The big handoff at Hearst

October 31, 2013, 10:37 AM UTC
Executive vice chairman Frank Bennack (left) and CEO Steven Swartz, in front of a painting of William Randolph Hearst at Hearst Corp. headquarters in Manhattan
Photo: Jonathan Becker

On Sept. 12, 2001, Hearst Corp. executives were scheduled to meet with their board and architect Norman Foster at company headquarters at 300 W. 57th St. in Manhattan. Hearst had long outgrown its original six-story art deco building, commissioned by William Randolph Hearst in 1926, and Foster had been brought in to come up with a plan to expand. The terrorist attacks of Sept. 11 waylaid that meeting, but not Hearst’s ambitions. Five years later the company moved into a stunning, 46-story cutting-edge tower (deemed “the most beautiful skyscraper to go up in New York since 1967” by The New Yorker’s architecture critic) built within the original landmark structure.

The move is classic Hearst: building a new future on top of its old-media foundation. What was once a newspaper publisher has evolved into a diversified holding company with a far broader mandate than its iconic founder could have imagined. Today Hearst’s assets include stakes in online media site Buzzfeed and financial services company Fitch Ratings. It operates medical and auto industry databases. In what was arguably one of the smartest deals ever, Hearst acquired a stake in cable juggernaut ESPN, a holding that’s the envy of the media world. (Even further afield, Hearst Ranch sells meat from grass-fed stock and wine.)

Meanwhile the company has shed businesses that underperform, including the San Francisco Examiner, Hearst’s flagship newspaper. “Nothing is sacrosanct, and nothing is susceptible to not changing,” says Hearst’s executive vice chairman Frank Bennack Jr. Bennack, 80, is the undisputed architect of Hearst’s new look. About 90% of Hearst’s revenue now comes from businesses that were not part of the portfolio when he became CEO in 1979. This summer in a historic handoff, Bennack — who has been with Hearst for almost 50 of the company’s 126 years — passed the CEO baton to his handpicked successor, Steven Swartz, 51.

Amid this transition, Hearst, which is privately held, gave Fortune a rare look inside its portfolio of companies and its venture-capital-like approach to investing. The businesses are run by outsiders, but William Randolph Hearst’s heirs still play a role in the company — five of 13 spots on its board of trustees go to family members. The remaining eight trustees are current or former Hearst executives. All 13 trustees are on the Hearst corporate board of directors, and they, in turn, elect the other 11 directors — also all insiders.

This close-knit structure — which sounds like a corporate watchdog’s nightmare — actually turns out to be a big part of what gives the company the freedom to make unconventional bets: Management is not constrained by Wall Street’s demand for a simple story or justification for an acquisition or an offbeat line of business (like grass-fed beef ). “They go by their own wavelength,” says Edward Atorino, a media analyst at the Benchmark Co. “They don’t talk to Wall Street. You try, they hang up on you.”

Yet Hearst has posted results that many public media companies would covet: Revenue, up about 13-fold since Bennack took over, is approaching $10 billion. Profits have more than doubled over the past decade and are nine times greater than 25 years ago. Since 2009, not a golden era for media by any means, Hearst has seen revenue grow 40% and earnings increase 78%. And while many publishing companies, including Time Inc. (parent of Fortune) and Condé Nast, are grappling with their digital futures, Hearst has been heartily embracing new technology; in 2012, print and electronic revenue were roughly equal.

All of which makes Bennack’s reign a tough act to follow. Indeed, the last time Hearst attempted a CEO handoff, Bennack had to be pulled back to run the company again. Swartz, a journalist-turned-CEO (a small club that includes News Corp.’s Robert Thomson), has the support of the Hearst family, but he knows he can’t sit still if he wants to keep posting the same kind of numbers that Hearst did on Bennack’s watch. “If we’re going to be as strong 10 or 15 years from now as we are today, we’re going to have to keep up a process of continually remaking the company,” says Swartz. “No one pushes us harder to do that every day than Frank.” But now Hearst will have to do it without Bennack at the helm.

Readers of Hearst’s famous glossies — including Cosmopolitan, Elle, and Marie Claire — might be surprised to discover that the editors of those beauty bibles frequent the same company cafeteria as Richard Malloch. Malloch, a former Morgan Stanley investment banker, runs Hearst Business Media, a decidedly unglamorous unit that includes periodicals such as Floor Covering Weekly and a company called Zynx Health, which provides doctors and nurses with decision-making tools. Malloch, who joined the company in 1991, got these marching orders from Bennack: Build a business that depends on subscriptions, not advertising, for its revenue.

Much of Malloch’s unit falls into the business-analytics category. It collects massive amounts of data and organizes the information for professionals. If you go into CVS to fill a prescription, it’s a Hearst company that tells the pharmacist whether you should be warned about drug interactions. If you get into a car accident, there’s about a 90% chance that a different Hearst-owned business is doing the collision estimate. Malloch’s unit is among the smallest at Hearst by revenue (the company won’t disclose the actual dollar amount), but it’s growing the fastest. Operating income and revenue grew at a 26% and 19% compound annual growth rate, respectively, over the most recent five-year period. Its margins are four, sometimes five, times that of the magazine arm, Malloch says.

It’s unquestionably a solid business, but how is it media? “I had this conversation 20 years ago with a legendary publisher,” he recalls. “I’m applying very different skill sets to capture enormous amounts of content,” he says, adding that he’s “sharing really detailed information — that’s part of what publishing is.”

The same question could be asked of the head of Hearst Ventures, George Kliavkoff, who’s also co-president of Hearst Entertainment & Syndication. Under Kliavkoff, Hearst launched a startup called Manilla. Manilla delivers mail digitally, storing bills and statements in the cloud, and also offers marketers an advertising platform. A media business entertains and informs, Kliavkoff explains, which allows you to aggregate customers and then sell access to those who want to reach that customer group. “That’s what Manilla is,” he says.

Kliavkoff’s ventures group operates much like a traditional VC firm, putting money behind startups and sometimes cashing out when they go public, as it did when video site Brightcove and online music service Pandora had IPOs. He’s also looking for companies that Hearst may eventually want to own outright. It’s a hunt for what could be the next new division of Hearst. “The broader directive is to think about what the company should look like 10, 20 years from now,” he says.

The ventures division’s returns aren’t going to make Sequoia Capital envious, Kliavkoff admits, but making money isn’t his first priority. He’s focused on identifying opportunities and risks for the existing businesses. Hearst, with a 10% stake, says it is one of the largest outside investors in Buzzfeed, known for clickable headlines such as the 21 MOST TOUCHING INTERSPECIES FRIENDSHIPS YOU NEVER THOUGHT POSSIBLE (an actual Buzzfeed headline). Hearst clearly isn’t interested for the site’s hard-hitting reportage. It wants to learn from Buzzfeed’s use of so-called native advertising, in which marketers deliver journalistic-style content that lives next to Buzzfeed’s staff-generated stories. Likewise, the corporate parent hopes to emulate the ventures group’s global reach: Almost half its investment dollars are outside the U.S. In China, for example, it has taken a stake in Yoka, a site that combines e-commerce and content. “We do a very good job, particularly in our women’s fashion magazines, of getting folks excited about buying something, but then we don’t always participate in that transaction,” Kliavkoff says. Yoka is a way of exploring how to get a piece of the sale.

It isn’t an overstatement to say that Frank Bennack has seen it all. He launched his career in publishing as a classified-advertising salesman and by age 34 was publisher of his hometown paper, the Hearst-owned San Antonio Light. He came to the attention of management when executives paid a visit to see the paper’s newly installed printing press. “I was able to introduce them to all of the local and state authorities and all of the advertisers,” he says, “and somehow they thought that was remarkable that I knew all these people.”

In 1974, Bennack headed to New York to lead all of Hearst’s newspapers. He started making noise about the company’s lack of what was then called electronic media — TV and radio. “One of the things that I cite often, and so do many others, is the failure of railroad men to be in the transportation business, to not recognize that, when airplanes came along, there were other ways to travel,” Bennack says. “If you get so committed to a particular way of doing things, then I think you’re destined not to grow or change.” Five years later, when he was made CEO, he remembers his predecessor, John Miller, telling him, “Frank, you will do things with the company that I won’t do. That’s what needs to happen to the company, so I’m going to retire.”

As CEO, Bennack’s initial push to broaden the company came out of necessity. Hearst was in the business of afternoon newspapers, which were losing relevance to the nightly television news. The company began buying up morning newspapers and converting its afternoon papers to the morning when it could. When Hearst acquired the Houston Chronicle in 1987 for $415 million — among the largest sums ever paid for a single newspaper at the time — it implemented this strategy by transitioning it into a morning paper. (Jeff Bezos bought the Washington Post earlier this year for $250 million.) Bennack started talking with his friend Leonard Goldenson, who ran ABC, about this thing called cable television. “We decided a lot of money was going to be lost,” Bennack says, “so we’d do it together instead of separately and cushion the blow.” Together they launched Daytime (today Lifetime) and Arts (today A&E). “For seven years it didn’t make money,” he says, “so I’d call that a big bet.”

Hearst got a new partner when ABC was sold to Capital Cities. In acquiring ABC, Capital Cities also gained a stake in ESPN, as ABC owned 80% of the sports network. RJR Nabisco owned the remaining 20%, and when it decided to sell, the new Capital Cities/ABC orchestrated the sale to Hearst. (The Walt Disney Co. eventually became Hearst’s partner in A&E and the majority owner of ESPN when it bought Capital Cities/ABC.) Not everyone was onboard. “There were people in the family that thought we should own 51% or 100% or none of it,” says William Randolph Hearst III, 64, the company’s chairman, who goes by Will. “That was the Hearst tradition coming out of the 1950s.”

Today many at the company view Bennack’s bet on ESPN as Hearst’s best media investment ever. Hearst spent roughly $170 million on the deal in 1990. Bernstein media analyst Todd Juenger estimates that ESPN is worth about $50 billion, putting Hearst’s stake at roughly $10 billion. And ESPN’s operating group within Hearst, entertainment and syndication, produces the majority of the company’s overall revenue and profits.

As the CEO of a private enterprise that doesn’t go to the public markets for financing and operates without debt, Bennack saw partnerships as a way to grow faster than if Hearst went at it alone. “We’d rather own half of a highly successful business than all of an unsuccessful one,” explains David Carey, president of the magazine division. Partnering has given Hearst entry into new lines of business — finance through Fitch or live events through One Three Media, a joint venture with Mark Burnett, the man behind The Voice. This approach works well for Hearst’s partners too. “When I think about the relationship with Hearst, it never comes down to what’s written in a contract. I don’t know that I’ve ever even referred to a contract, because I’ve never needed to,” says Disney CEO Bob Iger.

Bennack’s biggest failure may have been his first round of retirement. In 2002 he handed over the reins to Victor Ganzi, who was out six years later. The Wall Street Journal reported at the time that the trustees felt that Ganzi didn’t pay enough attention to them and that he “chafed” at Bennack’s continuing influence at Hearst. Will Hearst, a venture investor who is one of the founder’s grandchildren, says there was a feeling that the company had become insular and that information wasn’t being shared.

There was only one person at that point who could step up as CEO — Bennack. “So much of the company had changed on my first watch, and it felt very much frankly like my company,” he says. Bennack thought his second tenure — fondly called Bennack 2.0 throughout the halls of Hearst — would be a year or two, but he stayed for five.

One of his first orders of business was filling a gap in a missing generation of leadership. It was a necessary move if he was going to get succession right the second time around. “We knew Frank wasn’t going to be CEO forever,” says Hearst, although “a lot of people would vote aye in favor if that was one of the options.” Bennack presented a list of 15 internal executives to the board who, he felt, could succeed him. “If you weren’t on the list, you were either not very good or a little bit older than what we were looking for,” Hearst says.

Steven Swartz’s name kept floating to the top. Swartz was initially a content guy, having started his career as a reporter at the Wall Street Journal and eventually becoming founding editor and then CEO of SmartMoney magazine and website. When Bennack was reinstated, he promoted Swartz from deputy to head of the newspaper division, a role Bennack had once held, and made him COO in 2011 and president in 2012. The two operated in tandem. “Every transaction, every personnel move, every important decision, we talked about together,” Bennack says.

Colleagues say Swartz has the right demeanor to take over a company that has long had an industry giant at the helm. “I view Steve as a selfless executive who puts the company first,” says Hearst Television CEO David Barrett, “and I don’t think he’s going to be compelled to light up the sky for the sake of lighting up the sky.”

Executives around the company kept giving me the same answer when I asked if they could imagine a Hearst without Bennack: They didn’t have to. No one ever really leaves. “We have retirement parties on Friday,” Bennack says, “and they’re back in their offices on Monday.” As he’s moved into solely the executive vice chairman role, Bennack wants to travel and catch up on his personal record keeping, but he expects he’ll still give Hearst half his time.

Even the Hearst trust won’t be around forever. It expires when the last of William Randolph Hearst’s grandchildren who were alive at the time of his death have died. (“I’ll be sure to note that,” Will Hearst says when Fortune tells him that the estimate is 2045.) At that time, each of the five branches of the family will directly inherit one-fifth of the company, Bennack says, adding that they could decide to take it public or perhaps reenlist and keep the structure intact. “I would hate to see everybody just fly off in 100 different directions,” Hearst says. “I won’t be there to offer my advice, but I’m proud of the tradition.”

At least until then, it’s Swartz’s job to allocate capital. He’ll need to continue to embrace the culture of fail fast, which has meant unsuccessful projects like CosmoGirl magazine and ESPN 3D are killed. But it has also allowed for the addition of digital advertising and marketing services in the print divisions, new magazines like Food Network, and the expansion of brands across platforms — say Esquire TV or a Seventeen YouTube channel through a joint venture with AwesomenessTV.

“My guess is that, not unlike today, 10 or 15 or 20 years from now, 90% of revenue and earnings will be from things we don’t have today,” Bennack says. Whether his prediction comes true will be a test of his tenure. Were Hearst’s successes because of Bennack’s vision? Or did he instill a culture of change that will serve as a foundation for Swartz to build on?

This story is from the November 18, 2013 issue of Fortune.