Washington Post

Without WaPo, Graham Holdings should cede control to shareholders

March 13, 2014: 9:02 AM ET

Is it right for Graham Holdings to have super-voting shares now that it has no newspaper to protect from Wall Street or, for that matter, political pressures?

By Paul Hodgson

Donald Graham, super-voter.

Donald Graham, super-voter.

FORTUNE -- As proxy season approaches, the shareholders of two erstwhile media companies -- Graham Holdings (formerly The Washington Post Co.) and Media General -- can expect very different voting experiences.

When family-controlled newspaper companies like these two went public, many of them adopted super-voting share structures in the name of preserving family journalistic values against the supposed evils of Wall Street greed interested only in share price. And they were not alone. New York Times Co. (NYT), Scripps (SSP), virtually every cable and media company touched by Liberty Media (LMCA) tycoon John Malone (and there are a lot of them), and News Corp. (NWS) all have similar share structures.

But just because most large media companies exercise control through unequal voting rights does not make it right. If companies want access to public funds, they should cede control of the firm to public shareholders and not continue to run the firm like a private fiefdom; it's the democratic way.

I've chosen Graham Holdings (GHC) and Media General (MEG) to discuss the demerits of super-voting shares because not only do they present a stark contrast to each other, they are both family-controlled newspaper companies that have ceased to own newspapers. Indeed, Graham continues to divest itself of media outlets -- on Tuesday it announced a swap with major shareholder Warren Buffett's Berkshire Hathaway: Miami TV station WPLG for the majority of his Graham Holdings stake. The company still operates Kaplan University and a number of other TV stations.

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Despite having sold the Washington Post to Amazon (AMZN) founder Jeff Bezos last year, the company, renamed Graham Holdings after its controlling Graham family, still has super-voting shares. By contrast, Media General, now a broadcast company, gave up its super-voting structure and has only one class of stock.

Why the difference? A Graham Holdings spokesperson said that when the company went public in 1971, it was set up with a dual-class share structure in order to protect the family's interests in the company and the independence of its media properties. Following the sale of the Post, the ownership structure remains the same. With the newspaper as the company's main asset, the rationale behind the dual-class share structure was, at least, understandable. Now it is just poor governance.

The Grahams continue to own almost all of the company's class A shares, which represent almost two-fifths of the outstanding stock and continue to elect seven directors. The publicly traded B shares, despite representing a larger economic ownership, elect only four directors. Furthermore, Berkshire Hathaway (BRKA), which, until this latest deal, owned 23.3% of the B shares, had given the Grahams voting control of its holding since 1977, thus the family would have maintained majority control even if the two classes were reclassified into one.

Now that Buffett, who has owned these shares for decades, has decided to sell them, it's unlikely that they will become a challenge to the Graham family's control. It would be tempting to guess at a corporate governance reason behind the decision to sell, except that the shares Buffett owns in Berkshire Hathaway have even more super-voting power than those at Graham Holdings. Publicly traded stock at Berkshire Hathaway is entitled to only one-ten-thousandth of one vote.

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Media General sold most of its newspapers in late 2012. (Incidentally most of them were sold to Berkshire Hathaway, except for the Tampa Tribune, which went to a private investor.) Despite this, for a year, the company's supermajority shares remained in place. It was only when the company merged with Young Broadcasting that the shareholders, in this case the founding Bryan family, the holder of virtually all the super-voting B shares that controlled 70% of the board, voted to change the structure of the company. Fundamentally, the Bryan family, represented by chairman J. Stewart Bryan, voted to give up its special rights. This is not a common governance event. Post-merger, all Media General shareholders vote for all the directors. Media General did not provide a comment for this story.

But control over the election of directors was not the only demonstration of family control. The controlling shares were the only ones, for example, allowed to vote on the company's Say on Pay vote, the advisory vote that approves or disapproves of executive compensation policy at companies.

Unsurprisingly, support for executive compensation was pretty high at both companies, virtually 100% support every year since the vote was introduced.

Now, all of Media General's shareholders will be able to vote on Say on Pay, but at Graham Holdings, only the Class A shareholders -- the Graham family, in effect -- are allowed to vote on executive compensation. The public shareholders have no say on pay at all.

Beth Young, a lawyer and former colleague of mine at The Corporate Library, says this is perfectly legal. "Voting rights for each class of share is controlled by the [company] charter, and it is indeed legal for one class of share to be deprived of voting rights on some or all ballot items."

So, it's legal, but is it right? And is it right for Graham Holdings to have super-voting shares now that it has no newspaper to protect from Wall Street or, for that matter, political pressures? The answer to both these questions, I think, is "no."

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