Gannett's CEO is about to make big cuts to America's newspapers and he won't have to disclose how much he gets paid for it - despite helming a public company

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GateHouse Media owns the most newspaper titles in the US.

• Gannett CEO Mike Reed has been tasked with drawing up as much as $300 million of cost cuts to America's largest newspaper publisher after a merger last year brought the USA Today publisher and a large local newspaper chain under the same roof.
• His assignment, which will inevitably lead to people losing their jobs, may not be the most enviable role in the news industry today.
• But thanks to an arrangement with a private equity firm, Reed's own compensation will stay shielded from the public - and his own employees - as he takes an ax to the business. And that's despite Gannett being a public company.
• Business Insider took a look at the deal that granted Reed such anonymity, which traces back to 2013, when he became CEO of the media investment firm that acquired Gannett, called New Media Investment Group.
• The compensation is a byproduct of an uncommon management structure at public companies where a CEO is employed by an outside manager, rather than as a full-time employee of the company itself, according to corporate attorneys and Wall Street executives.
• In 2018, an adviser to shareholders of public companies in proxy votes, Institutional Shareholder Services, found about 90 U.S. public companies that were externally managed. That's compared to more than 3,400 publicly listed U.S. companies overall that year.
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Mike Reed is the CEO of Gannett, the largest U.S. newspaper publisher, and is planning layoffs as part of up to $300 million in anticipated cuts on the back of a huge merger with local newspaper owner New Media.

He's met with local newsrooms and answered questions about upcoming changes, telling The Tennessean, for instance, that he expects to make many cuts by the first half of February, according to a recent report by Poynter.

One thing he hasn't talked much about, though, is his own compensation, which is, thanks to an arrangement with a private equity firm, entirely shielded from the public eye - despite Gannett being a public company.

His pay contract, a carryover from his six-year tenure as CEO of New Media - a media investment firm created by private equity shop Fortress - offers a glance at how private equity can in rare instances be responsible for the compensation of CEOs at public companies on an ongoing basis.

Although it is not common, the contract presents a data point about private equity firms' influence in corporate America, at a time when politicians such as presidential candidate Elizabeth Warren scrutinize how their management strategies affect business and society.

Business Insider delved into Reed's pay arrangement shortly after he was named CEO of Gannett in November, reviewing SEC filings, speaking with corporate attorneys, Wall Street bankers and people close to the newspaper deal.

The findings turned up multiple instances where CEO compensation was not disclosed at a public company because of the involvement of an outside manager.

Meanwhile, the deal terms in the New Media/Gannett merger call for Fortress to stop managing the newspaper publisher in two years.

At that point, Reed - or whoever is CEO at that time - would no longer be employed by Fortress, the merger agreement said.

Until then, though, and as Reed sets out to make critical changes to the newspaper business, his employment contract with Fortress remains, though the private equity firm has agreed to reduce the fees it earns from managing the company overall.

Through a spokesman, Reed declined to comment for this article. So did Fortress.

Reed's history with Fortress

Reed's employment with Fortress traces at least as far back as his role as CEO of New Media Investment Group, which the firm spun out in 2013.

During Reed's tenure, he worked on its board with Fortress's billionaire CEO Wes Edens - who co-owns the Milwaukee Bucks - and managed New Media's expanding list of local newspapers under its operating division, GateHouse, which owned and operated papers throughout New England, Ohio, Texas and other parts of the country.

Yet each year, as New Media reported its annual proxy statement with the Securities and Exchange Commission, it excluded Reed's compensation where public companies normally disclose CEO pay.

Instead, New Media explained that Reed was an employee of Fortress, rather than the media investment firm itself, so his compensation would remain private - "a loophole in securities law," as one person familiar with the matter referred to it.

People familiar with the arrangement said it was completely legal and in-line with SEC disclosure requirements since Reed was paid by a third-party, Fortress, rather than the company he was managing, New Media.

Indeed, similar so-called "externally managed" structures have also been used at other public companies, like National Beverage Corporation, which distributes La Croix, the sparkling water beverage.

Externally managed companies

Such instances where a company is externally managed by the CEO of an outside management services firm, rather than a full-time employee of the company itself, are not common but there is some precedent, according to corporate attorneys and Wall Street executives.

In 2018, an adviser to shareholders of public companies in proxy votes, Institutional Shareholder Services, found about 90 U.S. public companies that were externally managed. That's compared to more than 3,400 publicly listed U.S. companies overall that year, according to a finance industry report by The Carlyle Group.

Within that 90-company sample size, most were real estate investment trusts, or REITs, according to ISS.

Experts told Business Insider that the externally managed structure can fuel investor concerns about potential conflicts of interest - when it comes to M&A, for instance, given PE firms' ownership of other companies.

This became an issue for Fortress in at least one other investment with an external management structure that did not disclose a CEO's compensation.

In 2014, Fortress spun off a publicly-traded investment firm called New Senior. The following year it bought 28 senior living home properties for $640 million.

Afterward, shareholder John Cumming sued New Senior CEO, Edens, and Fortress, pointing to the fact that the properties were owned by one of Fortress's own private equity funds, and claiming New Senior had overpaid in a deal that was full of conflicts of interest.

Fortress initially fought the lawsuit but paid $53 million to settle last year.

At New Media, however, Business Insider found no similar investor lawsuits related to its management structure, according to a search of federal court records.

'Various services' performed

Of the externally managed companies ISS found in 2018, many did not disclose CEO compensation details, according to ISS's head of US compensation research, David Kokell.

The disclosure of CEO compensation - not just the amount, but also performance metrics - is important because it can show whether the CEO is working in a company's best interests, rather than in the interests of a third party, Kokell said.

"Without the disclosure, you can't really evaluate that," he said.

In the case of New Media, the company did not lay out Reed's performance metrics in SEC filings, though in a sign that he is invested in the company's future, he bought 280,000 shares of Gannett in November, shortly after the merger.

The explanation

Language in proxy statements filed by New Media and New Senior show how Fortress explains why it does not disclose the CEO compensation.

In addressing Reed's 2018 compensation in an April 2019 proxy statement, New Media said that Reed "devoted a substantial portion of his time to the company ... although he did not exclusively provide services to us."

It said that Fortress compensated Reed "based on the overall value of the various services" he performed to the private equity firm, and that it was "not able to segregate and identify any portion of the compensation awarded to him as relating solely to service performed for us."

Reed did not respond to a request for comment about what other services he performed for Fortress, if not his service of managing New Media as CEO.

Overall, SEC filings show Fortress charged New Media management and incentive fees at a clip of $24 million a year including expenses, in the lead-up to its merger with Gannett.

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