Things are really nasty in Pleasantville these days. The Reader's Digest Association, best known for its pocket-size magazine, is in a state of protracted turmoil. The sputtering 76-year-old publisher founded to "inform, enrich, entertain and inspire people" has lately just incited a group of big-game-hunting shareholders, who want to see the Digest company restructured or sold. "This is a company that has been asleep," says Nell Minow, a principal of Lens, an activist Washington-based money manager with a substantial stake in the firm. "We are trying to bring them into the 20th century before we get to the 21st."
In the midst of a historic bull run, Reader's Digest stock has gone south and its market value has fallen by half. Revenues stumbled 8%, to $2.8 billion, in fiscal 1997. Operating profits at the company, situated in the Hudson River valley, have fallen for the past four years, from $393.7 million to $227.8 million (adjusted for restructuring). In January, Digest posted a 35% drop in its second-quarter earnings--the sixth straight quarter of bad news.
When a company such as Reader's Digest performs so poorly for so long, shareholders usually revolt, forcing directors to make drastic changes. But in Digest's case, the board, which is supposed to be independent, is in the grip of the CEO. That would be George Grune, 68, who because of an unusual stock arrangement holds sway over enough voting shares to remove every Reader's Digest director. Grune's power source is his role as chairman of two charitable funds established by the company's childless founders, DeWitt and Lila Wallace, who died in 1981 and 1984, respectively. The funds hold 71% of the company's class-B voting shares; fund directors currently occupy three of the eight board seats. Grune also oversees seven foundations that, along with another, smaller, fund, now own 25 million shares (30%) of the company's nonvoting stock. They supply money directly to a few elite New York City institutions, including the Sloan-Kettering Cancer Center and the Metropolitan Museum of Art. When the company slashed its dividend in July, these institutions were confronted by a drop in their yearly payouts from $58.7 million to $29.4 million. The funds, for instance, provided $8.2 million, or 11%, of the $75 million operating budget of the Wildlife Conservation Society, the New York Times reported. The dividend cut could cost the society $2 million, the amount it costs to keep 1,105 birds alive at its Bronx Zoo.
Faced with declining dividends, the institutions wanted to sell their stock, but the CEO held the cards. The stock price, meanwhile, slid from its $56 high in 1992 to about half that in the summer of 1997. At the close of 1997, Grune agreed to let the institutions divest. Six of eight foundations dumped 11.8 million shares, worth more than a quarter-billion dollars. Critics like Paul Tierney, whose company Corporate Value Partners owns 1.5 million shares, think the deal is less than charitable. The institutions had to sell at 25% under the market price. They were "like lambs being led to the slaughter," he says.