessary to look for the governance approach
that fits better the nature of the news activity, in a context of free markets.
Approaches of Corporate Governance

The literature on corporate governance that has been produced in recent years is
certainly vast; therefore making a complete synthesis is out of the aspirations of
this work. It is only worth mentioning that works as those of Shleifer & Vishny
(1997), Zingales (1998) and Becht, Bolton & Röell (2002) are useful to
understand the evolution and implications of this concept.
In a strict sense, corporate governance refers to the system of internal and
external mechanisms that are necessary to solve control problems derived from
the separation between company ownership and company management. As
Becht, Bolton & Röell (2002) point out “at the most basic level a corporate
governance problem arises whenever an outside investor wishes to exercise
control differently from the manager in charge of the firm. Dispersed
ownership magnifies the problem by giving rise to conflicts of interest between
the various corporate claimholders and by creating a collective action problem
among investors” (p. 5).
Thus, a good system of corporate governance would be the one that gets the
managers to take the best possible decisions in order to maximize the value of
the company for its owners, through internal mechanisms (for instance, the
ownership structure and the Board of Directors) as well as external means (the
companies trading market and the legal system).
From an economic perspective, a typical problem of “agency relation”
between a “principal” (investors) and an “agent” (managers) arises, in view of
the possibility that the latter could act on its own profit to the detriment of the
interests of the former, in the multiple daily decisions that are taken about the
company’s activity. As Tirole (2001) states, a corporate governance system tries
to solve “an adverse selection and a moral hazard problem. A good governance
structure is then one that selects the most able managers and makes them
accountable to investors” (p. 3).
79
Hence, a great part of the studies about corporate governance has focused in
the resolution of this problem, mainly in those situations where the ownership
is much dispersed. Regarding the fundamental mechanisms to face it up, Becht,
Bolton & Röell (2002) mention that there are basically five implemented: “i)
partial concentration of ownership and control in the hands of one or a few
large investors; ii) hostile takeovers and proxy voting contests, which
concentrate ownership and/or voting power temporarily when needed; iii)
delegation and concentration of control in the board of directors; iv) alignment
of managerial interests with investors through executive compensation
contracts; and v) clearly defined fiduciary duties for CEOs together with class-
action suits that either block corporate decisions that go against investors’
interests, or seek compensation for past actions that have harmed their
interests” (p. 5). Among those measures, the one that has gained the biggest
interest in the professional and academic sphere has been the reinforcement of
the functions of the Board of Directors, especially as a result of the recent
corporate scandals and abuses.
From the 1990s, since the publication of the Cadbury Code (1992) of
corporate governance, going through the declaration of standards of good
governance of the OECD (1999) and many other national and international
reports that have proliferated since then, there have been moves to reinforce and
reformulate the sense of the Boards of Directors. After the year 2000, the
analysis of those principles of governance was intensified and many of them
became binding –or suggested– standards on the companies that stand at the
stock markets.
Some of the basic rules of good corporate governance try to reach
particularly the following objectives: a) to safeguard a majority weight of
independent directors in the Board by reinforcing the concept of independence
with regard to the executives and in relation to the company’s interests; b) to
increase the control of the Board over the management of the company’s
executives by giving more responsibilities to the chief executives of the
company’s accounting and guaranteeing a fair audit; c) to watch carefully the
procedures of designations for CEO’s and other high level executives of the
company, which are responsible for daily operations and from which an
efficient and ethic behavior is expected; d) to qualify those designated as
members of the Board in such way that their profile will fulfill the functions
that they must assume; e) to establish an adequate compensation policy for
executives, according to the achievement of company’s objectives; f) to ensure
that the Board is an active body, which takes the initiative to work together
with the executives, reacts facing the problems that arise in the company and
adopts an appropriate communication policy; g) to establish efficient
mechanisms in order to evaluate the work of the members of the Board of
Directors.
In summary, the aim is to revert the common situation of the existence of
passive Boards of Directors. As Gershon (2004) comments, “in most
80
companies, the role of the governance system is only to put the right managers
in place, monitor their progress and replace them when they fail. Neither the
board nor shareholders offer opinions on strategy or policy unless managers are
clearly failing. What is needed is a system in which senior managers and the
board truly collaborate on decisions and both regularly seek the input of
shareholders” (p. 14).
Many of the initiatives of good governance suggested in the above
mentioned documents give an almost absolute priority to the objective of the
value for the shareholder as the central point of corporate governance, especially
in a strictly economic approach of the subject. It is true that national and
cultural traditions are very different amongst themselves, in such manner that it
is possible to talk about different paradigms of corporate governance (Weimer
& Pape, 1999). But in spite of this, generally, the focus on shareholder value as
the axis of all systems is very common and it leaves other objectives of great
importance for any corporation at a much secondary level. This is quite evident
in activity sectors where these “other objectives” are the essential core of the
company’s duties.
For this reason, the focus on the stakeholders’ value has increased its
relevance during these last years, together with the proposal of corporate
governance based on the maximization of the value for the shareholder. As
Tirole (2001) points out, “to most people, the economists' and legal scholars'
sole focus on shareholder value appears incongruous. Managerial decisions do
impact investors, but they also exert externalities on a number of ‘natural
stakeholders’ who have an innate relationship with the firm: employees,
customers, suppliers, communities where the firm's plant is located, potential
pollutees, and so forth” (p. 3). The author itself offers a definition of corporate
governance from the perspective of stakeholders: “the design of institutions that
induce or force management to internalize the welfare of stakeholders” (p. 4).
The core of the theory of stakeholders focuses in two essential questions: a)
what is the purpose of the firm? The answer to this question sets up the action
of the Board of Directors and the executives in regard to the value that the
company creates for its different stakeholders, by leading the strategy in the
right direction and by achieving its financial objectives as well as its mission; b)
what responsibility does management have to stakeholders? This pushes
managers to decide how they want to do business –specifically, what kinds of
relationships they want and need to create with their stakeholders to deliver on
their purpose. As Freeman, Wicks & Parmar (2004) point out, in this approach
“shareholders are an important constituent and profits are a critical feature for
delivering the value the firm promises, but concern for profits is the result
rather than the driver in the process of value creation” (p. 364).
This focus on the stakeholders does not determine systems or general
principles of governance, but guidelines and multiple answers, which depend on
the nature, and circumstances of the companies, since it discards the narrow-
minded vision that the main objective of the corporate governance should be
81
the creation of value for the shareholder. From the point of view of the
governance proceedings, or particular rules of corporate governance as those
mentioned in previous paragraphs, this focus does not necessarily modify the
mechanisms of control, but rather changes the objectives and the references for
creation of the value. As an example, the especial protection of the employees’
interests was the main realization of this focus on the stakeholders in some
countries. In Germany, France or Japan, employees are encouraged to
participate in monitoring activities of the Boards of Directors, by means of two-
tired board settings (Aste, 1999).
However, a Board of Directors and executives oriented to the creation of
value for the stakeholders works with a mixture of objectives and this is,
without a doubt, one of the weaknesses of this theory. That is the reason why
some authors still defend that the creation of value for the shareholder is the
best specific objective which may include the rest. Nevertheless, in a recent
debate about this subject, Sundaram & Inkpen (2004), supporters of this point
of view, admitted the strength of the focus on the stakeholders: “Regardless the
camp to which we belong, one premise should be clear: All of us seek a path to
a promised land in which accountable corporations managed by ethical decision
makers create the greatest value for the greatest number of stakeholders” (p.
371).
Together with these two approaches, fundamentally based on the theory of
the agency, it seems reasonable to suggest an approach to corporate governance
from different points of view with significant importance for those
organizations that require a great deal of public trust. Frey (2003), for instance,
has questioned the validity of the strict implementation of the theory of agency
to corporate governance, by pointing out that, in the case of corporations,
applying some of the management principles and paradigms of public
governance would be more suitable. For him, as it has been common to think
of applying certain conventional schemes of corporate governance of companies
to the Public Administration, it also makes sense to think in the opposite way.
More particularly, according to Frey, in order to draw the consequences derived
from this proposal, it would be pertinent to think about the following ideas:
“(1) There are substantial areas within the firm in which power is wielded and
in which politics enter the game. Corporate Governance can therefore learn
from Public Governance. Corporate Governance has been excessively oriented
towards the Agency Theoretic view of the firm as a nexus of voluntary
contracts.
(2) Many institutions produce goal-oriented intrinsic motivation. Most

important are an extensive and formalized selection process, fixed position and
income, and autonomy within rules. These institutions have the added
advantage of producing loyalty to the firm. Corporate Governance relies
excessively on extrinsic incentives to align the interests of principals and agents.
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(3) Division of power, rules and institutionalized competition effectively

constrain managerial power. These features have been either treated too lightly,
or have been altogether neglected, by Corporate Governance.
(4) The largest number of the economically relevant institutions today are
neither purely profit oriented market firms nor purely public. They are not well
served by organizational designs exclusively derived from traditional Corporate
Governance. Not-for-profit firm and firms with a varying degree of
governmental influence can benefit enormously from institutions derived from
Public Governance” (pp. 30-31).
In many corporations, it would be desirable that these ideas could serve as a

complement to the traditional schemes of the agency theory focused on
shareholder value. This is what happens, for instance, in some aspects of the
corporate governance of non-profit organizations or firms with public service
activities, such as hospitals (Jansen & Kilpatrick, 2004), in which the
achievement of an efficient management always begins with the clarity of their
mission and their commitment with society. In certain declarations of
principles of good corporate governance, this public orientation comes out with
the appeals to the responsibility or the social commitment of companies, in a
more or less explicit manner. Thus, in France, the Viénot Report (1995) points
out that management and directors must aim at ‘social interest’, as an element
that does not always meet the interests of both shareholders and stakeholders.
In Spain, concerning the mission of the Board members, the Aldama Report
(2003) mentions that they should protect the long-term viability of the firm, at
the same time they keep the unity of action of the Board with regard to the
whole protection of the general interests of society. The common problem is
that those declarations of intentions do not clearly result in supervision and
control systems to monitor the achievement of objectives, as it happens in fact
with the defense of the shareholders’ interests.
In the case of the news media companies, due to its peculiar activity of
undoubted public interest, it is clearly necessary to materialize those corporate
governance mechanisms which will look after the protection of its informative
mission, therefore guaranteeing the support to quality journalistic practices.
The aim is to coordinate adequately corporate governance and news
governance.
Corporate Governance and News Governance in Media Companies

At least since the Hutchins Commission established the principle of social
responsibility of media, and according to the widespread current acceptance of
their public transcendence, it seems clear that news companies fit perfectly into
models of corporate governance which harmoniously integrate the focus on the
stakeholders—including, of course, the shareholders as essential stakeholders—
with certain principles of public governance that are oriented towards the
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achievement of their mission and the maintenance of the public trust

demanded by the exercise of the journalistic duties.
In the performance of their activities, the commercial media should satisfy
the interests of their owners (shareholders), those of their employees, clients and
all concerned (stakeholders) and those of the citizens (society). In order to
achieve harmoniously those objectives, it is desirable that the highest
governance body (the Board of Directors) would accept that the news
professionals, led by the Editor, are the “agent” for the maximization of the
value for society, the same way it usually accepts that executives, directed by the
CEO, are the “agent” for the maximization of value for the shareholders (or for
the stakeholders, in wider approaches). From this perspective, we could talk
about the necessity of including principles of news governance in the corporate
management systems of journalistic companies in order to encourage, promote
and reward the fact that the “professional agents” would act to the advantage of
society, according to their honesty and professional ability. At the same time, it
would be a question of minimizing the possibilities that they could act on their
own profit or on a third part benefit, to the detriment of the interests of their
public and the citizens in general.
More specifically, according to the central point of analysis of this study, the
question is the following: if the CEO is the agent for the shareholders and the
main stakeholders, and the Editor is the agent for society, which should be the
concept, design, functioning and behavior of a Board of Directors dealing with
the necessity of harmonizing this duality? The matter has enormous relevance,
even just because the CEO designation is the Board’s responsibility, and the
Editor designation, usually, the CEO’s.
In 2002, when accepting the Distinguished Executive of the Year Award of
the Academy of Management, Russell Lewis, CEO of The New York Times
Company, commented that one of the keys of good corporate governance was
that the company’s purpose and values must be crystal clear. In addition, he
pointed out the four fundamental values of his company: 1. The quality and
integrity of the content we produce; 2. The requirement to strive for excellence,
while treating each other honestly and fairly; 3. A focus on creating long-term
value; 4. Good corporate citizenship (Lewis, 2002, p. 41). Without a doubt,
when accepted as purposes at all management levels, declarations of principles
as clear and convincing such as this one, are the beginning of systems of
corporate governance which are adequate to the nature of the news business.
However, this is not the general rule in the sector. Let us take Jay T. Harris
case. Harris, publisher of San Jose Mercury News, resigned as a way to protest in
view of the demand to do staff cutbacks in order to achieve the financial
objectives required by the parent company, Knight Ridder, when the Mercury
News had profitability out of its sales close to 30%. After the notorious
resignation, during a speech at the American Society of Newspaper Editors
(ASNE), Harris explained his decision and brought up the urgency of an open
debate about the search of the appropriate balance between financial interests of
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companies and journalistic necessities of media. According to Harris (2001a),

the conditions of such debate should be the following: “1) The discussion needs
to include all the stakeholders, not just publishers, editors, large shareholders
and institutional investors. Journalists and employees from the business side
need to be at the table as well. So do readers, scholars and a diverse group of
community representatives. 2) One goal of the effort should be to develop a
working definition of what being a good and faithful steward of the public trust
requires of newspaper managers and newspaper owners. 3) The moral, social
and business dimensions of the issue should be fully explored and given equal
priority. 4) The discussion should build the case for a steady and reliable
investment, insofar as prudent business allows, in news, circulation, research
and promotion. 5) The case needs to be made that editors must seek equal
access to the publisher's chair. Journalists cannot leave the helm to those who
do not have a deep commitment to a newspaper's responsibilities to its readers
and its community. 6) And finally, a way must be found to give the public a
sense of ‘ownership’ in its community's newspaper. It should hold the paper—
its managers and owners– to reasonably high standards and accept nothing
less.”
A discussion based on these conditions could certainly bring principles of
general acceptance about news governance, which could be useful to build
Boards of Directors sensitive to as well as committed to the journalistic mission
of their firms.
With similar ideas in mind, Peter C. Goldmark, Chairman and CEO of
International Herald Tribune, has presented four suggestions in order to
increase the commitment of high level executives with an independent
journalism: “1) The CEO of any large company that contains a serious news
organization should meet once a year, with other CEO’s of similar
organizations and with other independent figures in the news field, to assess the
health, independence, and status of his or her news organization; 2) Each
company that owns a news organization should designate a member of its board
of directors to assume a special responsibility for oversight and protection of the
independence and strength of that news organization. 3) Invite an annual
outside review—call it an audit if you like—of the independence and vigor of
your news function. 4) Fund, jointly with your sister companies, an
independent council to track, promote, examine, and defend the independent
news function in America and in the world at large” (Goldmark, 2001, pp. 17-
18).
In addition to proposals and ideas such as those originated by professionals,
the academic world has analyzed the improvable aspects of the Boards of
Directors of media companies, with the object to draw some general principles
of action, but at the same time they showed certain perverse effects of some
configurations of those structures.
In their detailed analysis of public traded newspaper companies, Cranberg,
Bezanson, & Soloski (2001) make the following recommendations about the
85
composition and functioning of the board: 1) That boards of directors should

have more than one member who is a retired or active journalist of high repute
and who does not work for the company; 2) Boards should comprise primarily
outsiders, and board members' compensation should not be tied to stock
market performance; 3) Executives' compensation “should be based in
significant part on the circulation and journalistic quality of the newspapers”; 4)
Boards should have legal authorization to consider news quality and the
community’s interest in its newspaper’s mission when taking all decisions, even
when the maximization of short-term shareholder return is compromised.
Other proposals which are more specific tend to the same direction, such as
the importance of the fact that the Boards could receive with special affection
the idea of having an experienced professional—a former editor, for instance—
as CEO, strengthening the particular sensibility required to lead these
companies. Even though it is probably minor evidence, Knott, Carroll & Meyer
(2002) have analyzed how it is more usual to find references to the social
responsibilities of media in institutional declarations made by CEOs with this
profile. Alternatively, to mention another example, the specific worry about the
presence of directors in the Boards with executive duties in other important
companies. In fact, authors such as Dreier & Weinberg (1979) alerted more
than two decades ago about the informative consequences of interlocking. An
& Jin (2004) have recently insisted on this matter with their analysis of the
presence of directors of financial entities and important advertisers in the
Boards of the main North American newspaper groups, from the point of view
of the theory of resources dependency.
But to harmonize corporate governance and news governance to the highest
executive level, not only requires a persuasive work or a search of references
about best practices. Above all, it entails a theoretical and practical justification
that both dimensions of governance end by truly creating long-term value in
this kind of companies. For that purpose, it is clearly necessary to develop goals,
objectives and specific indicators of good news management, associated with the
exercise of quality journalism. The necessary “news metrics” need to be created
so that the evaluation of that quality, influence, etc. is operational and acts as an
incentive when taking decisions. Just like the share value, the profitability or the
earnings per share act right now (Shepard, 2001). In this context, the studies
oriented to justify the relation between profitability measures and quality
measures earn special relevance, since they develop models that allow a long-
term connection between good corporate governance traditional principles and
good news governance objectives (Meyer, 2004).
Many journalistic quality breakdowns can be associated with an inadequate
integration between corporate governance and news governance, but probably
the most striking—and one of those that receive more attention—is the
possible loss of journalistic independence, either structural or casual. In the
sphere of the relations that we are considering, that loss of independence
happens, for instance, when the journalistic judgment over the current affairs
86
(the Editor’s responsibility) is disturbed because it does not agree with the
judgment made from extra-journalistic corporate interests (the managers’ and
executives’ responsibility). That is why the principle of division of powers,
typical of public governance and so deep-seated in the journalistic world under
the metaphor of the division of church and state, remains as valid as always.
However, what happens in practice is that conflicts of interests are more and
more complex every day and the exceptions to that division, very tempting.
Without the intention of presenting a thoroughly exposition, we will discuss
bellow some of the typical circumstances of conflict of interests between
corporate governance and news governance which influence the informative
independence, in view of which a more adequate action of Boards of Directors
and executives with a journalistic feeling is possible.
Governance and Conflicts of Interest

Argandoña (2004) points out that “a conflict of interest arises in any situation
in which an interest interferes, or has the potential to interfere, with a person,
organization or institution’s ability to act in accordance with the interest of
another party, assuming that the person, organization or institution has a (legal,
conventional or fiduciary) obligation to do so” (p. 2). According to that
definition, in the journalistic news coverage, conflicts of interests may have a
mixed nature. However, in this study we are going to focus in those that
connect corporate interests with journalistic interests.
A first approach to the subject could be the acceptance of the idea that any
news corporation, by the fact of being such, acts with a prejudice which favors
matters that are beneficial for itself and for the system where it belongs.
McChesney, among many other authors, has been long time repeating this idea:
“The corporate news media have a vested interest in the corporate system”
(McChesney, 2003: 315). Something similar happens to those who claim that
there is a systematic conditioning of the interests of the advertisers. This subject
is deeply analyzed by critic works such as Censorship Inc. (Soley, 2002), or by
more acquiescent approaches such as that of Sutter (2002), which states that the
favorable atmosphere created by a media system based on advertising is a public
good. In this article, we will leave aside that advertising pressure because it does
not directly connect with the question of ownership although, as Craig (2004)
shows, there could be cases where the implication of the board could be
fundamental.
Nevertheless, above motions for the rejection of corporate system, it is
certainly interesting to focus on some particular conflicts of interest, in which a
more careful relation between corporate governance and news governance—the
main objective of the above mentioned proposals—could have a positive
influence, especially in a business environment defined by the existence of
multimedia groups that are very diversified and have multiple, direct or
indirect, connections with other business sectors.
87
The first particular domain of conflicts of interest could be the topics of

public consequence (politics, law, etc.), which could influence the managerial
strategy of media groups. By way of example, this happens with legislative
topics about the communications sector. Giles & Hertzman (2000), in their
study about the coverage of 1996 Telecommunications Act by different
newspapers, conclude that “the financial interests of media owners influence
not only newspapers editorials but straight news reporting as well” (p. 383).
The authors claim that this shows that “as more and more media outlets come
under the control of fewer and fewer corporate owners, the potential for
conflict of interests increases. News organizations owned by large conglomerates
with far-flung investments are more likely to find that the public issues they
report on carry implications for their corporate parents’ financial health”. (p.
384). Recently, in view of the latest announcement of liberalization of the
regulations regarding media ownership made by the Federal Communications
Commission, the debate has revived. In an article called “The Sound of
Silence”, Kunkel (2003) commented: “Clearly Big Media had a seriously vested
interest in the FCC ruling coming out the way it did—lobbied long and hard
for it, in fact” (p. 4). This remark completed a large report about the case, in
which the contrast between the intense popular reaction and the scarce
journalistic attention in view of the subject was highlighted (Layton, 2003).
A second type of conflict of interests that could affect journalistic
independence is the one that arises around news that influences the non-
journalistic businesses of important shareholders, or associated to members of
the Board of Directors, which in some cases are companies of enormous
significance and public visibility. As Moore (2003) mentions, “in the case of
media companies, when a board member is linked to other powerful
businesses—companies its newsrooms cover—independent reporting could be
undermined, whether by overt outside pressure or by self-censorship” (p. 64).
Cases mentioned once and once again are those such as that of the silence of
ABC News about the problems of personnel recruitment policies of Disney
(owner of the station), or the silence of NBC, CNBC and MSNBC news
programs in view of pollutant activities in the Hudson River by General
Electric, main shareholder in all of them (Pollard, 2003). Very recently, in a
hard critic to big media groups, Ted Turner, CNN founder, referred to some of
those cases to show the necessity of renewing the media market. His judgment
was clear when criticizing the behavior of companies that become bigger and
bigger every day: “Safeguarding the welfare of the public cannot be the first
concern of a large publicly traded media company. Its job is to seek profits”
(Turner, 2004). Obviously, striking examples such as these are just the point of
the iceberg of a phenomenon that is too widespread, unfortunately, amongst
big and small groups, inside and outside the United States.
In the third place, it should be worth mentioning the conflicts of interests
that arise around the activities and products of media groups. In big multimedia
groups, the division between managerial decisions and editorial decisions, with
88
regard to the coverage of sectors in which the group sells products and services
(books, music, films, television, etc. ), could be threatened by the necessity of
promoting the cooperation (synergies) among the different divisions (Jung,
2001; Champlin, & Knoedler, 2002; McAllister, 2002; Williams, 2002). In the
same way, serious dilemmas come up when the question is about giving
information and opinion about the own managerial decisions of media,
especially when those have an important public relevance. Jung (2002) has
analyzed, for instance, how Time and Fortune, unlike other prestigious
magazines, made a more positive and more intense coverage on the three
operations by which Time Inc. became AOL Time Warner between 1989 and
2000. With similar cases in mind, Solomon (2000) points out that when it is
about covering corporate decisions by the media moguls—all and sundry—
“journalists, who work in glass offices, hesitate to throw weighty stones; a
substantive critique of corporate media priorities could easily boomerang. And
when a media merger suddenly occurs, news coverage can turn deferential
overnight” (p. 59). The situation is not very different in countries such as
Spain, where there is a healthy critic among media with regard to their
ideological orientation, or in relation to their nature –state owned or private–,
but not in incisive analysis or serious reviews about certain corporate decisions,
managerial strategies, etc. Hackett and Uzelman (2003) describe similar
situations in the Canadian press when it comes to covering the own media
sector. In fact, as Turow (1994) has explained, the increasing pressure of the
coverage of subjects that affect the own company makes, under those
circumstances, change even the usual working methods at the newspaper office.
Of course, none of the above-mentioned subjects is new, even though they
are probably increasingly frequent in the world of big media groups. In all the
situations commented, as Bogart (2000) points out, instructions from the top
management of organization seldom arrive to the news office in order to hush
up or propose stories. However, if they do not arrive is because it is not
necessary to do so in order to let others know what its position is or where its
interests are located. “Almost imperceptible Pavlovian cues reinforce desired
behavior and inhibit what is unwelcome” (p. 124). On the other hand,
including where that Pavlovian behavior is not present, the key is not the daily
influence of directors and managers—which is generally unacceptable, at least
in media of a certain quality—but the special occasion or occasions in which
this influence prevails. Even though they are isolated, extraordinary occasions,
they are relevant because of the relation of certain news with fundamental
corporate interests.
All this makes that the newsrooms feel progressively more the pressure of
ownership, or at least, this is what journalists declare repeatedly in different
surveys. Bill Kovach, Tom Rosensteil and Amy Mitchell, discussing the results
of the last survey to journalists made by the Pew Research Center (Project for
Excellence in Journalism, 2004), state: “News people....fear more than ever that
the economic behavior of their companies is eroding the quality of journalism.
89
In particular, they think business pressures are making the news they produce
thinner and shallower. And they report more cases of advertisers and owners
breaching the independence of the newsroom.…There is a manifest and
widening gulf between journalists and the people they work for” (pp. 26 and
29). In addition, different levels of interference of the ownership have been
documented, in specific cases, depending on the more or less diversified nature
of the companies (Price, 2003). Although there are probably various nuances
depending on the countries, it does not seem that this is a strictly American
phenomenon. In a survey among Spanish journalists made in 1999, those
identified their own company and the advertisers as the factors that most
influenced their daily journalistic work (Sánchez Aranda, & Rodríguez, 1999).
In summary, the reduction of the problems mentioned in the world of
media poses a question of efficient and ethical governance of corporations, in an
environment where it is difficult to clearly dissociate the different types of
interests that meet in the organization. In order to get good news governance it
is necessary to have a special care with the design of corporate governance
bodies, in line with the proposals mentioned about the Board of Directors. As
Van Liedekerke (2004) recently commented, corporate governance should
contribute to an ethic for the media that should look after its multiple
dimensions. This is even more urgent in an environment where it becomes
mandatory, due to the structural changes that the sector is going through: “a
shift in media ethics and accountability systems from the level of the individual
professional to media organizations and institutions” (Bardoel, & D’Haenens,
2004, 22).
If all this has relevance in the news media in general, there is a media sector
where all of the above mentioned even acquires almost tragic hints, because it
shows its more extreme face. This happens in the economic and financial
media, where the tensions between the interests of shareholders, professionals,
readers, news protagonists and society in general are hair-splitting. In fact, this
happens to economic journalism in any media, but obviously it is more intense
in those which have it as its almost exclusive task, not just one more –and
sometimes not very important– of its news beats. In these media, the tension
between news governance and corporate governance is aggravated. Therefore,
the demands of good governance are stricter and, in certain aspects, different.
We could certainly say that, as it was for Pompeii, Caesar’s wife, for them is
even more critical to be “above suspicion”.
90
Economic and financial media∗: corporate and news governance

News on the economy has been, during the last years, one of the most
developed areas of journalistic specialization. After several decades as the
“wasteland” of journalism (Welles, 1973), under the shadow of other more
popular specializations, such as politics or sports, the coverage of economic,
business and financial issues has gone up to hold a central position in the media
agenda.
The economic events themselves, as well as a general economic vision of
many other phenomena, were the protagonists of an end of the twentieth
century that was defined by the globalization of markets, the weakening of the
states and the emergence of the great corporations as essential actors of public
life.
As a response to those circumstances, a proliferation of media and
information spaces devoted to economic news has taken place in the majority of
developed countries (Arrese, 2002a). On the one hand, specialized media have
grown up extraordinarily—especially in the sphere of the press; on the other
hand, general interest media allocate more and more resources to their
economic sections or programs. All this has favored somehow a certain
popularization of economic news—and among them, more specifically the
financial news—that have gone from being a private reserve for experts to
becoming an area of interest which, although minor, it is getting more and
more spread among all kinds of citizens (Arrese & Medina, 2002c).
As sphere of the journalistic activity, the coverage of economic issues is still
dealing with a great number of professional challenges (journalistic, ethical,
educational), not very different from those of past times. However, as we have
already mentioned, some of them are becoming more important today, in view
of the increasing relevance of this kind of information and according to its
expansion amongst the different media. At the same time, the necessity of
facing the deficiencies of this journalistic specialization is getting worse if we
take into account the renewed weight of the economic decisions and the
companies’ actions in the life of citizens (Gans, 2003, 47-66).
Nevertheless, together with those professional challenges, one of the central
keys of this kind of journalism is the integrity of the companies that manage
media specialized in these subjects. And this integrity is, largely, in the hands of
the owners and directors, even more than in what happens in other kinds of
media businesses. As it happened in France, in the nineteenth century, when an
agent of the tsar, Arthur Raffalovich, practically bought the whole economic
∗
When talking about economic and financial media, we are referring to “media whose contents
mainly inform about economic topics and events in general (economy, business, finance) and
which are mostly aimed to people with responsibilities or interests in decision making in various
environments such as economic policies, finances, trade and business”. For a discussion about this
concept’s extent, which tries to distinguish these media from media of general interest and other
trade media, see Arrese, 2002a, 17.
91
and financial press of Paris, in order to promote the Russian Treasury Bonds
and the project of the Trans-Siberian railway (De Moreuil, 1982), the days
when only one person could manipulate the economic information of a whole
country are, fortunately, long gone. Today, a fact such as this one would be
unthinkable, although there still are many situations—given the variety of
media—in which more particular and localized—but much less visible—
influences act without too much control. However, what it has not changed, as
for the nineteenth century, is the nature of the management of this kind of
contents, which is the true hotbed of potential conflicts of interests and target
of all kind of suspicions about the action of undesirable influences.
Peculiarities of Companies Specialized in Economic News

Economic contents and particularly, media specialized in economic
information, are part of a communication paradigm distinguished by the
relation between elites (elite-to-elite communication), in contrast with the
traditional communication relation of other media, between an elite and the
masses (elite-to-masses communication) (Davis, 2003). According to Davis, this
paradigm would be defined by the following features: “1) elite sources dominate
news production; 2) elites are repeatedly in public negotiation and conflict with
each other (elites tend to use the media to promote their conflicting political
and economic goals); 3) elites are themselves very susceptible to media influence
and ‘dominant ideologies’; 4) much elite promotional activity is aimed, not at
the mass of consumer-citizens but rather, at other rival elites; 5) elites are
simultaneously the main sources, main targets and some of the most influenced
recipients of news” (p. 672-673). As it can be seen, the communication between
elites presents a “circularity” which brings up many problems to the exercise of
a quality journalism focused in the public interest, understood as general
interest for society.
In the particular case of economic media, this “circularity” implies that
many people and many companies may well be at the same time object of
journalistic coverage, sources of information, important advertisers, providers of
material and financial resources, specially valuable readers and, in some cases,
even owners or important shareholders. To take a particular example of extreme
situations: during several years of the 90’s the leading journal in economic
information in Spain, Expansión, belonged to a media group in which
Telefónica, the most active and important company in the country at that time,
was the main Spanish shareholder with the 20%.
Thus, if there is a possibility to fall into a certain pro-corporation prejudice
in general interest media, in the case of specialized media, the inclination is
even bigger. In theory, the following conclusions about the interrelation among
corporations, media and society, drawn by Deetz, & McKinley (2000) can be
clearly applied to them: “Little evidence suggests that media professionals are
ready to pursue a watchdog function in regard to corporations as vigorously as
they have government....Mass media as currently structured are not in a
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position to take the lead in bringing corporate control to the attention of the
public and providing a forum for public debate over value issues. Despite media
professionals who are dedicated to their conceptions of their jobs, the media
product is enmeshed in corporate control.…Although news critical of a
particular business’ activities regularly appears on business pages, the business is
most often criticized in reference to dominant corporate values of profitability
or competitiveness (pp. 39 and 63). In this same sense, when referring to the
interrelation among economic journalism, public relations and corporate elites,
Davis (2000) claims: “most debates covering business and financial issues –from
financial regulatory policy to ownership and corporate governance- are highly
influenced by corporate elite objectives, norms and values.…the consequences
are that a significant proportion of financial activity, corporate regulation and
economic policy-making evolves in a way that is likely to benefit corporate elites
and ignore others –and do so out of the sight of the general public” (pp. 299-
300). Analyzing the particular case of the coverage of New Economy in the
State of California, Kollmeyer draws similar conclusions with respect to being
favorable to the interests of big corporations and investors against to those of
workers (Kollmeyer, 2004). In short, it is quite natural to think with a prejudice
in favor of the economic power when considering economic journalism. As
Alterman (2003) has commented, “perhaps the easiest bias to identify in the
media is that of business journalism” (p. 118).
The convergence of interests between the business world and the media
world, and the vision they offer about it to specialized media tends to increase
particularly in times of economic boom. Including media where there can be no
doubt about their professional attitude and independence, the temptation to be
carried away by the point of view of the businesses is very serious. Regarding the
information coverage of the Enron collapse, Richard Lambert, former director
of Financial Times, recognized that some important keys, which could have
helped to preview what happened, were overlooked: “The signs were there for
anyone who cared to look. The fact that Enron executives had for some time
been selling their shares for all they were worth was public information.” When
trying to look for an explanation to this fact, he concluded: “It takes courage
and conviction to say the emperor has no clothes” (cited in Donkin, 2003: 37).
Reinforcing the idea, but from more theoretical point of view, Zingales & Dyck
(2002; 2003) suggest that economic journalists do not have special incentives to
cover the troubles and scandals about corporations. Much on the contrary, they
have incentives to access a quid pro quo relation with the sources, from which
they obtain private information in return of positive coverage of the companies,
especially in times of economic boom. This practice of searching agreements
and controlled coverage in return of scoops has been condemned in multiple
occasions, including in the case of big media involved, such as The Wall Street
Journal (Conniff, 2000; O’Brien, 2000).
Just like in other moments of history, during the first years of this new
century, economic journalism has gone again through a moment of self-
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reflection, after the crash of the dotcom boom and the proliferation of corporate
scandals. Once more, arguments about the weakness of this kind of journalism
and its inclination to act as the driving belt of the system have been hoisted
again.
It seemed that the information boom in this field was on the verge to crash
almost overnight. The heroes of economic journalism, specially finance
journalists, suddenly became villains and everywhere accusing voices raised to
impute an irresponsible behavior to media, as they had encouraged irrational
expectations and dubious managerial practices in an uncritical way (Goozner,
2000; Madrick, 2001; Longman, 2002; Sherman, 2002; Shiller, 2002; Page,
2002). The critics arose especially in countries with more tradition in this kind
of journalism—particularly, United States and United Kingdom—but similar
analysis were undertaken in other places. In Australia, for instance, Kitchener
(2002) analyses the defective coverage of the HIH scandal, which went
unnoticed in the economic sections of the main media, even though there were
sufficient evidences and some professionals alerted about the problems of the
company.
Well before the confirmation of these failures, media critics such as Howard
Kurtz had alerted about the tangle of interests that gathered around specialized
media, both new and old, as they were increasingly dependent on the opinion
of analysts, who were experts and executive stars that took the attention of a
public dazzled with the wealth that Wall Street could generate (Kurtz, 2000). In
other areas, other voices warned of the weakness of this information field. After
analyzing the economic journalism in France, Julien Duval, concluded that
around the problem of journalists’ independence with respect to the economic
sector, the central question is not whether or not editors can freely write about
those who, advertisers or shareholders, finance the media, as whether or not
journalists can express in their articles on the economic field a point of view
that is not entirely determined by it (Duval, 2000).
The tension between corporate governance and news governance under the
above-described circumstances is the highest. Moreover, the coverage of certain
topics, especially business and financial, can become extraordinarily strained. In
such conditions, an approach of corporate government focused on the
shareholders, or even on the stakeholders, could make almost indistinguishable
the defense of corporate interests and journalistic interests.
Even more than in any other kind of media, in these media the creation of
value through the maintenance of a solid public trust is the only appropriate
method of management.
However, it is quite surprising that, in view of the described panorama—an
almost structural conflict between news governance and corporate
governance—a great part of the effort to improve the exercise of journalism in
this sector has focused on the review of good practices oriented to control the
work of journalism professionals. Those rules, materialized in ethical and
behavior codes, have become more and more demanding, with the object to
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clear up any doubt about that journalists perform their jobs for the public
benefit and not for their own advantage.
In recent years, it has been quite common that professional associations—
such as the Spanish Association of Journalists of Economic Information (APIE)
in Spain, or the Society of American Business and Economic Writers (SABEW)
in the United States—and companies and media—such as Reuters, Dow Jones
or the Financial Times—have had reinforced their ethical codes, in order to
make sure that their professionals are pure. This reinforcement of cautions has
become more intense, if that is possible, in the new electronic specialized media,
which lacked a solid journalistic tradition in those aspects (Flint, 2004; Bialick,
2004). However, as Fink (2000, 190) points out, although many codes are
written mainly to defend the reputation and institutional image of media,
without giving too many guidelines for the personal ethical behavior, it is quite
certain that all of them agree in the majority of the principles of action.
With the intention of summarizing some of those principles, it is worth
saying that all of them include six fundamental worries about journalists’
behavior:
a. Use of the information and/or the journalistic activity on one’s own

benefit, including practices, which go from the insider trading to countless
tricks used by the companies to thank and make easier journalists’ work
(presents, travels, promotions, etc.).
b. Conflicts of interest with other economic and/or professional activities of

journalists. In the majority of codes, it is strictly forbidden that professionals
could develop other economic and professional activities of any kind, in the
fields about which they give information.
c. Demands of internal and external transparency. Transparency is one of

the leading principles of honesty and integrity in the exercise of information
tasks, on the part of media as well as the sources. Internally, in order to face
the responsibility of certain ethical problems which are continuously
renewed, as we have already mentioned. Externally, the requirement of
working to the maximum with sources on the record or with the detailed
identification of particular interests of experts and other collaborators in the
journalistic activity.
d. Confidentiality and information reserve. Without the intervention of any

enrichment, the great sensitivity of economic information demands special
doses of confidentiality and discretion on the part of the professionals who
manage it.
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e. Distinction between information and advertising. Although some codes

do not make many explicit references to this issue, in general, they include it
through indirect allusions to the question.
f. Independence, competence and responsibility. Finally, there are multiple

references to general principles of journalistic independence and professional
competence in all the codes, as fundamental axis for decision-making when
facing ethical dilemmas.
Without a doubt, in an environment of intricate and tempting webs of interests

such as this, the spread of the commitment of economic media to follow these
principles creates an atmosphere at the newsroom that favors quality
journalism. After all, among economic journalists, it is quite frequent to be in
the crossroads to take difficult decisions between “business pressures and
journalism values” (Borden, 2000; Tomkins, 2002) and personal interest and
public interest. Today, the occasions in which the decision in view of with these
dilemmas is not right are exceptional, especially in the case of the latter.
Nobody will be surprised today because a good financial journalist dies without
becoming wealthy, just like some decades ago the British public did when they
found out that a famous stock-exchange columnist had died without becoming
a millionaire (Searjeant, 1985).
But even if this is that clear, it is surprising that the same effort has not been
made in order to reach an agreement on governance and management codes,
which could complement and support those professional demands from the
point of view of the behavior of editorial companies and their leaders, which
represent shareholders and executives. There are frequent cases in which ethical
codes, such as the ones mentioned, rule in the newspaper offices of companies
whose shareholders, directors and executives have a great number of interests in
companies, sectors and activities about which the newsroom informs daily.
Again, a situation similar to what we have already discussed about the media in
general, although this one is lived with different intensity. An & Jin (2004),
when referring to the problem of interlocking, remind us again of this kind of
double standards by means of which “what is forbidden for reporters is
permissible for publishers and, in fact, encouraged for board directors” (p. 21).
Well, in the case of economic media, the maintenance of those double
standards can be devastating for the quality of journalism.
Of course, specialized media with a long tradition and solid reputation are
very conscious of this problem, as they are aware of the special importance of
the division “church-state”. Recently, on the occasion of one of those recurrent
debates about juxtaposition of editorial content and advertising content,
Stephen Shepard, editor-in-chief of Business Week, made a comment on the
long experience that business magazines had in managing well that issue: “We
write about advertisers all the time and the church-state rules got fixed early on,
and are well understood” (cited in Steinberg, & Bandler, 2004). However, the
96
grey areas are numerous, even regarding this subject and prestigious
publications. Almost a decade ago, the condemnation of Fortune about the
existence of “lists of untouchable advertisers” in Forbes had a great echo. This
event shows up the complex management of the division that Shepard mentions
regarding this kind of publications (Diamond, 1996). In fact, nearly at the same
time the Business Week editor did those comments, The New York Times echoed
the experiment that Forbes.com had initiated to establish links with the
advertisers in the references to trade marks and companies that were made in its
articles (Ives, 2004). It should not be forgotten that the weight of advertising
income in economic media over the total turnover is usually much higher than
in the rest of the media, which precisely does not favor the editorial
independence. As Bogart has says (2003), “editorial independence can best be
maintained when readers contribute significantly to the cash flow and when
advertisers are many and diverse” (p. 46).
Setting aside this advertising factor, after all of the above mentioned, it is
quite evident that companies which manage economic media should maximize
cautions in such manner that corporate governance and news governance could
be in tune, respecting the demands of the latter. In this sense, the answers to
questions such as the following are key: who are the shareholders of the
companies? Who are the members of the Board of Directors? What is their level
of involvement in other businesses and economic activities? How are the codes
of management conduct and journalistic conduct combined? Which guarantees
are there to keep the journalistic independence?
Without the intention of answering systematically to these questions, we
will briefly comment some of the aspects related to them bellow, with regard to
the economic press in European countries and the United States. With the
objective of showing certain desirable practices, we will subsequently set out the
current principles of action of two of the companies that manage media of
recognized quality: Dow Jones (The Wall Street Journal) and Pearson (The
Financial Times).
Panorama in Europe and the United States

In practice, the situation of companies specialized in economic and financial
news is quite different from country to country and it depends on journalistic
and business traditions. The cases of Italy, Spain, France, Germany, United
Kingdom and United States, seen from the point of view of their leading media,
might be a good example of such variety.
In Europe, the most special case is probably in Italy. The unquestionable
leader of economic information is the newspaper Il Sole 24 Ore, flagship of a
group that has developed other businesses, all of them specialized, around such
trademark in the radio, television and editorial world. The company belongs to
Cofindustria, the confederation that includes the main great companies of the
country. Although the newspaper is edited with high professionalism and its
success is indisputable (it sells around 400,000 copies), it precisely does not
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stand out because of having a watchful attitude on anything that could harm
the great industrial interests. Well-documented, analytical, with great
information of services, it has traditionally acted more as a working tool for the
business class than a watchdog in the Anglo-Saxon sense (Bocca, 1997). This
intimate relation with the industrial interests is not an isolated case in the
market of Italian press, which has been traditionally controlled by the great
industrial groups.
The situation of the Italian press has not changed too much after the
publication of Carte False, the manifesto that revived the debate about the
miseries of economic journalism in that country. Written in 1986 by
Giampaolo Pansa, editor in chief of La Repubblica, Carte False condemned,
among other things, the close personal relations of some economic journalists
with businessmen, which meant in practice corruption cases and an interested
and acritical information about the business world. In fact, the general manager
of Fiat, Cesare Romiti, very knowledgeable about those relations, showed his
agreement with the thoughts of Pansa in a famous television show.
Furthermore, business relations should be added to those personal relations,
because the big industrial groups controlled a great number of important
magazines and papers. Just to mention some significant cases, at that moment
Agnelli’s FIAT controlled Il Corriere della Sera, la Gazzeta dello Sport, La
Stampa and Il Mondo; De Benedetti, general manager of Olivetti, La Repubblica
and the weekly L’Espresso; the king of concrete, Pesenti, had power over Il
Tempo; the holding of chemical products Mondedison, Il Messaggero; the state
holding of energy ENI owned Il Giorno and the news agency Italia, and
Ferruzzi gained control of the economic daily Italia Oggi. Pansa (1988)
concluded that the journalistic information was in the hands of “few, big and
‘impure’” (p. 276).
In view of this panorama, probably the best that could happen to an
economic newspaper is to depend on an association such as Cofindustria, but it
does not obviously seem the appropriate model to develop quality journalism,
including all its aspects. As a matter of fact, there have been some unsuccessful
attempts to dissociate the editorial group of Il Sole 24 Ore from Cofindustria
(Lunati, 1994).
With regard to Spain, the situation is quite different. There are three
economic newspapers in the market, all of them quite young. The main two are
part of big media groups which both are public traded companies. The first
one, Expansión, belongs to Recoletos Group, which has interests in sports and
free press and in turn, it is controlled by the British group Pearson. The second
one, Cinco Días, is a minor product within the multimedia range of Prisa
Group, the main communications group in Spain. Prisa edits the main quality
newspaper, El País; it owns the main radio station and a great part of the
business of pay television, in addition to having an important presence in the
film and editorial business. Out of the two newspapers, only Expansión has
managed, with certain success, to spread out its trademark to other products,
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audiovisual as well as electronic. However, none of them has obtained a

comparable reputation to that of some of their equivalents in Europe. And, in
addition, they suffer, to a certain extent, the disadvantages of being minor
publications in the middle of the ambitious aspirations of their media groups
(Arrese, 2002b).
Some observers regret that such conditions have not helped to develop an
economic journalism with better quality. Jesús Cacho, an incisive economic
journalist who has sheltered in his own on-line publication in recent times, said
lately: “Although much more competitive than journalism on politics,
economic journalism is also suffering the devastating effects of the lack of
business independence and the fact that their owners go to bed with the big
groups of economic and financial power. To this ends, the business
centralization has turned dreadful for the freedom of speech. Great advertisers
dictate what it is allowed to say and what has to be said in the mass media. That
tough, that terrible” (Cacho, 2004).
In a certain way, the situation of the French economic press is somewhere in
between the Italian and the Spanish. Only the leading newspaper, Les Échos, has
managed to establish a solid reputation of influential and quality newspaper,
following the steps of Financial Times model, whose editorial company,
Pearson, controls the French paper as well. Nevertheless, it has to keep this
position in a tremendously difficult environment, because practically the rest of
specialized publications –just like many other media– is in the hands of big
industrial groups, led by well known business men such as Dassault, Bouygues,
Arnault, Lagardère, among others. Halimi (1995), Tailleur (1999) and Routier
(1999) have alerted of this little encouraging situation. The sale of Socpresse
group to the aeronautics mogul/tycoon Serge Dassault has recently joined the
long tradition of participation of big industrial groups in the control of French
media. In addition to publications such as Le Figaro and L’Express, the
acquisition included L’Expansion, one of the most influential magazines of the
French economic press (Le Monde, 2004). It is quite understandable that in
view of this scenario, Duval (2000) concludes that the present state of the
French economic journalism is defined by its low degree of autonomy.
On the other hand, Germany has historically counted on a solid tradition of
good titles of economic information, with the daily Handelsblatt as the
unquestionable market leader and journalistic core of the editorial group von
Holzbrinck, associated in several projects with Dow Jones. In spite of the
professionalism of this newspaper and other specialized media, it does exist a
certain culture of serious, but little aggressive economic journalism, excessively
identified with the industry of the country. This is probably one of the main
reasons why Germany is the only European country in which a serious
competitor to the leader has recently arisen. And moreover, it comes from
another market.
The launch of Financial Times Deustchland in 2000—the extension of the
British paper trademark—meant a real commotion in a quite stagnant sector.
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The Economist commented with the following words the possibilities of success
of the newspaper, taking into account the situation of the national economic
press: “German business journalism is stodgy and slow. When Oskar Lafontaine
resigned as finance minister at 6 pm, the German papers scraped a mention,
while the FT had the full story” (The Economist, 2000). Property of Pearson and
Bertelsman, the newborn came into the market strongly, publishing an
important scoop on Siemens’ labor problems and promoting itself with an
advertising campaign which included testimonials of distinguished personalities
of the German economy who gave their support to the new title (Rushe, 2001).
Without a doubt, is the British economic press the one that has known how
to maintain the highest standards of journalistic quality, with two reference
titles such as Financial Times and The Economist. Although later on we will
discuss some conditions of corporate governance and news governance of their
editorial companies, it is worth mentioning that both have become a reference
in economic journalism in an international level as well. Today, it is widely
accepted to consider them as global titles rather than just British mastheads. In
any case, as Tunstall (1996 354-373) has affirmed, those titles have raised the
level of British economic and financial journalism to an extraordinary height,
practically overcoming the main political newspapers in power and influence.
The judgment that Tunstall makes is convincing: “Financial journalism has
become the senior specialist field within British journalism; and the Financial
Times has taken over from The Times as the leading prestige paper in Britain”
(p. 370). Probably because of this reason, because of the real condition of
institutions that those titles have reached, the competition of other specialized
publication is nearly insignificant in United Kingdom. When the existing offer
of such valuable information has real quality and the confidence generated by
the accuracy, the depth and the independence of judgment is that high, the
need to look for alternatives lowers. As Hargreaves (2003) states regarding the
newspaper of the City, nobody can question the “sense of trust between the FT,
its sources of information, and its readers” (p. 203).
Although it belongs to a very different market, the Wall Street Journal plays
a similar role in the American case, just as Business Week plays it within the
world of business magazines, together with Fortune and Forbes, although the
editorial and business circumstances of these two are a little different. The Wall
Street Journal has become a standard of quality in economic journalism, with
presence and influence in a large number of international markets. Beyond the
debate of the strong ideological aspects of its editorial pages and its famous
“split personality” (Bagdikian, 1981; Lieberman, 1996), very few doubt the
excellence of its journalistic coverage, even those ones that disagree with many
of the opinions of the publication. The story of the stay of Ken MacDougall
(1988) in the New Yorker newspaper has become part of the history of
journalism. MacDougall, radical journalist of liberal ideas was able to work
during ten years without too many problems in a newspaper of eminently
capitalist ideas. In the end, MacDougall remarked that he left the newspaper
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with a mixture of (ideological) resentment and (professional) affection. Precisely

he pointed out the following: “Affection for a paper that never asked me—or
any other reporter I heard of—to write a puff piece for an advertiser, take it easy
on a news source, or angle a story beyond what the facts warranted” (p. 24).
This quick review of the situation of some of the main economic newspapers
does not exhaust the richness of situations that come up in every country
around the media specialized in economic information, far from it. Even in
mature markets with long tradition in this field, such as the American, the
expansion of this sector has produced news media in which delicate situations
for the journalistic independence happen. For instance, it is quite often
mentioned, the case of CNBC, the main specialized television channel, property
of General Electric. New businesses that have arisen around the Internet have
also set out problems. These businesses have a high degree of specialization in
financial information and the barriers between corporate, personal and
informative interests are, somehow, fragile. This is, for instance, the case of
TheStreet.com, whose main shareholder and columnist is James J. Cramer, a
well-known investment funds agent. Perhaps because of this reason, this kind of
enterprises requires very strict editorial rules. The Street.com Inc. has adopted a
thorough conflict policy. For instance, the firm forbids the editorial staff to
have individual shares from other companies or to make reference to any
possible influences on them by the founder and the Board of Directors of the
company: “Restrictions have been placed upon the involvement of the board
members and business staffers of TheStreet.com Inc., including columnist and
board member James J. Cramer, in the editorial content of the magazine. Board
members and business staffers are not permitted to discuss individual stocks
with editorial staffers….Moreover, as a general matter, neither board members
nor business staffers.…are informed of the contents of any of our stories prior
to their being posted on the sites” (TheStreet.com’s Conflicts and Disclosure
Policy, 2004).
A different story is that of the portal The Motley Fool, because of its
complex nature as both investment and information service (Hirschey,
Richardson, & Scholz, 2000). The Motley Fool encourages its authors to invest
in values, because it considers them as finance “communicators and teachers”
—not journalists. Nevertheless, at the same time, it maintains very strict rules
in order to avoid speculative buying and selling and in order to publish in the
profile pages all the investments that its columnists have at every moment (Fool
Disclosure Policy, 2004).
Finally, it is worth mentioning the existence of minor media, some of them
hyperespecialized, which are in the hands of owners with obvious interests in
the subjects covered. This happens, for example, with The Deal, a publication
devoted to cover the current affairs about mergers and acquisitions of
companies which belongs to the financial wizard Bruce Wasserstein, head of the
investment-banking Lazard, who recently managed to get the ownership of the
New York magazine (Shafer, 2004).
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After this quick review of the situation of the sector in different markets,
with the lights and shadows of each case, it is worth examining carefully two
particular cases. As we have already said, The Wall Street Journal as well as The
Financial Times are models of economic journalism all over the world and both
fight in numerous battle fronts in order to reach the position of global leader,
with the admiration of all and sundry (Revel, 2000). It is, therefore, interesting
to analyze how their editorial companies manage to balance the forces exerted
by their managerial and informative interests, by the means of actions that
relate to their corporate governance.
Two Models of Corporate Governance: The Wall Street Journal (Dow

Jones) and The Financial Times (Pearson)
Even though that in their sector of activity they could be qualified as excellent,
neither The Wall Street Journal nor The Financial Times, nor their respective
editorial companies, are unblemished institutions. From the point of view of
their corporate governance as well as the daily management of their activities,
they are intensely going through the above-mentioned tensions between
corporate governance and news governance. And generally, they have lived
those tensions through difficult times for their respective businesses, the
occasions when the real pulse and character of an organization are put into the
test.
In recent years, on the occasion of a severe advertising crisis, The Wall Street
Journal as well as The Financial Times has suffered strong labor tensions because
of the pressure to control the costs (Strupp, 2003; Roche, 2003). Equally, the
editorial companies have some improvable aspects from a corporate perspective.
In Dow Jones, for instance, there have been professionals that have complained
publicly in different moments about the fact that the positions of Chairman
and CEO of the company had fallen on the same person, Peter Kann, who, in
addition, happens to be the husband of the company’s publisher, Karen Elliott
House, or that certain directors did not precisely have the profile required by
the company, with such publications as The Wall Street Journal or Barron’s in
charge of criticizing the honor of other businesses (Tharp, 2002). By the same
token, it would be worth being critic with some aspects related to interlocking.
Directors of big corporations make up the Board of Directors of both
companies. Nothing unusual, were it not for the fact that the economic press
has the urgent need to be “above suspicion”. In the case of Pearson, his
chairman is at the same time, chairman of one of the most important British
banks: HBOS; some of its directors are also performing managing duties at
companies such as Abbey National, Colgate-Palmolive, Time Warner or
Unilever, and its CEO is a non-executive director of Nokia. The list of
interlocks in Dow Jones is even longer (Bristol Myers, Ford, Sprint, American
Express, J. C. Penny, Sara Lee and Xerox, among others), although as An & Jin
(2004, 25) have proved, their behavior with regard to this aspect has recently
been much more reserved than that of other prestigious American journalistic
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companies, such as the editors of New York Times, Washington Post and Chicago
Tribune. In addition to the ones mentioned, these companies will probably
have many other improvable aspects.
Nevertheless, we can certainly say that, generally speaking, both companies
have overcome satisfactorily those problems, without compromising the
principles and basic needs of an independent journalism of high quality. In fact,
these companies have a recognized reputation from the point of view of their
corporate governance. Dow Jones, for instance, was one of the three journalistic
companies that had a position in the ranking of the 100 Best Corporate
Citizens, made annually by the Business Ethics magazine, which highlights the
best American corporations in taking care of their stakeholders (Business Ethics,
2004).
Although both companies are in general quite different, they share some
common features which are worth mentioning since they are relevant, as we
have seen, in the harmonization of corporate governance and news governance.
The first attribute shared by the British newspaper and The Wall Street
Journal—in contrast to other examples observed in publications from other
countries—is that they represent the real flagship of their editorial companies,
which have not important interests out of the editorial world. This has always
been this way in the case of Dow Jones. Pearson has worked intensely during
the last decade in order to define a coherent strategy in publishing (Arrese,
2003). Secondly, the CEO’s of both companies have a long career in
journalism. Peter Kann, Dow Jones CEO since 1991, worked in the newspaper
when he was young and won the Pulitzer at the age of 29 for the coverage of the
war between India and Pakistan in 1972. His management career accelerated
after inspiring and leading the expansion of the newspaper towards other
markets, with the launch of the Asian Wall Street Journal in 1976. Two years
later, he was appointed vice-president of the company and sine then he has not
stopped having a main managerial role in the group (Foege, 2000). Marjorie
Scardino, for her part, arrived to Pearson in 1996, after almost a decade of
important executive positions at the head of The Economist Group. Before
that, together with her husband, she had founded a “muckraking weekly”, The
Georgia Gazette, which gave them a Pulitzer (Reed, Pascual, & Symonds,
2001). In the third place, although both firms are public traded companies,
certain families have historically played a central role in their corporate
management, thanks to share schemes that gave them the control to take key
strategic decisions. Today, this does not happen anymore in Pearson, but not a
long time ago, when Financial Times was nearly in the hands of Rupert
Murdoch, the opposition of some professionals and certain key shareholders
was fundamental. They formed an alliance so the Australian tycoon ceased in
his efforts (Morgan, 1988; Shawcross, 1992: 384-387). On the other part, it
does really happen in Dow Jones, which keeps a dual share system (ordinary
shares and control shares) by means of which the company is well tied in the
hands of the Bancroft family, although they are not involved in the daily
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management such as the Sulzbergers (New York Times) and the Grahams
(Washington Post) (Serwer, 1997; Auletta, 2003). In the forth place, as we shall
see later on, both firms have a strong institutional sense of the journalistic
activity as the driving force of their mission. Finally, all this is well supported by
their international expansion, which diminishes their ability to influence
particular corporations and advertisers, but increases the power to negotiate and
the moral strength of the media they manage.
The described features have probably contributed to the wish to preserve the
journalistic integrity at the maximum, which can be clearly noticed in the
principles of corporate governance and other current policies in Dow Jones and
Pearson, although at the same time, it is quite evident that none of them
guarantees that integrity.
We will outline below some ideas that clearly reflect the philosophy of
governance of both companies, in their attempt to harmonize corporate and
news interests, out of a selection of documents and public statements.
In January 2004, Dow Jones made public a document entitled Principles of
Corporate Governance∗. Out of the 22 articles that make it up, most of them
usual in any document of this kind, two are worth commenting. The first
principle states that it is the duty of the Board of Directors and the executives of
the company to watch over the good management of the company on the
interest of the shareholders. But it makes reference immediately to the “public
mission” and the attributes of quality of its products, with a special mention to
the newspaper: “Dow Jones seeks to protect and preserve the quality,
independence and integrity of its products and services, including The Wall
Street Journal, on which the Company’s long-term prosperity and public
mission depend” (p. 1). Throughout the document, there is another explicit
mention of the journalistic activity, which has certain importance. The ninth
article says the following: “Because of the nature of the Company’s publishing
business, no management directors are permitted to serve as directors of other
public companies, except as representatives of Dow Jones in cases in which the
Company owns shares in another company (p. 3).
Equally, the company has produced a Code of Conduct for Directors.
Although some points are quite conventional in its writing, in the light of the
problems described in this article and the “public mission” mentioned in the
previous epigraph, some of them may have important implications. More
particularly, the section devoted to “Conflicts of interests” details: “Each
director should endeavor to avoid having his or her private interests interfere, or
appear to interfere, with (i) the interests of the Company or (ii) his or her
ability to perform his or her duties and responsibilities objectively and
effectively. Directors should avoid receiving, or permitting members of their
immediate family to receive, improper personal benefits from the Company,
∗
All the documents about corporate governance of Dow Jones and Pearson mentioned in this
epigraph might be consulted in the information for investors of their respective corporate web
pages (www.dowjones.com; www.pearson.com).
104
including loans from or guarantees of obligations by the Company. A director

should make full disclosure to the entire Board of any transaction or
relationship that the director reasonably expects could give rise to an actual or
apparent conflict of interest with the Company and seek the Board’s
authorization to pursue such transaction or relationship” (p. 1). By the same
token, the point entitled “Encouraging the Reporting of Illegal or Unethical
Behavior” would be worth pointed out, interpreted from the perspective of the
duty that the Board has to watch over aspects of news governance. This point
says: “Directors should endeavor to ensure that management is causing the
Company to promote ethical behavior and to encourage employees to report
evidence of illegal or unethical behavior to appropriate Company personnel.
Directors should endeavor to ensure that the Company will not allow
retaliation against any employee who makes a good faith report about a possible
violation of the Company Code of Conduct” (p. 2). Given that, as we shall see,
many directions of the Code of Conduct of the company refer to honest
journalistic job, there is no interpretation but that of the special interest of the
Board to encourage and support that good journalistic activity.
Similar thoughts might be applied to the guidelines about standards of
designation of independent directors (Director Independence Standards), who
need to be selected, as the executive directors, “for their character and wisdom,
judgment and integrity, business experience and acumen”. Although the
decision about who is the independent director in each particular case remains
in the Board’s hands, once the SEC rules are fulfilled, the independence
guidelines set, among others, the maximum monetary limits of the personal or
professional relation that those company directors are allowed to have, either by
payments made to the company or received from it. More particularly, the limit
is set on $100.000 a year in payments for personal services—apart from the
income as director—and on $1 million or the 2% of consolidated gross
16
revenues of the company to which the potential director is directly or
6
The detailed writing of these limits are as follows: “No director will qualify as an independent
director if: —he/she is receiving or has received in the past three years more than $100,000 per
year in direct compensation from the Company, excluding director or committee fees and
pension or other forms of deferred compensation; —any member of his/her “immediate family”
(as defined below) is receiving or has received in the past three years more than $100,000 per year
in direct compensation from the Company; —he/she is or has in the past three years been a
director or “executive officer” (as defined below) of a company that makes payments to, or
receives payments from, Dow Jones (including its subsidiaries) for property or services in an
amount which in any single fiscal year exceeds the greater of $1 million or 2% of such other
company’s consolidated gross revenues; —his/her immediate family member is or has in the past
three years been an executive officer of a company that makes payments to, or receives payments
from, Dow Jones (including its subsidiaries) for property or services in an amount which in any
single fiscal year exceeds the greater of $1 million or 2% of such other company’s consolidated
gross revenues; —he/she is or has in the past three years been an executive officer of a charitable
organization to which Dow Jones (including its subsidiaries) made contributions in an amount
which in any single fiscal year exceeds the greater of $1 million or 2% of such charitable
organization’s consolidated gross revenues”. (Dow Jones & Company, Inc. Director Independence
Standards, January 2004).
105
indirectly professionally related. These kind of limits have special importance

from the point of view of the designation of independent directors in regard to
executives, but from an informative point of view, it would be worth thinking
about stricter limits in order to avoid interlocking with other great corporations
(especially, in the case they are important advertisers and creditors).
Finally, another key document is the Code of Conduct for all the employees
of the company. This is a document connected with the previous ones, since it
is based on the company’s mission as well, and it is applied—its basic guidelines
are—to all the employees, from the most basic position to the CEO. The Code
begins with the following declaration of principles, intimately bound to the
journalistic spirit of the company: “The central premise of this code is that
Dow Jones’ reputation for quality products and services, for business integrity,
and for the independence and integrity of our publications, services and
products is the heart and soul of our enterprise. Put another way, it is an
essential prerequisite for success in the news and information business that our
customers believe us to be telling them the truth. If we are not telling them the
truth—or even if they, for any valid reason, believe that we are not—then Dow
Jones cannot prosper. The Company will suffer, for example, if our customers
cannot assume that: Our facts are accurate and fairly presented; Our analyses
represent our best independent judgments rather than our preferences, or those
of our sources, advertisers or information providers; Our opinions represent
only our own editorial philosophies; or There are no hidden agendas in any of
our journalistic undertakings” (p. 1).
The Code establishes a high degree of demand in all the important aspects
that a good ethical code for economic journalism takes care for, from the use of
privileged information to the prohibition of buying and selling shares in the
short term, going through the incompatibilities of external activities, the
declaration of interests, etc. Perhaps the most significant feature is that,
regarding its fulfillment, there is no distinction made between editorial staff,
advertising staff and management staff. The text clearly says: “the responsibility
for safeguarding and growing a Company that lives up to this code lies with
each and every one of us. Every Dow Jones employee holds a position of trust.
Acceptance of a position at any level or in any part of Dow Jones includes
acceptance of individual responsibility to uphold Dow Jones policies governing
legal and ethical business practices.…It must be clear to each of us that business
integrity is necessary in every business decision—and that it is not the special
province of news employees, or members of the legal department, or anyone
else. Business integrity requires that we make all of our business decisions, and
approach all business questions, objectively and realistically, and in the long-
term best interests of all of our shareholders” (p.1). Moreover, it grants singular
prominence to management teams as guarantors of the company’s integrity:
“Managers, by virtue of their positions of authority, must be ethical role models
for all employees. An important part of a manager's leadership responsibility is
106
to exhibit the highest standards of integrity in all dealings with employees,

customers and the world at large. Managers must avoid even implicit or
unspoken approval of any actions that may be damaging to the reputation of
Dow Jones, and must always exercise sound business judgment in the
performance of their duties” (p. 1).
Given the high level of demand of the Code and the importance that the
highest executives of the company should manage its fulfillment, the last article
leaves this task in the hands of the Board of Directors: “Any waivers of or
amendments to this code that apply to the Company’s Chief Executive Officer,
Principal Financial Officer or Controller may be made only by the Company’s
Board of Directors or a committee of the Board. Any such waivers or
amendments will be disclosed promptly as required by applicable law and the
rules of any exchange on which the Company’s securities are listed or traded”
(p. 8).
The spirit that inspires the aforementioned documents, which is usually
more important than the particular rules –always improvable–, is reflected in
many institutional declarations as well. In his letter to shareholders of the
Annual Report of 2004, under the title “The Power of Words”, Peter Kann
comments that Dow Jones has overcome difficulties in recent years by keeping
its main values, “quality, integrity and independence”, and that it has achieved
it by guaranteeing the “focus on business content” and the investment in
“quality and long-term future of our products and franchises” (p. 26).
To some extent, these words reproduce the basic aspects of the company’s
purpose, which has passionate journalistic nature. In the same Report, the main
values of Dow Jones are reminded: “a) A commitment to, and justifiable pride
in, the quality of our publications and services and the value they provide to
customers; b) A commitment to uncompromising journalistic and business
integrity; c) A strong sense of journalistic and business independence, taking
pride in charting our own course rather than following the pack; d) A clear
focus on content as our core competency and on business as our primary
market; f) A strong sense of loyalty to our publications and services, based on a
conviction that they serve a genuine public interest; g) A belief in civility and
collegiality in our Dow Jones workplace, recognizing the importance of all of
our employees to our success; h) A conviction at Dow Jones that by pursuing all
of these values we can best build value for shareholders” (p. 27).
As declaration, it is possible to say that it complies satisfactorily with the
desirable integration of corporate governance and news governance in the
direction suggested throughout this article. In a recent profile of Dow Jones,
Ken Auletta remarks this fact too, especially when discussing the strategy of
strong investment in content improvement undertaken by Peter Kann in a
moment of bad economic situation for the company. And, as an explanation,
he quotes the following words of Kann: “There are a lot of ways to judge a
C.E.O: One of them, fairly, can be the share price. On the other hand, if you
are trying to run a company like this, and part of your role is to enhance what
107
the company does best, then I think I have at least helped create an
environment where a content company produces great content” (Auletta, 2003,
p. 10). Harris (2001b) points at The Wall Street Journal as one of the few great
newspapers that has been able to resist the pressure to reduce editorial costs
drastically.
Although with a different style, given that Pearson gathers journalistic
businesses as well as education and editorial companies, the documents and the
institutional declarations of the British company also declare the singular worry
to make well what has to be made and with the best economic results as
possible.
In the review of the principles of corporate government that rule the Board
of Pearson, the company declares in its Annual Report 2004 that it fulfills the
current British Combined Code of Principles of Good Governance, except in
some minor aspects, such as the permanence of directors in the Board for than
nine years of the formal acceptance of the principle of division of the functions
of Chairman and CEO—although in practice, two different people currently
hold those posts. Since the company did not need to modify practically its
principles of governance, it could commit to ‘beyond compliance’ standards
wherever possible.
In this sense, other areas of management where Pearson had paid special
attention, such as the publication of a Code of Business Conduct, were applicable
to all the employees. In an annex, the Code pointed out the importance of
monitoring it as something alive, connected to the highest responsibilities of the
management: “Corporate governance rules require that we monitor and certify
whether we've complied with this code of conduct. In our case, this code
embodies behavior that is integral with our culture and our way of doing
business, so just having managers sign a statement that we've complied with it
won’t tell us much. Instead, each year Pearson’s CEO will send everyone in the
company an e-mail strictly about the code, highlighting some areas, making
sure everyone is paying attention to it and understands it; and each of you will
have to reply”.
As in the case of Dow Jones, although this time written in a way which is
less based on casuistry, the Code gathers the main aspects regarding the basic
conflict of interests and the reprehensible actions of the economic journalism
itself, in addition to other general aspects of professional integrity. In fact, given
the higher variety of businesses of Pearson, it surprises how the company tries to
give a sense of unity to all its activities. Marjorie Scardino, in her CEO letter to
the shareholders, in the Annual Report 2004, summarized it this way: “(Pearson
is) A coherent company with one focus and one set of values.…Our main aims
relate to the larger world of what we do—teaching children to read; helping
adults get new skills; providing the best business intelligence; helping citizens
and governments function better; helping people acquire knowledge that
consists of facts and understanding.…We value three qualities above all:
bravery, imagination and decency. To us, those aren’t just run-of-the mill
108
words: they guide our decision-making and our behavior” (p. 5). She concluded
further: “As we meet that basic human yearning for knowledge, we will build
the long-term value of our company (p. 9).
This sense of unity in the businesses of the company resulted in such basic
principles of actions for quality journalism such as the public commitment and
the independence. Under the epigraph “Our responsibility to society”, the Code
of Business Conduct reads: “Much of our business involves keeping faith with the
public: as an education publisher with a responsibility to serve the purpose of
learning; as a newspaper publisher dedicated to giving an unbiased account of
events; as a company that protects the editorial independence of authors and
editors everywhere. This public trust partly defines our company, and we will
uphold it at all costs”. Again, this idea is repeated explicitly in the Annual
Report, making a reference to the editorial as well as the journalistic activity:
“As the world’s largest publishing company, our editorial judgements—whether
it’s the comment and analysis in our newspapers and online or the authors and
stories that we publish—can have a big impact. Editorial independence is a
central part of our culture and we separate editorial and commercial decisions”
(p. 25).
The intense tradition of journalistic independence of Financial Times which
lies on those three words is not only the main value which impregnates the rest
of the company’s businesses, but also one of the fundamental responsibilities of
the Board of Directors. Dennis Stevenson, Chairman of Pearson, explained it
this way in an interview for a Japanese newspaper: “The Financial Times is
unusual in Britain -the only newspaper in Britain where the owners,
proprietors, play no part in editorial decisions. Never. One of my jobs as
chairman of Pearson is to protect the complete independence and integrity of
the newspaper.…And I passionately believe that is a very important part of the
FT. During the general election before the last one—when I was on the board
of Pearson but before I became chairman—the FT supported the Labor Party.
Everyone went to completely nuts—all the advertisers went mad. My
predecessor was a member of the Conservative Party. But Pearson said nothing
to The Financial Times” (Anai, 2000).
Logically, in these companies the editorial independence does not mean
managerial indifference. Just as in Dow Jones, the CEO of Pearson has shown
an open and clear interest in the content improvement of Financial Times in
recent years, to such an extent that in some cases she embarrassed the
professionals of the newspaper. This is what happened in 2002, when during a
conference, she mentioned the lack of education of economic journalists as one
of the reasons why the majority of them—including those of the Financial
Times—was not able to find out the accounting sly tricks that were behind
scandals like the Enron affair. The comment produced a public protest of the
editorial staff, but there were also journalists who privately admitted that
Scardino was partly right (Byrne, 2002; Donkin, 2003).
109
Perhaps, another data that may help to better understand the journalistic
spirit of Pearson—which has been up until the moment in harmony with an
active search to increase the value of the company for its shareholders—is its
historical linking with the editorial company of The Economist, model of quality
economic journalism par excellence.
Financial Times Ltd., 100% property of Pearson, holds a share of 50% of
the capital of the editorial company of The Economist since 1928, while the
other 50% is in the hands of particular investors—among others, well known
families such as the Schroders, the Cadburies, the Rothschilds, etc. —and the
magazine employees. However, by means of the establishment of a complex
share system, since the very moment of the purchase, the control remained in
the hands of the particular shareholders, without any possibility for Financial
Times Ltd. to get access to it (Arrese, 1995: 407-410). With little relevant slight
changes, that is still the situation of the binding of both companies, in spite that
in certain moments there has been some confrontation between the two parts of
the shareholders (Shamoon, 1986).
However, in addition to this peculiar structure of ownership, the former
owners of the magazine established a Board of Trustees—which was common
at that time in some publications as “voluntary agreements of owners to limit
their own sovereignty in the public interest” (Lee, 1978: 127)—with the
objective to preserve “the character, traditions and independence of The
Economist” (The Economist, 1928, p. 55). The Board consisted of four relevant
personalities of the British public life, without any connection to the magazine,
and once created, it acted independently, selecting internally a new member
when there was a vacancy either for voluntary resignation or for death. This
Board had two basic missions: approve or reject the designation or dismissal of
the editor of the magazine. Subsequently, in order to reinforce the legitimacy of
the Board, further over its statutory nature, the Trustee figure was associated
with a special type of share that could block the own modification of its
constituent articles in General Assembly (Arrese, 1995: 410-418). This scheme
is actually current and has had particular importance in certain moments of the
history of the magazine. In addition, it has allowed that the weekly fought with
special intensity and moral strength in complicated moments for Pearson, such
as the case of the mentioned purchase threat by News Corporation (The
Economist, 1988).
The peculiar share structure and the Board of Trustees had the objective to
guarantee the editorial independence, which was identified with the figure of
the director of The Economist, whom the Statutes gave complete and exclusive
responsibility of the editorial policy and all the aspects regarding the editorial
staff—recruitment, salaries, etc. The tradition maintained since then and today,
the post of director of The Economist continues to be an example of editorial
autonomy opposite the executive bodies of a journalistic company. Of course,
this does not avoid the emergence of conflicts of interests, pressures and
difficult decisions, even when a Board of Trustees is created, with absolute
110
autonomy, in order to guarantee the editorial independence. In March 1992,

The Economist published an article in which the actions of some executives of
the National Westminster Bank (NatWest), as well as of the Bank of England,
were questioned after the investigations initiated in 1988 on the unsuccessful
Blue Arrow share issue. One of the Trustees of the weekly was Lord Alexander,
president of NatWest, who asked to open an investigation to this respect to the
Department of Trade and Industry (DTI), thanks to the information of The
Economist. When informing about the initiative of Lord Alexander, the
magazine concluded its article pointing out that “Lord Alexander is a trustee of
The Economist. Trustees are never consulted on the contents of our articles”.
Finally, the DTI investigation discredited the suspicions of the magazine, which
in one of its longest apologies—a whole page—had to make its excuses to the
institution presided by its Trustee and to the Bank of England. “We therefore
apologise to NatWest, the Bank of England, and the individuals to whom we
referred, and retract this claims absolutely” (The Economist, 1993, 86).
With the certainty that there are no miraculous schemes of corporate
governance, the models of the Financial Times and The Economist inside
Pearson show, at least, how the courage and the editorial quality find formulas
in order to spread themselves, even in the case of a kind of journalism as tangled
as the economic.
In the light of all we have set out above, and with these models as reference,
we can draw some basic conclusions about corporate governance in media
specialized in economic information.
Conclusions
Just like in the case of general mass media, those devoted to economic news
require corporate governance structures that go beyond the conventional
paradigm, focused in the maximization of shareholder value. The adoption of
wider models, such as that of the governance focused on the stakeholders,
together with other initiatives oriented to sensitize the Boards of Directors
about questions regarding governance for the information quality—news
governance—may help to improve the management of these specialized
companies.
Nevertheless, given the peculiarities of these companies, the intensity of
conflicts of interests that raise within them, the nature of their contents—which
generate communication relations among elites, it is necessary to think about
more complex models in order to integrate corporate governance and news
governance suitably. More particularly, given the circularity and the
coincidence of interests among their different stakeholders, it seems advisable to
adopt governance systems which could be closer to public governance
approaches, with the objective to achieve and maintain a high level of public
trust, based on an integrity “above suspicion”. For this reason, the journalistic
activity demands special rules of behavior for the professionals devoted to this
111
news beat. And many of these rules relate to their ability to carry out certain
economic activities and to the exercise of the transparency regarding economic
interests that could motivate conflicts of interests. Equally, as we have seen in
the cases of Dow Jones and Pearson, in certain aspects, these rules are applicable
to the rest of employees of the company, with special reference to the executive
staff as well.
From the point of view of corporate governance, and more particularly with
regard to the share structure and the composition of the Board of Directors, it
would be coherent to turn the spirit of those rules (typical of professional
conduct) into principles of corporate action. More specifically, it would be
worth mentioning four spheres which would require special attention: the
ownership structure, the composition and functioning of the Board, the exercise
of managerial transparency and the guarantees of division between commercial
and editorial decisions.
Regarding the ownership structure, in the case of companies focused on
economic information it seems prudent to maximize the precautions in order to
avoid that companies or institutions with great prominence in the economic
activity could become significant shareholders, whether they have interests in
the media world or not. For that purpose, it could be interesting to keep share
schemes such as those discussed in the case of Dow Jones and The Economist, or
such as the one recently adopted by Google for its initial public offering (IPO),
which has caused a great stir in the financial markets (Eisenmann, 2004).
Precisely, Google founders justified the goodness of a dual share system using
information companies as an example: “While this structure is unusual for
technology companies, it is common in the media business and has had a
profound importance there. The New York Times Company, the Washington
Post Company and Dow Jones, the publisher of The Wall Street Journal, all
have similar dual class ownership structures. Media observers frequently point
out that dual class ownership has allowed these companies to concentrate on
their core, long-term interest in serious news coverage, despite fluctuations in
quarterly results” (Letter From the Founders, 2004). Needless to say, these
schemes have also important weaknesses that deserves special attention, as the
Hollinger scandal has recently revealed (Burt, 2004).
Secondly, when considering the composition and functioning of Boards of
Directors, the proposals made for other general interest media are perfectly
applicable: the need of journalistic competence of some of their members, their
participation in the monitoring of editorial quality, etc. However, there are two
aspects that might require particular attention: interlocking and the definition
of independence criteria for non-executive managers. Regarding interlocking,
the question is to reduce the presence of managers with similar responsibilities
in other companies to its maximum; as for the latter, it is necessary to define
more strict independence criteria, even more in the case of economic or
professional independence, direct as well as indirect, regarding the company’s
112
activities. In this sense, it is worth paying special attention to the independence

regarding advertising, financial and legal interests.
The third sphere which needs special attention in companies focused on
economic information is that of the managerial and informative transparency.
Just like in some cases professionals are required to make a declaration of
economic interests, it is necessary a bigger effort so that companies make public
their corporate interests, in general as well as in each one of the circumstances
in which those interests could be related to the current affairs of which they
inform. And this not only means observing the rules of transparency generally
accepted (corporate governance), but also including in the news items any
information that could be useful to the public in order to make a better
interpretation, beyond any suspicion (news governance). Obviously, this
desirable transparency exercise, in its different aspects, is rather an art than a
regulation practice. In fact, a misunderstood declaration of interests might give
rise to almost ridiculous situations, like when Mario Bartiromo, CNBC anchor,
declared on air that she had a few shares in Citigroup before interviewing the
president of the company. As Hahn (2002) points out: “‘full disclosure’ may be
a laudable goal, but is likely to be a disaster in practice. Some disclosure norms
imposed by the media are not likely to be very helpful in promoting useful
information for their audiences, and will likely have unintended adverse
consequences” (p. 1).
Finally, as it has been specially discussed in the case of Pearson and The
Economist, a clear corporate commitment with the principle of journalistic
independence seems wise. This commitment could materialize in explicit
guarantees in order to protect the power of the editorial staffs management of
media. The Board of Directors has ultimately the ability to provide measures in
order to favor this essential element of quality journalism, which is so searched
in the personal actions of professionals (independence from their particular
interests) but so battered some times because of the institutional actions
(dependence from corporate interests). Without a doubt, this is one of the
fundamental axis of good news governance, but at the same time, it is one of
the spheres that more suspicion causes in the exercise of economic journalism.
The situation of many economic media, described in preceding pages,
presents a great number of challenges when it is analyzed from the point of view
of those four spheres of improvement of corporate governance and news
governance. Undoubtedly, the responsibility to face them devolves upon
managers and executives. However, the role of the information professionals
should not be forgotten, since they have a double function—internal and
external—in the improvement of that integration between corporate
governance and news governance.
Internally, it is necessary a greater activism on the part of journalists. More
than a decade ago, Mintz talked about the big structural difficulties that existed
for the exercise of a more independent and critic economic journalism, in a
context of corporate news media. However, at the same time he stressed the
113
little pressure that journalists exerted in the newspaper offices: “It is a cheap
shot and erroneous to imply that blame for the pro-corporate lies entirely on
owners, outside directors, managers, or the economic imperatives of the mass
media entities that are themselves big business. Reporters do not deserve to get
off so easily. Those who attempt serious coverage of corporate governance and
misconduct often break through, even when they inflict pain on personal
friends of the owners and managers. Too many reporters don’t even try” (Minz,
1991, 75). From the external point of view, the economic media also have the
function of practicing media economics criticism, just as they do with the rest
of the sectors and activities. As Dyck and Zingales (2002) point out, “media
pressure corporate managers and directors to behave in ways that are ‘socially
responsible’. Sometimes this coincides with shareholder’s value maximization,
others not” (p. 1). Well, this function of the media regarding corporations in
general should be fulfilled regarding the media industry itself as well.
All of the above mentioned may improve the conditions for the exercise of a
corporate governance in conformity with the necessities of news companies, but
logically it does not guarantee a good governance, which always depends more
on people than on structures. In fact, as Miller (2002) says talking of the
analysis of “the Frankenstein Syndrome” that the media sector is going through,
“whether mega-media conglomerates will result in responsible corporate citizens
or, like Frankenstein, turn on their creators depends in large measure on the
ethical modeling within those organizations. If there isn’t a consistent and clear
commitment to ethical modeling at the top of managerial pyramid, then it
must emanate from the trenches—an extremely difficult but not impossible
task” (p. 110).
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126
Governance, Structures, and Strategy in German Media Firms
Corporate Governance, Ownership Structures,

and Corporate Strategy of Media Companies:
The German Experience
Elmar Gerum and Nils Stieglitz
The burst of the Internet stock market bubble and recent corporate scandals
have rejuvenated interest in the corporate governance of the capitalist firm, and
especially of media and telecommunications firms. In the media industry, the
French conglomerate Vivendi has been at the center of the corporate
governance debate. Under the leadership of its CEO, Jean-Marie Messier,
Vivendi embarked on a merger and acquisition spree that turned the former
utility company into one of the world’s leading media and telecommunications
companies in the 1990s. Messier’s unrelated diversification strategy turned out
to be a disaster (Sjurts, 2004). Faced with a mounting debt burden and a
declining stock market value, the company nearly collapsed in 2002, resulting
in the sacking of Messier the same year. Investigations by the US Securities and
Exchange Commission (SEC) later revealed that the company issued false
statements, made improper adjustments to earnings and failed to disclose future
financial commitments. Since the dismissal of Messier, Vivendi has struggled to
improve its corporate governance, because it was widely believed that Messier
had too much leeway in managing the corporation.
The Internet bubble burst and the ensuing slump in the media industry
have also hit German media companies, especially companies listed on the
“Neuer Markt”, the German stock exchange for new, fast growing corporations
established in the mid-1990s and closed in 2003. EM.TV was once the most
valuable company listed on the Neuer Markt. After its IPO in 1997, EM.TV
made a string of spectacular, but overpriced acquisitions. This external growth
strategy led to vast financial losses, nearly bankrupting the company. Its share
price dropped from an all-time high of 120 euro in 2000 to only a few
eurocents. Its founders were convicted of corporate fraud in 2003, but class
action suits by investors were not successful (Ryan, 2003). While EM.TV is a
much-publicized case of bad corporate governance of German media
companies, it is an exception rather than the rule.
Rather, as we shall show in the paper, owner-controlled media companies
dominate the German media industry, allowing for the effective management of
corporate strategy. Furthermore, the corporate strategy influences the legal
framework and the corporate governance structure of the individual media firm.
In this chapter we clarify our understanding of corporate governance, provide
an overview of the German system of corporate governance, which is
127
remarkably different than the Anglo-American corporate governance system, we

outline the corporate governance of German media companies with special
attention to ownership and legal structures, and we discuss the link between
corporate governance and corporate strategy of media companies.
Corporate Governance – an Overview

Corporate governance is one of these terms that are often used but seldom
clearly defined. According to Zingales (1998: 497), the term did not even exist
thirty years ago. Today, the term is applied to a wide range of subjects, ranging
from corporate finance, managerial behavior, fraud, but also to corporate
structure and the boundaries of the firm (Miwa, 1998). Thus, it seems to be
worthwhile to clarify our conception of the term.
The understanding of most of the Anglo-American literature is encapsulated
in the classical definition provided by Shleifer and Vishny (1997: 737):
“Corporate Governance deals with the ways in which suppliers of finance to
corporations assure themselves of getting a return on their investment.”
According to this view, corporate governance is, above all, investor protection
(LaPorta, Lopez-de-Silanes, Shleifer & Vishny, 2000). Managers as agents act
on the behalf of the shareholders and other investors as their principals. To
successfully manage a corporation, managers need discretionary decision rights
to conceive and implement business strategies. The key problem of corporate
governance then becomes how to align the manager’s behavior with the
interests of shareholders through the setting of appropriate incentives and
regulations. Thus, this approach focuses on the implementation of shareholder
value and does not discuss the legitimacy of shareholder’s interests or the
relevance of other interest groups or stakeholders (Tirole, 2001). This sharply
contrasts with the continental European and especially German discussion on
corporate governance, in which questions of legitimacy figure prominently. For
example, the involvement of workers in the decision-making processes on the
corporate and individual firm level (labor co-determination), consumer rights,
environmental protection have all been important issues in the European
corporate governance debate since the late 1960s (see Gerum, 2004a, for an
overview). Corporate governance is therefore more broadly understood as a
mechanism for resolving conflicts between various interest groups (see also Roe
2003 for a similar conception). Research has focused on the organization of
corporate conflict resolution mechanisms, especially the structure, composition,
and control and decision rights of supervisory boards.
The theory of incomplete contracts offers a framework to reconcile these
two approaches to corporate governance (Hart, 1995). Because of incomplete
contracts between parties, manager’s discretionary behavior influences not only
the welfare of shareholders, but possibly of other stakeholders as well (Hoshi,
1998; Tirole, 2001; Gerum, 2004b). For example, employees with firm-specific
skills have an interest in the efficient allocation of their human capital to
128
maximize quasi-rents and as a result their wages. In this sense, managers are also
the agents of employees. This logic can be extended to suppliers, consumers,
and the public interest. National corporate governance systems differ in the
legitimacy of stakeholder interests and in the mechanisms to resolve conflicts
between stakeholders and to control managers.
The German System of Corporate Governance

In the literature, a number of approaches have been put forward to characterize
national systems of corporate governance, which put a different emphasis on
questions of legitimacy and mechanisms of conflict resolution. To characterize
the German system of corporate governance, we shall follow Hirschman’s
general taxonomy of conflict resolution mechanisms, exit, voice, and loyalty.
They can be readily applied to corporate governance systems (Thompson &
Wright, 1995; Gerum, 1998; Nooteboom, 1999).
The exit mechanism describes the Anglo-American corporate governance
system. In the case of conflicts or managerial excesses, shareholders exit a
corporation by selling their stakes on equity capital markets. Since the Great
Depression, legislative actions have gradually reinforced and improved this
fundamental control mechanism. Much the same exit logic applies to labor and
product markets. The interests of creditors, on the other hand, are only
relatively poorly protected (LaPorta, et al., 2000). Institutions that facilitate
voice as a control mechanism are virtually non-existent (Black, 1990). In
contrast, loyalty shapes the corporate governance of Japanese companies
(Gerum, 1998).
Corporate Governance and Corporate Law in Germany

The German corporate governance system represents the typical version of a
voice-centric system (Gerum, 1998). Unlike the Anglo-American stock
corporation, the German Aktiengesellschaft displays a three-tiered legal structure.
The stockholders elect the supervisory board (Aufsichtsrat) in the general
meeting of stockholders (Hauptversammlung), but they have no direct influence
on the management of a corporation. The supervisory board appoints and
dismisses the members of managing board (Vorstand), which is thereby
legitimatized to manage the corporation on behalf of the stockholders.
Moreover, the supervisory board controls the managing board. Besides being
able to consult the managing board, the supervisory board has the power to
veto strategic plans and investments proposed by the top management.
Thereby, the voice mechanism is institutionalized as the core control
mechanism of the German stock corporation. This organizational model
corresponds with corporate finance largely based on outside finance provided by
the universal banking system. Large creditors may hedge their risks by equity
investments, thereby gaining seats in the supervisory board of the corporation
129
and establishing long-term relationships with the borrowing company. In this

way, the supervisory board not only serves the interests of stockholders, but also
protects creditors.
Traditionally, banks have been the main creditors of the German
companies, the so-called Hausbanken (Prigge, 1998). Moreover, the interests of
creditors are well protected by German law, while shareholders’ rights are much
less well developed (LaPorta, et al., 1998). Because of the smaller importance of
equity markets and the reliance on outside capital, highly concentrated
ownership structures, e.g. single owners or family ownership, and a reliance on
debt-based finance characterize many medium-sized German firms, the German
Mittelstand (Economist, 2003).
Voice mechanisms not only protect the interests of investors, but also of
employees. German business law offers far-reaching protection against
employee’s dismissal, thereby constraining the effective working of the exit
mechanism on the labor market. More importantly for our discussion,
mandatory labor co-determination through works councils (Betriebsräte) even in
small and medium firms and through employees’ representatives on the
supervisory board of large corporations (Aufsichtsratmitbestimmung)
institutionalizes an explicit stakeholder perspective on corporate governance
(Gerum & Wagner, 1998). Other stakeholder interests, i.e. consumers,
suppliers, communities, are protected by external regulations that complement
the internal voice mechanism.
Because of weak protection of shareholder’s interest through German
corporate law and a weak reliance on control by exit, the “Neuer Markt” was
largely inconsistent with the German mode of corporate governance and must
be considered a short-term experiment that failed to catch on (Vitols, 2004).
For example, corporate reporting was largely inadequate. A survey found that
90 percent of all Neuer Markt companies failed to report properly (Ryan,
2003). Civil cases brought against Neuer Markt companies by shareholders
were largely turned down. After the demise of many Neuer Markt companies,
the German stock exchange chose to close this market segment and not to
strengthen its regulation and supervision. Thus, EM.TV and its corporate
governance problems cited in the introduction were very much an exception,
and not the rule for German media companies.
The Structure of Supervisory Boards

The supervisory board forms the backbone of the German corporate system.
Within legal limits, corporations may alter the competence of the supervisory
board. Most importantly, stock corporation law does not detail for what kinds
of business proposals the supervisory board has veto power and which must be
approved by it. The charters of the corporation specify these so-called
zustimmungspflichtige Geschäfte, business proposals submitted by the managing
board the supervisory board may veto. These could include strategic planning,
strategic initiatives, but also functional policies. The more business proposals
130
must be approved by the supervisory board, the higher is the veto competence
of the supervisory board that allows controlling managers ex ante. Without any
veto power, the supervisory board may control managers’ behavior only ex post,
by exerting its right to elect and dismiss members of the managing board.
Gerum (1991) studied the veto competence and the composition of the
supervisory board of large German corporations and was able to identify four
different empirical types of supervisory boards (see Table 1).
Owners dominate the managing supervisory board. The chairperson of the
supervisory board is a (large) shareholder and the veto competence of the
supervisory board covers a broad range of business proposals, i.e. strategic
planning, strategic initiatives, and functional policies. The managing
supervisory board sets the corporate strategy of the firm and controls the
corporation’s managers ex ante. This type could be found in 13 percent of large
private German stock corporations. The controlling supervisory board represents
the traditional division of labor as set out in german stock corporation law.
Shareholders dominate the supervisory board and while being able to control
the managing board ex post, the corporate strategy is devised by hired
managers. 23 percent of large private German stock corporations correspond to
this model. In the strategic control supervisory board and the representative
supervisory board, non-shareholders dominate the supervisory board. Despite
shareholders being in a minority and the chairperson being a non-shareholder,
the strategic control supervisory board may restrict managerial behavior, because
it has the potential to control ex ante the setting of corporate strategy by
vetoing business proposals put forward by the managing board. This type was
found in 37 percent of the corporations studied. The representative supervisory
board (27 percent) is largely an instrument of the managing board to strengthen
business ties with clients, policy makers, and other relevant interest groups.
Thus, the representative supervisory board often fails to align managerial
behavior with the interest of shareholders.
Table 1. Types of German Supervisory Boards

Veto Competence
high low
Board Composition
managing supervisory board controlling supervisory board
Shareholder dominated (13%) (23%)
Non-shareholder dominated strategic control supervisory representative supervisory
board board
(37%) (27%)
Source: Gerum, 1991, p. 729
Corporate Governance of German Media Companies

Obviously, the outlined voice-based system shapes the corporate governance of
German media companies, but there exist additional distinctive features that
131
only apply for media companies. First, from an economic point of view, owners
of media companies potentially are not only motivated by pecuniary gains (e.g.
profits) but derive non-pecuniary gains from majority equity positions in media
companies, because they offer the potential to influence the public opinion on
political and cultural issues (Demsetz & Lehn, 1985). We shall term these non-
pecuniary gains the ‘publishing motive’ of owners. Ideally, corporate
governance of media companies thus not only protects the pecuniary gains of
owners, but also their publishing interests as well. The publishing motive has
important ramifications for the economic and legal status of media companies
in Germany. Thus, ceteris paribus, media companies tend to have higher levels
of ownership concentration than other firms (Gedajlovic, 1993).
Legal Status of Media Companies

Furthermore, German constitutional law protects the publishing motive of
owners (freedom of speech, freedom of the press), with important legal
consequences for labor co-determination. German companies, which
predominantly publish information and opinions, are exempted from labor co-
determination on the supervisory board. The rights of works councils are also
7
limited. These are the so-called ‘biased firms’ (Tendenzunternehmen) , a special
legal status that was created to protect the owner’s publishing motive. A key
feature of the German corporate governance system therefore does not apply to
many media companies. For example, labor co-determination on the
supervisory board does not apply to Axel Springer Verlag, Germany’s second
largest media company. One exception is Schlott Gruppe AG. Schlott is mainly
active in printing and direct marketing and is therefore not considered a biased
firm, since its main concern is not publishing. Half of Schlott’s members on the
supervisory board are employees’ representatives. Bertelsmann is not forced to
appoint employees’ representatives to the supervisory board by German
corporate law. Reflecting its cooperative corporate culture, three out of 12
members are employees. In addition, one member represents the interests of
Bertelsmann’s lower-level managers that are not members of the managing
board (the so-called leitende Angestellte).
Furthermore, the publishing motive shapes the regulation of media
companies. According to German legislators and judges, freedom of speech
requires a diversity of opinions to protect the interests of consumers. High
concentration of media markets in the hands of a few publishers is seen as
problematic, because it restricts the diversity of opinions in the market place.
To protect the interests of consumers, the German competition law specifically
regulates mergers and acquisitions of media companies to prevent the
7
Tendenzunternehmen is a name given to enterprises and establishments, which directly serve political,
associational, religious, scientific, educational or charitable aims. Although in Article 8(3) of the official
English text of Council Directive 94/45/EC on European Works Councils these are described as
“undertakings…which pursue directly and essentially the aim of ideological guidance with respect to
information and the expression of opinions”, no real equivalent of the term exists in English.
132
establishment of dominating market positions (Pressefusionsgesetz).

Furthermore, among a plethora of other regulations, TV broadcasting
8
companies may not gain market shares higher than 25 percent. This regulation
limits the growth of the leading German TV broadcasting company RTL, a
Bertelsmann subsidiary. The market structure of the TV broadcasting industry
is shaped by the existence of publicly owned broadcasting stations that compete
with private TV stations. Their aim is to preserve the diversity of opinions and
provide free access to information to all consumers. They are financed by
mandatory fees and controlled by special supervisory bodies that include
representatives from many interest groups, i.e. political parties, the church,
education, cultural system, etc.
Ownership Structures of German Media Companies

Ever since Berle and Means’ (1932) seminal study, the separation of ownership
and control in managing firms has been at the center of debate on corporate
governance. A firm is considered manager-controlled if ownership is widely
dispersed and none of the owners therefore has an incentive to exert control
rights over the hired managers. This is assumed to be the case if none of the
stockholders holds a blocking minority. According to German stock
corporation law, ownership of 25.01 percent of equity constitutes a blocking
minority in the general meeting of stockholders. The blocking minority gives its
(ultimate) individual owner sufficient incentives to actively control managers
(Demsetz & Lehn, 1985). Thus, firms with smaller shareholders are considered
to be manager-controlled.
9
Based on our analysis of the 100 largest German media companies , 67
percent must be considered owner-controlled. 33 percent can be classified as
managerial firms, because none of the owners holds more than 25 percent of
the equity (see Table 2). A closer examination reveals that this figure overstates
the problem of the separation of ownership and control in the German media
industry. Only one of the ten largest private media companies is manager-
controlled. Owners control the five largest publishers of newspapers (Sjurts,
2002). The four largest magazine publishers, with a combined market share of
nearly 60 percent, are controlled by owners (Sjurts, 2002). Together with
publicly owned radio stations, owner-controlled firms also dominate the radio
broadcasting market. The German TV broadcasting market is shaped by both
owner-controlled private firms and publicly owned TV broadcasting stations
(Sjurts, 2002). The later must be considered manager-controlled. With the
exception of Premiere, Germany’s leading Pay-TV company, owners control all
privately held TV stations (Sjurts, 2002; KEK, 2004)
8
This is regulated in the Rundfunkstaatsvertrag that liberalized the German TV broadcasting industry in the
1980s.
9
The selection of the 100 largest media companies is based on Horizont (2004). The size of the firm was
measured by annual revenues in 2003.
133
Table 2. Ownership Structures of the 100 Largest German Media Companies
Category Description Number of

firms
Owner-controlled firms Largest owner > 25% of equity 67
Manager-controlled firms Largest owner < 25% of equity 33
Institutional investor-controlled Largest owner = institutional investor 3
Listed stock corporation Shares publicly traded 4
Subsidiaries of foreign firm Largest owner non-German firm 14
Moreover, the number of manager-controlled firms further decreases if we look

at the corporate governance structures of the German media companies. Many
of the manager-controlled firms are publicly owned.
Corporate Governance Structure of German Media Companies

To analyze corporate governance structures of media companies, we develop a
simple taxonomy that allows capturing the variety of legal structures of firms
and the influence of owners on management. According to the property rights
theory, legal corporate governance structures may be differentiated by how
planning- and decision rights, income rights, and disposal rights are allocated to
different stakeholder groups. Table 3 shows the types of corporate governance
structures that are relevant for our discussion.
Table 3. Corporate Governance Structures of Media Companies
Corporate Planning and Residual income Disposal rights No. of

10
governance decision rights rights firms
Capitalist (owner- Owners Owners Owners 67
controlled) firm
Managerial firm Owners Owners Owners 33
Managers
Foundation Founders Trust beneficiaries Trust beneficiaries 6
Trustees
Co-determined firm Owners Owners Owners 4
Managers
Employees
Cooperative Members Members Members 1
Managers
Public corporation General public Government Government 3
Managers
Incorporated public- General public General public General public 11
law institution Managers Managers Government
10
Because multiple entries are possible for an individual firm, the total is higher than the sample.
134
(1) Capitalist firm. The capitalist firm represents the classical form of private
enterprise. All residual rights remain in the hand of (dominant) owners. In
media companies, the publisher owns the firm and decides on all important
business decisions, even if hired managers take care of day-to-day business. As
we have already shown above, 67 percent of all large German media companies
are owner-controlled, because a single owner holds a blocking minority.
Furthermore, 40 percent of the 100 largest German media firms may be
classified as entrepreneurial firms. In the entrepreneurial firm, the publisher is
owner and manager. Since owners, managers, and publisher are the same
person, the classical problem of corporate governance, the separation of
ownership and control, is non-existent in the entrepreneurial firm.
(2) Managerial firm. In the managerial firm, professional managers exert the
planning and decision rights on behalf of the owners, while income and
disposal remain in the hand of owners. 33 percent of the studied German
media companies are managerial firms, but only ten companies may be
considered classic cases of the managerial firm, because the other 19 represent
special constellations. Four of the managerial firms are controlled by a
foundation, one by a cooperative, three by public corporations, and eleven
managerial firms are incorporated public-law institutions. These corporate
governance structures are discussed below. Furthermore, four managerial firms
are owned by non-profit organizations like the Catholic Church or the Social
Democratic Party (SPD), Germany’s ruling political party.
(3) Foundation. Foundations control six of the largest German media

companies. A board of trustees that is appointed by the initial founder manages
a foundation, while additional members later join through cooptation. The
founder also names the trust beneficiaries. Because planning and decision rights
often end up in the hands of hired managers, and not in the hand of trust
beneficiaries, many foundations are manager-controlled, even if additional
institutions like a supervisory board or committees exist. This applies to four of
the studied companies. Two owner-controlled foundations (Bertelsmann,
Cornelsen) are expectations to this logic, the most important one being
Bertelsmann. The Bertelsmann Foundation controls 57.6 percent of
Bertelsmann AG, with the still living founder, Reinhard Mohn, and his wife,
Liz Mohn, being key members of the foundation’s board of trustees. Moreover,
the Mohn family holds directly 17.3 percent of Bertelsmann AG’s equity. The
Bertelsmann Verwaltungsgesellschaft, a limited liability company, manages the
capital stakes of the Mohn family and the Bertelsmann Foundation, with Liz
Mohn being the chairwoman. Lastly, she sits on the Bertelsmann AG’s
supervisory board. Taken together, these institutions guarantee the effective
control of Bertelsmann AG’s top management by the Mohn family and
Bertelsmann can therefore be considered owner-controlled.
135
(4) Co-determined firm. Because of the special legal status of media firms as
“biased firms”, co-determined companies are the exception in the German
media industry. Schlott Gruppe and Cinemaxx are the only German media
corporations with a co-determined supervisory board (according to Germany’s
core co-determination law, the Mitbestimmungsgesetz 1976). In both cases, the
legal status of the ‘biased firm’ does not apply, because Schlott’s main concerns
are printing and direct marketing, and Cinemaxx primarily operates a nation-
wide chain of movie theaters. Another exception is Bertelsmann that voluntarily
implemented co-determination on the supervisory board. Furthermore, Spiegel
Verlagsgruppe may also be considered as a co-determined company. The
employee-owned KG Beteiligung Spiegel-Mitarbeiter holds 49.5 percent of
equity, thereby institutionalizing employees’ participation in strategic business
affairs.
(5) Cooperative. While small cooperatives are usually governed by their

members, large cooperatives rely on hired managers to exercise planning and
decision rights and are therefore manager-controlled. Only one of the 100
largest German media companies is a manager-controlled cooperative,
Deutscher Genossenschafts-Verlag. The company is owned by German bank
cooperatives.
(6) Public corporation. Public corporations control three of Germany’s largest

media companies. A public firm must also be considered manager-controlled,
with managers exercising the planning and decision rights. Ownership of public
corporations is, by its very nature, widely dispersed, because the owners are
municipalities, the German Länder (states), or the federal government.
(7) Incorporated public-law institution. Eleven media firms have the legal status
of incorporated public-law institution. These are active in the TV broadcasting
and in the radio industry. Because of dispersed ownership—the general public
is the owner—they must be classified as manager-controlled. Special
committees supervise the management of the incorporated public-law
institutions, with members coming from a wide range of interest groups.
The Impact of Corporate Strategy on Corporate Governance of

Media Companies: Theory and Application
While much of the literature asserts a link between corporate governance and
managerial decision-making, its impact on corporate strategy—as one of its
outcomes—seems to be far less appreciated. In this section, we provide a model
that highlights the link between corporate strategy and its governance structure
for German companies. The core idea is that the chosen strategy shapes the
composition and competences of supervisory board. After outlining the general
model, we apply it to the case of German media companies.
136
Corporate Strategy and the Structure of the Supervisory Board:

An Empirical Model
Earlier we showed that different empirical types of supervisory boards exist for
German corporations in general. This typology may be readily applied to
German media corporations as well. What is striking about these four types is
that their emergence is only weakly explained by the ownership structures of the
corporations. This runs counter to much of the conventional wisdom in the
corporate governance literature that asserts a strong influence of ownership
structures on board structures and corporate strategy (i.e., Amihud & Lev,
1999). While corporations with dispersed ownership structures are more likely
to have a non-shareholder dominated supervisory board, the type of supervisory
board is predominantly explained by the corporate strategy pursued by the firm.
With increasing diversification and geographical expansion, the composition
and veto competence of the supervisory board are adapted to meet new strategic
opportunities and threats (Gerum, 1995). These organizational dynamics
highlight the interplay between corporate governance and corporate strategy.
The national corporate governance system provides the legal framework for
firms. Within these legal restrictions, the corporate governance of an individual
firm may be adapted to the specific needs of the chosen strategy.
A managing supervisory board is chosen if hired managers are employed to
take care of day-to-day business, but the owners are competent and willing to
direct the business policy of the firm. Usually, the owner is also the founder of
the firm, and this type of supervisory board is prevalent for firms in the early
stages of corporate evolution and especially for single-product or dominant
product firms.
The controlling supervisory board is prevalent in more diversified owner-
dominated firms. With corporate growth and especially the expansion into new
regional markets (geographical diversification) and the diversification into
related industries, new managerial competencies are needed to manage the
corporate strategy of the firm. Thus, owners can no longer effectively evaluate
strategic initiatives and have to focus on controlling the managing board ex
post. Therefore, the veto competence of the supervisory board changes towards
a controlling supervisory board to account for the new situation.
A representative supervisory board reflects growing diversification and a more
demanding business environment. The non-shareholder dominated supervisory
board allows the inclusion of advisors to consult the managing board in its
decision-making process. Moreover, the composition of the supervisory board
follows the need to stabilize relationships with important suppliers, customers,
financiers, and politicians (Pfeffer & Salancik, 1978). The representative
supervisory board thereby becomes more effective in implementing corporate
strategy, but it comes at the price of a decreased control of the managing board.
In the case of increasing related and unrelated diversification, a strategic
control supervisory board becomes more effective. The supervisory board thereby
becomes an integral part of the strategic control process of the firm. Since
137
strategic control is, fundamentally, ex ante control, the supervisory board is well
endowed with veto competence to carry out this task, thereby taking an active
part in shaping corporate strategy. In an owner-controlled corporation, the
dominant owner initiates the introduction of a strategic control supervisory
board to take account of a more demanding environment. They voluntarily give
up seats in the supervisory board to make room for experts, i.e. business
consults, CEOs from other industries, or academic experts. In manager-
controlled corporations, the managing board influences board composition
through cooptation.
Supervisory Boards of German Media Firms

These types of supervisory boards may be readily applied to German media
firms. Even if the typology was devised for the German stock corporation, it is
applicable to other legal structures of the firm as well, because one can identify
equivalent controlling bodies in other legal forms of the firm that accomplish
the tasks of the stock corporation’s supervisory board.
In contrast to the stock corporation, the type of the supervisory board in
other firms is not only influenced by corporate strategy, but also by its legal
structure. The non-corporations typically pursue a single-product or a
dominant-product strategy. Due to the restricted access to equity markets and
the limited management capacity, the non-corporations usually do not have the
financial or managerial resources to diversify into related industries or expand
into new geographical markets. The owner-controlled private firm, e.g. different
forms of partnerships, therefore corresponds to the managing supervisory board.
Because owners manage the firm, they can control ex ante hired managers in all
business matters. The same logic applies to owner-controlled limited liability
companies. In limited companies, owners directly control managers ex ante
through their all-encompassing influence in the stockholder’s meeting. In
addition, a manager-controlled private or limited company usually also
corresponds to the managing supervisory board, because the company meeting,
despite its dispersed ownership, still has the potential to control managers ex
ante. 76 percent of all German media firms studied are either a private or a
limited liability company (see Table 4). The same analysis also applies to the
single cooperative in our sample. Furthermore, eleven media companies are
incorporated public-law institutions. Different interest groups dominate the
supervisory committees, and their competence structure corresponds to the
strategic control supervisory board of a private corporation.
As we have discussed before, the type of a stock corporation’s supervisory
board cannot be readily discerned by analyzing stock corporation law. Our (on-
going) analysis of the supervisory boards’ composition and veto competence of
12 stock corporations in our sample shows that six corporations chose a
managing supervisory board, three the representative type, and three
supervisory boards correspond to the strategic control model. Overall, German
media companies are governed by managing supervisory boards. This type
138
Table 4. Legal Structures and Type of Supervisory Board
Veto Competence
high low
Board Composition
Shareholder dominated Managing supervisory board Controlling supervisory
Private firm (50) board
Limited liability company (26)
Cooperative (1)
Stock corporations (6)
Non-shareholder dominated Strategic control supervisory Representative supervisory
board board
Incorporated public-law Stock corporations (3)
institutions (11)
Stock corporations (3)
applies to 83 percent, thereby ensuring the effective ex ante control of managers

by owners. Additionally, eleven incorporated public-law institutions and three
stock corporations display a strategic control supervisory board. Managers are
controlled ex ante by a supervisory board dominated by non-shareholders.
Table 4 provides a summary of the different legal structures of media firms and
its corresponding type of supervisory board.
To trace the link between corporate strategy and the corporate governance
of the individual firm, we studied the stock corporations in greater detail. The
following Table 5 lists the type of supervisory board for German stock
corporations in the sample.
Table 5. Supervisory Boards of German Stock Corporations
Veto Competence
high low
Board Composition
Shareholder dominated Managing supervisory board Controlling supervisory
(1) ProSieben Sat1 board
(2) Ravensburger
(3) Bremer Tageszeitung
(4) Home Shopping Europe
(5) IDG
(6) Euvia Media
Non-shareholder dominated Strategic control supervisory Representative supervisory
board board
(10) Bertelsmann (7) Schlott Gruppe
(11) Springer (8) Cinemaxx
(12) VIVA Media (9) Wall
139
Managing Supervisory Board

(1) ProSieben Sat1 focuses on the German TV broadcasting industry and can be
considered a dominant product firm. Besides licensing TV broadcasting rights,
ProSieben Sat1 owns four of Germany’s leading TV channels (Pro7, Sat1,
Kabel 1, n-24). It also has a controlling stake in Euvia Media AG & Co. KG,
which also operates a TV channel (Neun Live). ProSieben Sat1’s supervisory
board is a reflection of its dominant-product strategy. The board exclusively
consists of shareholder, with ProSieben Sat1’s main stockholder, Saban Capital
Group, holding the positions of chairman and vice chairman. Because Saban is
mainly active in the media industry, its representatives are competent to decide
the corporate strategy of the corporation. The charters of ProSieben Sat1 also
establish several committees that support the supervisory board in its decision-
making process. The corporation’s managing supervisory board is therefore well
equipped to set the corporate strategy of the firm and to control managers ex
ante.
(2) Ravensburger is a dominant-product firm that is mainly active in the

publishing of children’s books and boardgames. Ravensburger’s only
stockholder, the Maier family, dominates the supervisory board. The chair is
Otto Julius Maier, the former CEO of the corporation. The supervisory board’s
veto competence is high, constituting a managing supervisory board.
(3) Bremer Tageszeitungen AG is a single-product firm in the local newspaper

publishing industry, but also holds small capital stakes in two radio companies.
Its supervisory board is dominated by Hackmack, Meyer and Co., a partnership
that is the only stockholder.
(4), (5), (6) Home Shopping Europe, IDG, and Euvia are all subsidiaries of other
corporations and all pursue a single-product strategy. Home Shopping Europe
AG is a subsidiary of Germany’s leading mail order company Quelle (10.1
percent of equity) and HSN Homeshopping Networks (89.9). The firm’s single
business (single-product firm) is the operation of HSE 24, a shopping channel.
IDG Communications Verlag is a fully owned subsidiary of IDG, a magazine
publisher based in the USA. Euvia Media is owned by HOT Networks (48.6
percent) and ProSieben Sat1 (48.4 percent). Christiane von Salm, Euvia’s
CEO, holds the remaining three percent of equity. Being single-product firms
and subsidiaries, all three firms are governed by managing supervisory boards.
Representative Supervisory Board

(7) Schlott Gruppe is a related diversifier, with main operations in printing and
direct marketing. The corporation is manager-controlled, with two institutional
investors being the largest stockholders. The co-determined supervisory board is
dominated by non-shareholders and has only a limited competence to veto
140
business proposals. Schlott Gruppe consequently features a representative

supervisory board to meet the demands of its diversified businesses.
(8), (9) Cinemaxx and Wall are two interesting cases, because both firms are
managed by CEOs who are the principal owners. Moreover, both corporations
are single-product firms: Cinemaxx AG operates a national chain of movie
theaters, while Wall’s business is street furniture. Despite their focused
corporate strategies, both have chosen to implement a representative supervisory
board to enlarge their management capacities. The separation of ownership and
control does not exist, since the principal owners are CEOs, so there is no need
to tightly control the managing board. Thus, the owners were free to choose a
representative supervisory board to stabilize business relations, without the
associated costs of a less effective control of managers.
Strategic Control Supervisory Board

(10) Bertelsmann, as Germany’s largest media corporation and Germany’s only
global player in international media markets, is controlled by the Mohn family
who holds 75 percent of the capital. Groupe Bruxelles Lambert (GBL), with 25
percent, is the second stockholder. Despite this highly concentrated ownership
structure, Bertelsmann’s supervisory board is dominated by non-shareholders.
While Mohn family and GBL both hold seats on the supervisory board, the
chairman and the vice-chairman are both non-shareholders. The charter of the
corporation specifies a broad range of business matters that the supervisory can
veto. Bertelsmann’s supervisory board is therefore considered to be of the
strategic control type. This can be explained by Bertelsmann’s diversified
activities in related international media industries. Bertelsmann and its
subsidiaries is active in the international book, newspaper, magazine, and music
publishing business, the TV and radio broadcasting industry, and in Internet
media (Sjurts 2004). Bertelsmann’s strategic control supervisory board accounts
for the increased complexity and dynamics of corporate activities by allowing
for the ex ante control of managers not only by owners, but also by non-
shareholders, creditors, and employees.
(11) Axel Springer Verlag is a diversified media corporation, with its main
business operations in the magazine and newspaper publishing, TV production,
and Internet media. During the last decade, Springer has expanded its
operations into Eastern Europe (Sjurts, 2002). Furthermore, Springer holds
minority stakes in TV broadcasting companies and in radio stations. Principal
owner of Springer is the Springer family, holding 60 percent of the
corporation’s equity. Like Bertelsmann, its supervisory board is not dominated
by stockholders. While the two largest stockholders (Springer family, Hellman
& Friedman) hold seats on the supervisory board, it is dominated by non-
shareholders to extend Springer’s management capacity and its ability to
stabilize business relations. While Friede Springer is the vice chairwoman, the
141
chairman is a non-shareholder. The supervisory board has veto competences on

a wide range of business proposals. It is therefore of the strategic control type.
(12) Viva Media AG operates Germany’s leading TV channels for music videos
and, through its subsidiaries, produces entertainment TV shows. The firm can
be considered a related diversifier. Turner Broadcasting owns a controlling stake
of 30.6 percent of equity, with Vivendi’s Universal International Music holding
11
15.3 percent. The corporation can therefore be considered manager-
controlled, because both Turner and Vivendi are managerial firms. Its
supervisory board corresponds to the strategic control type. While half of the
supervisory board consists of shareholder representatives, the chairman and the
vice-chairman are both non-shareholders.
Controlling Supervisory Board

Interestingly, none of the German stock corporation has chosen a controlling
supervisory board. One reason, which is supported by the empirical analysis of
large German stock corporations by Gerum (1995), could be that the
representative supervisory board offers advantages over the controlling
supervisory board, while both share the same core weakness, the exclusive
control of managers’ decision-making ex post. Compared to the controlling
supervisory board, the representative supervisory offers the opportunity to aid
the implementation of corporate strategy by stabilizing business relationships
12
with suppliers, customers, and other stakeholders. Furthermore, non-
shareholders like consultants, lawyers, or academics may advise and support the
managing board in the strategic planning process, without having any formal
veto competence. For these two reasons, it could be in the interest of large
shareholders to initiate the switch from a controlling supervisory board to the
representative type.
Conclusions
The purpose of this paper was two-fold. Firstly, we provided an overview of
ownership structures of the 100 largest German media companies. As it became
clear, the vast majority of private media firms in Germany are owner-
controlled. The high ownership concentration of German media companies can
be explained by two disparate factors. Owners gain a non-pecuniary benefit
from controlling a media firm (the “publishing motive”). Furthermore,
Germany’s system of corporate governance, with its reliance on external
finance, tends to reinforce and preserve ownership concentration. The Berle
11
Viacom has agreed to purchase 75.6 percent of Viva’s capital by the end of the year. Germany’s regulatory
bodies must still approve the acquisition.
12
An/Jin (2004) provide some empirical support for this hypothesis. They studied the board composition of
13 US-American newspaper corporations and concluded that interlocking directorates are an important
instrument to stabilize ties with key resource owners.
142
and Means problem of the separation of ownership and control therefore is only
of small relevance for the corporate governance of German media companies.
Secondly, we tried to establish a link between corporate governance and
corporate strategy. The corporate governance of the individual firm largely
follows the chosen corporate strategy. As we have shown, the corporate strategy
explains both the legal structure and the type of the supervisory board of
German media companies. Remarkably, corporate strategy, and not the
ownership structure, explains the composition and the veto competence of a
firm’s supervisory board.
A shortcoming of our analysis is that we have not provided a detailed
discussion of the influence of the corporate governance system on corporate
strategy. The corporate governance system provides the framework for
formulating corporate strategy and certainly does influence the strategic
decision-making process. The core mechanism for conflict resolution—exit,
voice, or loyalty—may influence not only how strategies are selected, but also
what kinds of corporate strategies emerge (Nooteboom, 1999). Furthermore, as
Porter (1992) has argued more than a decade ago, corporate strategy crucially
depends on the mode of finance and the access to capital markets. For example,
an exit-based corporate governance system with easy access to capital markets
facilitates mergers and acquisitions via stock swaps, but also the financing of
radical product innovations via venture capital. On the other hand, a bank-
based corporate governance system, with its reliance on bank-mediated credits,
might hamper corporate growth through mergers and acquisitions, but could be
very effective in providing sustained financing for incremental innovations or
long-term projects. As we have shown in the description of the German
corporate governance system, corporate governance systems also differ in the
ways the interests of various stakeholder groups are taken into consideration.
Through labor co-determination, the German corporate governance explicitly
adopts a stakeholder perspective on business policy that influences how strategic
options are evaluated and implemented. Thus, the corporate governance system
influences the strategic management that in turn shapes the governance of the
individual firm. This crucial link between these two different levels of corporate
governance and corporate strategy has received only very limited attention in
the literature on corporate governance. We feel this is a major shortcoming that
should provide fertile grounds for future research.
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Rupert Murdoch and BSkyB
Risky Business: Rupert Murdoch and BSkyB’s

Architecture of Accountability
Ian Weber
Recent corporate failures in the United States and the United Kingdom have
placed immense pressure on organizations to strengthen corporate governance
systems and standards. Central to these governance processes is the systematic
re-appraisal of architecture of accountability, which provides structures and
processes to ensure companies are managed in the interests of their owners.
Both the United States and United Kingdom have attempted to reform
corporate governance systems through the Sarbanes-Oxley Act (2002a, b) and
the updated Combined Code on Corporate Governance (2003) as a way to restore
investor confidence in the capital market system.
For the United Kingdom, the first test of the updated Combined Code came
within four months of the release of the Higgs Report (2003), which focused
on ways to strengthen the corporate governance system by clarifying roles and
improving the effectiveness of non-executive directors within public listed
companies. The appointment of 30-year-old James Murdoch as chief executive
of United Kingdom blue chip satellite television broadcaster British Sky
Broadcasting (BSkyB) raised important questions of the Higgs’
recommendations. These questions related to the credibility of the selection
process undertaken by BSkyB in appointing James Murdoch and family
relationship with the Chairman Rupert Murdoch who controls 35.4% of
BSkyB through News Corporation, one of the world’s largest media empires,
where Murdoch Snr. is also Chairman and the largest shareholder with 31% of
the voting stock.
Critics of the decision, including some of the United Kingdom’s largest
institutional investors, suggested the appointment of son James was
“indefensible,” citing director independence and the selection process as major
weaknesses in corporate governance at BSkyB (A family affair, 2003: 13).
However, Rupert Murdoch defended the decision, arguing that BSkyB had
“clear and comprehensive” corporate governance guidelines that were followed.
As Murdoch suggests, “our corporate governance is a model to everybody … I
challenge you to find anything wrong with the corporate governance”
(Thomson, 2003). This chapter explores corporate governance issues
surrounding BSkyB’s controversial chief executive appointment and critically
examines the relationship between these issues, family-run public companies
and risk management.
147
News Corporation and BSkyB: A Family Affair

News Corporation established itself as the complete global television operation
with the purchase of controlling interests in the United States-based satellite
television company DirecTV in early 2004. Capturing a 34% stake in
DirecTV, which boasts 12 million subscribers, marked a pivotal turn in
Murdoch’s 50-year rise from single newspaper owner in Australia to a truly
global media baron (Grover and Lowry, 2004). Murdoch now oversees a media
empire that generates $30 billion a year in revenues (Gunther, 2003: 30) and
reaches out to every corner of the world. In addition to the United States-based
assets of Direct-TV, Twentieth Century Fox Studio, Fox Network and 35
television stations, News Corporation has established a worldwide network of
satellite television distribution in the United Kingdom (BSkyB), Italy (Stream),
Asia (Star TV), Australia (Foxtel), Latin America (Sky-Tel), as well as swathes
of the Middle East (Gunther, 2003: 32).
One has to only look to the United Kingdom to see how Rupert Murdoch
has used his trifecta of pricing power, programming clout, and indifference to
losses to establish News Corporation’s satellite television operations as the pre-
eminent program provider within key markets around the world. Murdoch
began his British television assault in 1989 with four channels and films from
only half the Hollywood studios, eventually taking a 35.4% controlling interest
in BSkyB. He applied his favored, though risky, business strategy of spending
heavily and absorbing short-term loses for long-term market position, at one
point spending £1 billion to roll out digital set-top decoder boxes in the United
Kingdom. BSkyB offers viewers more than 400 channels with the ability to
shop or gamble over the television.
The company’s aggressive positioning in the market placed pressure on rival
cable television operators, forcing one to liquidate and the other two into
financial restructurings. Cable firms NTL and Telewest are both mired in debt
and neutered, while ITV continues its slow recovery from the collapse of its
ITV Digital Platform (Hodgson, 2004). The cable companies did not help
themselves by spending lavishly in the face of Murdoch’s media machine, which
used its stable of newspapers, including The Times of London, to heavily
promote BSkyB (Weber and Evans, 2002). The move proved a marketing
success with British television viewers flocking to the satellite broadcaster. As of
August 2004, BSkyB has more than 7 million subscribers, or approximately
30% of Britain’s 25 million TV homes (Grover and Lowry, 2004).
Rupert Murdoch’s success in establishing BSkyB as a blue chip investment
company over the past 15 years has attracted and retained some the United
Kingdom’s main institutional investors. What concerns critics, though, is
Murdoch’s willingness to use his vast media outlets to pursue personal agendas,
whether politically conservative causes or his own family business interests.
Murdoch’s family company, Cruden Investments, holds 19% of News
Corporation’s equity and 31% of shareholder voting rights. Outside
shareholders generally own the non-voting, “preferred,” shares, while Murdoch
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owns a major portion of “ordinary” shares, which act as extraordinary shares

because they carry added voting rights (Higgins, 2003).
13
As a second-generation media scion himself, Rupert Murdoch once openly
promoted his sons Lachlan and James as the rightful successors to his family
media empire. However, in the new era of corporate governance, defined by
processes to ensure accountability, Murdoch Snr. has become more circumspect
over time about appointing his eldest son Lachlan to the positions of Chairman
and Chief Executive Officer, suggesting News Corporation’s Board would play
a key role in such decisions. However, the appointment of James at BSkyB,
becoming the youngest chief executive in British corporate history, rekindled
talk of nepotism within News Corporation. James’s progression up the
corporate ladder has been meteoric, moving from a student newspaper editor at
Harvard to chairman of the pan-Asian satellite television operation Star TV,
which is owned by News Corporation, in less than a decade. During his five
years at Star TV, James demonstrated his sustainability by reversing estimated
₤60 million a year in losses at the Hong Kong-based broadcaster into a small
profit (Born, 2003). However, some credit must be given to Rupert Murdoch
and News Corporation, which spent millions of dollars to nurture beneficial
relations with China’s leaders.
While critics of the BSkyB appointment focused on James’s relative
inexperience, it points to a broader managerial dilemma, that of how to make
the most of the strengths of family business but avoid the potential pitfalls.
Early research suggested that family-run businesses would operate at the
expense of other shareholders (e.g. Adelphia Communications) or push upon
the company a second-rate scion to manage operations (e.g. Wang
Laboratories). However, other examples illustrate that family investors (e.g.
Duponts and Ford) are more likely to take a long-term view, drawing on well-
established knowledge and expertise to run the family business successfully (A
family affair, 2003: 13). More recent research suggests the latter model, where
companies in which families have influential stakes, appear to be, on average,
good investment opportunities. Anderson and Reeb (2003) argue that large,
publicly traded companies with founding family presence outperform those
with dispersed ownership structures. This situation raises the question of who
monitors the family and alleviates shareholder-shareholder conflicts over
decision-making. In studying the United States-based Standard and Poor’s
(S&P) 500 firms from 1992 to 1999, Anderson and Reeb (2003) found
significant corporate governance differences between family and non-family
firms.
We find that the salient element in limiting family opportunism in US firms
is the relative influence of independent and family directors. Overall, rather
than focusing on divergences in family ownership and control as reported in
13
Rupert Murdoch inherited a financially flagging Australian-based Adelaide Advertiser from his
father Keith Murdoch.
149
East Asian firms, investors in US firms appear to focus on the presence of

independent monitors to counterbalance family influence.
Establishing independent advice within family media firms relates
specifically to how managers and directors employ risk management
contingencies to deal with potential conflict situations. According to Picard
(2004), risk management focuses on understanding risks and recognizing
potential damages or losses that can occur, identifying the scope and nature of
various risks, deciding how to handle them, working to reduce exposure to
risks, and preparing to cope with problems that may arise from such situations.
Reducing a company’s exposure to risk requires “understanding and monitoring
the environment, improving decision making by seeking advice and education,
eliminating or controlling risk through contingency planning, legal protections,
and safety programs” (Picard, 2004: 76). Accordingly, improving knowledge
and acquiring independent advice relates directly to effective corporate
governance, including appointing directors from outside the company
(Neubauer and Lank, 1998). An independent company board can “reduce risk
while enhancing success of entrepreneurial family businesses … This, in turn,
will have a positive influence on the longevity and viability of family businesses”
(Craig and Lindsay, 2002: 476).
Corporate Governance, Investor Concerns and Director

Independence at BSkyB
Rupert Murdoch grappled with corporate governance issues as News
Corporation expanded and diversified throughout the 1980s and 1990s, with
subsequent business practices attracting much skepticism from media critics
(Gunther, 2003: 37). Contributing to this skepticism was the way News
Corporation employed more liberal Australian accounting rules (than the
United States’ GAAP) to its hard-to-value, far-flung assets, which were
embedded in a complicated mix of associated entities, joint ventures and
subsidiaries. Post-Enron, News Corporation has attempted to address these
issues by clarifying the company’s reporting and improving relationships with
investors through its development of more transparent corporate governance
guidelines throughout its diverse global media interests.
In the United Kingdom, BSkyB employs an array of programs and
guidelines as part of the company’s broader corporate responsibility framework,
covering the areas of customers, employees, community, suppliers and
environment. Specifically, BSkyB publishes six documents that outline
“Corporate Governance Policies,” including a Memorandum on Corporate
Governance and Terms of References for Board Standing Committees (BSkyB,
2004a). The company also publishes on its website a Code of Ethics for the chief
executive and chief financial officer of the company. This corporate governance
system also has the added task of meeting the requirements of the Sarbanes-
Oxley Act, as BSkyB is also listed in the United States. Under the Act, BSkyB
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must comply with the Code of Ethics in order to ensure it meets “… best
practice with regards to compliance with the rules and regulations of the US
Securities and Exchange Commission” (BSkyB, 2004a).
In addition to its internal governance system, BSkyB is linked to various
external corporate governance groups. The company is a member of the
Corporate Responsibility Group (CRG), a collective of 50 leading United
Kingdom companies that promote the adoption of social, ethical and
environmentally responsible approaches to business practice and develop
corporate social responsibility initiatives. Linked to this group is the London
Benchmarking Group (LBG), which provides services to improve the
management, measurement and understanding of corporate community
involvement for member companies. BSkyB is also a member of the Corporate
Social Responsibility (CSR) Media Forum, a group of United Kingdom-based
media organizations, which work to develop and promote corporate social
responsibility within the media sector.
BSkyB has also participated in external corporate governance audits. In
2002, the company took part in a Business in the Community (2003) “Corporate
Responsibility Index,” which provides an annual benchmark of how companies
manage, measure and report their corporate responsibility to investors. Business
in the Community annually invites 500 companies comprising FTSE100 and
FTSE250 companies, other non-FTSE listed businesses and sector leaders from
the Dow Jones Sustainability Index to participate in an assessment of their
corporate responsibility initiatives. BSkyB, however, declined an invitation to
participate in the 2003 study. In that same year, BSkyB was included in a
separate study on media corporate governance initiated by MediaGuardian. The
study found that three quarters of United Kingdom media companies,
including BSkyB, failed to comply with guidelines on best practice (Tryhorn,
2003). The findings came as the Higgs’ Report on the role of non-executive
directors was incorporated into the Combined Code on Corporate Governance.
Of the 33 media companies surveyed, just eight met conditions on the
independence of directors and chairman, as well as guidelines on executive pay.
BSkyB was awarded a single star (out of 3) for having a non-executive chairman
in Rupert Murdoch—though he was not considered independent— but failed
on issues of independence of directors on the board and major executive pay
14
issues relating to outgoing chief executive Tony Ball. Further concerns over
the independence of directors were raised when James Murdoch was appointed
to replace Ball in November 2003 at BSkyB’s Annual General Meeting
(Tryhorn, 2003). As one investor group analyst suggested “… the idea of
having a father and son as a chairman and chief executive respectively of a
public company flies in the face of every rule of corporate governance” (Born,
2003). The main concerns, however, go beyond just the appointment of James
and his independence from father Rupert on decisions concerning both BSkyB
14
BSkyB applied restrictions to former chief executive Tony Ball’s £10 million “non-competitive”
arrangement, preventing him from joining another media company for a period of 2 years.
151
and News Corporation. There are the more troubling aspects of lack of
transparency and objectivity in conducting the search for, and selection of, the
chief executive of a publicly limited company.
The appointment of James Murdoch came as no surprise, but the manner in

which it has been done is a disgrace and flies in the face of corporate governance
practices, regulatory bodies and shareholders. There is nothing new about
nepotism. One would have understood if the appointment had just been made
and presented as a fait accompli. Instead, we have seen a hypocritical charade of
a democratic process, with headhunters—whoever they are—and a paper
nomination committee engaged merely to deliver a shortlist of one, beneficiary of
a pre-determined process. (Shah, 2003)
Scottish-based Standard Life Investments (SLI) and Morley Fund

Management—both top 10 shareholders of BSkyB—as well as leading United
Kingdom investor group National Association of Pension Funds (NAPF) and
Association of British Insurers (ABI) voiced concerns over the selection process
employed by BSkyB directors (Johnson, 2003; Bevans, 2003; Litterick, 2003;
Andrews, 2003). Particular criticism was leveled at Lord St John of Fawnsley,
BSkyB’s Senior Non-Executive Director and head of the satellite television
company’s Nomination Committee. ABI, whose members control almost a
fifth of the United Kingdom stock market, issued a “red top” warning over the
re-election of Lord St John to the BSkyB Board. While ABI has a policy of not
explicitly guiding its members on how to vote in annual general meetings, the
“red top” notice is a strong signal that it disapproves of a company’s corporate
governance (Johnson, 2003). One of the main concerns was Lord St John’s
personal friendship with Rupert Murdoch and his length of tenure as a director,
both raising questions of independence in leading the Nomination Committee,
which made the recommendation for chief executive officer at BSkyB. Other
concerns were also raised by ABI and NAPF over Lord St John’s conduct
during the lead up to the appointment of James Murdoch. ABI criticized Lord
St John’s cancellation of a meeting between the two parties in October 2003,
following an initial consultation a month before. The group suggested the
cancellation went against the spirit of Higgs’ updated guidelines for corporate
governance (Griffiths, 2003). NAPF also accused Lord St John of failing to
anticipate legitimate investor objections to the appointment of James Murdoch
and adequately communicating these concerns to the BSkyB Board (Warner,
2003).
Murdoch Snr. responded to the criticism by establishing a corporate
governance committee to “review all the relevant codes and statutory
obligations” (Rae, 2003). At the time of the review announcement, the BSkyB
Board was made up of two Executive Directors and 13 Non-Executive
Directors, eight of whom were considered Independent Non-Executive
Directors by the company but not by analysts and investors. The role of the
152
review committee, chaired by Non-Executive Director Lord Wilson of Dinton,

was to assess what changes to the Board were appropriate and the composition
of its committees. Following the internal audit, Lord Wilson recommended the
appointment of at least one more independent non-executive director.
Commenting on the review, Rupert Murdoch suggested that:
The changing corporate governance environment in this country and the

United States imposes increasing burdens on non-executive directors in all
walks of industry. Sky’s corporate governance has been evolving in line with
this changing environment. For example, the company agreed at last year’s
[2002] AGM to amend the Articles of Association so that News Corporation
is now no longer permitted to directly nominate board members. We are
highly sensitive to regulatory requirements and guidelines and we take our
responsibilities in all areas of regulation, including corporate governance,
extremely seriously (Rae, 2003).
The BSkyB review corresponded with broader attempts to strengthen the

United Kingdom’s corporate responsibility system for best practice,
implemented primarily through the Combined Code on Corporate Governance.
The Combined Code began with the Cadbury Code in 1992, and had been
taken forward by the Greenbury, Hampel and Turnbull reports. Both Sir
Robert Smith (2002) and Derek Higgs (2003) launched separate reviews of the
Combined Code. These reviews formed part of the Labour Government’s re-
appraisal of the adequacy of corporate governance in the wake of recent
corporate failures in the United Kingdom and the United States, and one of the
severest bear markets witnessed in recent times. The Higgs’ Report focused
specifically on the effectiveness of non-executive directors, searching for ways to
strengthen the existing governance architecture by increasing corporate
accountability and maximizing sustainable wealth creation. As the Higgs Report
(2003: 11) suggests:
Corporate governance provides architecture of accountability – the structures

and processes to ensure companies are managed in the interests of their
owners. But architecture in itself does not deliver good outcomes. The Review
therefore also focuses on the conditions and behaviours necessary for non-
executive directors to be fully effective.
Within Higgs’ wide-ranging recommendations, a number of key points are

relevant in relation to the criticism leveled at BSkyB over corporate governance
practices. Higgs’ (2003: 6, 9-10, 24, 36) recommendations focused on:
• Board Structures – at least half of the board (excluding the Chairman)

should be “independent.” In so doing, Higgs offered a new definition of
“independence” to replace the multitude of definitions that existed in the
153
previous guidelines. A non-executive director is now regarded as

independent when the board determines that person is independent in
“character and judgement” and there is no relationship or circumstances
that could, or could appear to, affect that person’s judgement. Such
relationships include, but not limited to, a director that has close family
ties with any of the company’s advisors, directors or senior employees,
represents a significant shareholder, or has served on the board for more
than 10 years.
• Division of Executive Powers – the position of Chairman should be
separated from the position of chief executive in order to foster
relationships of trust with the executive and non-executive. A degree of
detachment from the executive can also be valuable in ensuring objective
debate on strategy and other matters.
• Senior Independent Director-shareholders – this director should be
available to all shareholders and should attend regular management
meetings with a range of major shareholders to develop a balanced
understanding of the themes, issues and concerns of shareholders. In
addition, the senior independent director should communicate these
views to the non-executive directors, and, where appropriate, to the
board as a whole.
Changes to the Combined Code were generally considered a positive and

necessary step by both companies and institutional investor groups as a way to
maintain the United Kingdom as one of the leaders in the movement to reform
corporate governance. Most often, the United Kingdom’s corporate governance
systems and standards have been compared to the United States, since both the
updated Combined Code and the Sarbanes-Oxley Act were tabled within 12
months of each other. On the surface, the visible features of United Kingdom
and United States’ companies and their governance appear similar. However,
there are a number of stark differences that exist between the models, especially
in relation to the board of directors, regulation, role of institutional investors
and executive pay.
One of the key differences relates to whether the Chairman and the chief
executive should be combined. Today, 95% of FTSE 100 companies have
separated the two positions, in line with Combined Code guidelines, while the
number of S&P 500 companies to have done so is a distinct minority.
Differences are also found in the area of regulation, particularly in relation to
centralization. While the United States prefers decentralized and checked
power, reflected in the balanced roles of the Securities and Exchange
Commission (SEC), exchange listing rules and state statutes, the United
Kingdom has consolidated almost all public company oversight in the Financial
Service Authority, a super regulator. Moreover, there is no single, recognized
code of best practice in the United States, relying instead on established rule of
law, as found in the Sarbanes-Oxley Act. In contrast, the United Kingdom
154
advocates self-regulation in corporate governance to a much greater degree. The

United Kingdom’s form of corporate governance champions the concept of
“comply or explain”—in which a company either complies with a
recommendation, or if not, explains why. Another key difference is the role of
institutional investors and consensus between companies and shareholders.
United States’ institutions, most notably public pension funds, tend to engage
in adversarial relationships with companies compared to United Kingdom
institutions, employing tactics of voting against management when the need
arises. United Kingdom institutions will employ similar strategies, but to a
vastly different degree and are more reluctant to take a public position. This
situation reflects the role of consensus in the United Kingdom, achieving more
success with behind-the-scenes maneuvering than publicly orchestrated battles.
Finally, the most obvious difference existing between United Kingdom
governance-related issues and the United States is that of executive pay. While
United Kingdom investors differ with United States contempories over
combining chairman/chief executive roles, there is resolute defiance over large
compensation payments in the form of “golden parachutes” or executive
severance agreements. Where such payments are commonplace in the United
States, the United Kingdom has insisted on rolling employment contracts of
not more than a year (Konigsburg, 2003: 34-36).
Risky Business: When Profits Fail to Deliver Market Confidence

The test of BSkyB’s corporate governance architecture came nine months after
the company’s 2003 Annual General Meeting, when James Murdoch released
the first financial results under his leadership. The financial report showed that
DTH (Direct-to-Home) subscribers increased by 81,000, pushing the final
quarter numbers to a total of 7.4 million. Accordingly, BSkyB realized record
profits of ₤600 million, paying a dividend of 3.25 pence per share – the first in
five years (BSkyB, 2004b: 1). Commenting on the financial results, James
Murdoch said:
This has been a year of good progress for BSkyB. We have reported the second
full year of positive earnings since the launch of Sky digital and strong case
generation, confirming that the group is in robust financial health with clear
momentum on which to build for the future. Today’s announcement of new
long-term growth targets and a return of cash to shareholders demonstrate our
confidence in the exciting growth potential of this business and our ongoing
commitment to deliver value to shareholders (BSkyB, 2004b: 2).
Within the report, BSkyB also provided projections of long-term growth and
operating targets. The company predicted the satellite broadcaster would secure
10 million DTH subscribers by 2010, with a promise to return surplus capital
to shareholders in addition to ordinary dividends. The market, however, reacted
155
negatively to BSkyB’s long-term vision, with investors deserting the company,

sending the stock price tumbling 19% on the day the announcement was made
by James Murdoch. Analysts cited weaker-than-expected subscriber additions
(down from expected figures of 200,000 for the period) and a downgrading of
promised 30% profit margins by 2007 as the main causes for the unexpected
sell-off (Szalai, 2004). Added to investor concerns over BSkyB’s position is the
surprise success of Freeview, the low-cost digital television package launched by
15
the BBC and BSkyB, which has secured 3.5 million subscribers (Hodgson,
2004).
Steiner (2004) suggests these concerns contributed to significant credibility
problems for James Murdoch who has had a difficult time rebuilding trust with
investors after a disastrous Annual General Meeting nine months earlier in
which their concerns over his appointment were ignored. At the heart of this
mistrust is BSkyB’s failure to pay adequate attention to Picard’s (2004) risk
management initiatives such as “improving decision making by seeking advice
and education,” which resulted in shareholder-shareholder conflict between
Rupert Murdoch and institutional investors. This conflict relates closely to
Anderson and Reeb’s (2003) findings on the role of independent directors in
family firms. Institutional investors’ claims of nepotism in appointing James
Murdoch cast doubts over the ability of non-executive directors to act
independently of Chairman Rupert Murdoch. As a result, the Combined Code
failed to provide strong architecture of accountability to limit family
opportunism and provide a counterbalance to family influence at BSkyB.
The Combined Code’s inability to guarantee good corporate governance
practices relates to three areas of the Higgs’ Report. First, Higgs recommended
that the position of Chairman of the Board be clearly separate from the role of
chief executive “in order to foster relationships of trust with the executive and
non-executive.” However, investors felt the father-son relationship could
constrain the Board’s decision-making process by concentrating too much
power in the hands of one family, which was extricably linked to the major
shareholder. Such power could potentially limit objective debate when decisions
on the direction of BSkyB conflicted with Rupert Murdoch and News
Corporation’s interests. The potential for this to occur was enough to impact
on long-term investor confidence in BSkyB’s viability, which contributed, in
part, to the sudden sell-off of the company’s shares.
Second, investors were concerned with the perceived level of independence
of non-executive directors on BSkyB’s Board. The Higgs’ Report (2003) defines
a non-executive director as “independent” when “the board determines
[emphasis added by author] that he [sic] is independent in character and
15
Freeview was a joint BBC/BSkyB venture. BSkyB was happy to partner the venture so long as it
thought Freeview posed no serious threat to its own premium service. Freeview, launched in early
2003, offers a cut-down package of basic, non-premium channels without a subscription
(Hodgson, 2004).
156
judgement” and there is “no relationship or circumstance that could, or could

appear [emphasis added by author], to affect his [sic] judgement.” Such
relationships deal specifically with directors with close family ties to company
advisors, directors or senior employees; a significant shareholder; or a director
who has served on the Board for more than 10 years. Investors felt these
guidelines were not followed by BSkyB, suggesting the Board was not
sufficiently independent because directors were too closely linked to either
Rupert Murdoch or his company News Corporation (Buckingham and Tooher,
2004). For example, Senior Non-Executive Director Lord St John, who led the
search for the new chief executive, had served on BSkyB’s Board since the
company was first listed in 1991, exceeding the 10-year guideline. Investors also
felt Lord St John had been appointed by Rupert Murdoch because of his close
friendship with the Chairman and his family, citing his lack of business and
media experience as supporting evidence to the claims. Lord St John’s lack of
experience runs counter to BSkyB’s 2003 Annual Reports and Accounts, which
states that: “Non-Executive Directors of the Company bring a wide range of
experience and expertise to the Company’s affairs” (BSkyB, 2003). Accordingly,
investors cast doubt on Lord St John’s ability to independently perform the key
role of leader of the Nomination Committee, which put James Murdoch
forward as the sole nomination for the position of chief executive. When
Murdoch promised to appoint additional independent directors, one
institutional investor responded:
We have serious corporate governance concerns that these changes do not

appear to address. We have no way of telling whether the selection process has
been robust and objective, as the company has declined to keep us informed
(McDonough, 2003).
Third, investors criticized BSkyB’s efforts to maintain communication with

shareholders leading up to the 2003 Annual General Meeting, and subsequent
appointment of James Murdoch, suggesting the situation ran counter to good
corporate governance under the Combined Code and BSkyB’s own guidelines.
The Higgs’ Report recommended that a Senior Independent Director should
maintain open communication with shareholders through meetings so as to
gain a balanced understanding of the themes, issues and concerns, and then
communicate these to the Board, thus enhancing the quality of decision-
making. BSkyB’s 2003 Annual Reports and Accounts supports this
recommendation, suggesting “the Company is keen to maintain a dialogue with
institutional shareholders in order to ensure that the objectives of both the
company and the shareholders are understood.” However, Lord St John’s
decision to cancel a meeting with key investors to discuss James Murdoch’s
pending appointment raised concerns that the BSkyB Board did not have a
complete understanding of how strongly investors felt about the situation, thus
157
limiting the Board’s ability to make an informed decision on who should

succeed Tony Ball as the chief executive of the company.
These three situations expose how the Combined Code can be exploited
under the self-regulatory “comply and explain” guidelines. Murdoch’s response
to claims of non-compliance to the Combined Code came more in the form of a
challenge than an explanation of the selection process and directors’ behavior,
suggesting investors could go elsewhere if they were unsatisfied with BSkyB’s
decision making (Litterick, 2003). His stance was reinforced by the knowledge
that United Kingdom investors traditionally rely on consensus and behind-the-
scenes maneuvering rather than the publicly orchestrated battles found in the
United States. Given this response, the United Kingdom’s current corporate
governance framework is simply too vague and flexible to adequately deliver
Anderson and Reeb’s (2003) independent monitors as a counterbalance to
family opportunism.
While institutional investors focused on the Combined Code’s inability to
deliver better corporate governance, the situation highlights an even more
interesting development, that of Rupert Murdoch’s preference for operating
within a more stringently controlled United States’ corporate system. A number
of aspects point to this preference, including corporate structures and economic
trends. First, Murdoch clearly prefers the United States-style company board
structure of two executives (chief executive and finance director) and combined
chief executive-Chairman positions (e.g. BSkyB’s father-son executive
relationship), as in the case of the majority of S&P500 companies (Tooher and
Rees, 2003). Second, News Corporation generates almost 80% of its profits and
70% of its revenues from the United States’ market (Schulze, 2004a). Within
the first quarter of the 2004/05 financial year, News Corporation reported an
18% rise in net profits (US$761 million, on consolidated revenues of US$7.4
billion) from its United States’ interests (News Corp posts, 2004). Third,
Murdoch announced in late 2004 that News Corporation would move its
headquarters from Australia to the United States and secure a listing on the
S&P500 Index, which the company believes would trigger more buying of the
company’s stock by United States’ super funds. However, to do so required
Murdoch to implement far-reaching concessions on corporate governance as a
way to first gain initial investor support (Schulze, 2004b) and second secure
approval from the United States’ corporate governance monitoring body
International Shareholder Services (ISS) and the Australian equivalent, the
Australian Council of Superannuation Investors (Schulze, 2004c). In the lead
up to the approval, ISS senior vice-president Patrick McGurn indicated that the
proposal was supported “due to the economic benefit to shareholders, but
further change was required” (Schulze, 2004c). At the top of the list of
corporate governance reforms were board independence issues, succession
planning issues, and communication with shareholders, which, coincidently,
were the same points raised by BSkyB’s institutional investors at the time of
James Murdoch’s appointment. These amendments were designed to provide
158
News Corporation shareholders with more potential to benefit from hostile

takeovers and ensure their voting rights were not eroded by the issue of super
voting shares. As McGurn suggests:
Some people have indicated these could be hollow promises, but our position
is we will give them [News Corporation’s Board] the benefit of the doubt
now, given the strong economic benefits of the transaction. But if they don’t
address them adequately there will be a new forum on these issues at the next
general meeting. We will then be applying our US guidelines and that would
currently lead us to make recommendations against a significant number of
their board directors. By our calculations this board doesn’t have a majority
of independent directors or committees (Schulze, 2004c).
Underlying News Corporation’s profit motive, however, is that the stricter

United States’ corporate governance system fits better with Murdoch’s
approach to business ventures than a self-regulating system, which cannot cope
with his aggressive, risk-taking mentality. Where the United States’ system is
most advantageous is that it starts with the entrepreneurial position of risk
taking by establishing a more flexible position on “best practice,” then allowing
the power of investor lobbying and the legal structure of the Sarbanes-Oxley
Act, the Securities and Exchange Commission (SEC), as well as exchange listing
rules and state statutes to govern a company’s adherence to corporate
governance guidelines. Much of that advantage can be attributed to the United
States’ long history of dealing with family-owned companies. In so doing, the
United States corporate governance system is better positioned to address the
often-competing interests of investors and family where influence and
opportunism are ever present.
Conclusion
The thrust of new Labour reforms of the United Kingdom’s corporate
governance system was to give more power to institutional investors. Armed
with the catchphrase of Architecture of Accountability, Higgs (2003) set out to
reappraise the corporate governance structure to restore investor confidence in
the capital market system in the light of recent corporate failures in the United
Kingdom and the United States. Faced with the first test of the new corporate
governance guidelines, the updated Combined Code failed in its purpose to close
the gap between the public owners of a company and its board. Paradoxically,
investor demands for quicker and higher returns on investment profits has
turned public companies into more ruthless profit-making machines, even at
the expense of the wishes of institutional investors.
Given this situation, the BSkyB case study illustrates how the United
Kingdom’s self-regulating corporate governance system fails to cope with
family-run public media companies that embrace entrepreneurial risk-taking
159
approaches to business. Murdoch is compelled to both look after the public

interests of BSkyB as a major investor and his own personal interests as the head
of a family company. Normally, any resulting conflict of interest between these
dual roles would be addressed by the presence of independent monitors to
counter family influence. However, the decision to place more power in the
hands of investors (including Murdoch) exposed the dangers of the United
Kingdom’s self-regulating system that cannot guarantee the independence of
directors, as well as prevent nepotism and family opportunism. Consequently,
the system creates less, not more, confidence in the capital market system, as
evidenced by the lack of investor support for BSkyB after James Murdoch’s
appointment.
The challenge for the United Kingdom corporate governance system is to
find ways to ensure the presence of independent monitors where a conflict of
interest occurs within the unique situation of family-run public entities. The
BSkyB situation highlights that such companies will not acquiesce to investor
demands unless compelled to do so, as evidenced by the ineffectiveness of
64.6% of BSkyB shareholders to force the company’s Board and Rupert
Murdoch to listen to investor concerns over selection processes, board
independence and division of powers. It is perhaps time to look to other
systems, such as the United States, to find a more effective way to guarantee the
presence of independent monitors through more stringent guidelines rather
than attempting to modify a corporate governance system that essentially places
the onus on the family to self-regulate against its own influence and
opportunism. The most compelling lesson learnt from comparing the United
Kingdom and the United States’ is where to place flexibility in the corporate
governance system.
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164
Conrad Black and Corporate Governance
The Pain of the Obdurate Rump: Conrad Black

and the Flouting of Corporate Governance
Marc Edge
In the face of growing complaints from shareholders in the spring of 2003 that
New York-based Hollinger International Inc. had for years been seriously
mismanaged, company chairman Conrad Black publicly dismissed corporate
governance as a “fad.” He described as “zealots” those investors who called for
corporate governance principles to be instituted in the company he had
founded, which many felt he used his voting control over to run to his own
benefit (Morton, 2003). In 1998, Hollinger ranked as the world’s third-largest
newspaper company, after only News Corp. and Gannett, and included such
titles as the London Daily Telegraph, the Chicago Sun-Times and the Jerusalem
Post, along with Canada’s largest newspaper chain (Jones, 1998: 40). By the fall
of 2003, however, the company was divesting assets rapidly and Black was
forced to defend himself against charges that he and Hollinger International
president David Radler had improperly enriched themselves at the expense of
other shareholders by taking millions of dollars in unauthorized expenses,
“management” fees and “non-compete” payments. Included in the questionable
disbursements was US$8 million paid for a collection of the personal papers of
former U.S. president Franklin Delano Roosevelt, on whom Black was writing
a biography. Never one to back down from a dispute, the Canadian press lord
characterized the dissident shareholders as “corporate governance terrorists”
(Leonard, 2003).
Black has made his disdain for corporate governance well known for many
years. In 1996, while he was in the process of taking over Canada’s oldest and
largest newspaper chain, Southam Inc., Black fought—and won—a celebrated
battle with that company’s independent directors. After the five directors, who
together had served a combined 81 years on Southam’s board, opposed Black’s
plan to break up the former family-owned firm, he described them as an
“obdurate rump.” Black had proposed taking ten of Southam’s smaller dailies
for his Canadian company, Hollinger Inc., in exchange for his 20 percent
ownership of Southam shares. Thwarted in that attempt, Black instead bought
out Southam’s other major shareholder, giving him effective control of the
company with 41 percent of its shares. Black quickly convened a special
meeting of Southam shareholders and used his voting control to oust the
independent directors who had stood in his way. He then dismissed Southam’s
CEO and installed himself as the company’s head without even bothering to
convene a meeting of the company’s reconstituted board of directors (Brehl,
165
1996). One expert called the episode “a dark day for corporate governance in
Canada.” Several of the deposed Southam board members, including some of
Canada’s leading executives, were harsh in their criticism of Black’s new
management regime. “They obviously expected the Southam board to be a
rubber stamp,” said Hugh Hallward, president of Montreal-based Argo
Construction Ltd. Another was even more prophetic. “Radler and Conrad
Black don't believe in a board,” said Ronald Cliff, chairman of B.C. Gas. “They
don't believe in corporate governance” (Ferguson, 1996). Canada’s national
newspaper, the Globe and Mail headlined the brouhaha: “The pain of the
obdurate rump” (Goold, 1996).
In late 2003, as Black embarked on a publicity tour to promote his 1,296-
page biography, Franklin Delano Roosevelt: Champion of Freedom, Hollinger
International announced that he had agreed to resign as its CEO. Black and
Radler had both promised to repay US$7.2 million in unauthorized payments,
the company added. But on December 22, Black invoked his Firth Amendment
rights in refusing to testify at hearings convened by the U.S. Securities and
Exchange Commission (SEC) into the finances of Hollinger International, and
the following week he failed to make the first installment of his promised
repayment of unauthorized fees to Hollinger. In early 2004, Hollinger
International filed a lawsuit against Black, Radler, three other executives, and
companies they control, claiming US$200 million in damages. After selling the
crown jewel of his newspaper holdings, the Telegraph, Black commenced a
lawsuit of his own against Hollinger International in April over disputed stock
options. The following month, Hollinger International increased the amount of
damages it claimed from Black and his co-defendants to $1.25 billion,
including trebled actual losses under U.S. racketeering laws. A press release
issued by the company outlining the legal claim quickly brought a lawsuit in
response from Black, which was filed in Ontario Superior Court, claiming
C$800 million in damages for libel (Burt, 2004).
On August 30, 2004, a 513-page report to the SEC described Hollinger
International under the management of Black and Radler as a “corporate
kleptocracy.” The report by a special committee of Hollinger International
directors detailed what it called a “self-righteous and aggressive looting” of the
company by its controlling shareholders over a period of years. It counted more
than US$400 million it claimed Black and others had appropriated for their
own use between 1997 and 2003, or more than 95 percent of Hollinger
International’s adjusted net income during that period. The claimed abuses
were made possible in large part, according to the report, by a lack of basic
corporate governance safeguards in place at Hollinger International. Seats on
the company’s board of directors had been handed out by Black to members his
circle of social and political associates, including former U.S. Secretary of State
Henry Kissinger. Perhaps the most serious lapse of corporate governance
chronicled in the report involved Hollinger International board member
Richard Perle, a former U.S. Assistant Secretary of Defense. Perle served as the
166
third member of Hollinger International’s executive committee, along with

Black and Radler, but according to the report he admitted not discussing the
documents he signed with the company’s principals and that he “generally did
not even read them or understand the transactions to which they applied”
(Report, 2004: 483).
Black then increased his libel claim against Breeden and senior Hollinger
International directors from C$800 million to more than C$2 billion (Burt,
2004). In October, Black succeeded in a legal challenge to Hollinger
International’s bid to pursue racketeering charges against him when a federal
court judge in Chicago returned the case to state court, thwarting the
company’s bid to recover trebled damages (Kirchgaessner, 2004). The following
month, however, the SEC filed suit against Black and Radler in Chicago,
seeking the return to Hollinger International of US$85 million in “ill-gotten
gains.” The lawsuit also sought to prevent Black from exercising control over
his shares in Hollinger International by having them placed in a voting trust,
and to bar both men from serving as a director of any public company
(Steinberg, 2004).
Regardless of the ultimate outcome of the various legal actions that have
been commenced, however, the case of Hollinger International looms as a
cautionary tale of the perils for media companies of failing to adhere to
standards of corporate governance. It is thus worth examining, despite the
preliminary nature of the established facts, while of course holding in abeyance
any final judgments of wrongdoing.
Background
While he was born into money, Black is fond of pointing out that he began
assembling his newspaper empire before receiving his inheritance. He and
Radler, together with silent partner Peter White, purchased the failing
Sherbrooke Record in their home province of Quebec for C$18,000 in 1969,
cutting its payroll by more than 40 percent almost immediately. Once he
acquired his C$7 million inheritance, Black began to display the takeover
tactics that would gain him notoriety in his native land, eventually gaining
control over assets worth C$4 billion (Newman, 2003). He inherited an
interest in the giant Canadian holding company, Argus Corp., of which he
proceeded to gain control, largely from the widows of its founders. Black then
began selling off the most valuable Argus assets piecemeal. One of his more
controversial moves involved claiming for Argus a C$38-million pension fund
surplus from the Dominion supermarket chain it controlled. An ensuing
lawsuit resulted in a court order that Argus pay the money back, with interest.
Black wrote a column for the Toronto Sun describing the investigative reporters
who followed the story for years as “swarming, grunting masses of jackals”
(Siklos, 1996: 210).
167
Black soon divested most of his non-newspaper holdings and began to

concentrate on assembling a newspaper empire to rival that of his boyhood idol,
William Randolph Hearst. The modest, 15-paper chain of small-city titles he
and Radler assembled during their first decade in the newspaper business,
Sterling Newspapers, proved extremely profitable. By 1973, the modest chain
owned 42 percent by Black was worth an estimated C$20 million (Winter,
1997: 39). The secret of Sterling’s success, Radler revealed in testimony before
the 1980 Canadian Royal Commission on Newspapers hearing, was “the three-
man newsroom, and two of them sell ads” (Black, 1993: 378). But Sterling’s
small size did little to satisfy Black’s lofty ambitions. Using the proceeds of his
sale of Argus divisions, Black entered a high-stakes bidding war in 1980 for
control of F.P. Publications, Canada’s second-largest newspaper chain. F.P.
Publications had briefly grown even larger than Southam in the mid-1960s and
at its height included the Toronto Globe and Mail, Winnipeg Free Press,
Vancouver Sun, Ottawa Journal, and Montreal Star. Black’s main rival for F.P.
Publications, however, turned out to be Canada’s only billionaire, Ken
Thomson, who had inherited the title Lord Thomson of Fleet, along with the
Times of London, from his father Roy in 1976.
Out-bid by Thomson for F.P. Publications, Black then set his sights on
Southam, which by the mid-1980s had become widely held as a public
company. A fourth generation of Southams by then held only an estimated 30
percent of the issued shares in the newspaper chain printer William Southam
had formed in 1897 by adding the Ottawa Citizen to the Hamilton Spectator he
already owned. This diffusion of ownership made the family firm vulnerable to
takeover, and Black was one of the aspiring acquisitors, buying up five percent
of the company’s outstanding shares in 1985. A defensive “share swap” between
Southam and the Torstar Corp., owners of Canada’s largest-circulation daily,
the Toronto Star, ended the takeover speculation at least temporarily, however.
In exchange for a 30-percent interest in the smaller Torstar, Southam gave up
20 percent of its shares in a “near merger” that made its takeover a practical
impossibility (Edge, 2004: 229).
Thus thwarted, Black sold his Southam shares for a profit and turned his
attention elsewhere in his quest for acquisitions. Starting in 1986 with the
purchase of 34 small-town newspapers in the U.S. for $106 million, Black and
Radler built their Hollinger subsidiary American Publishing into a chain of 340
titles over the next decade, investing a further US$302 million in more than
100 purchases in the process. A regular classified ad in the trade magazine
Editor & Publisher attracted buyers, many of whom were encouraged to sell by
changes to U.S. capital gains tax rules. The small-town newspapers Hollinger
acquired became money spinners under the management of Radler, who
became known as the “human chain saw” for the sight-unseen method he once
explained for reducing labor costs at each new publication Hollinger acquired.
168
I visit the office of each prospective property at night and count the desks....That
tells me how many people work there. If the place has, say 42 desks, I know I can
put that paper out with 30 people, and that means a dozen people will be
leaving the payroll even though I haven't seen their faces yet (Newman, 1992).
After buying the faltering Chicago Sun-Times, then the eighth-largest daily in
the U.S., for US$180 million in late 1993, Hollinger followed the same cost-
cutting strategy it used successfully at smaller newspapers, setting aside US$10
million for voluntary redundancies at the unionized daily. After a 20-percent
reduction in staff, the paper’s cash flow doubled, and within a year the Sun-
Times was generating a 15-percent return on revenue (Jones, 1995). Not
everyone at the 500,000-circulation daily was happy with the cost-cutting
measures imposed by Radler at the Sun-Times, however, as eight senior editors
left within a year, along with popular columnist Mike Royko. By 1995,
American Publishing ranked as the second-largest newspaper chain in the U.S.
by number of titles, but only 12th in size by total circulation (Siklos, 1996).
Hollinger’s worldwide expansion was financed in large part by Black’s
acquisition of the London Daily Telegraph for US$60 million in 1985, when
the venerable newspaper was badly underperforming, as were most other Fleet
Street titles, due to high labor costs brought by powerful unions. By joining the
non-union movement out of Fleet Street, combined with Hollinger’s payroll
cutting, almost three quarters of the 3,900 Telegraph staff was soon jettisoned.
(Siklos, 1996, 155) From an annual loss of £8.9 million in 1986, Telegraph plc
recorded a profit of £41.5 million in 1989. That year, Black utilized the
newspaper’s new computerized typesetting equipment to publish during a strike
by journalists, using only management personnel. The victory, he wrote in his
1993 autobiography, exposed “one of the great myths of the industry: that
journalists are essential to producing a newspaper” (Black 1993: 405).
According to Black biographer Richard Siklos (1996: 156), the Telegraph
became a “newspaper cash machine capable of funding its owner’s desire to
pursue the acquisition of practically any newspaper in the world.” One of the
newspapers Black and Radler coveted was the Jerusalem Post, offering US$20
million for it when the highest bid for the faltering daily to that point had been
US$8 million. According to deposed publisher Irwin Frenkel, after first
promising not to interfere with the editorial content of the traditionally-liberal
daily, Radler (who is Jewish) took a direct interest in the newspaper’s politics.
After the purchase was complete, noted Frenkel, Radler instituted a radical
change in editorial policy by installing as publisher a friend who had been a
colonel in the Israeli army but who had no previous newspaper experience.
He wanted a newspaper that served and reflected the prevailing nationalist

temper and did not criticize occupation or settlement of the West Bank or Gaza.
Like his bosses, he had little respect for journalists and what he considered their
pretensions to know better (Frenkel, 1994: 168).
169
The change in editorial direction prompted thirty-two Post journalists to

threaten to resign, and Radler gratefully accepted the cost savings brought by
the uncompensated terminations. “It was convenient for me,” he said, “because
there were 32 too many people, if not more, in the editorial department at that
time” (Wells, 1996).
Another country in which Black and Hollinger invested their Telegraph
profits was Australia, purchasing 20 percent of the Fairfax group, which
included the Sydney Herald and the Melbourne Age, for more than A$100
million in 1991. Black set about reducing the chain’s workforce of 4,340,
which boosted profits and doubled Fairfax stock price, but foreign-ownership
laws prevented him from increasing his interest in the company. That didn’t
stop Black from becoming, according to Siklos (1996: 241), “the central
character in one of the most vicious and highly-politicized takeover battles that
Australia has ever seen.” The firestorm of controversy that saw Black beat a
hasty retreat from Down Under and sell his Fairfax investment was prompted
by revelations he made in his 1993 autobiography, A Life in Progress. Black
wrote of meeting Australian Prime Minister Paul Keating in 1992 about raising
the country’s limit on foreign ownership of media. “If he was re-elected and
Fairfax political coverage was ‘balanced,’ he would entertain an application to
go higher,” Black wrote (1993: 453-454), adding that the opposition leader had
“already promised that if he was elected he would remove restraints on our
ownership.” The published remarks caused an uproar in Australia, because
Black had indeed been allowed to increase his stake in Fairfax to 25 percent
only weeks after Keating had been re-elected the previous year, amid protests
from journalists and politicians (Siklos, 1996: 349). A Senate inquiry into the
affair in 1994 resulted, and the attendant publicity prevented any possibility
Black would be allowed to increase his ownership of Australia’s press any
further. Two years later he sold his stake in Fairfax for a profit of A$300 million
(Dalglish, 1996).
Conquering Southam
Despite Hollinger’s international success, Black and Radler had been shut out
of major newspaper acquisitions in their native Canada following their failures
to take over F.P. Publications in 1980 and Southam Inc. in 1985. The
defensive “share swap” between Southam and Torstar that had prevented a
takeover of the newspaper chain was challenged by minority shareholders of
Southam in a long-running court battle, however. They claimed the motion to
approve the share swap had been improperly passed because there had been
insufficient notice given to shareholders before an extraordinary meeting had
been called to vote on it. Before the matter could come to court, however, the
lawsuit was settled in 1988 with a compromise that its ten-year “standstill”
period, during which each company agreed not increase its holdings in the
other, would be reduced to only five years. That meant Southam would be “in
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play” as a takeover target again in 1990, with Torstar as its largest shareholder
in a position to control its fate. Black made repeated offers to Torstar for its
stake in Southam as a result of this development, and in 1992 he finally
acquired its 20 percent ownership by agreeing to pay a 15-percent premium
over the stock’s market value (Edge, 2004: 229).
Southam family members, who were concerned that Black would impose his
conservative politics on their traditionally liberal dailies, then made a fateful
move in a last attempt to keep him from acquiring control of the newspaper
chain. They recruited one of the few Canadian newspaper owners with the
financial resources to counterbalance Black’s influence on Southam’s board,
citing a company bylaw that allowed them to issue C$200 million worth of new
shares to Montreal businessman Paul Desmarais. Southam family members had
first sounded out Desmarais, whose Power Corp. owned a chain of forty-one
newspapers in Quebec, on his willingness to continue the Southam tradition of
quality newspapers, and reportedly received his agreement. But when Black
began using his control of seats on the Southam board of directors to push for
cost-cutting measures at the chain, Desmarais backed his plan due to the
company’s continuing financial losses. Soon, according to Siklos (1996: 404),
the pair found themselves shut out of Southam financial information by the
company’s independent directors on the grounds that their own companies
were industry competitors. Out of frustration, Black offered to buy Desmarais’
shares in Southam. Desmarais countered with a proposal to break up the
historic chain, with Hollinger taking ten of its smaller dailies in exchange for its
one-fifth ownership. When that plan was blocked by the independent directors,
Desmarais accepted Black’s long-standing offer to buy his Southam shares and
the Hollinger head’s victory over the “obdurate rump” was assured.
Five days after consolidating his control of Southam, Black used the
coincidental occasion of Hollinger’s annual meeting to publicly scold the
conquered company’s management, particularly its vanquished independent
directors. According to Black, Southam management had “long accepted
inadequate returns for the shareholders, published generally undistinguished
products for the readers and received exaggerated laudations from the working
press for the resulting lack of financial and editorial rigour.” Black admonished
the former first family of Canadian newspapers for panicking into its 1985
share swap with Torstar to forestall his takeover ambitions, pointing out that
the move ultimately backfired. “If Southam's management had been a little
more courageous,” he crowed to stunned silence, “it might still be a family-
controlled company” (Miller, 1998: 62).
In his bid for total control of Southam, Black utilized a combination of
ingenuity and persistence over the next several years. He first made an offer to
shareholders in late 1996 of C$18.75 a share in an attempt to bring his
holdings in the company above 50 percent. When his first offer failed to
acquire sufficient stock, Black then sweetened the bid to C$20 a share early in
1997, which resulted in 8.5 million Southam shares being tendered. That was
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sufficient to bring Black’s holdings in Southam, through his control of

Hollinger, to 50.7 percent of issued shares. Black then used his majority control
of the company in April, 1997 to disburse most of Southam’s treasury in a
C$2.50 “special dividend.” That enriched Hollinger most of all, and Black used
the C$47 million windfall to finance a leveraged bid for the Southam shares
that remained outstanding in an attempt to acquire enough of its stock to take
the company private by having it “de-listed” from the stock exchanges as a
public company. His complex offer, which included both cash and shares in
Hollinger, was only enough to increase Black’s holdings of Southam stock to
58.6 percent, however. (Edge, 2004: 232).
After acquiring a key block of Southam shares held by a New York mutual
find in 1998, paying a 22-percent premium over market price to raise his stake
to 69.2 percent, Black again made a bid for the company’s remaining stock.
This time he used his voting control on the Southam board to authorize the
borrowing of C$523 million to finance the offer, using the money to declare
another extraordinary dividend, this time of C$7 a share. Black used the cash
that accrued to Hollinger as a result to finance another offer to Southam
shareholders, this time of C$22 a share for all outstanding stock. When that
failed to persuade several key institutional investors to sell, Black sweetened the
offer to $25.25 a share early in 1999, which resulted in 90 percent of
outstanding shares being tendered, raising Hollinger’s holdings in the company
to 97 percent. That was sufficient to allow Black to apply to the Ontario
Securities Commission to de-list the company, which had begun trading on the
Toronto Stock Exchange in 1945 (Edge, 2004: 232).
One of the first major moves Black made as controlling shareholder of
Southam was to utilize the company’s nation-wide resources in publishing a
second national newspaper in Canada in competition with the Globe and Mail,
whose liberal politics he opposed. Despite publishing most of the country’s
leading dailies, Southam had never published a newspaper in its hometown of
Toronto, which was dominated by the Star, Canada’s largest-circulation daily,
the Globe and Mail, and the tabloid Sun. This Black moved into the Toronto
market by first acquiring in mid-1998 the Financial Post national business daily
from the Toronto Sun chain in exchange for Southam’s original Spectator in
nearby Hamilton, three smaller Southern Ontario dailies, and C$150 million.
(Cobb, 2004: 86) Utilizing Southam’s head office plant in suburban Toronto,
Black assembled a newspaper staff from across Canada and around the world,
drawing largely on journalists from his newly-acquired chain of dailies across
the country. In October, 1998 the National Post began publishing, but its start-
up costs soon began to weigh down Southam and Hollinger financially. Its first-
year losses of C$44 million caused Hollinger’s share price to drop almost 20
percent that year, as investors nervously eyed the company’s accumulated C$2.4
billion in debt (Edge, 2004: 232).
The conservative politics of the National Post did little to endear Black to
Canadian Prime Minister Jean Chretien for the newspaper’s persistent coverage
172
of a growing patronage scandal in his riding, and its editorial efforts to “unite
the right” in opposition to his Liberal Party. In mid-1999, when the Telegraph
owner was offered by British Prime Minister Tony Blair the seat in the House
of Lords that traditionally accompanies such a position, Chretien vetoed the
peerage by citing an obscure provision requiring federal approval for Canadian
citizens to hold foreign titles. Black responded with a lawsuit against Chretien
for abuse of process, and when it was thrown out of court in 2000, he
renounced his Canadian citizenship in order to take up his peerage as Lord
Black of Crossharbour. As foreign ownership of the press is restricted in
Canada, Black sold the Southam chain he had worked for so long to acquire to
television network CanWest Global Communications in August of that year for
C$3.5 billion (Edge, 2004: 232).
Corporate Structure
In order to separate its Canadian holdings from its growing international
newspaper empire, Toronto-based Hollinger Inc. established a New York-based
subsidiary called Hollinger International Inc., which went public with an IPO
in 1994. The corporate structure Black set up to control Hollinger
International was just as ingenious as the takeover strategy he used to acquire
Southam. It provided for a “pyramid” of control that allowed him to exercise
control over Hollinger International despite owning less than a quarter of its
shares. His majority control of Hollinger Inc., along with Radler’s minority
position, was held in the name of a company they controlled, called Ravelston
Inc. It in turn owned a majority of a company called HLG, which in turn
owned a minority of Hollinger International Inc. Thus, while they exercised
control over Hollinger International through this “pyramid” structure, Black
and Radler owned 18.8% of its shares in 2002 (See Figure 1).
Black and Radler controlled Hollinger International through Hollinger
Inc.’s ownership of all 14.9 million Hollinger International Class B preferred
shares, which each carried 10 votes compared with only one vote for each of the
company’s Class A common shares. Thus, despite owning only 30 percent of
Hollinger International stock, Black exercised an estimated 73.8 percent of
voting control over the company (Leonard, 2003). It was through this majority
voting control in Hollinger International that other shareholders complained
that Black was running the company to his own advantage.
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Source: Report (2004), 8.
Figure 1. Black and Radler’s Effective Economic Ownership in Hollinger
Corporate Governance
Hollinger International directors were appointed to the board by Black
personally, through his control of its voting shares, and they tended to include
not business experts but instead members of his social circle. Among the
Hollinger International directors appointed by Black, who is keenly interested
in world politics, was former U.S. secretary of state Henry Kissinger, former
Illinois governor James Thompson, former U.S. ambassador to Germany
Richard Burt, and Black’s wife, columnist Barabara Amiel. “Black had the votes
to replace any member of the board, and they all knew it,” concluded the 513-
page report of Hollinger International’s independent directors. “Black called the
shots, and he wanted a board filled with prominent people who wouldn’t make
waves” (Report, 2004: 43). As a result, the report alleged, the Hollinger
174
International board was “not alert” when Black and Radler began “looting” the
company to the detriment of non-controlling shareholders. Board meetings, the
report claimed, “functioned more like a social club or public policy association
than as the board of a major corporation, enjoying extremely short meetings
followed by a good lunch and discussion of world affairs” (Report, 2004: 38).
The report does not attach blame to the inert directors, claiming they were
“fed distorted information by Black and Radler,” but it does note that the
political appointees “did little to seek independent advice of their own.”
Instead, the report’s findings reserve most of the blame for Black, Radler, their
circle of controlling insiders, and the system of corporate governance they
created at Hollinger International.
The inherently dangerous aspects of a dual voting structure, separating

governance power from economic interest, make heightened sensitivity and
scrutiny highly important to protect the interest of noncontrolling shareholders.
Hollinger didn’t get either sensitivity or scrutiny, and the shareholders paid the
price (Report, 2004: 38).
Shareholder concerns
After Hollinger International sold off its Southam newspaper chain in 2000, the
company’s second-largest institutional investor (after Southeastern Asset
Management) began to ask questions about a sharp increase in management
fees that were paid to Black and Radler through Ravelston. New York
investment dealer Tweedy Browne Co. LLC, an 80-year-old firm that that
oversees US$8.5 billion in assets and specializes in companies it considers
undervalued, began investing in Hollinger International in 1999. By 2001, it
owned about 18 percent of the company’s shares, and after the Southam sale it
began to question an almost tenfold increase in management fees flowing to
Ravelston. Unlike most firms, Hollinger International compensated its senior
executives not with salary and stock options but instead through management
fees paid to companies Black and Radler controlled. Tweedy Browne pointed to
the fact that from US$4.1million in 1995, the management fees paid by
Hollinger International to Black, Radler, and several other senior executives
through Ravelston had increased to US$38 million in 1999 and over an eight-
year period had totaled more than US$203 million. That level of
compensation, Tweedy noted, far outstripped what was being paid to senior
executives at other major newspaper companies. It also questioned almost
US$74 million in “non-competition fees” paid to Ravelston following a series
of Hollinger International’s newspaper sales in 2000 and 2001, including the
sale of Southam (Kirchgaessner, 2003).
Some pointed for clues to what was going on to the fact that Black’s
Toronto-based company, Hollinger, Inc., upon which he had built his pyramid
of international media control, was highly leveraged. Estimates placed the
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annual debt-servicing costs on the US$120 million in high-yield bonds

Hollinger Inc. had issued to finance Black’s press empire at US$14 million.
(Cherney, 2003) When the recession of 2001 reduced Hollinger Inc.’s revenues
and is share price tumbled from $16 to $9, Hollinger Inc.’s debt ratio more
than doubled from its already-high level of five times EBITDA to more than
ten times gross earnings. Tweedy Browne questioned the extraordinary level of
management fees being paid to Ravelston in such lean times, filing a complaint
with the SEC in the spring of 2003. It also wrote a letter to members of the
Hollinger International board of directors on the eve of the company’s May
2003 annual meeting, demanding an investigation and threatening a lawsuit if
none resulted (Leonard, 2003). The investment firm’s hand had been
strengthened immeasurably, as had that of all corporate governance advocates,
with the February 2003 ruling of a Delaware court that Disney’s directors could
be sued by shareholders over a contentious US$140-million severance payment
they had approved for company president Michael Ovitz. As a result of this
sudden legal liability of Hollinger International directors for failing to exercise
good corporate governance, Browne was able to convince them to appoint two
new independent directors to the board and to convene a special committee to
investigate the company’s finances. Wall Street investment banker Gordon
Paris was drafted onto the board and commissioned to chair the special
committee (Maich & Tedesco, 2003).
Others pointed to the lavish lifestyle Black and his wife enjoyed, which
included a private jet to fly them between residences in London, New York,
and Palm Beach, Florida. Hollinger International’s accounting firm, KPMG,
noted that the company was paying almost US$250,000 annually to maintain
those residences, provide Black with a car and driver in London, and keep up
his private jet. KPMG pressed Hollinger International for increased disclosure
of these expenditures and also questioned the US$8 million paid by Hollinger
International for Roosevelt’s correspondence to his cousin, some of which hung
framed on the walls of Black’s various residences (Leonard, 2003). When the
special committee of Hollinger International directors discovered US$32
million in payments made to Ravelston in 2001 that had apparently not been
approved by the company's audit committee or board, nor properly disclosed in
the company’s filing to the SEC, the dissident shareholders had the smoking
gun they long smelled. According to the Financial Post, Paris confronted
Thompson, who served as chairman of Hollinger International’s audit
committee, and got his agreement to the removal of Black and Radler from the
company’s management structure, along with several other senior executives,
including the company’s corporate counsel. The agreement of other Hollinger
International directors was then obtained, the newspaper reported, including
that of Kissinger, who was consulted by telephone from Beijing. Paris then
confronted Black, who when faced with the findings and told that the
company’s filings to the SEC would have to be delayed as a result, agreed to
176
repay US$7.2 million in unauthorized management fees paid to him and to

step down as Hollinger International’s CEO (Maich & Tedesco, 2003).
After Black refused to certify it on the advice of legal counsel, the company’s
quarterly earnings report was filed with the SEC five days late, and the
regulatory body launched an investigation of its own. The late filing admitted
that Hollinger International had overstated profit by roughly US$17 million
over a period of years due to the unauthorized and undisclosed payments to
Black and other top executives. In January, 2004 Hollinger directors
commenced a lawsuit in Illinois district court to recover US$380 million in
funds it claimed Black and others misappropriated over a seven-year period,
along with more than US$100 million in interest. Under federal racketeering
laws, the directors are seeking the company’s actual damages to be trebled, for a
total damage award of US$1.25 billion. The SEC followed suit with a lawsuit
of its own against Black, which reportedly could bring criminal sanctions as a
result of his 1982 agreement to refrain from future securities law violations in
settling a complaint that he had made misleading statements in his takeover of
Cleveland-based Hanna Mining (Stewart & Partridge, 2003).
The Paris Report

The committee of Hollinger International’s newly-installed independent
directors that Paris chaired commissioned forensic analyst Richard Breeden, a
former SEC chairman and bankruptcy monitor at WorldCom, to conduct a 14-
month investigation and to write a report. Its voluminous findings released on
August 30, 2004 provided more detailed allegations of malfeasance against
Black, whom it claimed used his control of Hollinger International to make it a
personal “piggy bank” to finance his lavish lifestyle, including:
• US$3-million to subsidize the purchase of a condominium residence for

the Blacks on New York’s Upper East Side;
• Lavish expense claims by Black, including one totaling US$24,950 for

“summer drinks,” and another for US$42,870 to hold a birthday gala for
Mrs. Black attended by Barbara Walters and Peter Jennings, among
others;
• US$8.9 million paid by Hollinger between 1996 and 2001 to acquire

FDR papers and memorabilia without Board approval;
• US$3-4 million annually to lease a Gulfstream IV jet aircraft for Black’s

use.
177
It also noted that the company purchased a US$11.6-million Challenger

aircraft for Radler, who at one point was publisher of four major dailies in three
countries: The Chicago Sun-Times, the Jerusalem Post, and the Vancouver Sun
and Province (Report, 2004: 24).
The compensation paid to Hollinger International’s top five executives in
2000 totaled US$122 million, the report revealed, including nearly
US$53 million in non-compete payments from the sale of Southam to
CanWest Global.
This represented a nearly unbelievable 30.2% of Hollinger’s 2000 adjusted

EBITDA, and 61.6% of Hollinger’s adjusted net income. For an encore, Black
and his four senior officers received total compensation in 2001 that the
Committee estimates was more than $69 million, representing 73.4% of
Hollinger’s adjusted EBITDA in a year Hollinger reported a net loss of over
$337 million (Report, 2004: 30).
The report claimed that in addition to the “non-compete” payments, Black and
Radler also received through Ravelston US$3.9 million in annual management
fees from CanWest perpetually in exchange for reducing the purchase price paid
to Hollinger International for Southam by US$39 million (Report, 2004: 194).
Even more “stunning in its audacity and its utter disregard for either market
practices or the legal standards of fiduciary behavior,” the report added, was the
fact that until 2003 Hollinger’s proxy statement compensation tables “did not
include disclosure of even $1 in compensation to Black, Radler and the other
Ravelston executives resulting from more than $226 million in management
fees Hollinger paid to Ravelston since 1996” (Report, 2004: 30).
Even more complex—and profitable—than the executive compensation
structure of Hollinger International, according to the report, was the web of
“related-party” transactions that allegedly enriched Black and Radler by selling
them many of the down-sizing company’s newspapers at cut-rate prices, even as
low as $1. In some cases, the report pointed out, Hollinger International even
paid companies with links to Black and Radler to take over the titles. The
transactions often took place, according to the report, despite more attractive
offers being made for the newspapers by other companies. Several of the most
glaring examples occurred in the Canadian province of British Columbia, where
Hollinger’s control over newspapers had resulted in a divestiture order from the
Canadian Competition Bureau.
Throughout 2000, Radler failed to inform the Board of offers from an

unaffiliated purchaser to buy Hollinger’s Kelowna Capital for between $7.4
million and $8.1 million, and chose instead to sell the newspaper for $5 million
to West Partners....Approximately five months after being given $2.3 million to
take Hollinger’s Vernon Sun, West Partners sold it for $213,000. Approximately
178
two years after acquiring Hollinger’s Kelowna Capital for approximately

$5 million, West Partners sold it for $13.7 million (Report, 2004: 66).
The report’s harshest criticism, however, was reserved for Perle, who served as a
director of Hollinger International starting in 1994 and as a member of its
executive committee from early 1996. Perle, who served in the Reagan
administration, is credited by many with masterminding the 2003 U.S.
invasion of Iraq as a member of the Pentagon’s volunteer Defense Policy Board,
which he chaired (Hersh, 2003). Perle also headed Hollinger International’s
failed internet subsidiary Hollinger Digital from 2000 until 2003, for which he
received an annual salary of US$300,000. Despite making investments that lost
US$49 million for Hollinger Digital, Perle collected lucrative bonuses, the
report noted, because he was rewarded for the company’s online successes, but
not penalized for those that lost money. As a result, Perle’s bonus for 2000
totaled US$3 million despite the division’s overall losses. The report points to
the fact that Black and Radler controlled this system of compensation as
creating a direct conflict for Perle’s role as the third member of Hollinger
International’s executive committee. In interviews with the special committee,
the report stated that Perle admitted to simply signing the documents he was
given in that capacity, without reading them first.
It is difficult to imagine a more flagrant abdication of duty than a director

rubber-stamping transactions that directly benefit a controlling shareholder
without any thought, comprehension or analysis....Perle clearly had a motive to
abdicate his fiduciary duties as an Executive Committee member so as to
accommodate the persons responsible for his huge Hollinger compensation, Black
and Radler (Report, 2004: 488).
Conclusions
In early 2005, Hollinger International finally filed its 2003 annual report,
which showed a US$73.4 million loss for the year. It also revised the company’s
earnings for the four previous years, including losses of US$230.6 million in
2002 and US$326 million in 2001 (Condie, 2005). Later that January,
Hollinger Inc. announced new “rigorous governance policies” that it said “meet
or exceed” regulatory requirements for Canadian publicly listed corporations
(Norris, 2005).
While legal proceedings involving the accusations detailed in the report of
the Hollinger International committee are ongoing, ultimate conclusions in this
case cannot, of course, be drawn. Black and Radler have denied the allegations
of malfeasance made against them, issuing a statement through Ravelston that
described the Paris committee report’s findings as “exaggerated claims laced
with outright lies” (Weber, 2004). However, given Black’s well-known
disregard for corporate governance and the allegations that now surround him
179
and the company he founded, it is not premature to note a connection.

Whatever the final outcome of the case might be, more regard for the rights of
non-controlling shareholders might have helped to insulate Black and his senior
executives in Hollinger International from these allegations of malfeasance,
extravagance, and self-dealing. Black’s mistake, some claim, was in managing
Hollinger International as if it were a private company. As a result, the noted
history buff and Napoleon devotee, some predict, may have finally met his own
corporate Waterloo.
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182
Michael Eisner was Framed
Michael Eisner was Framed:

Newspaper Narrative of Corporate Conflict
Angela Powers and Robert Alan Brookey
When corporations plan for change such as mergers, acquisitions, or

replacements, one question that must be raised is whether or not the
marketplace will respect the decision. Public sentiment and confidence in
corporate leaders are often won or lost, at least temporarily, due to the way
particular events are covered in the media. This exchange of information is
often conveyed in a narrative of controversy.
The purpose of this chapter is to look at corporate relationships of CEOs,
board members, and share holders as they are presented in the mass media. The
Walt Disney Company and CEO Michael Eisner provided a unique
opportunity to study corporate maneuverings in the media and to analyze how
journalists covered a dramatic issue over several months. How did corporations
use the media to gain approval for initiatives? How did individuals use the
media to highlight deficiencies, place blame, and influence public sentiment?
Analyzing the way news is relayed becomes increasingly important as the
popularity of business news increases, as does its potential to impact perceptions
of corporate stability and success and ultimately the trust of shareholders and
the public.
Background
In November 2003, Disney celebrated the 75th birthday of Mickey Mouse.
Eisner used the occasion as an opportunity to tout the synergistic practices for
which Disney has been admired, announcing that Mickey would soon appear in
a variety of media, including comic books, direct-to-video movies, and DVD
releases of old Mickey Mouse cartoons (Pack, 2003). In the same month, Eisner
announced robust earnings for Disney’s media outlets, despite continued
lackluster attendance at the company’s theme parks.
On December 1, 2003, Roy Disney, Vice Chairman and nephew of the
company founder Walt Disney, resigned from the Disney board (Gavin, 2003).
He used the occasion to publicly criticize Eisner, issuing a three-page letter in
which he held Eisner responsible for the faltering performance of the company
and called for his resignation. Roy Disney’s resignation drew a lot of attention,
due in no small part to the fact that he was the last member of the Disney
family to be actively involved in the company. His resignation also galvanized
media attention on internal conflicts within the company and the building
183
resentment of Eisner’s management style. Then another board member, Stanley

Gold, resigned, seconding Disney’s call for Eisner’s resignation (Ahrens, 2003).
In spite of the earnings reported in November, these resignations suggested all
was not well at Disney, and Eisner was to blame.
Eisner suffered another public embarrassment when Pixar CEO Steve Jobs
announced in January 2004 that he was ending the negotiations to continue the
collaboration between his computer animation studio and Disney (Pixar,
2004). For many industry insiders, this break did not come as a surprise. Jobs
had been very vocal about what he saw as the inequities in the Pixar-Disney
contract. First, while the contract allowed the two companies to share
production costs and box office receipts, Disney received a distribution fee off
the top of gross revenues. In other words, Disney made more money off of
Pixar’s films than Pixar. Second, Disney held the rights to Pixar’s films,
meaning that Disney could decide unilaterally how the films and the films’
characters could be repurposed for sequels, spin-offs, and other ancillaries
(Rose, 2004). Through most of 2003, Jobs and Eisner had been negotiating a
new agreement between the two companies. When these negotiations broke-off,
it appeared as though Eisner had suffered a very public failure. After all, the
earnings that he bragged about in November were due in part to the $340
million that Pixar’s Finding Nemo had generated at the box office. Given that
the other major studios were anxiously courting Pixar, it appeared that Eisner
had let a big fish get away, pun intended. Roy Disney wasted no time in using
the event to his advantage, arguing that Eisner’s failure to negotiate with Pixar
supported his claim that Eisner needed to step down.
Also in January, the Board of Directors of the Disney Company announced
that it had approved the separation of the positions of Chief Executive Officer
and Chairman of the Board and began reviewing its Corporate Governance
Guidelines to reflect and conform to such changes. These actions followed
extensive criticism over several years in the media and otherwise of Disney
corporate governance policies (Orwall & Lublin, 2004).
In spite of these changes, Disney’s misfortune was viewed as an opportunity.
Two weeks after Jobs broke off talks with Eisner, Comcast issued a $54 billion
take-over bid for Disney (Miller, 2004). Comcast, one of the largest cable
providers, was looking to invest in content, and acquiring Disney would give
Comcast an enormous catalog of titles across a variety of media. Apparently, the
vulnerability of Eisner precipitated the offer. In fact, when Disney shareholders
met in early March 2004, Eisner received a vote of no-confidence, and was
removed as chairman of the Disney board. Later that same day, Comcast
executives were talking to the press about how the vote on Eisner boosted the
prospects for their take-over bid (Parker, 2004). Some industry analysts,
however, had a different take on the situation, and claimed that the move to
remove Eisner as board chairman, but retain him as CEO, would actually
protect Disney from a hostile take-over (Tanaka, 2004). Given that the bid
would ultimately fail, these analysts displayed a good deal of foresight.
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Constructing Business Relationships in News Coverage

None of this would have been so heavily highlighted in the press 20 years ago.
The recent surge in business news is due to the long economic boom in the
1990s and the growing number of small private investors into stocks and
mutual funds which made information about the stock market more interesting
and important (Fursich, 2002). In addition, more people have become
interested in the business aspects of the media and investing in the glamour
industry which has led to a greater interest in business reporting in general.
News stories about the media are no longer limited to what takes place in front
of the camera, but also what takes place in the boardroom and other arenas of
business. The recent coverage of problems involving AOL/Time Warner,
Vivendi, and Disney evidence our point. The media players at the center of
these stories are creating the real-life drama and becoming icons in themselves,
while the news media frame and create the context for such drama.
We know the media set our political and social agendas by deciding which
information is important. They have the ability to lend legitimacy to a problem
and sensationalize an issue. Often, mere news coverage of an issue is enough to
legitimize the problem (Walsh-Childers, 1994). With the preponderance of
business coverage, it is more important than ever for stories to present all sides
with fairness and balance. Simon, Fico, and Lacy (1989) define fairness as the
inclusion of statements from sources representing all sides of a story. Balance is
the relative amount of coverage devoted to a particular side in a story. Without
balance, the press is able to focus the public’s attention on a particular problem
and give the perception that one side of a problem is more important than the
other (Price & Tewksbury, 1997). Overall, prestigious papers have been found
to be better than smaller papers at providing space that reported all sides of an
issue because circulation size and reputation provide the editorial resources for
greater research and fair and balanced reporting (Fico & Soffin, 1995).
But variables that may affect balance of coverage are public relations
routines. Swisher and Reese (1992) state that public relations workers tend to
exploit the objectivity routine by being highly quotable and highly accessible.
Too often sources are used to cite the facts without further investigation and to
give credibility to what the reporter visualizes. The over-use of sources
representative of one side has the potential to negatively influence not only
attitudes, but also public officials’ responses. Research indicates that reporters
can be easily influenced by particular viewpoints. Powers and Fico (1994)
found that despite the availability of numerous information sources and
resources, journalists’ decisions to use them may be patterned by influences
other than concerns for audience needs or adherence to professional norms. A
survey of journalists from the high circulation newspapers indicated that news
content was found to be most powerfully shaped by journalists’ bias of source
qualities. The personal judgments of journalists had the most powerful and
numerous influences on the selection of sources in both routine and conflict
situations.
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Fursich (2002) demonstrated that public relations efforts and the

appropriation of this discourse by elite U.S. newspapers creates myth and
rituals. Media coverage of the merger of Daimler-Benz and Chrysler was
analyzed to indicate how a narrative strategy was manufactured and developed
over time. They found that public relations had a major influence on how the
myth of “marriage” between the two companies was first presented and later
extended in news coverage. Journalists reduced coverage to a few players which
resulted in a failure to help readers understand the global relevance of the issue,
the oligopolistic tendencies of the car industry, and the global dependencies of
the world economy.
In addition to public relations, journalists themselves constantly look for the
drama in a story and confound the issues. Bishop, (2001) looked at the social
drama in newspaper coverage of a sports stadium construction controversy and
whether or not coverage was biased. He found that the initial response by
journalists was to push stadium development. Journalists were caught between
their appreciation of sport as cultural force and their desire to serve readers. By
the time journalists critically examined the stadium plan, team and city officials
were rhetorically ahead. City officials had already manipulated their idea of
service to the community to suit their ends and nudge reporters to do the same.
Such bias in reporting may occur as journalists “select some aspect of a
perceived reality and make [it] more salient in a communicating text, in such a
way as to promote a particular problem definition, causal interpretation, moral
evaluation, and/or treatment recommendation for the item described”
(Entman, 1993: 52). Journalists’ framing of stories may not be deliberate, but
rather an observation of existing media accounts that have already been partially
framed and presented in certain contexts (Gamson & Modigliani, 1989).
Bennett and Lawrence (1995) also discuss the framing phenomenon in
terms of news icons or powerful images arising out of a news event. Iconic
images live beyond their originating event by being introduced into a variety of
news contexts. Icons can be either culturally affirming or challenging. Lang and
Lang (1968) indicate that media images are often anticipated by the press to the
point that they may be unconsciously manufactured. They discovered a
“pattern of expectations” that was established by the media before the actual
event…in the case of Eisner, the stockholder’s vote of “no-confidence.” Their
study emphasized that mass media can over-dramatize events and ultimately
give a false impression that drives public opinion. Burke suggests a method for
analyzing the dramatization of these events.
According to Burke (1969), human motives can be discovered in the stories
that we tell. Influenced by Marx, Burke believed that social hierarchies were
created and maintained rhetorically, and that these hierarchies were reproduced
in narratives of success and failure. The Pentad is at the heart of Burke’s theory
of dramatism. He believed that stories contained five elements articulated by
five questions that might be familiar to most journalists: what was done (act),
when or where it was done (scene), who did it (agent), how he did it (agency),
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and why (purpose). These elements explain how this use of rhetoric can operate
at a systemic level to elevate or degrade situations, individuals or organizations.
As Trice and Beyer (1984) have argued, like all cultures, organizations have
rites, and some of these rites involve the removal of top executives. Trice and
Beyer refer to these as rites of degradation: “The manifest and intended
consequences of rites of degradation are to dissolve the social identities and
associated power of the persons subject to the degradation” (p. 659). Burke’s
theory can be used to explain how the media coverage of Eisner functioned to
rhetorically position Eisner for degradation and created a narrative to justify
Eisner’s removal from the Disney board. In this pursuit, news articles were
analyzed in terms of the following research questions:
RQ1: What issues did newspapers address when covering the Disney
corporate conflict?
RQ2: Were the types and numbers of sources used fair and balanced?
RQ3: Did geographic, economic, or content variables influence
coverage?
RQ4: What was the nature of the relationships among Eisner and
Disney stakeholders as played out rhetorically in the media?
Method
Newspaper articles were retrieved from the ‘Newspaper Source’ database which
provides full text searches for 225 national and local newspapers including USA
Today, The Times (London), The Boston Globe, and The Chicago Tribune. Many
of these newspapers are among the highest-circulation newspapers targeting
males and corporate leaders (Bacon, 2003). Using the search term “Eisner,” and
limiting our search to the period between November 2003 and March 2004, we
found 563 “hits” from this database. Because the database also includes
transcripts from some broadcast media sources, we eliminated these, as well as
short articles (one paragraph), editorials, and articles that were not about
Michael Eisner specifically. Although we cannot be sure that the sample
obtained was exhaustive, ‘Newspaper Source’ is a comprehensive, cumulative
index of all newspaper articles published in selected newspapers. This time
period was chosen because significant events occurred during this period,
specifically the departure of Roy Disney, the erosion of the Pixar deal, and the
Comcast take-over bid.
Traditional content analysis was used to identify the main issues addressed
and the number and type of sources used in the articles. To measure fairness
and balance, the main issue of the story and the number and type of sources in
each story were analyzed. Pre-testing of the data identified seven key issues
covered in the controversy: (1) No-confidence vote, (2) Eisner management/
personality, (3) Roy Disney, (4) Comcast takeover, (5) Strength/future of
company, (6) Corporate governance, and (7) Pixar. Coder reliability after three
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pretests for this measure was 94 percent. Pre-tests also identified types of
sources used in stories which included (1) Eisner, (2) Roy Disney and family
members, (3) Disney employees, (4) the public and individual shareholders, (5)
lawyers/analysts, (6) board members (7) institutional shareholders, (8) Comcast,
and (9) Others. Types of sources used in each story were then coded. Coder
reliability on this measure after one pretest was 100 percent.
In addition to counting issues and sources, coders used a five-point Likert
scale with 1 being the most negative (against Eisner) and 5 being the most
positive (for Eisner) and 3 being neutral to measure whether the controversy
was equally covered. If a source constructed an argument against Eisner, it was
coded as negative. If a source was supportive of Eisner, it was coded as positive.
Coders also looked at the story in its entirety and judged the overall balance,
taking into consideration the space devoted to each side of the story and the
tone of the lead, headline and the sources. Coder reliability after two pretests
for source balance was 93 percent. Coder reliability after three pretests for
overall story balance was 88 percent.
Stories were also analyzed for rhetorical content. Condit (1999) argues the
combination of qualitative and quantitative methods is necessary to obtain a
balanced and textured understanding of an issue. Considering that news creates
narratives about corporations and corporate leaders, we analyzed these articles
from the perspective of Kenneth Burke’s theory of dramatism. A random
sample of every third news story, 75 stories in total, was submitted to a close
textual reading. From this reading, specific elements of the narrative were
isolated; i.e. agents, agency, purpose, scene and action. Specific quotations were
then selected from the sample to illustrate how these elements were articulated
in the stories. The purpose was to identify the rhetorical content which our
coders observed. In addition to coder reactions, we were interested in what
some of the stories actually said and how the drama was articulated. We did not
correlate these specific passages to our coders’ responses, but given their
responses, and the content of the passages, the inferential leap between the two
is clear.
Results
The first research question addressed the main issues of the newspaper articles.
Table 1 indicates 22.1 percent of the sample concerned the no-confidence vote;
21.7 percent was on corporate governance of Disney; 16.1 percent was on the
strength and/or future of the company; 13.8 percent was on the Comcast
takeover; 12.9 percent focused on Roy Disney and his call for Eisner’s ouster;
8.8 percent was specifically on Eisner’s personality; and 1.8 percent of the
sample was on Pixar’s breakup with Eisner and Disney.
188
Table 1. Issues Covered in Newspaper Articles
Issue Frequency Percent

No-confidence 48 22.1
Corporate Governance 47 21.7
Strength/Future of Company 35 16.1
Comcast Takeover 30 13.8
Roy Disney/Ouster of Eisner 28 12.9
Eisner Personality/Style 19 8.8
Pixar 4 1.8
Other 6 2.8
Total 217 100
The second research question addressed whether the types and numbers of
sources used were fair and balanced. The mean number of sources used in
stories was 3.97. The range of sources used was zero through eleven. The mean
bias of sources was 2.5. Figure 1 indicates of all sources interviewed, the most
interviewed group of people were the analysts including professor, lawyers, and
business and media experts. The second largest group interviewed was
spokespersons from the institutional shareholders groups. One of the least
interviewed sources was Eisner himself, making up only 6 percent of the sources
used in stories; while Roy Disney, Stanley Gold made up 14 percent of the
sources interviewed. Looking at the bias of these sources, chi-square analysis
indicated significant differences. Table 2 indicates the Disney/Gold category, as
well as the institutional shareholders were the most unfavorable toward Eisner;
while Disney employees were the most favorable toward Eisner.
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Roy Disney
Gold
14%
Other Employees/
4% PR
12%
The Public
Comcast Eisner (Individual
6% 6% Shareholder,
Tourists)
6%
Institutional Analysts
Shareholder (Profs, lawyers,
20% experts) 26%
Board
Members
6%
Figure 1: Types of Sources Used in Eisner Stories
190
Table 2: Bias of Sources
Bias
Source Very Unfavorable Neutral Favorable Very Total
Unfavorable Favorable
Gold/Disney 84 15 3 0 0 102
Institutional 46 48 44 9 2 149
Shareholders
Analysts 27 57 96 13 4 197
Individual 11 12 19 2 3 47
Shareholders
Disney 5 7 23 25 31 91
PR/Employees
Comcast 4 18 21 1 2 46
Board 2 2 19 9 9 41
Members
Eisner 1 2 9 6 26 44
Other 8 2 15 2 1 28
Total 188 163 249 67 78 745
Pearson Chi-square value: 528.949, DF 32, Sig:.000
The third research question asked whether geographic, economic, or content

variables influenced coverage. Overall, there was little difference in coverage of
the corporate controversy among newspapers. A slight correlation existed
between newspaper and issue covered (.140). For example, a newspaper in the
east such as the Philadelphia Inquirer negatively covered Eisner and the no-
confidence vote more frequently since the shareholders meeting took place in
Philadelphia. More positive stories about the strength of Disney and Michael
Eisner were possibly covered by newspapers in California and Florida such as
the Orlando Sentinel because of their proximity to Disney theme parks.
A significant correlation also existed between source bias and overall story
bias (.797). As more sources for or against Eisner were used in the story, the
more for or against was the overall story bias. Significant relationships also exist
between issue covered and story bias (.223). For example, stories on the “no-
confidence vote” were the most negative Eisner stories.
The fourth research question addressed the nature of the relationships
among Eisner and stakeholders as played out rhetorically in the media and
depicted in Figure 1. Using Burke’s method of dramatism, the act was
identified as the no-confidence vote that precipitated the removal of Eisner
from the chair of the Disney board. Although there were many actions that
occurred in the time period that we studied (the Comcast bid, the Pixar
departure) it was the no-confidence vote by the shareholders that served as the
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center of the narrative. This is apparent from the data that rank the vote as the
most frequent issue covered in the newspaper articles. We would add, however,
that the issue of corporate governance, which ranked second, also reveals that
the no-confidence vote was the central action. Eisner’s corporate governance
abilities motivated the shareholders vote. Therefore, many stories that focused
on corporate governance issues used the vote as either a pretext or a context.
Although the vote was held by the shareholders, and the board was
responsible for removing Eisner as chair, neither the shareholders nor the board
emerge as agents in the news coverage. Instead, Eisner emerges as an agent, and
Disney and Gold emerge as counter-agents. Because Eisner is so central to the
Disney organization, and because he has purposefully assumed a visible role
with the company, it should come as no surprise that he became the focus of
the news coverage. In fact, many stories comment on his close association with
the company. However, the substance of this coverage is worthy of note:
Almost as much as Mickey Mouse, Michael D. Eisner has been the public
face of the Walt Disney Co. Visitors to the company's theme parks are greeted
by a sculpture of Mickey holding hands with founder Walt Disney. But, for
the past 20 years, Eisner has been as familiar a centerpiece as Cinderella's
Castle (Disney's new drama: Dissension, 2004: A01).
In 1984, Eisner took over as CEO and began a kind of shock treatment to
revive the slumbering Disney, then a shabby and neglected operation. He and
his team invested in the theme parks, then jacked up admission prices. He
sold Disney's back catalogue of movies on video and the dollars poured in. He
pumped up the animation department, built hotels, cranked out plush toys
and books, to be sold in spiffy stores. He did tie-ins with McDonald's. The
stock market was awed from the get-go. Shares of Disney doubled in the first
18 months he was in the job (Heigh-ho or heave-ho? 2004: C01).
Eisner, 61, has headed Disney for the past 20 years and is widely credited
with steering the company to new heights during the first decade of his
tenure. But the past few years have been bumpy, leading to the unprecedented
shareholder revolt that culminated in Wednesday's annual meeting in
Philadelphia (Dissidents blast new Disney chairman, 2004: 1).
These passages reveal how Eisner is invested with the responsibility of helming
the company, and credited with many of the Disney’s successes. But as the last
passage demonstrates, this praise is often tempered with criticism:
The troubled mid-1990s proved at least one thing about Eisner: he was one
of the most talented corporate politicians in American history. Having seen
off all those who posed a serious threat to him, Eisner reigned without
challenge. And Disney's board of directors was one of the coziest collections of
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insider buddies in any Fortune 100 company (The man who took the
Mickey, 2003: 4).
You sense he'll do battle today in Philadelphia with an almost existential

conviction that his enemies are making a grave error. He knows he's right,
and the only question left in the mind of Michael Eisner is: How soon will
everyone else come to the same conclusion? (Heigh-ho or heave-ho? 2004:
C01).
Mr. Eisner has been chairman and chief executive of Walt Disney since
1984. With an acquiescent board, he had seemed to many to be the ultimate
survivor, capable of seeing off any number of rivals, including the remnants
of the Disney family (Feeding frenzy, 2004: 29).
While these passages acknowledge Eisner’s accomplishments, they also identify

two problems that emerge in the news coverage. First, Eisner is accused of
installing a board of directors that is too compliant. Second, he has cultivated
enemies including Disney and Gold. The first problem we will address when we
discuss how the news coverage identifies agency. The second problem, however,
is central to our discussion of the agent, or in the case of Disney and Gold, the
counter-agents.
As our data reveal, almost 13% of the newspaper articles focus on Roy
Disney and his attempts to challenge Eisner. And as we mentioned earlier,
Disney was soon joined by Gold in this campaign. In the news coverage, both
Disney and Gold are identified as important agents who helped bring about the
vote(s) on Eisner.
But he will continue to face a spirited campaign led by chief critics Roy E.
Disney and Stanley Gold, dissident former board members who want Eisner
to resign from the company completely. They are demanding that the board
seek a new chairman who they believe is more independent than they perceive
Mitchell to be. Gold and Disney have made clear that they are going for the
kill. Gold and Disney vow to continue their campaign by speaking to and
meeting with the company's shareholders in the coming days (Critics jeer
Disney move, 2004: 1).
The dissatisfaction snowballed after two former directors—Stanley Gold and

Roy Disney, the nephew of Walt Disney—mounted a campaign to oust
Eisner, Mitchell and two other members of the board, citing the company's
poor performance and the directors' failure to make corporate-governance
reforms such as separating the chairman and chief-executive positions. Gold
and Disney also want Eisner out as CEO (Dissidents blast new Disney
chairman, 2004: 1).
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The movement to eject Eisner is being led by former directors Stanley Gold
and Roy E. Disney who have been traveling the country during the last three
months to meet with shareholders and investors under a "Save Disney"
banner. In a Wednesday statement, they called the vote "a clear and
dramatic message that change is needed now and Michael Eisner must go"
(Disney shareholders' no-confidence vote, 2004: 1).
Clearly, Disney and Gold are portrayed as the active agents leading shareholders
in a campaign against Eisner. In turn, this campaign is represented in political
and military terms, with Disney and Gold referenced as “dissidents” leading a
shareholder “revolt.”
Given that the individuals on either side of this corporate conflict are
represented as agents, they are also provided with agency, the means through
which they act. Specifically, the Disney Board is represented as Eisner’s agency,
while the group loosely identified as the shareholders are represented as Disney
and Gold’s agency. It should be noted, however, that the ways in which these
two agencies are portrayed is quite distinct, and reflects the nature of the
conflict between Eisner, Disney and Gold. For example, the Disney board is
portrayed as completely compliant with Eisner’s wishes:
Walt Disney Co.'s much-maligned board of directors spent years trying to

convince shareholders that it was serving them, and not simply doing the
bidding of chief executive officer Michael D. Eisner….But long before that,
Disney's board had earned a reputation as Eisner's puppets….Among the
board's alleged sins: Too many directors were tied to Eisner. For several years,
Eisner's attorney and the architect who designed his Aspen home served as
Disney directors, though both left the board as the company responded to
investor calls for reform (Choice for Disney chairman disappoints, 2004: 1).
Small investors-ordinary folks holding tens or hundreds of Disney shares in

safe-deposit boxes, framed on walls, stored in desk drawers or filed in online
brokerage accounts-also withheld support from Eisner, who has been
criticized for failing to designate a successor, for the poor performance of some
Disney properties such as ABC television and for appointing a lapdog
corporate board (Disney vote shows new strength, 2004: 1).
Walt Disney's board faces pressure to prove it can independently evaluate

Comcast's hostile $47.7 billion takeover proposal after years of derision as one
of the USA's most pliant boards....In the late 1990s, Eisner's hand-picked
boards were regarded as among the USA's worst by governance specialists at
the Corporate Library, a shareholder rights group, and in such magazines as
BusinessWeek and Chief Executive (Does the Comcast-Disney deal add up?
2004: 03b).
194
These passages illustrate how Eisner’s management style is represented. He is

characterized as a “micro-manager” who surrounds himself with “cronies,”
“puppets” and “lapdogs.” In fact, Disney and Gold often single-out Eisner’s
“handpicked” board as point of criticism. By way of contrast, their leadership of
the shareholders is often reported in different terms.
The movement to eject Eisner is being led by former directors Stanley Gold
and Roy E. Disney who have been traveling the country during the last three
months to meet with shareholders and investors under a "Save Disney"
banner....Given a short time to speak at the meeting, Gold lashed out at the
company's current board as beholden to Eisner, and incapable or unwilling
to criticize the company's current management. Gold excoriated Eisner for
continuing to receive a multimillion-dollar salary even as the company's
operations have faltered (Eisner loses vote, 2004: p.1).
Two former directors of the company, Roy E. Disney, a nephew of founder

Walt Disney and his ally, Stanley P. Gold, have argued that Eisner's
departure is essential….Yesterday, shareholders acting on the suggestion of
Roy Disney and Gold and withheld more than 20 percent of their votes from
Mitchell and two other board members considered friendly to Eisner: Judith
Estrin and John Bryson….Muted applause for Eisner contrasted sharply with
the spirited cheers given Gold and Roy Disney, the 74-year-old who was
pushed off the board in November through a forced retirement (Shareholder
protest, 2004: 1).
Upon hearing the results, former board members and vocal Eisner foes Roy
Disney and Stanley Gold exchanged hugs and handshakes with supporters
sitting near them in the audience of 3,000. Gold intermittently chewed on
an unlit cigar. At the Disney meeting, shareholders gave Eisner a cool
reception. In contrast, Roy Disney and his financial adviser Stanley Gold,
who both left Disney's board last year, received standing ovations from much
of the crowd as they spoke for the 15 minutes the company allotted them. The
two have waged a lengthy "Save Disney" campaign to oust Eisner for his
alleged poor performance over several years, his lofty pay, his alleged
manipulation of the board and for not listening to their concerns as directors
(Disney shareholders put pressure, 2004:1).
Disney and Gold are portrayed as leaders who have obtained their following
voluntarily. The shareholders are portrayed as supporters who literally applaud
Disney and Gold’s efforts to “Save Disney.” This support appears to be broad-
based and extends across the country. It also contrasts sharply with the agency
attributed to Eisner: a small, select board of directors.
Although the ‘scene’, according to Burke, refers to the location of the action,
some of the news articles locate the vote in a context much larger and abstract
195
then the geographical site of the shareholders’ meeting (Philadelphia). Instead,

the vote on Eisner and the dramatic struggle between the Disney board and
shareholders is compared to other corporate scandals of the time.
Still, it's stunning to see so many masters of the 1990s' universe under fire
from so many directions. Whether the perceived problem is just inadequate
profit, as with Eisner, or alleged misdeeds, as with Ebbers, Enron and others,
one theme links many of the current tales of turmoil in the board room. That
is the danger of chummy systems of corporate governance, where directors take
a see-no-evil, laissez-faire approach to executives who are the main reason the
director got on the board in the first place (Upheaval at Disney, 2004: 1).
That's what steamed shareholders of the Walt Disney Co. told chairman and
chief executive officer Michael D. Eisner Wednesday in a surprising and
resounding no-confidence vote that experts said likely heralds a new era of
grassroots shareholder activism. Reforms put in place after billion-dollar
accounting scandals at Enron Corp., Tyco International Ltd. and WorldCom
Inc. include new federal rules that force mutual funds to disclose how they
vote in shareholder matters-in support of or against company management
(Disney vote shows new strength, 2004:1).
Eisner's plight is the latest sign that the era of the unquestioned chief
executive is ending. Corporate chieftains have been denounced by investors
and tossed from the leadership of the companies they founded, such as
America Online chairman Steve Case; attacked in court, such as Martha
Stewart; or pressured to give back huge pay packages, such as former New
York Stock Exchange chief Dick Grasso (Disney's new drama: Dissension,
2004: A01).
It is interesting to note that despite this construction of the scene, Eisner has
never been accused of the malfeasances that have tarnished the reputations of
Ken Lay and Martha Stewart. Even Disney and Gold have never accused Eisner
of illegal dealings; their complaints have been about mismanagement. These
passages reveal an associative argument based on the premise that Eisner’s
situation is similar to those that have precipitated other corporate scandals. And
while “chummy systems of corporate governance” may be to blame for the
situations at Enron and Tyco, the comparison to Disney is at best unsound,
and at worst, unfair. Still, the context of corporate scandal is one of the ways
the news articles set the scene for the Disney drama.
Of course the shareholders’ vote and the board’s subsequent decision to
replace Eisner were designed to correct Disney’s corporate governance
problems: this was the purpose. When the board removed Eisner as chair, he
was replaced by George Mitchell, a former senator and current board member.
196
Consequently, Mitchell’s appointment was discussed in the news articles in

relation to this purpose.
To mollify the dissidents, the Disney board did strip Eisner of his role as
chairman of the board. He was replaced by George J. Mitchell, the former
U.S. senator who was already a director. As an olive branch, the move looks
like a failure, since the dissidents view Mitchell as an Eisner ally. Indeed,
shareholders withheld 24 percent of their votes in Mitchell's re-election
(Disney vote the first whimper of shareholder power, 2004: 1).
Former Sen. George J. Mitchell said Friday he feels no need to prove his
independence as chairman of the Walt Disney Co. and challenged criticism
that he is too close to the company's controversial chief executive officer,
Michael Eisner. Since this week's meeting, Mitchell has been working to
correct what he says is a misinterpretation of his relationship with Eisner.
Some shareholders contend that Eisner has too much control over the board
and that directors have been too reluctant to criticize his decisions (New
Disney chairman addresses shareholders' criticisms, 2004: 1).
Once again, however, he pulled off a brilliant political coup. Eisner hired
George Mitchell, the US senator nominated for the Nobel Peace Prize for his
role in negotiating Northern Ireland's Good Friday agreement, to head a so-
called "corporate governance committee". In a move worthy of Machiavelli
himself, Mitchell introduced a new rule saying that directors should retire at
72 -then called on the increasingly troublesome Roy Disney, 73, to give up his
position (The man who took the Mickey, 2004: 4).
Comparisons to Machiavelli are seldom flattering, and this case is hardly an

exception. In fact, this last passage positions Mitchell’s appointment to the
board as the catalytic event that led to Disney’s departure and subsequent
campaign against Eisner. Consequently, it is clear why Mitchell’s appointment
was not accepted by Disney, Gold or the shareholders as a proper means of
redress. Indeed, the headlines of some stories trumpeted this dissatisfaction:
“Dissidents blast new Disney chairman,” “Choice of Disney chairman
disappoints many shareholders.” These articles suggest that Mitchell’s
appointment may undermine the very purpose that prompted appointment.
Indeed, the drama seems to have come full circle, in which the resolution of the
conflict centers on the same individual who helped perpetrate the conflict.
Discussion
The purpose of this paper was to look at media coverage of corporate
governance issues at Disney during a specific point in time. It did not attempt
to measure or define the efficacy of corporate governance at Disney or Eisner’s
197
management style. Rather it looked at how particular stories were presented, as

well as the process through which stakeholders used the media to garner
support and initiate change. Few studies have addressed media coverage of
CEOs; therefore, this study lays groundwork for future research. The findings
and implications are discussed briefly.
First, the research highlighted the emphasis on stories surrounding a single
meeting of the shareholders of Disney and the vote of no-confidence taken
against Michael Eisner. Secondly, the research indicated that the most-
interviewed types of sources were the spokespersons of the institutional
shareholders. These were usually people speaking on behalf of state retirement
systems. Third, there was very little difference in coverage of Eisner among
newspapers. However, proximity to Disney theme parks resulted in more
positive stories.
Overall both the quantitative data and qualitative analysis support a less
than favorable coverage pattern of Eisner’s leadership performance and decision
making of recent takeover events. Once the negative theme was picked-up, all
media followed suit, and the stories were reported from a single perspective.
This is known as herd journalism. Results indicated the stories from 28
newspapers worldwide basically said the same thing and were more anti-Eisner
than neutral or pro-Eisner in spite of increasing revenues at Disney.
Roy Disney’s letter of resignation to Eisner, in which he blasted Eisner for
lack of leadership and direction, was written in November 2003, three months
before Comcast’s offer to purchase the family entertainment giant. Yet the letter
was renewed after Eisner rejected Comcast’s offer. The media may have seen
Disney’s resignation as a smoldering neophyte for the flurry of criticism that
followed, from Eisner’s subsequent removal from the chairman position (he
currently retains his CEO billet), to Disney shareholder’s vote of no-confidence.
As quoted by Patience Wheatcroft in The Times, UK, “When else would you
kick a man, but when he was down?”
While Bennett and Lawrence focus on the media icons related to
environmental issues, this study focused on the icon of Mickey Mouse and all
that the Disney brand represents. Extensive coverage challenged the leadership
of the company and brought to light management behaviors formerly hidden
within walls of corporate boardrooms. Our study indicates the news agenda
favored a narrative that portrayed the Disney controversy in decidedly dramatic
terms, including a kingly CEO with a star chamber, a couple of revolutionaries
leading a populist campaign, and a Machiavelli thrown in for good measure.
Our conclusion may be obvious to some: a good news story is also a good story.
What may be less obvious, however, are the ways in which the elements of a
story are constructed.
This study suggests a number of implications. News and information media
are concerned less with fact and more with issue and innuendo. This supports
An, Jin, and Pfau (2004) who found people pay attention when issues are
examined, regardless of specific factual information. People tend to remember
198
issues and not necessarily the facts. Journalists often exploit this audience nature
and craft issue-oriented stories to be easily remembered. Furthermore, the
research indicates that journalists rely on accessible sources such as public
relations professionals. Therefore, media corporations would do well to focus
on the development of mutually beneficial public relationships. The challenge is
to have the media present a fair and unbiased report to the public which is
increasingly difficult to achieve without the benefit of positive relationships.
At this point, the double entendre of our title should be evident. Eisner is
framed by these stories in the manner associated with academic theory; but he
was also framed in the guttural sense of the word. It is not our place to judge
Eisner’s management style, or his responsibility for Disney’s fiscal problems.
However, his association with other dishonored (and indicted) CEOs by this
newspaper coverage is suspect. It is also a public relations nightmare. Clearly
the rites of degradation have moved outside the discourse of internal corporate
communication and are now played out in the public sphere. Public relations
practitioners can then learn from Eisner’s example. Spin control cannot focus
exclusively on the individual at the center of a controversy, but must also be
mindful of the other elements that complete the narrative and contribute to the
drama.
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Contributors
Soontae An is an assistant professor in the A. Q. Miller School of Journalism
and Mass Communications at Kansas State University. Her research interests
are media management, political communication, and advertising regulation
and policy. She is on the editorial board of Communication Studies. Her articles
have appeared in Journalism and Mass Communication Quarterly,
Communication Law and Policy, and the Oxford Companion to the Supreme
Court of the United States.
Angel Arrese is associate dean at the School of Communication at University
of Navarra, Spain. He is assistant professor of marketing and has been director
of the Media Management Department (1996-2001). His main research
interests are media marketing management and the economic and financial
media markets. Among his main works are La identidad de The Economist
(1995), Economic and financial press: from the beginnings to the first oil crisis
(2001), and Prensa Económica. De la Lloyd’s List al wsj.com (2003). Professor
Arrese is a member of the editorial boards of the Journal of Media Economics,
Journal of Media Business Studies and Comunicación y Sociedad.
Robert Alan Brookey is an associate professor in the Department of
Communication and the co-director of the Laboratory for Interconnectivity,
Networking and Communications at Northern Illinois University. His current
research addresses the impact of digital technology on synergistic practices in
the entertainment industries. His work has appeared in Critical Studies in
Media Communication, Argumentation and Advocacy, and Communication
Studies. Brookey has served on the editorial boards of Critical Studies in Media
Communication, Quarterly Journal of Speech, and Western Journal of
Communication.
Marc Edge is a visiting assistant professor in the Department of
Communication, University of Texas at Arlington. He studies newspaper
competition and is the author of Pacific Press: The Unauthorized Story of
Vancouver’s Newspaper Monopoly and Red Line, Blue Line, Bottom Line: How
Push Came to Shove Between the National Hockey League and its Players.
Elmar Gerum is a professor of organization and human resource management
at the Philipps University Marburg, Germany. His main research interests are
corporate governance, the recruitment of top managers, organizations and
networks, and corporate strategy, especially in the media and
telecommunication industries. Among his main works are
Arbeitsgestaltungspolitik (1981), Der mitbestimmte Aufsichtsrat (together with
Horst Steinmann and Werner Fees, 1988), a large scale empirical study of the
203
German corporate governance system that is currently being updated, and Der
Mobilfunkmarkt im Umbruch (together with Insa Sjurts and Nils Stieglitz,
2005), a strategic analysis of the mobile communication industry in Germany.
Hyun Seung Jin is an assistant professor in the A.Q. Miller School of
Journalism and Mass Communications at Kansas State University. His research
interests are Integrated Marketing Communications (IMC), media economics
and management, advertising, and consumer behavior. His research has
appeared in Journal of Advertising and Journalism and Mass Communication
Quarterly.
Miles McGuire is an assistant professor of journalism at the University of
Wisconsin Oshkosh. He has worked as a daily newspaper reporter, a magazine
editor, and Washington bureau chief for a group of specialty newsletters
covering financial services. His research interests include the effect of the stock
market on corporate behavior. He holds a bachelor degree from the University
of Maryland and an MBA from Loyola College of Maryland.
Robert G. Picard is Hamrin professor of media economics and director of the
Media Management and Transformation Centre at Jönköping International
Business School. He is the author and editor of 20 books on media economic
and management issues, including The Economics and Financing of Media
Companies and Media Firms: Structures, Operations, and Performance, and is
editor of the Journal of Media Business Studies.
Angelea Powers is professor and director of the A.Q. Miller School of
Journalism and Mass Communication, Kansas State University, Manhattan,
Kansas. She received her Ph.D. from the University of Michigan and is an
expert on media management, broadcast journalism, and digital news
convergence. She is a Senior Fulbright Specialist and has been a Fulbright
Scholar at Vytautas Magnus University in Kaunas, Lithuania. She has
numerous publications on media management and economics.
Dan Shaver is an assistant professor at the Nicholson School of
Communication at the University of Central Florida in Orlando and was
previously on the faculty of Michigan State University. Before earning his
Ph.D. at The University of North Carolina—Chapel Hill, he spent three
decades in the newspaper industry, working in both editorial and business
departments. His main research interests are media management and
economics, new technologies and media ethics.
Mary Alice Shaver is the a professor and director of the Nicholson School of
Communication at the University of Central Florida in Orlando. She was
previously on the faculties of the University of North Carolina at Chapel Hill
and Michigan State University. Her main research interests are in media
economics and advertising revenue. She is the author of Make the Sale!: How to
204
Sell Media with Marketing and Strategic Media Decisions: Understanding the
Business End of the Advertising Business.
John Soloski is professor and dean of the Grady College of Journalism and
Mass Communication at University of Georgia. His is a specialist on media
economics, telecommunication policy, and media law. Soloski is the author and
editor of several books including Taking Stock: Journalism and the Publicly
Traded Newspaper Company and Libel Law and the Press: Myth and Reality.
Nils Stieglitz is a research fellow at Philipps University Marburg, Germany,
and a lecturer at Hamburg Media School, Germany. His main research interests
are corporate strategy, organization and innovation management, especially in
converging industries. Among Dr. Stieglitz’s main works are Strategie und
Wettbewerb in konvergierenden Märkten (2004) and Der Mobilfunkmarkt im
Umbruch (together with Elmar Gerum and Insa Sjurts, 2005), a strategic
analysis of the mobile communication industry in Germany.
Ian Weber is an Assistant Professor in the Department of Communication at

Texas A&M University. His main research interests are global media
citizenship, digital broadcasting, and Chinese media development.
205
206
JIBS Research Reports
(1998-1) Nilsson, Ulf: Produktkalkyleringens utformning och användning hos en
mindre underleverantör i fordonsbranschen, Licentiatuppsats i företagsekonomi
(1999-1) Florin Samuelsson, Emilia: Redovisning och små växande familjeföretag,
Licentiatuppsats i företagsekonomi
(1999-2) Forsberg, Svante: Centerpartiet - hemvist i stad eller land? En studie av
centerpartiets interna diskussion om val av strategi gentemot väljarna 1958 – 1973,
Licentiatuppsats i statskunskap
(1999-3) Samuelsson, Mikael: Swedish Family and Non-family Enterprises -
Demographic and Performance Contrasts
(1999-4) Samuelsson, Mikael: Swedish Family and Non-family Enterprises -
Demographic and Performance Contrasts: A Multivariate Approach
(1999-5) Hansemark, Ove C: Teoretiska, metodologiska och praktiska problem
kring entreprenörskap och trait-ansatsen, Licentiatuppsats i företagsekonomi
(1996-6) Salvato, Davidsson & Persson (eds.): Entrepreneurial Knowledge and
Learning. Conceptual advances and directions for future research
(2000-1) Jonson Ahl, Helene & Florin Samuelsson, Emilia: Networking through
empowerment and empowerment through networking
(2000-2) Karlsson, Tomas & Junehed, Johan: Entrepreneurial opportunity
development – Describing and comparing opportunity development processes in
small firms experiencing high growth
(2000-3) Blombäck, Anna: Growth and risk-taking behaviour in SMEs
(2000-4) Eriksson, Agndal, Brunninge, Bäckström & Karlsson:
Jönköpingsregionens näringsliv - Dynamik, drivkrafter och samverkan
(2001-1) Bruns, Volker: A dual perspective of the credit process between banks and
growing privately held firms, Licentiate thesis in Business Administration
(2001-2) Nilsson, Rolf: Agglomeration Economies and Specialisation in
Functional Regions in Sweden, Licentiate thesis in Economics
(2002-1) Salvato, Carlo: Antecedents of Entrepreneurship in Three Types of Family
Firms
(2002-2) Kjellgren, Jonas: Essays on Agglomeration and Sectoral Diversification in
Sweden, Licentiate thesis in Economics
(2002-3) Kyrö, Paula: Benchmarking Nordic statistics on woman entrepreneurship
(2002-4) Agndal, Henrik and Axelsson, Björn (eds.): Networks and Business
Renewal
207
(2003-1) Alberti, Fernando: What makes it an industrial district? - A cognitive
constructionist approach
(2004-1) Eliasson, Christian: Corporate entrepreneurship: A longitudinal study of
determinants and consequences of resource recombinations in existing organizations,
Licentiate thesis in Business Administration
(2004-2) Picard, Robert G. (ed.): Strategic Responses to Media Market Changes,
Media Market and Transformation Centre
(2004-3) Andersson, Martin: Studies of Knowledge, Location and Growth,
Licentiate thesis in Economics
(2004-4) Sciascia, Salvatore (ed.): Exploring Corporate Entrepreneurship.
Entrepreneurial Orientation in Small and Medium sized Enterprises
(2005-1) Picard, Robert (ed.): Corporate Governance of Media Companies, Media
Market and Transformation Centre
208

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ROBERT G. PICARD (ed.

Corporate Governance of Media Companies

© 2005 Robert G. Picard and Jönköping International Business School Ltd.

Printed by ARK-Tryckaren AB, 2005

Corporate Governance : Issues and Challenges 1

The Effects of Interlocking Directorates on the Financial Performance 11

Hidden Costs and Hidden Dangers: Stock Options at 29

The Effects of Governance Structure on Reinvestment Strategies 47

Taking Stock Redux: Corporate Ownership and 59

Corporate Governance and News Governance in 77

Corporate Governance, Ownership Structures, and Corporate Strategy 127

Risky Business: Rupert Murdoch and 147

The Pain of the Obdurate Rump: Conrad Black and 165

Michael Eisner was Framed: Newspaper Narrative of 183

Corporate governance issues and challenges are rising in contemporary society

Prof. Robert G. Picard, Director

Corporate governance issues have risen to prominence in recent years as a result

The Context of Corporate Governance

The Rise of Publicly Owned Media Firms

Principles of Good Governance

An investor that has been particularly active in promoting good corporate

Media and Good Governance Principles

is related to better financial performance or fewer or increased governance

Blankenburg, W. & Ozanich, G. (1993). The effects of public ownership on

CalPERS [California Public Employees Retirement System] (2004).

Carlsson, R (2001). Ownership and value creation—Strategic corporate

Clark, T. (2004). International corporate governance: A comparative approach.

Coase, R.H. (1937). The nature of the firm, Economica, 4, 386-405.

Demsetz, H. & Lehn, H. (1985). The structure of corporate ownership: causes

Eisenhardt, K. M. (1989). Agency theory: An assessment and review, Academy

Forbes (2003). Forbes Global 2000. http://www.forbes.com/2003/07/02/

Maguire, M. (2003). Wall Street made me do it: A preliminary analysis of

Meyer, P. & Wearden, S.T. (1984). The effects of public ownership on

Mickelwait, J. & Wooldridge, A. (2003). The company: A short history of a

OECD [Organization for Economic Co-Operation and Development] (1999).

OECD (2003). Survey of Corporate Governance Developments in OECD

OECD (2004). OECD Principles of Corporate Governance, Draft Revised

Picard, R.G. (1994). Institutional ownership of publicly traded U.S. newspaper

Sarbanes-Oxley Act (2002). Public Law 107-204 (HR3763).

Williamson, O.E. (1964). The economics of discretionary behavior: managerial

The Effects of Interlocking Directorates on the

Corporate governance research has identified a variety of factors associated with

increased financial dependency were more likely to appoint representatives of

Board Composition and Financial Performance

perspective contend that superior corporate performance will be linked to a

Newspaper Public Ownership and Financial Performance

Data and Measurement

include banks, insurance companies, investment companies, and diversified

Analysis and Results

Table 1. Representation of Financial Institutions from 1988 to 2000

Company Financial Institutions on the Board

Table 2. Representation of 100 Leading Advertisers from 1988 to 2000

Company Leading Advertisers on the Board

Results of the regressions in Table 3 report the strength of association as well as

Table 3 Hierarchical Regressions on Profitability

Effects 1) ROA 2) ROE

institutions was negatively related to a firm’s profitability, while the ratio of

Baysinger, B. & Buttler, H. (1985). Corporate governance and the board of

Baysinger, B. & Hoskisson, R. (1990). The composition of boards of directors

Bianco, M. & Pagnoni, E. (1997). Interlocking directorates across listed

Blankenburg, W. &Ozanich, G. (1993). The Effects of public ownership on

Boyd, B. (1994). Board control and CEO compensation, Strategic Management

Burt, R. (1983). Corporate profits and cooptation: Networks of market constraints