Knight Newspapers went public on April 22, 1969, with an initial offering of 950,000 shares. John S. Knight had yielded the titles of chairman and chief executive officer to his brother James L. two years earlier, but he retained the title of editorial chairman. In that role, and because of his history as a founder of the company, he was invited to speak at a meeting of Wall Street analysts. He told them, “Ladies and gentlemen, I do not intend to become your prisoner.”
In an interview with Dan Neuharth years later, Knight recalled that occasion. “I told them why. I said that as long as I have anything to do with it we are going to run the papers. We are going to spend money sometimes that they wouldn't understand why, for future gains and we did not intend to be regulated or directed by them in any respect.”
Knight's associates never took him to another analyst meeting.1
It was easier to keep Wall Street at arm's length in those early days because the Knight family retained 58.8 percent of the shares after the initial offering. By the time of Alvah Chapman's tenure as CEO from 1976 to 1988, the company had become Knight Ridder, but still had insider control, even though “family” was defined more broadly by then.
“We used to have family... shareholder meetings,” Chapman recalled after his retirement. “It was my family and Lee Hill's family and Bernie Ridder's family and Tony Ridder's family and all the Ridders and all the Knights and the foundation. We used to keep score, and it was like 56–57 percent in my time. It's gone downhill quite a bit from there.”2
By 2002, institutional and outside investors controlled about 90 percent of Knight Ridder stock, according to P. Anthony Ridder, who became CEO in 1995. Contacts with investors and analysts became more intense. “Since I have been CEO,” said Ridder in 2002, “the number of meetings has increased dramatically, and institutional investors expect you to call on them.”3
This need to answer to outsiders was a major cultural shock to newspaper companies, which had traditionally been managed in a fairly informal way. This chapter traces that development through interviews with present and former officers of three publicly held companies, Gannett, Knight Ridder, and McClatchy. They have been differently managed, but their three histories have a common thread: their transitions were executed by people who had been socialized to the ideals of social responsibility at newspapers operated by the Knight brothers and their news-editorial guiding light, Lee Hills, in the 1960s and 1970s.
A little bit of this history, I witnessed firsthand. In 1962, I left my reporting beats at The Miami Herald to become the Akron Beacon Journal's correspondent in the Knight Washington Bureau. Edwin A. Lahey, the bureau chief, told me, with a touch of pride, “The Knight Newspapers come together in only two places. One is the Washington Bureau, and the other is Jack Knight's briefcase.”
Alvah Chapman
It was true. Knight Newspapers consisted of just five newspapers owned by four companies, which in turn were owned by the Knights. “There were minority stockholders in Akron and minority stockholders in Charlotte,” Chapman recalled in 2002. Their investments were based on faith in, and personal knowledge of, the Knights.
“They never had seen an operating statement. It just never had been done,” said Chapman. There was a board of directors consisting mostly of people who worked for the Knights, and it met just once a year.
“They passed out numbers, and they took up the numbers at the end of the board meeting. They didn't let the directors even keep the numbers to ponder over.
“The executive committee was formed the week I joined the company [1960]. It was formed because Jim Knight decided to build the Herald building and forgot to tell his brother Jack about it.... Jack thought it was going to bankrupt the company. They build a $25 million building. It was just an oversight he forgot to tell his brother about.”
Chapman had graduated from the Citadel in 1942 with a major in business and served in the Army Air Corps as a bomber pilot. He learned the newspaper business on family newspapers in Bradenton, Fla., and Columbus, Ga.
“My father was a newspaper publisher. My grandfather was a newspaper publisher. I knew I wanted to be a newspaper publisher when I went to college. I took business because I knew that's what I wanted to specialize in. I knew the journalism thing would come along by absorption.”
As the youngest member of Knight's brand-new executive committee, Chapman was assigned to set its agenda. That gave him plenty of freedom to poke around. He found some interesting things, such as $15 million in bank accounts that were not drawing interest—overlooked because of the lack of a consolidated financial statement. Jim Knight believed that The Miami Herald never gave refunds when a wrong telephone number or other critical error appeared in a classified ad. Chapman investigated and found that the ad staff kept its records in pencil and just erased an entry to prevent an unjustified charge from being made when an error occurred. He instituted a record-keeping system that let management track errors and know how much they were costing.
Erwin Potts
When Erwin Potts left The Charlotte Observer for McClatchy newspapers in 1975, he found a tradition of informality that reminded him of the Knight newspapers a decade earlier. Potts's first job after college had been with the Charlotte News, and he never forgot the thrill of his first page-one byline. After service in the Marine Corps, he joined The Miami Herald as a reporter at about the same time that Alvah Chapman was walking around with a clipboard, tightening up procedures on the business side. Potts was city editor of the Herald when Knight Newspapers went public, and Chapman, then executive vice president under Jim Knight, brought him downstairs to be his assistant. The deal was that Potts would go to Tallahassee to be general manager of the Democrat if his business-side stint worked out. It did. He later moved on to Charlotte, where he was serving as general manager when Knight and Ridder merged.4
The nature of the company changed in that time period. Part of it was the greater administrative structure required by the company's size and part was the increased centralization and command-and-control structure put in place by Chapman. The effects of going public were starting to kick in, especially when a recession in 1973–74 led to demands from headquarters for cost cutting. Potts was thinking that the newspaper business wasn't as much fun as it used to be when he got a call from a headhunter working for McClatchy. The company was going outside to look for professional management. Out of curiosity, Potts went to Sacramento to meet the family.
“Eleanor McClatchy was in her 70s then, and she was still in charge of the company. And it was one strange company. It was weird. Totally private. Eleanor was the boss. She ran everything. Nobody crossed Eleanor. She was a sweet wonderful little lady, like your favorite aunt.
“But for 30-some years she had been running that company. Three newspapers, seven radio stations and two television stations. And the guys who worked for her were her department heads. They were her board of directors and the only board of directors she had. C. K. [Eleanor's nephew] was the editor and vice president. She had already made it clear he was to succeed her. I got along well with him from the start, and I got along well with her from the start. And I liked them both. They were simple and unpretentious. It was a totally different environment from Knight Ridder. Very low-key. To be ambitious was a no-no.”
But Potts soon found himself in the same role that Chapman had assumed back at Knight Newspapers, making things work with more transparency and efficiency. He did it with a laid-back California style.
“One of the attractions of McClatchy to me was that it was private. For most of my early years at Knight, it was private. The public-company pressures weren't unbearable but it sure changed the environment at Knight. And particularly when it became Knight Ridder, there was much more pressure for profitability, and it was a little less emphasis on personal relationships. Part of it was size. McClatchy was the opposite of all that. It was a smaller environment. It was very private. It was very personal.
“C. K. was a guy with a wide open mind. You could walk into his office and say, C. K., I think we ought to buy The New York Times and here's how we can do it. If you made a credible case in twenty minutes, you'd be doing it. And that's not too much of an exaggeration. He didn't want an hour, just twenty minutes. I loved working that way. I had spent a year or two in Charlotte trying to get a new computer system approved by the corporate office in Miami and had gone through paperwork and jumped through all sorts of hoops and still hadn't gotten the damn thing.
“In McClatchy, all I had to do was walk in and say C. K., we need a new computer system. He might call the financial guys and say do we have enough money to buy a computer system, but that was it.
“It was just a lot simpler and a lot easier to do things. Now if you wanted to do something like change a picture on a wall, that could be a major issue. One of the few times Eleanor ever got mad at me, or not even me but a guy who worked for me, wanted to change the wallpaper in the cafeteria. It had been in there for like 50 years. And we didn't think to ask Eleanor, and when that wallpaper was changed, it was a major blunder.”
Al Neuharth
A perceived need to make operations more efficient was also what led Gannett Co. to raid the Knights for executive material. Al Neuharth was assistant managing editor of The Miami Herald when Jack Knight and Lee Hills decided to move him to what Knight called the “hard-ball” market of Detroit. Their Detroit Free Press faced a difficult competitive situation. The Knights had lost their bid to buy the failing Detroit Times, and The Detroit News snapped it up, acquiring enough circulation to be the dominant daily in Detroit.
Neuharth was just the kind of scrappy competitor they needed. Raised by a single mother in difficult financial circumstances in South Dakota, he served with the 86th Infantry Division, part of George S. Patton's Third Army in Europe. After the war, he attended the University of South Dakota on the G.I. bill and took a $50-a-week job with the Associated Press. Then he launched his first business venture, a statewide sports weekly called SoDak Sports. It failed, and Neuharth got as far away from South Dakota as he could, landing a reporting job at The Miami Herald in 1954. “Getting to the top,” he would say later, “means taking one smart step at a time. Managing, maneuvering, manipulating your way from one stepping stone to the next.”5
Gannett was a smaller outfit, but that step gave him more responsibility, as operating head and general manager of the two Rochester newspapers, the Times-Union and Democrat and Chronicle.
“We were too small, a little old shit-kicker company from Rochester, N.Y., to get a hell of a lot of attention,” he recalled.6 He got attention by drawing on his knowledge of Florida and persuading Gannett to invest close to $10 million in a new daily for the booming Cape Kennedy market. Florida Today was launched in 1966, and it broke into the black less than three years later.
Going Public
Newspaper companies go public for different reasons. For Gannett, it was to raise capital for acquisitions.
“We were a newspaper company and we wanted to grow as a newspaper company. But as a small, private company there was a limit to how much we could leverage ourselves.” After a major acquisition, “our borrowing capacity was pretty much at its limit and we couldn't see where we were going to go unless we had a public tank to dip in.”
In 1967, when Neuharth was executive vice-president, Gannett got its public tank, and further acquisitions began. By 1979, the company owned seventy-eight daily newspapers, a national news service, seven television and fourteen radio stations, billboard operations in the United States and Canada, twenty-one weeklies and the research firm of Louis Harris & Associates.7
Knight Newspapers went public two years later, but for different reasons. The Knight brothers were getting along in years, and they worried about the possibility of the company being broken up or sold to pay the estate taxes. Correspondence collected by Jack Knight's biographer, Charles Whited, shows what the older brother was thinking. In a letter to Basil “Stuffy” Walters, who had been his editor at the Chicago Daily News, Knight wrote: “Under our peculiar tax laws, which prevent the accumulation of ‘excessive reserves,’ a company which might wish to remain small has either to pay this money out in dividends or acquire another property. Thus, the small get bigger. Strange reasoning, isn't it?”8
In a letter to his brother Jim, he continued to worry about the temptations of growth. “I think we have objectives other than simply trying to see how big we can become.... Sometimes the lure of bigness tends to make newspaper publishers forget their prime responsibilities.”9
After the public offering in 1969, the urge to grow was quick to kick in. The first big acquisition was Walter Annenberg's Philadelphia Inquirer and Daily News. The deal did not have the unanimous support of the executive committee. Jack Knight voted “no.”
For McClatchy, the motivation for going public was more like Knight's than Gannett's. As Erwin Potts recalled the situation, the decision came as a surprise.
“I remember one day C. K. walks in my office and says I think we ought to go public. And he knew how I felt about going public because he knew that's one of the things I liked about McClatchy was that we weren't public. I looked at him like I thought he was crazy. What's this all about?
“He said the kids are getting older and we need to think about what happens if I die or if Jim McClatchy, his older brother dies. We could have problems. I think that was one of the primary motivations. He was right. Two years later, he was dead. And the transition was fairly orderly whereas it would have been very chaotic if it was a privately held company... .
“The shares were already on the market. There was liquidity. People were able to sell shares for estate tax purposes or whatever. It clearly had been the right thing to do, although I didn't think so at the time and sort of made a pest of myself over the issue. I did not make any bones about it. I told him I don't think we have to do this. I just don't think there's any compelling need to do it. But once he made up his mind about what he was going to do, he was a very strong guy.” The company went public in 1988.
But C. K. McClatchy did take a precaution that the leaders of Knight and Gannett had not. He saw to it that two classes of stock were created. The A shares, a majority of the total at first, were kept in the family and given a 10–1 voting advantage over the B shares that went to the public. Over time, as various family members died or cashed out, A shares were converted to B, and the public gained a majority of shares, but the family still maintained overwhelming control of the voting power.10
Adjusting to Wall Street
Gannett Company was the first traditional newspaper company to embrace Wall Street, and the relationship was smooth. Neuharth got it off to a good start by realizing that analysts were graded on their short-term performance, and so he created a program of earnings management to give them the quarter-to-quarter predictability they wanted. He also educated them about the newspaper business.
“In those days, Wall Street knowledge of newspapers was limited to New York City,” Neuharth recalled in 2002. “And most of them were dying. So they were sure it was a dying industry. All they had to do was look around. You went from 10 newspapers to four in five or six years. And so they (investors) thought union problems, high cost, television dipping into your advertising pie....
“And so.... we tried to educate them that the newspaper business was not New York City. The newspaper business was Rochester and Elmira and Westchester and New York state. And it was the small and medium sized cities around the country that represented the newspaper business, and they were all doing damn well. Some of them had licenses to steal, as you know.”11
John Morton, a former journalist who became an analyst and then a newspaper consultant, has said that Wall Street analysts would rather see a company increase its earnings 400 percent in steady increments than gain 500 percent in zigs and zags.
“I know it's irrational,” he told a seminar in Chapel Hill, “but it's exactly the way Wall Street thinks, and, of course, the person I was quoting was Kay Graham who very famously once said that.... we don't manage our earnings, we'd rather get from zero to 5 in zigs and zags than to 4 in smooth lines. She told that to a bunch of security analysts from major financial institutions, and a whole bunch of them went out the next day and sold out their Washington Post stock....
“There were, of course, buyers on the other side of all those transactions. I once pointed out that somebody who was a buyer at what was then about $17 a share recently enjoyed a price of about $560 a share.”12
Neuharth's level-performance strategy was made easier by the relatively small size of the newspapers in Gannett. A small-town monopoly newspaper owned the tollgate on the flow of information between a retail merchant and the customers. That's why he called owning the newspaper “a license to steal.” Big city papers had more chaotic markets and a greater likelihood of competition. They were also more likely to have to deal with unions. But earnings smoothing, as Neuharth recalled, was “a piece of cake” for monopoly newspapers in smaller and medium sized communities.
“We managed it for quarterly earnings gained. We just shifted the cost. Nothing illegal. You just figure out what you're going to do, when you're going to build a new plant here or there or somewhere else and smooth it out. Managing monopoly newspapers is the easiest executive job in the world.... particularly if they're in small or medium sized communities because you can manage everything. Newsprint is not as big a factor. You get into the big cities, the Canadian newsprint manufacturers have a hell of a lot to say with whether you have up or down quarters or years. It's much less of a factor with small newspapers.”
There were some external factors that made it easy for Gannett and other newspaper companies in the 1970s. Cold-type printing technology was replacing the old hot-lead system by then, and computer pagination was moving work from the composing room, which was more likely to have a strong union, to the newsroom. In the early cold-type processes, stories and headlines were printed out on paper and pasted up on page forms whose images were transferred to the printing plate by a photographic process. That technology eventually evolved into a direct computer-to-plate method, which meant that copy editors in the newsroom could do all of the work formerly done by compositors in the back shop. Some of the cost savings were applied to better printing with more color, better detail in the photographs, and ink that didn't rub off on the reader's hands. That still left plenty for the bottom line.
Another factor that helped smooth earnings growth was inflation. One of the generally accepted accounting principles (GAAP) is the money-measurement principle. A newspaper might win Pulitzer prizes, have an appealing design, and serve as watchdog and guardian of its community, but all accountants look at is the nominal value of the money it makes. When there was double-digit inflation, that factor alone could account for most of the 15 percent annual increase in nominal earnings that Gannett used to impress Wall Street.
Accountants don't focus on nominal dollars out of ignorance. There's just no uniformly agreed-upon method for arriving at inflation-adjusted dollars. Both the Consumer Price Index and the Gross Domestic Product Deflator have applications for limited ranges of cases. Keeping accounts on an apples-to-apples basis for a wide range of business applications to compare at a given point in time is easier with nominal dollars.
By the 1980s, inflation began to ease, and it became harder to squeeze new savings from innovative production technology. It was also then that Gannett delivered a shock to Wall Street: a risky new venture, USA TODAY. Looking back years later, Neuharth saw it as proof that the company had not been deterred by Wall Street from making long-term and risky investments.
“If you want to look at the numbers, our stock went to hell when we announced USA TODAY. We were ridiculed. We were convinced it was a long-term investment that had a good chance of paying off. Not a sure bet, but a long-term investment that had a good chance of paying off pretty big. And if it didn't we could slash a good bit of what we were spending on our other newspapers. So we paid no attention to Wall Street. Had we, we wouldn't have launched it, (or) we would have folded our tent after the first year.”
Gannett's early success with Wall Street did not go unnoticed by other newspaper companies. In my brief time at Knight Ridder corporate headquarters (1978–81), some of us in middle management cursed Neuharth for setting the profitability bar so high. We had larger papers, and the price of newsprint was a major and uncontrollable factor. We also had chronic labor problems in Detroit and Philadelphia.
But Alvah Chapman, who was present for the transition of Knight Newspapers from a private to a public company in 1969 and who oversaw the merger with Ridder Publications in 1974, remembered only admiration for Neuharth.
“I felt he was setting a standard to move us all up the scale,” recalled Chapman in a 2002 interview. “That's all.”
In Chapman's view, Wall Street's preoccupation with quarterly earnings growth was not all bad. “There's some discipline there that a well-managed business needs to be aware of at least to protect itself.... You program your costs to the extent that you can, some of it you can't program, you can't control. You have to go ahead and take them when you get them. To the extent you can manage your business so that you do no damage to the quarterly earnings, it's better to do it that way.”
For Chapman, the connection between profitability and quality journalism was obvious. He was asked if taking the company public inhibited it from making long-term investments in quality.
“I don't think so. We made decisions like merging Knight Ridder after we went public. We expanded our Washington Bureau, doubled the size of the Washington Bureau, after we went public. We added our overseas bureaus after we went public. We started Business Monday after we went public. We started the Neighbors sections after we were public.”
He remembered the statistics from his administration of the company in detail from the merger (he oversaw the merger and became CEO two years later) to his retirement.
“In my fifteen years, from 1974 to 1989, Knight Ridder's stock grew 23 percent, compound growth rate. We had fifteen straight years of increased earnings per share. We won thirty-seven Pulitzer Prizes in that period of time....
“Each year.... we increased our contributions budget for community responsibility. So there's responsibility to the readers, the community, the employees. We were in the 100 Best Companies to Work for in America twice. The first two editions that came out, both editions covered Knight Ridder. That's not so now.”
But the pressures of being a public company were felt at lower levels. I worked for James K. Batten when he had the painful job of carrying the bad news about earnings requirements out to the individual newspapers for which he was responsible. The emotional burden was heavy. From the news-side perspective, the main tool for smoothing earnings was the contingency budget. Under normal circumstances, a budget is a planning tool. Under the contingency system, editors had to produce several layers of planning with each budget. If revenues fell below a certain point, a contingency plan was triggered which meant, in effect, a budget cut in the middle of a planning year. There were no layoffs in those years, but projects got postponed and staffs were thinned through attrition in times when advertising was down.
It was in that period that Erwin Potts decided that managing a Knight Ridder newspaper wasn't fun anymore, and he jumped to McClatchy. When that company went public in 1989, he took advantage of the family voting power that made it possible to keep Wall Street at more of a distance.
Some of his early Wall Street conversations contained echoes of John S. Knight two decades earlier.
“We said early on to the analysts, in any public presentation we made, that we consider ourselves a quality newspaper company, and we did not intend to operate in a manner that required quarter-to-quarter gains in profitability constantly. If people wanted that kind of investment, they really shouldn't invest in us. We're a long-term good investment. And that's proven to be the case, if you look at our stock. We think that over a period of time, we'll be good. We'll be adding value to your investment as time goes on. But we're not going to do it like hamburger franchises. We're going to manage the business the way we think good newspaper people and good business managers should manage it, for long-term value and also because we think that a good newspaper has to be a good citizen and that those are not incompatible objectives.”13 As the company grew, Wall Street became more interested, Potts recalled.
“We went to the forums they had in New York City and we made presentations. We were attentive to the analyst community. We didn't ignore them. But we didn't feel like we had to dance to their tune if it was contrary to what we thought were the best interests of the company. And I think that's an advantage that we've enjoyed over the Gannetts and the Knight Ridders and the other companies that are not positioned the way we are. I don't want that to sound like the management is not responsive to the financial community. It is. After all, if people don't invest in the company outside the family, then the stock isn't going to have a public value and is not going to be worth anything to the family or to anybody else. You can't ignore those things. We've always had a profit motive, a strong profit motive.”
Like Chapman, Potts saw some benefit in the discipline of the market.
“You've got to make money, in any business. In the newspaper business you've got to make it if you want to do the things you need to do to make newspapers better. Our company is a good example in the past of how those things could work against you if you didn't make money. The Sacramento Bee's building was falling down back in the 1970s. The presses were ancient. So was our pre-press equipment. We needed everything under the sun but we couldn't buy it. We'd have to go to the bank and beg.
“And today, we can invest in equipment if we need to, to make a better-looking newspaper. We can invest more in staff in newsrooms. And we continually reinvest in the newsroom. Gary Pruitt, my successor, is fond of saying this, and I think it's very true: as a company, historically, we have never been boom or bust. If the economy's good we don't go out and hire ten new reporters because the economy's good. When it goes bad, we don't lay off either.
“But we have steadily improved. We're always, constantly investing in improvement.”
One of the benefits of this even-handed management is a happier workplace.
“People feel better about the company,” said Potts. “They know they can make a career there. They know they can make a commitment to the company. The company has a commitment to them, as well. That's changed a lot in the business world at large. Double commitment back and forth doesn't seem to apply in many companies anymore. We've taken a lot of care with that over the years.”
The Next Generation
For the next generation of managers, things did not go nearly as well. Al Neuharth and Alvah Chapman both retired in 1989. Chapman's successor at Knight Ridder was James K. Batten, who had given up a job he loved, editor of The Charlotte Observer, to get on the corporate ladder. Buzz Merritt recalls visiting him in Miami. They were old tennis buddies, and Merritt had been Batten's first editor at The Charlotte Observer.
“He said let's go get a sandwich, and we got in his car, and I said, ‘Jim, why in the world did you give up the editorship of a great newspaper, with all your news background, in order to become a corporate officer?’
“And his response was, ‘Somebody has to watch the bad guys.’”
In the top job, Batten remained an able advocate for the news side, but an untimely brain tumor forced him to yield the reins to P. Anthony Ridder several years ahead of the planned schedule. Batten died in 1995.
Tony Ridder had earned the nickname “Darth Ridder” among the editors when he performed the task that Batten had hated, carrying the bad news from headquarters about budgets to the individual newspapers. Ridder had been a reporter early in his career, but his management jobs were business side. That made him a logical successor to Batten, given the Knight tradition of alternating between business experience and editing experience in the top job. What was lacking was a strong number two and heir-apparent to protect his back on the news-editorial side. An anecdote from Buzz Merritt illustrates the problem.
“We had an editors-only meeting shortly after Jim died.... [Ridder] gave his usual speech about you can have quality and high returns, too. And then there was a traditional Q and A. This is a roomful of editors, and somebody, I forgot who it was, asked what worries you, what keeps you up at night?
“He thought for a minute and said, ‘Electronic classifieds.’ And the air just went out of the room. And the evening was over.”
Rationally, Ridder's answer to the editor's question was a sound one. If the Internet was to become the substitute technology that would destroy newspapers, the effect was likely to be felt first in classified advertising. But a better answer for that audience would have been phrased in terms of the danger to newsrooms in that very real threat. If Batten had been asked that question, he might have given the same answer, but couched it like this: “My fear is that electronic classified advertising, which is starting to grow, will become the leading edge of a force that deprives of us the means to carry out our traditional First Amendment responsibilities to our readers and their communities.”
Tony Ridder's biggest problem was not of his making. It was on his watch that the game got much harder. The cost savings from new production technology were about used up, and newsprint prices took a big jump in 1995. In constant 2003 dollars, the eastern USA price went from $580 per metric ton in 1994 to $797 in 1995. That made newspaper managers think twice about trying to maintain circulation levels in the face of such a high variable cost.14
The price of newsprint eventually found its way back to the pre-1995 level, but it took the rest of the decade. Newspapers could still show earnings growth, but they had to raise prices and cut costs to get it done. The exuberant investing style that produced the stock market bubble of the nineties turned the analysts of Wall Street into celebrities and intensified the tendency toward short-term thinking.15
It also raised the visibility of analysts who worked on the sell-side. The analyst community is divided into the sellers of research, who generally work for brokers and investment bankers, and the buyers of research who represent large institutional investors such as pension funds, insurance companies, and endowed non-profits. Pressure on public companies came from the sell side. John Morton, the former analyst described the incentive structure:
“There is this great deal of pressure on the buy side to have their portfolio increase, because that's basically how they're graded, and so the sell-siders want to sell them information that makes them happy, and so they put pressure on the companies. I mean it's exactly like that. And that's where the pressure comes from.... It's the pressure particularly from sell-side analysts to produce predictable events and no surprises.....
“When I first got into this back in the early seventies and I was a Wall Street analyst, it was unheard of for a company to give earnings guidance to Wall Street.... But they all do that now, except for The Washington Post .... They basically tell Wall Street what they're going to earn, and, and if there's anything that happens to cloud that, you know, they'll alert you right away because they don't want there to be any surprises.”
Short-term prediction, in Morton's view, became more important than fundamental research, and that's a reason he left the business.
“You suddenly had analysts who don't do any research at all. They're recommending companies out there that, if you looked at their cash flow balance, were heading for a cliff.”
His view is echoed by people on the other side of the analyst-company relationship. While the people who were CEOs at the time newspapers started going public had fairly benign views of Wall Street, managers at the turn of the century were more guarded. Douglas H. McCorkindale, who took the reins at Gannett from John Curley in 2000, said, “The quality of analytical work on Wall Street, in my view, diminished in the late 90s. I think that too many of them didn't do their homework. I was fascinated by analysts issuing earnings estimates on Gannett and writing pieces about Gannett and never calling us and asking us a question.”
McClatchy's Gary Pruitt, who became CEO in 1996, took a parallel view. “I think the analysts don't do enough independent analytical work. What they do is too often just repeat what management has said as opposed to doing independent work.”
This weakness created the need for more intensive communication efforts on the part of the company, according to Pruitt. “Sometimes if you don't speak to the analysts or don't give guidance or don't talk about what you are doing, I fear we cast our fate to folks who are going to define the company for us. And I don't want to do that.”
Both Pruitt and McCorkindale were lawyers who joined their respective firms as general counsels. McCorkindale was chief financial officer before taking the top job at Gannett, and Pruitt was vice president of operations and technology for McClatchy.
The analyst-company relationship was complicated by Wall Street corruption in the 1990s. The crash of the dot-com bubble brought attention to conflicts of interest among analysts whose pay structure rewarded them for bringing in investment banking business. This arrangement created a temptation to make a company look better to investors than it really was, in order to land it as a client.
Tony Ridder remembered that period. “Here's somebody that's really supposed to be like a reporter bringing, in effect, an ad salesman with him, saying, ‘Look, I'm going to do the story on you and right next to me is an ad salesman. Why don't you spend more money in the Kansas City Star?’”
The same thing happened to McCorkindale at Gannett.
“I've had analysts come in here, with their investment bankers, and make the pitch as to why we should hire them and hint how positive their report could be. I told them to get the hell out of the office. That happened during the last couple of years.”16
Ridder saw reforms taking hold.
“The thing is,” he said in 2002, “it's hard to generalize about analysts because most are very principled. I think 95 percent of them are damn smart. They ask very good questions. They might like to get more business somehow, but I think most are honest about it.
“I think some are interested in the quality of the journalism. Some are not. Some just view it as a business. Some don't. Some believe that there's a relationship between the quality and the future growth prospects.”17
One additional source of stress for editors at both Knight Ridder and McClatchy in the nineties was the continuing movement to a more centralized management. Unlike editors at Gannett, they had become accustomed to a system of editors and business managers reporting separately to corporate headquarters. That meant every editor had an advocate at headquarters, but it bucked too many problems to the top. At McClatchy, Potts started to change that in 1991 when he named Gary Pruitt publisher in Fresno. Under the local-publisher system, one person reported to headquarters on behalf of both the news and business sides. There was efficiency in that because conflict got resolved at a lower level. But it left editors feeling more vulnerable to pressures from the business side.
When Merritt was editor in Wichita he saw one unexpected consequence of centralization. Papers started buying basic supplies and services like travel and film through the corporation's central purchasing service. That saved money, he said, but the business managers “were astonished when the camera business in Wichita we bought our film from stopped advertising in the newspaper. They were stunned....
“Now how're you going to make up for the fact that the camera company isn't advertising in our newspaper? Publishers and owners and people who are bosses have to be convinced that the financial success of their newspaper is dependent on all those things. It is dependent upon the success of the community, not only financially but civically and every other way.”
Layoffs also have an impact on the community. If the reporters are secure and happy, the community is probably going to be happier with their product. In 2001, a massive wave of reductions in force, through buyouts, attrition, and layoffs swept through the industry. Knight Ridder's cuts drew more attention than most. One catalyst was the very public resignation of Jay Harris, the publisher in San Jose, and his emotional farewell to the American Society of Newspaper Editors.
Harris had gained recognition as an early adopter of precision journalism when he used a computer to do investigative reporting for Gannett's Wilmington (Delaware) News Journal. While on the faculty at Northwestern University, he designed ASNE's first census of minorities in newsrooms. After Harris rejoined Gannett as a national correspondent, Jim Batten recruited him and put him on Knight Ridder's executive ladder. He was Tony Ridder's assistant before becoming publisher of the San Jose Mercury News.
His problem with the budget cuts in San Jose, he said, was not just their magnitude, but the rhetoric in the deliberations, which focused “myopically on the numbers.”
“What troubled me, something that had never happened before in all my years in the company, was that little or no attention was paid to the consequences.... There was virtually no discussion of the damage that would be done to the quality and aspirations of the Mercury News as a journalistic endeavor, or to its ability to fulfill its responsibilities to the community.”18
By that time, aggressive earnings management had been built into investor expectations. Tony Ridder was still four years away from the breakup of his company when he rationalized the cuts as merely “what other public companies are doing.”
“If the whole industry was basically going along with the flow, then it would be a lot easier to go with the flow. But when the industry is reducing head count and cutting back on spending, the price of our stock would be killed if we didn't react to the situation.”
But when Rick Edmonds analyzed the situation in 2002, he found that Knight Ridder had been reacting more strongly than other companies. The company's stated goal in response to the economic downturn that began toward the end of 2000 was to trim news staffs by 10 percent. At other public companies, in Edmonds' analysis, staff changes ranged from no more than 5 percent cuts at worst to modest increases at best.
“Knight Ridder accounted for an astonishing 60 percent of the net cuts among public-company newspapers in this analysis during 2001,” Edmonds reported. Cutting staff size was nothing new at the company, but it had usually been done through attrition—not replacing people who left of their own accord. Layoffs were quicker but came at a greater social and human cost.
There was a historic rationale for Tony Ridder's actions. The news staff buildup under Chapman and Batten had made analysts uneasy because it departed from the only gauge they had, the industry average. “So,” said Edmonds, “as management said, the 2001 cuts were more a remedial action to bring staffing levels closer to the industry norm than a pace-setting move.”19
But what if the “norm” was the wrong strategy? What Jane Cote and Jerry Goodstein called “herding behavior” among analysts translated too easily into herding behavior by newspaper companies. Few analysts ever want to stand out as different, because “joining the consensus provides cover” for their reputations.20 CEOs can seek the same cover.
Gannett went through the 2001 downturn without layoffs only because it was already at or below the norm. There was nowhere to cut. Its staffing had been bare-bones to start. McCorkindale saw some irony in this.
“There are a lot of good analysts who do a consistently good job, ask questions, blunt questions, many questions we don't want to answer. But one of the things they see is that Gannett doesn't have a lot to cut because we don't have a lot of extra cost to begin with.
“Therefore they focus on a company that's more casually managed, where they can cut and get a better result. They'll have that type of company on their buy list. And there's nothing I can do about that except to say, ‘Don't you pay for management?’ To be surprised ... because all of a sudden advertising is down, doesn't make sense. If you're paying attention to this business, which is not that complicated, you will not be surprised. It's a pretty straightforward business. It's a very cash flow positive business. You know what the receivables are.... I don't know how you can be surprised if you are paying attention.”
McCorkindale did not believe that Gannett would behave any differently if it were a private company—and might even be at a disadvantage.
“A number of companies that have had family votes to protect the management structure were very comfortable. And, in many cases, they'd get into union agreements that were just silly. It had nothing to do with compensation. It was agreeing to work rules. They're all changed now. If they had been on the firing line to perform, they might not have been quite so comfortable. So, no, I don't have any trouble, and we don't get any real financial pressure from Wall Street that we react to.”
Some incidents in Gannett's history bear him out. The creation of USA TODAY was a prime example of a public company going against the short term concerns of the analysts to make a large and risky investment. McCorkindale remembered a more recent case.
“We bought Multimedia [Cablevision, Inc.] in 1995. We stepped up and I decided we're going to buy the whole thing. Everybody wanted to buy a piece. I said ‘no, we can do the whole thing.’ Wall Street immediately came to the conclusion that Gannett knew nothing about the cable business, so we should sell it right away. Get rid of it for $800 million. But we sold it four years later for $2.7 billion. If we had paid attention to Wall Street, we would have lost $2 billion for the Gannett shareholders.
“You can't let them dictate your management. You can listen to them. You can try to keep them happy. But, at some point, you're going to disappoint them. And we're going to tell them, ‘No, there are no more bodies to be cut out of Gannett. So, if you don't like that, go find a company that's poorly run and then you'll get some bodies cut out.’ I've been doing this for thirty years, and I don't have any problem with just telling them that they're off base.”
On the other hand, Gary Pruitt, who replaced Erwin Potts as CEO of McClatchy in 1996, believed that family control carried a strong advantage. McClatchy, like Gannett, avoided layoffs in the 2001 downturn, but for a somewhat different set of reasons.
“While the newspaper industry is cyclical, it is not so cyclical that in a downturn you must have layoffs,” he said in a 2002 interview.21
“Looking at it historically in the United States, downturns are relatively brief, typically 11 months or so. And growth is much more prolonged. Usually five or more years, often longer. We're very fortunate to have more up years than down years, and if you can run your business consistently, you are better off. So, we try to remain consistent in good times and bad....
“Also, on a human level, I really felt for anyone in a tough economy. But for our employees, it sounds old fashioned, but we really do have a commitment there and a compact. And we're not going to have layoffs if we can avoid it.”
Pruitt was mindful of the competition from new technology and believed that this competition, or its potential, created pressure to improve quality through good times and bad.
“We always say to our papers, your challenge is no matter what, the paper must improve. It always drove me crazy ... where in a downturn, news hole cuts were made and the paper got worse....
“And I always thought restaurants don't make food worse in a downturn. Car companies don't make cars less safe in a recession. Clothing companies aren't making lower quality clothes. If they did, we wouldn't be their customer. We would resent them for it, and we should resent them for it. And I wouldn't give them business even in good times after that. Why is it okay to make a newspaper worse in a recession? That's your excuse for making your product worse? It makes no sense. We thought what we need to do, even in a downturn, is plan how we will improve each paper.”
Despite those brave words, there eventually came a downturn that was too much for even the idealism of Pruitt and the McClatchy family. Before the company acquired Knight Ridder, its share price was above $75. In late 2008 it dropped below $1.50 and the company had sold its Star-Tribune in Minneapolis and put The Miami Herald' s bayfront land up for sale to raise cash to meet the payments on its debt. The recession that began that year, overlaid on the accelerating shift of advertising from print to Internet, hurt all newspaper companies. But McClatchy, burdened with that debt, was harder hit than most.
McClatchy tried to minimize the debt by selling twelve of the old Knight Ridder papers and keeping the ones in growing markets so that Pruitt was able to brag in his 2007 report to shareholders that the growth rate in McClatchy markets was “40 percent faster than the U.S. average.” Late in 2008, he told an alternate weekly, the Sacramento News & Review, that he would hang on.
“I came into this not because I had an MBA and I thought this was a good way to make money, but because McClatchy believed in First Amendment rights and quality journalism,” he said. “When you see the bad revenue numbers, you go, ‘Oh God, this is so terrible, I don't need this anymore.’ But probably the only thing worse than staying would be quitting. It's too important.”22
The Analysts
The relationship between analysts and the managers of newspaper companies is more complicated than it seems on the surface. For one thing, analysts can't tell management directly what they want it to do. That would make the analysts too much like insiders and run afoul of the Securities and Exchange Commission's full disclosure rules. But they can convey their wishes and expectations by asking questions. And, since most of the questions clearly represent efforts to get a better estimate on the next quarter's results, management gets the point.
But Lauren Rich Fine, who retired from Merrill Lynch in 2007, said the analysts didn't really dictate management behavior.
“The companies that do things for us are wrong. Not one of us respects a company that is doing things for us. We'd rather them run their company, help us understand how they're running it, then we can decide how much their stock is worth.”
The analysts had become a little bit tired of journalists complaining about the discipline of Wall Street—especially in those cases where going public was a move to keep the company intact after the death of a founder.
“The real genesis of all the problem here,” said Fine, “is newspaper companies went public for the wrong reason. They didn't care about the shareholders, they did it for their purposes. My frequent point that I've made is that if you don't like what it means to be a public company, you don't need to be public because, here's the good news, as many of you have pointed out, these companies generate a lot of free cash. Not one of them, not one needs to be public.
“So, that's where the real tension comes in between Wall Street and the public newspaper companies, which is ‘Hey, I didn't tell you to go public, but as long as you did, I expect a return.’”
William Drewry, then an analyst for Credit Suisse First Boston, had a similar view. “If you want to be a public company, by default you hold yourself up to the scrutiny of the market. And the market demands growth. It demands return on its invested capital because the market buys the stock, is investing capital, and wants a return on it. There's a threshold that has to be crossed to have success.”
And yet, the analysts have a surprising respect for those public companies that organized themselves to have some independence from their investors. Before she retired, and before the recession hit, Fine liked both The Washington Post and McClatchy for their long-term views.
“They went public for the exact more or less same reason (as Knight Ridder), to keep a franchise together, and they run it their own way. They are running for asset value over time. Their margins, I don't know off the top of my head what they are for The Washington Post, but they've got be about the lowest that we've probably ever seen. They couldn't care less about what I think about the margin. But they do all the right things in terms of investing, having a quality newspaper, and that stock has done magnificently.”
Conversely, analysts don't like companies that always yield to Wall Street's shifting winds. Fine mentioned a firm, not a newspaper company, that “has a CEO that we love to refer to as somebody who ages but doesn't mature. He does things purely based on what he thinks Wall Street wants them to do. He buys and sells assets on that basis. As a result, everybody hates this company because they're afraid that the last person in the door gave him bad advice.”
In contrast, Fine said, Wall Street appreciates a company that has a plan and follows it.
Different analysts have different strategies and different time horizons. The sell-side analysts like Fine and Drewry tend to have shorter outlooks than those on the buy side. But even among them, there is variance.
Merrill Lynch used to provide split ratings of companies—long-term and short-term outlooks. But that confused people, so they switched to doing just a single rating, and it tends to tilt toward the short term.
“There are times where I know a stock is going down, and I will have to tell people to sell because I know the stock is going down,” said Fine. “But, where I liked our split ratings was I could tell somebody, short term, you should sell. But long term, a year from now, the stock is going to be higher. So if you want to suffer the transaction costs, if you want to have a stomach ache, just understand that it's going down but I believe it's coming back up again.”
If media companies could find a few quality indicators that could be measured and published periodically, would Wall Street care or even pay attention? Fine thinks so, at least in markets with competition.
“You can't please every investor every day. You can hope that people see the virtue of how you're building the value of your company over time, which is all that you all are trying to get at, is to build the value, you build the quality, you build the circulation, and you're building revenue. You're looking at it that way. So you're trying to attract the value investor, who says I really see what you're doing. I'm going to make money with you if I invest over time, and I recognize those times where you're not going to look as good as somebody else. But a few years out you'll look better.”
Analysts were easier to convince about the importance of quality journalism when a market was competitive. But Fine was typical when she expressed skepticism about the value of quality where a newspaper already dominated its market. “If I was the average person, not somebody working on Wall Street... and I lived in Cleveland, I'd be reading the Cleveland Plain Dealer. It could be a great paper. It could be a horrible paper. I either want a paper or I don't. That's the thing I always have trouble wrestling with.”
Newspaper reporters have a cynical expression that helps them cope with the inherent frustrations of their profession: “Good things happen in spite of management.” For the best of the top managers, a parallel idea might be, “Good things happen in spite of Wall Street.” Al Neuharth's tenacity in creating USA TODAY and seeing it through its ten years of red ink illustrated the value of managerial autonomy to take risks beyond the limited tolerance of most analysts.
In the spring of 1981, Lee Hills made his last address to the Knight Ridder shareholders. As an employee-shareholder, I was there. Lee had stepped down as chairman of the board two years earlier but continued some involvement in day-to-day operations. The company had been public for twelve years, and he was well aware of the tensions. Profits are necessary, he said, but “one priority clearly stands above orderly profit growth and all other requirements. That is the long-range health of our company.
“It isn't always easy as a public company in America today—in any industry—to keep this top priority in mind. Many big traders in the stock market and their advisors decide to buy or sell depending on how this quarter's results compare with the previous quarter and the last year.
“I happen to think that this short-term pressure is unhealthy for American business.... The short-term pressures must be resisted—no matter how beguiling—in favor of long-term success. We are not building a company that measures its life or its progress in 90-day spans . . . we are committed to the idea that quality coincides with the interests of the shareholders.”23
It was an echo of John S. Knight's opening remarks to the analysts twelve years earlier. It would always be necessary to do some things that they did not understand. It was necessary to not become their prisoner.
Jack Knight died in the last days of that spring. By coincidence, I had told him goodbye a few weeks earlier. The two of us shared a secretary in The Miami Herald building, and she alerted me when he was ready to make his annual escape to Akron ahead of the sub-tropical summer. My resignation from the company had been announced, and I went down to the office of the editor emeritus overlooking Biscayne Bay.
He steered our last conversation toward quality issues. He didn't like the Herald' s latest design, which included a lot of attention-demanding black borders. The eighty-six-year-old philosopher-king of newspaper publishing waved the paper in the air, complained about the small type and chafed at its “funereal look.” We shook hands, I patted him on the shoulder, and we wished each other well. As I returned to my office on the sixth floor, I listened for the sound of a page turning in the history book.
1. Akron Beacon Journal, “John Shively Knight 1894–1981, A Tribute to an American Editor,” offprint, June 1981.
2. Interview with Jane Cote and Philip Meyer, Miami, Fla., Aug. 4, 2002.
3. Interview with Jane Cote in San Jose, Calif., and Philip Meyer, by telephone, Oct. 25, 2002.
4. Interview with Jane Cote, San Jose, Calif., Oct. 26, 2002.
5. Al Neuharth, Confessions of an S.O.B (New York: Doubleday, 1989), 69.
6. Interview with Jane Cote and Philip Meyer, Miami, Fla., Aug. 7, 2002.
7. http://www.gannett.com/map/history.htm (retrieved Oct. 4, 2003).
8. Whited, Knight: A Publisher in the Tumultuous Century (New York: E. P. Dutton, 1988), 272.
9. Ibid., 273.
10. By the time McClatchy's 2007 annual report was prepared, there were 57 million A shares and 25 million B shares.
11. August 2002, interview.
12. John Morton, remarks to Seminar in Media Analysis, School of Journalism and Mass Communication, University of North Carolina at Chapel Hill. April 22, 2002.
13. October 2002 interview.
14. Newspaper Association of America, Facts About Newspapers 2003. The constant-dollar adjustments are mine, based on the Consumer Price Index.
15. Landon Thomas, Jr., “Wall Street's Harsh New Reality,” The New York Times, Aug. 17, 2003, Section 3, page 1.
16. Interview with Philip Meyer in McLean, Va., and Jane Cote by telephone, June 10, 2003.
17. October 25 interview.
18. Luncheon Address by Jay Harris, American Society of Newspaper Editors, April 6, 2001. Posted at http://www.asne.org/kiosk/archive/convention/2001/harris.htm (retrieved Oct. 20, 2003).
19. Rick Edmonds, “Newsroom Staffing: Public Companies No Worse Than Private,” Poynteronline, www.poynter.org (posted Dec. 5, 2002; retrieved June 5, 2003).
20. Cote and Goodstein, “A Breed Apart? Security Analysts and Herding Behavior,” Business Ethics 18:3 (February 1999): 305–14.
21. Gary Pruitt, interview with Jane Cote, Sacramento, and Philip Meyer (by telephone), October 2002.
22. Quoted by R.V. Scheide, Sacramento News & Review, Sept. 11, 2008.
23. Hills, “A Commitment to Quality,” Knight-Ridder Newspapers First Quarter Report, 1981, 9.