The two—class shareholding system at the New York Times Company, which ensconces the Sulzberger clan in control of the board of directors despite owning less than 10% of the equity, is driving down the value of the company. Unable to evict the incompetent manager and hard left ideologue scion Pinch Sulzberger from his post as publisher and chief executive, class A shareholders are protesting the only way the can, by bailing out of their holdings, thereby driving down the stock price.

The Wall Street Journal reports ($link) on the move away from two—class shareholding schemes in Brazil:

Seeking to boost its stock price through better corporate governance, Brazil's biggest telecommunications company, Tele Norte Leste Participações SA, known as Telemar, announced a plan to eliminate a two—class shareholder structure that concentrates power in the hands of a small group of investors.

The move follows similar reorganizations by aircraft maker Empresa Brasileira de Aeronáutica SA, or Embraer, and poultry maker Perdigão SA. The two companies recently abolished different classes of stock to be able to trade on Brazil's Novo Mercado, a separate listing within the São Paulo Stock Exchange that requires a higher level of corporate governance. Research shows that companies in the Novo Mercado trade at multiples as much as 30% higher than companies that aren't listed there.

Brazil's biggest family—owned businesses often have two classes of stock: nonvoting shares, usually more easily traded and held by minority investors, and voting shares, which are rarely traded and are often concentrated in the hands of a family or a small group of investors. Corporate—reform advocates in Brazil argue that empowering minority shareholders will make companies more open and accountable. (Some U.S. companies have similar structures, including Dow Jones & Co., the publisher of The Wall Street Journal.)

The two—tier corporate system came into vogue in Brazil in the late 1960s, when the country's military rulers pushed through a law allowing companies to have as much as two—thirds of their capital in nonvoting shares. That allowed Brazil's wealthy families to tap the markets for capital without losing control of their companies. Because of that law, families can control their business so long as they own half of the voting shares —— which works out to just 17% of total capital. That structure reduces the power of minority shareholders and can lead to abuse by controlling shareholders.

Meanwhile, CNBC is reporting that influential investment house Morgan Stanley is planning to issue a report urging the New York Times Company to abandon its two class shareholding system, as a means of maximizing shareholder value. Ordinary Class A shareholders cannot force such a move, but if extended family members who hold stock and are tired of seeing their holdings decline in value support it, who knows? Pinch may discover the wonders of accountability to shareholders.

Hat tip: Ed Lasky

Thomas Lifson   4 18 06