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Tierney is part of a Greek chorus of money managers who assert, as loudly as they can, that the company's corporate-governance system is totally compromised by the cross directorships with the foundations. "We as class-A [nonvoting] shareholders are impotent to effect any kind of change," complains Jonathan Lewis, an analyst at Franklin Mutual Advisors, which is headed by the feared raider Michael Price. The outfit, which has made runs at Dow Jones & Co., Chase Manhattan Corp. and Sunbeam Corp., wants Grune gone. Says Lewis: "Grune is an ineffective manager, and I think the board of directors should expeditiously seek to replace him and/or to pursue the sale of the company." It's not quite the welcome back Grune anticipated when Digest lured him out of retirement to reclaim the CEO job last August. Grune declined requests for an interview.
The company and the angry shareholders agree on one thing: Reader's Digest has a tremendous amount of hidden value. They have locked horns over how to unlock that value for shareholders. "This is a $3 billion global business," says Craig Monaghan, Reader's Digest treasurer. "When it's running properly, it's a cash machine. It hums. We need to fix that."
And fast. While Reader's Digest still boasts the world's largest magazine circulation--more than 27.8 million monthly copies sold in 19 languages--its feel-good stories and aging readership (average age: 47 and rising) have kept it out of step with the competition. Even before oral sex became a dinner-table topic, the Digest had lost resonance with generations of today's readers. The U.S. subscription base has decreased by a million since 1993. That's not terrible, but to maintain circulation levels, the magazine must add 5 million new subscribers a year. Not an easy task.
The Digest, while it accounts for only 26% of the company's revenues, provides the brand name that has been used as a front door to roll out a range of books, music and videos, sold mostly through direct marketing. These home and entertainment divisions bring in the bulk of the sales and profits. Recent attempts to move into new markets through joint ventures with Avon (to sell magazines with makeup) and Microsoft (to create CD-ROMs) have been unsuccessful. At Digest's immensely profitable overseas businesses, which accounted for 57% of its revenues last year, sales have fallen from $1.9 billion in 1995 to $1.6 billion in 1997.
Last April, four months before he resigned, CEO James Schadt unveiled a $400 million revitalization plan to push the company out of its morass and move it forward. But his approach, which upended the firm's age-old philosophy of dedicated product testing prior to direct-mail pitches, was roundly criticized by Wall Street as lacking coherence. In the week the plan was presented, the stock dropped 21%. Schadt's strategy was further hampered by the departure of more than two dozen senior executives.
The company's strength has become its weakness. Reader's Digest has been unable to exploit its greatest core asset: a monster database. Despite 100 million households logged in and millions of dollars spent maintaining the data, the company has yet to find an effective way to match products with new consumers. "They are wedded to the past," says Minow.