In the past few weeks we have been treated to the oftentimes shocking spectacle of News Corp. Chairman and CEO Rupert Murdoch, one of the world’s most powerful media moguls, publicly refusing to accept responsibility for the criminal phone hacking activities of employees of his now-shuttered News of the World British tabloid. The eighty-year old magnate, while testifying before the House of Commons, apologized for the scandal, but he denied knowing until very recently, of the widespread hacking of thousands of private voice mails and the bribery of police officers; a practice that has been ongoing since at least 2005.
Murdoch, appearing somewhat befuddled and “humbled,” told the committee "The people I trusted to run it and maybe the people they trusted" are to blame, adding that he shouldn’t be held responsible for the criminal behavior of a newspaper that represented a tiny fraction of his global empire. His son James Murdoch, chairman of News International, also denied responsibility, while simultaneously admitting to authorizing millions of dollars in payments to settle claims against the company for hacking. The scandal has now reached the United States with the FBI launching an investigation into allegations that News Corp. hacked the phones of the families of 9/11 victims.
What does this scandal say about New Corp.’s commitment, or lack thereof, to corporate governance? Corporations rise and fall based on their organizational strengths and weaknesses. The Board of Directors is tasked with oversight of senior management, setting the tone for the corporate culture of an organization and is responsible for corporate governance. Directors answer to, and are legally obligated to protect the interests of stockholders. News Corp. says it’s “committed to strong corporate governance and sound business practices,” but there is a lack of independence of its Board that makes such a commitment nearly impossible. Although News Corp. is a publicly traded corporation Rupert Murdoch has oftentimes treated it like a private family business.
Murdoch serves as both Chairman of the Board and CEO, a structure that has come under fire in the past few years because it makes genuine oversight problematic. Two of his children, Lachlan Murdoch and James Murdoch, are board members, as well as five company executives. The remaining nine independent directors on the Board have limited power. Why? Primarily because there is no “one share one vote” system in place at News Corp. The controversial dual-class stock structure limits voting rights to class B shares. And Rupert Murdoch and his family control nearly forty percent of the 798 million class B shares. The class A shareholders have no voting power and no say in how the Murdoch family media conglomerate is managed. But they do have the power to sue Murdoch, his company and the directors for breaches of fiduciary duty.
Groups of institutional investors are now forcing Rupert Murdoch’s hand by filing a slew of lawsuits against News Corp. and its directors for shoddy corporate governance. One such lawsuit, spearheaded by the Amalgamated Bank, rails against the Board of Directors that failed in carrying out its oversight duties and permitted Rupert Murdoch to treat News Corp. like a "family candy jar." The suit points out that despite years of police investigations and arrests of News Corp. employees, Rupert Murdoch didn’t authorize the Board of Directors to launch an internal investigation until July 7, 2011.
The lawsuit alleges the phone hacking crimes “show a culture run amuck within News Corp. and a board that provides no effective review or oversight." Moreover, because of Murdoch’s opposition to sound corporate governance shareholders suffer from a "Murdoch discount" that weakens the value of their shares.
Institutional shareholders, already troubled over the lack of a transparent succession plan, are also calling for Rupert Murdoch to step down as CEO to make way for a strong independent voice on the Board. News Corp.’s annual general meeting in October should be filled with plenty of fireworks.
We have seen time and again the consequences when the Board does not set effective risk management procedures. Additionally, internal management controls must be established and ethical business practices must come from the top down. Unfortunately, once again it has taken a crisis to illuminate the weaknesses in New Corp.’s corporate governance structure. This will continue to place the company and its directors at risk, unless and until major institutional reforms are implemented. For the rest of us out there take note!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.