Agency Problems at Dow Jones and the WSJ

Unusual job guarantees would put top Journal editors in a tight spot.

You can’t tell the players without a scorecard, and today The Audit will spell out where the economic interests of business-side and news-side executives at Dow Jones & Co. and its prized asset, The Wall Street Journal, stand in regard to the News Corp. bid.

Basically, the interests of key figures both at DJ and, unusually, at the WSJ are geared toward a sale, and not just a sale, but a sale to News Corp.

Top Wall Street Journal editors are in an especially tough, I would say, unique, position. They must cover the deal even-handedly, even though many of them fear News Corp. would wreck their paper. On the other hand, they also own stock and options that suddenly have a lot of additional value, sometimes millions of dollars more, thanks to the offer. That value collapses if News Corp. goes away.

Now, The Audit has come upon a draft document showing news executives could have other reasons to like a News Corp. deal.

Marked “privileged and confidential” and dated June 12, the draft sets out a structure by which Dow Jones’s controlling Bancroft family at one point sought to insulate the Journal editorially in the event of a sale to News Corp. Prepared by Wachtell, Lipton, Rosen & Katz, a high-profile New York law firm known for its deal expertise, its purpose is stated here:

As has been publicly stated, the Family is only willing to pursue negotiations of a transaction if and when the Family is satisfied that a structure can be developed and implemented that ensures the level of commitment to editorial independence and integrity and journalistic freedom that is the hallmark of DJ.

As reported elsewhere, the Bancrofts wanted DJ to be a separate (if wholly owned) entity within News Corp., controlled by a 12-member board including two family designees and three mutually appointed independent journalism experts. A (now-jettisoned) Special Committee on Editorial and Journalistic Independence and Integrity, the five non-News Corp. directors, would have had sole right to hire and fire “Essential Journalistic Officeholders.”

Not reported elsewhere: the arrangement would have guaranteed the top jobs of four people by name: Gordon Crovitz, the Journal’s publisher; Marcus Brauchli, the new managing editor; Paul Gigot, editorial page editor; and Neal Lipshutz, managing editor of Dow Jones Newswires. Known as “incumbent Essential Journalistic Officeholders,” these four “would be offered the opportunity to continue in his positions following closing.”

I don’t want to make too much of the document because it’s a draft and the language and contemplated structure have changed substantially in a week. The special committee has been replaced by a different and wholly independent compliance panel, for instance. But it represents what the Bancrofts wanted at one point. What’s more, as the Journal reports this morning, the latest known version continues to provide unspecified job protections for editors.

The Bancrofts’ editorial proposal calls for the establishment of a special committee to enforce a set of editorial principles News Corp. would be expected to adhere to, according to a family spokesman. It also includes protections for top editors and provisions to enforce the agreement. These elements were included in earlier drafts as well, and it wasn’t immediately clear how the version submitted to the Dow Jones board had been revised.

A family spokesman tells The Audit that the family is not publicly spelling out whatever protections are contemplated.

He also notes that if the family isn’t convinced the Journal’s editorial integrity will be permanently protected, “there won’t be a deal” with anyone.

A couple words about guaranteed jobs, if those are still on the table. For one thing, Crovitz is the paper’s top officer as it covers the deal, so that’s troubling. Second, Brauchli is the top editor. True, he has handed the task of overseeing deal coverage to his predecessor, Paul Steiger, but he remains the boss.

An editor or publisher being guaranteed a job in writing is both good and bad. It’s good in that it means you are free to cover the deal without worrying about antagonizing future bosses. It’s bad in that it gives you an incentive to favor a sale, and to News Corp., and not to another party. No sale means you keep your job, but without a guarantee.

So, News Corp. deal—job guarantee. Not News Corp.—no job guarantee.

Who has a guaranteed job? The King of Jordan and a couple of other people. That’s it.

Second, it is unclear to me why news jobs would have to be guaranteed by name if other protections to protect integrity are adequate.

Third, the whole thing is awkward because, as the Journal itself reported, Crovitz, Brauchli, Gigot, and others have consulted with the family on how to maintain the paper’s editorial integrity in the event of a sale. Brauchli, in particular, in on the hot seat. He is responsible for the (Steiger-led) coverage, while talking to the family about the terms of the deal, including potentially those involving his own job.

This is a problem. Is it manageable? I’d say so, but there it is.

Am I suggesting editorial executives would compromise coverage because a News Corp. deal might include a job guarantee? No.

However, business-press readers should know where key parties’ interests lie and be on guard against the assumption that if there isn’t any deal—say this whole thing goes away— something bad will necessarily happen. Remember, deals are generally good for people directly involved in them, but not necessarily for the buying entity, the seller, their investors or consumers.

A certain momentum takes hold. Generally speaking, if a deal goes through, people involved get paid. This includes investment bankers, lawyers and advisors of many stripes. Executives at the buying company are also happy, in part because they are running a bigger company. This is why you don’t see many closing dinners at KFC.
I’ve written about the deal infrastructure which includes the business press. But news and business-side executives have strong economic incentives running in favor of a sale, and it is fair to point those out.

At year-end 2006. Steiger owned DJ securities worth $8.7 million with the offer, and $5 million without it.

Crovitz owned securities worth $12 million with the deal, $7 million without it.

Rich Zannino, Dow Jones’s CEO, stands to receive $23.5 million if the offer goes through and he is severed within two years. That’s called being set for life. If the deal doesn’t go through, he gets to go back to work. He has told the controlling Bancroft family that DJ will not be able to get to News Corp.’s $60-a-share offer anytime soon, which is no doubt true. Again, having a big stake in a sale doesn’t mean he’ll push for it. But, still, the man’s human.

As today’s Journal makes clear, some family members question the motives of even the family’s own lawyer, Martin Lipton, the famed deal lawyer and the “Lipton” in Wachtell Lipton:

Meanwhile, some family members privately have voiced concern about potential conflicts faced by Mr. Lipton and their other advisers. Mr. Lipton’s law firm, for instance, in 2004 worked for News Corp.’s independent directors as part of a $50 billion plan to move the media conglomerate’s home base from Australia to the U.S. And in the same year his firm was tapped as the “external legal counsel in the U.S.” by a special committee of News Corp.’s nonexecutive directors to consider an acquisition. Some Bancrofts have questioned whether the previous ties with Mr. Murdoch would lead advisers to push for a deal with him. Mr. Lipton declined to comment.

Generally speaking, deal lawyers get paid a lot more handling a sale than just billing by the hour giving advice. We’re talking about millions of dollars.

Point is: As the Bancroft draft memo makes clear, Dow Jones executives, editors, and other actors have very big economic stakes in the outcome, all running in the direction of a sale. Business-press readers should be aware of these as they try to figure out what’s best for the nation’s leading financial daily. After all, Dow Jones changes hands less than once a century.

And, remember, nothing has to happen. The idea that it does comes from News Corp. PR and crybaby shareholders, like The Audit, owner of 344 shares, who don’t want to lose the value of the offer.

Business-press readers shouldn’t care about any of that.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.