Editor’s comment: Murdoch and News Corp, hacked to bits?

Shareholders can’t say they weren’t warned!

Anyone that still doubts the potential for ethical and ESG issues to batter a company’s share price need only take a look at News Corporation’s (News Corp) shredded ticker: down almost 7% in a week, wiping more than $3bn off the company’s value. The value destruction followed that of the values: the closure of the News of the World newspaper came as the tawdry phone hacking affair hit new lows when it was revealed that the paper’s journalists had, amongst other crimes, infiltrated the messages of a murder victim and targeted the families of dead soldiers. As coverage revealed the tabloid had transgressed public decency norms, so the retribution of the public and advertisers was swift and merciless. Public acceptability can appear elastic – and the News of the World had been stretching it for years – but beware when it snaps: it can be torturous to mend, if possible at all. Let’s not forget that the News Corp share price drop has come without any new prosecutions. Nor is it a result even of a rejection yet by the UK government of its bid for the 61% of shares that it doesn’t own in BSkyB, the satellite broadcaster; likely as that may seem now that the bid has been referred back to competition and regulatory authorities. Just a week ago BskyB shares were worth 850p each. Now, the shares are trading at 690p each, down by more than 17%.The news will get worse. In journalist speak: the story has legs. There are new revelations daily, and there will likely be more people sent to jail; phone hacking is, after all, illegal in the UK as in most countries. And opponents of the ‘Murdoch Empire’ now smell blood as the apparent vested interest omerta between big media, politicians – and staggeringly – some police officers, splinters. Some are suggesting that News Corp’s complex web of offshore accounts in tax havens should be investigated. Others have opined that the US Foreign Corrupt Practices Act could get involved and make News Corp (a US-listed company) liable if any employee is found to have bribed a foreign official (for example, a member of London’s Metropolitan Police), even if no one at head office knew. In 2003, Rebekah Brooks, now Chief Executive of News International, the UK subsidiary of News Corp, told Parliament that The Sun newspaper had paid police for information. Under the Dodd Frank Act, potential whistleblowers on any such crime could win a percentage of the eventual fine if they report acts of bribery. There is even suggestion that Rupert Murdoch could be considered ‘unfit’ by law to run a UK company and the company broken up. And as Responsible Investor reported yesterday, US shareholders are already sharpening their knives with the assistance of class action lawyers: Link to story

They have some potent arguments, notably that the board should have intervened when it learned of the hacking problems years ago when a journalist and a private investigator were jailed: the bad apples defence is a classic smokescreen in any scandal. The shareholder complaint reads: “These revelations should not have taken years to uncover and stop. They show a culture run amuck within News Corp and a Board that provides no effective review or oversight.” The plaintiffs note that editors implicated in the affair – including Rebekah Brooks – were consistently promoted even while the scandal was unfolding. The shareholders are also seriously concerned that James Murdoch, Chairman and Chief Executive of News Corp in Europe and Asia, acknowledged that he personally approved the payment of nearly £2m to silence two lawsuits against the company. Murdoch admitted: “I now know that I did not have a complete picture when I did so. This was wrong and is a matter of serious regret.” Given that the hacking case could involve thousands of people there is a serious issue of legal liability here. As with many ‘corporate guru’ cases before it – especially in the media (Conrad Black anyone?) – Rupert Murdoch himself also faces allegations of confusing company goods with his own. The US shareholders originally filed suit in May 2011 in the Delaware Court of Chancery challenging News Corp.’s $615m purchase earlier this year of Shine Group Ltd., a UK film and TV production company run and majority-owned by Murdoch’s daughter Elisabeth, whose windfall share of the sale, they say, came to $250m. As the complaint notes, “[Rupert] Murdoch did not even pretend that there was a valid strategic purpose” for the Shine deal, as he proudly boasted that its goal was to bring his daughter back into the News Corp. fold so she could join his Board. The complaint adds: “Murdoch has treated News Corp. like a family candy jar, which he raids whenever his appetite strikes. Ignoring the distinction between public and family business, the Board has repeatedly permitted Murdoch to:(i) intertwine rampant nepotism in the conduct of Company business; (ii) undertake actions designed to maintain his control over News Corp.; (iii) use News Corp. resources for his own personal and political objectives; and (iv) reward himself handsomely with excessive compensation.” Shareholders with faith in the Murdoch story have been mauled, but as so often with such ESG scandals they can’t say they weren’t warned. They’re not listening though. Both News Corp and BSkyB have had governance red flags for years due to the cosy influence of the Murdoch family: father & son running a public company, and both combined Chairs and CEO! The damage to a company appears to be significantly higher and more far reaching when the incentives in a particular industry push those involved to dangerous abuse: in this case a media company’s close relationship to government and journalists ripping through ethical standards. It has similarities to the case of BP, a company able to regularly flout safety concerns because of its lucrative business and lax regulatory regimes. Indeed, both the media and oil industries face similar challenges more broadly: a business model in some flux that is very much in the public eye. It makes them particularly sensitive to ‘blowback’: the reputational and financial damage that can swiftly be inflicted on companies. In terms of investment, I believe both cases also tell us that the cost to shareholders of stepping up their engagement with potential problem companies and investing in better ESG research is marginal in comparison to the price they may pay in the event of a catastrophe. That said, the research on companies needs to be deeper, more challenging, time-sensitive, able to factor in worst-case scenarios and more VOCAL. If these are so-called ‘black swan’ events, then we are seeing a hell of a lot of them! The whole sordid Murdoch tale is a reminder of the old adage about knowing the price of everything but the value of nothing. As with media, so with business and investment: you have to stand for something, otherwise you will fall for anything!