High corporate governance standards: low ethical performance (the NewsCorp case)

The following case has been adapted from the second edition of Corporate Governance – principles, policies and practices, due to be published early 2012.

The News Corporation case
News Corporation (NewsCorp) is a media conglomerate, founded by Rupert Murdoch in Australia in 1979. In 2010, the company, now head-quartered in New York, had world-wide revenues of over $30 billion, profits of over $2.5 billion, and over 50,000 employees. The company’s main revenues come from cable networks, with the Fox News channel, and filmed entertainment. Publishing, including newspapers, accounted for less than 20%. NewsCorp shares are listed on NASDAQ and the Australian Securities Exchange.

Rupert Murdoch, born in 1931, has enjoyed unrivalled political influence around the world, being described by the Economist (23.7.11) as “a press baron, a manipulator of politicians, and a king maker.” The Murdoch family dominate the control of NewsCorp using dual-class shares. The ‘A’ shares, which account for 70% of the equity, have no voting rights, and consequently the holders of these shares have no say in board-level appointments. The B shares, which account for 30% of the equity, carry all the votes. The Murdoch family control about 39% of these voting shares, giving them unassailable control

News International Ltd. is the wholly-owned British subsidiary of NewsCorp, publishing the “The Times” newspaper, and the “News of the World”. The chairman of News International is James Murdoch, born in 1972, who is Rupert Murdoch’s son.

The seventeen directors of NewsCorp include nine who are nominally independent, but whose length of service and connections would make that definition doubtful in some corporate governance codes. They are:
Rupert Murdoch, Chairman and Chief Executive Officer, NewsCorp
José María Aznar, independent director. Former President of Spain. President,
Foundation for Social Studies and Analysis
Natalie Bancroft, 34, independent director, member of the family that controlled
Dow Jones and Wall Street Journal prior to their disputed take-over
by NewsCorp
Peter Barnes, independent director, Chairman of Ansell Limited a US-based and
Australian-registered maker of industrial gloves
Chase Carey, Deputy Chairman, President and Chief Operating Officer, NewsCorp
Kenneth E. Cowley, independent director, Chairman, R.M. Williams Holdings Pty.
Limited
David F. DeVoe, Chief Financial Officer, NewsCorp
Viet Dinh, 43, independent director and chairman NewsCorp Nominating and
Corporate Governance Committee. Professor of Law, Georgetown
University. Having fled war torn Vietnam, he served as assistant attorney general under President George Bush
Rod Eddington, independent director appointed in 1999. Chairman for Australia and New Zealand, J.P. Morgan. Former chief executive of British Airways
and of Australia’s Ansett Airlines. Said to have been mentor to Rupert
Murdoch’s son Lachlan, who is also a NewsCorp director
Joel Klein, Executive Vice President, CEO, Education Division, NewsCorp
Andrew S.B. Knight, independent director. Chairman, J. Rothschild Capital
Management Limited
James Murdoch, Deputy Chief Operating Officer, NewsCorp
Chairman and CEO, International News Corporation
Lachlan Murdoch, Executive Chairman, Illyria Pty Ltd
Thomas J. Perkins, independent director. Partner, Kleiner, Perkins, Caufield & Byers
Arthur M. Siskind, Senior Advisor to the Chairman, NewsCorp
John L. Thornton, independent director appointed in 2004. Professor and Director of
Global Leadership, Tsinghua University of Beijing. Formerly Chief Operating Officer of Goldman Sachs and an independent director of HSBC involved in power struggles at board level.
Stanley S. Shuman (Director Emeritus), Managing Director, Allen & Company LLC
Source: www.newscorp.com/corp_gov/bod.html

The matter of succession has been raised by some analysts. The possibility of a dynasty passing from father to son was questioned, and the suggestion made that Rupert Murdoch move to non-executive chairman and a new appointment made as CEO. The name of Chase Carey, currently COO NewsCorp, was often mentioned.

Details of the board committees can be found at: http://www.newscorp.com/corp_gov/bc.html, which also provides access to the charters of those committees, including the Nomination and Corporate Governance Committee. The News Corporation Statement of Corporate Governance is at www.newscorp.com/corp_gov/socg.html

NewsCorp publish the group’s standards of business conduct, which can be accessed at www.newscorp.com/corp_gov/subc.hrml
The concern for ethical conduct is reflected in a letter from Rupert Murdoch, Chairman and Chief Executive Officer:

Dear Colleagues:
For more than a half century, News Corporation has shaped global media by ensuring the public’s needs are met and that our offerings are of the highest caliber. Today, hundreds of millions of people around the world trust us for the best quality and choice in news, sports and entertainment.
This public trust is our Company’s most valuable asset: one earned every day through our scrupulous adherence to the principles of integrity and fair dealing.
We have revised this Standards of Business Conduct to make it easier to read and use, and to clearly outline what we should all expect of ourselves as colleagues. Each of us has the power to influence the way our Company is viewed, simply through the judgments and decisions we each make in the course of an ordinary day.
It’s an important responsibility and I’m honored to share it with you.
Rupert Murdoch
Source: www.newscorp.com/corp_gov/sobc_letter.html

Disaster strikes NewsCorp and its subsidiary News International
In July 2011 the best-selling British Sunday newspaper, the “News of the World”, was closed after 168 successful years. For some years, the company had faced damaging allegations of telephone hacking to obtain stories, but had claimed that this was the work of a single rogue, free-lance investigator, who went to jail. But subsequently it emerged that the practice was widespread and known to senior executives. The public were not too concerned when they believed that the hacked telephones belonged to entertainment and sports stars, and other celebrities. But when it emerged that the journalists had intercepted voice messages of a missing 13 year-old school girl, Milly Dowler, who was subsequently found murdered, the public mood changed. Worse, it was discovered that journalists had deleted messages from her cell phone to make more space for subsequent material, leading her parents to believe she was still alive. Evidence emerged that telephone hacking to obtain stories was widespread and ran to thousands, including families of soldiers killed in Iraq and Afghanistan and people killed in the terrorist bombings in London. It was then alleged that large sums had been paid to celebrities, who had discovered that their voice mails had been listened to by the “News of the World”, to settle actions for breach of privacy. On 19 July 2011, Rupert and James Murdoch were summoned before a committee of the British House of Commons to answer questions. Rupert Murdoch said that “this is the most humble day of my career”

Worse was to come, when it appeared that payments had been made to police for information. This raised the possibility of prosecution for bribery under the American Foreign Corrupt Practices Act. Some senior police officers resigned.

The BSkyB deal fails
News International owned 39% of the company BSkyB, which ran the successful British satellite Sky TV station. James Murdoch was chairman of BSkyB. In early 2011, New International bid for the remaining shares. Expectations were high that the bid would be approved by the UK broadcasting and competition authorities, and accepted by the shareholders. However, the saga over telephone hacking and payments to police caused the government to block the bid, which was abandoned on 14 July 2011. News Corp shares plunged 7%, wiping $3bn. off its market value. Nevertheless, on 29 July 2011, the BSkyB board of directors unanimously voted for James Murdoch to remain as chairman.

Some questions inevitably arise
1. How can the disreputable behaviour have occurred at the News of the World when the Group had such a clear commitment to high standards of conduct?
2. As the top executives of the subsidiary and the holding companies respectively, should either James or Rupert Murdoch be held responsible, for the bad behaviour in a relatively small and not very significant part of the Group?
3. Is the use of dual class shares to maintain a family’s domination over a public company really desirable? Is it right that the ‘A’ shares, which account for 70% of the equity, have no voting rights and therefore no say in board-level appointments?

Bob Tricker 8 September 2011

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