When facing a potential conflict of interest, in journalism, as in finance, it’s good to err on the side of disclosure.
The Financial Post, the business section of Canada’s National Post and that country’s answer to The Wall Street Journal, went the other way this summer and kept its readers in the dark about the paper’s relationship to the subject of two of its stories. That bad decision came back to haunt the paper and, in our view, hurt its credibility.
In late July, Diane Francis, a prominent Post columnist, wrote two columns that cast Fairfax Financial Holdings Limited, a Canadian insurance and financial-services company, in a positive light. One took Fairfax’s side in a long-running and controversial dispute the company has had with short sellers. The other was a largely uncritical question-and-answer session with Fairfax Chief Executive Prem Watsa.
Not mentioned: Fairfax owns a significant stake in the National Post’s parent company, Canwest.
Francis and her editor both say it wasn’t necessary to disclose that because Canwest’s voting shares are controlled by the Asper family. If only it were that simple.
The saga begins with a July 28 column by Francis headlined “Fairfax Financial beats bad markets.” In it she interviews Watsa about his successful bet against credit markets, which has resulted in a wave of cash for the firm this year. At the time, the shares were languishing (though they’ve jumped more than 20 percent since). The questions, except for one about an investigation by the Securities and Exchange Commission into alleged accounting irregularities at Fairfax, weren’t exactly hard-hitting, including this one:
What’s the latest with the short selling attack mounted a couple of years ago against Fairfax by several hedge funds in the U.S.?
Three days later, Francis mentioned Fairfax again in a column headlined “Wall Street shorts ruin markets” and took its side in a lawsuit against what it alleges was a conspiracy by hedge funds (the short sellers mentioned in the headline) and analysts to drive down its share prices with false rumors.
The column itself would have been fine as an opinion piece and fits into a larger school that opposes short-sellers, who borrow a company’s shares and bet that they’ll fall, so they can buy them at a lower price and collect the difference. (The fact that shorts lately have been proved right time after time during the current financial crisis is as beside the point as it is true.)
If Francis wants to hold that opinion, it’s okay with us. But she should disclose her paper’s connection to her subject.
True, disclosure can take some of the impact out of a piece, since readers might mentally discount an opinion that coincides with the interests of the publication’s financial backer. And true, disclosure is annoying. We find it annoying, for instanced, that we feel compelled to mention that we’re partly funded by a short-selling hedge fund, Kingsford Capital Management. We’re also funded by long investors, as well as people and institutions that aren’t investors at all, as well as Columbia. Unlike the situation with the Post writing about its part owner, Kingsford has nothing to do with this story. Still, there it is. Forget we mentioned it.
In an email exchange, Francis told us Fairfax’s stock ownership of Canwest was “irrelevant. The stake is tiny—the Asper family controls the empire through” multiple-voting shares. (Like The New York Times Company or the old Dow Jones, say, Canwest has multiple tiers of stock that allow the original owners to control the company without owning most of the shares. That’s because each of their shares gets multiple votes.)
Francis compares writing about Fairfax to writing about a company who advertises in the paper. “There is no conflict any more than there would be a conflict writing about a bank or other corporation that advertises in any of the Canwest media properties,” she says. She also says it isn’t necessary to disclose it because it’s so widely known. “Editors felt that biz readers know that,” she says.
Ian Karleff, the Financial Post’s managing editor, uses similar reasoning to explain why it’s not necessary to disclose Fairfax’s stake in his paper’s parent. “It’s a passive investment as far as we know,” he says. “I’d think there are a lot of individuals that own a stake in Canwest. If it got to the point where they actually had control or were on the board we would disclose it.”
Karleff says Post editors give her leeway on such decisions. “Diane—she’s been around a long time,” he says. “She knows the boundaries, she knows what would be crossing the boundaries and I would trust that decisions she makes in her position and years of being financial journalist, that she would know when she should disclose that. As editor at large, we do leave a lot of those decisions up to her.”
Still, Karleff acknowledges: “It’s a good point to raise and something we will consider in the future.”
In this case, the Post made a serious mistake.
Fairfax’s stake is neither “tiny,” “passive,” nor remotely comparable to that of an advertiser.
While Fairfax has little voting power, it owns about 10.5 percent of Canwest’s economic value (known as market capitalization). It beggars belief that Watsa and Fairfax don’t have clout, if for no other reason than their ability to push the stock price down by selling off their stake at a time when Canwest can ill afford it: Its shares are down 70 percent so far this year.
Tell us an advertiser that can do that.
Second, even before the Francis’s columns ran, Fairfax had a well-established history as an active, not to mention controversial, investor. For instance, it was among a small number of companies to sue analysts and short sellers for allegedly trying to take to take it down by spreading false rumors about its accounting—and soon thereafter announced—that’s right—a major accounting problem. For background, here is a good Fortune piece from last year, which has eye-popping details like Fairfax’s law firm allegedly hiring “tails” to follow hedge-fund workers.
Here’s how the Post’s sister paper, the Edmonton Journal, described the company in August 2007 (before Fairfax bought its big stake in their parent):
Fairfax has been a tempting target for short sellers. The company headed by Watsa, who built his property-casualty insurer through acquisitions, has been plagued by erratic earnings and accounting errors.”
What’s more, Fairfax, much like Warren Buffett’s Berkshire Hathaway and unlike a mutual fund or other passive investors, has often built stakes in and bought companies outright (indeed, last week it bought a controlling stake in a Minnesota animal-feed company). And—wouldn’t you know?—the day after the second of Francis’ columns appeared, it emerged in the Globe and Mail that Watsa and Fairfax were in talks with the Asper family to take struggling Canwest private.
It is odd that Karleff would say—even today—that the investment is passive, when the “passive” investor was in talks to buy his paper’s parent. What’s more, the Post’s most recent news stories about Fairfax haven’t mentioned the relationship or the Canwest/Fairfax talks. How does that work?
And the “everybody knows that” defense doesn’t wash either. Everyone on earth knows Rupert Murdoch owns The Wall Street Journal, but that doesn’t prevent it from disclosing the relationship when it writes about News Corp. That’s just being fair to readers.
There is no suggestion Francis or her editors knew about the discussions, which had to be going on at the time of the columns—before they ran—but the turn of events illustrates why it’s important for the press to get everything on the table. It just looks bad to speak kindly of a company that owns a significant part of your parent without disclosing it. It looks much worse when that company is engaged in talks to bail you out.