Tags: News Corp | Rupert Murdoch | News of the World

Scandal Turns Up Heat on News Corp. Board

Friday, 15 Jul 2011 08:26 PM

NEW YORK (Reuters) - The resignations of two of Rupert Murdoch's top lieutenants are not expected to solve the corporate governance problems at his beleaguered media empire, which is widely criticized for having an over-cozy board.

Les Hinton, head of News Corp's Dow Jones & Co, resigned on Friday after becoming a target of criticism for the phone-hacking scandal that occurred when he oversaw Murdoch's British newspaper arm, News International.

Earlier on Friday, another top Murdoch confidante, Rebekah Brooks, who worked under Hinton when she was News of the World's editor, also resigned.

Holding executives accountable may be the first step in stemming the crisis, but News Corp still needs to correct the culture that led to problems, corporate governance experts said.

"For us in the public to be reading about this for so long without any decisive action is mind-boggling to me," said Fred Tannenbaum, managing partner at law firm Gould & Ratner and expert on family-owned businesses.

"My sense is they should put in best practices for ethics, for reporting, for fact-checking and for determining how the facts were obtained," he said.

Stronger corporate governance, including a more independent board of directors, would have pushed News Corp to take much earlier action to hold those responsible to account -- and might have limited reputational damage, experts said.

News Corp's board has long been criticized for being packed with family and corporate insiders who lack independence.

News Corp has said in filings that nine of its 16 board members are independent under Nasdaq listing rules. However, News Corp's dual voting class stock structure gives the Murdoch family control over nearly 40 percent of votes, giving them major say over who is on the board.

"Even if you were to create an independent board, which you should do, they're still going to be beholden to the family because the family still controls the vote," said Charles Elson, chair of the Weinberg Center for Corporate Governance at the University of Delaware.

A spokesman for News Corp declined to comment.



On Friday, Murdoch tried to gain control of the scandal by apologizing to the parents of a murdered schoolgirl, in what appeared to be an admission that the News of the World had in 2002 hacked into the voicemails of their missing daughter.

It was that damning allegation, in a rival newspaper 10 days ago, that reignited a five-year-old scandal that has forced Murdoch to close the News of the World and drop a $12 billion plan to take full control of highly profitable pay-TV operator BSkyB .

News Corp's board has been silent since the turmoil erupted, but Joel Klein, an executive and former assistant U.S. attorney general, along with independent director Viet Dinh, a law professor, have been appointed by Murdoch to oversee the issue and keep the board informed.

Corporate governance experts said the board should have created an independent committee to investigate when hacking allegations first came to light in 2005.

"They would have uncovered some of what's coming out now -- that it goes much further than some tittle-tattle about movie stars," said Nell Minow of GovernanceMetrics International.

Earlier attention might have limited the damage to News Corp's name, which worsened this week as a ninth suspect in the hacking scandal was arrested.

"When you have nine people arrested, it seems so systematic and almost conspiratorial you have to wonder whether there was any real oversight," said Gould & Ratner's Tannenbaum.

The threat of legal liability may push News Corp's board to take action, governance experts said.

In an amended lawsuit filed in Delaware last week, institutional investors alleged that board "has remained silent and passive" on the hacking issue, showing its "utter capitulation to the control and domination of Murdoch."

"By failing to take action to investigate, control and limit the fallout from the hacking scandal, the board breached its duty and exposed the company to billions in losses that could have otherwise been avoided," the lawsuit said.



News Corp has said in filings that nine of its board members are independent under Nasdaq listing rules. However, the lawsuit said that three of those, Kenneth Cowley, Rod Eddington and Andrew Knight, were senior executives at News Corp or a subsidiary at the time they were named to the board.

The board already includes Murdoch's sons James and Lachlan, and his daughter Elisabeth is due to join in 2012.

Many newspaper companies have dual-class voting structures to cushion the publications from short-term profit pressures, but it may be time to rethink the structure, said the Weinberg Center's Elson.

"I've always objected to it because I think any time you separate economic interest from voting interest, problems happen," he said.

Lack of oversight and dual-class structures have been a problem at several companies engulfed in past scandals.

The board at Hollinger International, for example, was sued in 2003 for standing by while press baron Conrad Black received millions of dollars in authorized payments.

And the board of Adelphia Communications was dominated by the Rigas family during a financial fraud that led to its 2002 bankruptcy.

"The core asset of any journalistic enterprise is its integrity; you have to believe what you're reading," said Tannenbaum of Gould and Ratner. "So I would think a board in a media business like this would go to great lengths to assure its integrity." (Reporting by Dena Aubin and Yinka Adegoke)

© 2015 Thomson/Reuters. All rights reserved.

1Like our page

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

America's News Page
©  Newsmax Media, Inc.
All Rights Reserved