A corporate accident waiting to happen

The phone-hacking scandal has not only closed the UK’s News of the World newspaper, but has cast doubt over the Murdochs’ future at News Corp

Tabloid journalism in Britain took a big reputational hit with the News of the World (NoW) phone-hacking scandal in July, a feat that might hardly have seemed possible just a few months ago.

But despite claims of similar practices at its competitors, the scandal has particularly stained News International (NI), owner of the now-defunct NoW and Britain’s largest national newspaper stable. And this local difficulty has exposed News Corp to serious threats.

NI is one of the most aggressive players in the UK newspaper industry and was feared by the political classes – the NoW delighted in revealing its victims’ pecadilloes – so it was always going to face a harsh backlash if it ever crossed the line of acceptability.

Tittle-tattle about the powerful and famous are one thing. Scouring the voicemail of a murdered teenage girl for stories, raising her parents’ hope that she was alive and, in the process, deleting what could have been evidence in a murder investigation, crossed that line.

But if the scandal was bad enough, the response of News Corp management has further damaged the brand. Even if one accepts that crises are unavoidable from time to time, one of the golden rules of managing one is to assess a problem and its likely outcome, and take responsibility and control the situation. This could mean delivering the bad news yourself, apologising where appropriate and generally working to draw the sting. NI initially ignored the story and then worked to suppress it.

Phone-tapping was allegedly endemic at the NoW by 2006, and involved bribing Metropolitan Police officers. Indeed, the police now have a list of 4,000 possible targets.

In 2006, NoW royal editor Clive Goodman and private investigator Glenn Mulcaire were arrested, Goodman for illegally intercepting calls to members of the royal household. He was suspended a few days later. In November, Goodman admitted illegally intercepting calls to St James’ Palace and, in January 2007, was jailed for four months. Mulcaire admitted this and further charges of intercepting phone calls and was jailed for six months.

Then NoW editor Andy Coulson said measures had been put in place to ensure such conduct could not be repeated. Later in 2007, NI executive chairman Les Hinton told MPs that Goodman had acted alone.

However, NI paid former Professional Footballers’ Association chief executive Gordon Taylor a sum thought to be as much as £700,000 in damages and legal costs for having his phone illegally hacked. In an agreement reached at a special court hearing, his silence was secured. Within two years, NI had paid £1m in out-of-court settlements on cases where evidence of phone-tapping was likely to be revealed.

At this point, the balance of probability was that the scandal would not stay hidden indefinitely. News Corp had around five years to get control of the issue and draw the poison from the story before it broke.

The fact this did not happen meant that when the scandal finally did explode, the company’s management and corporate governance came under immediate scrutiny.  

Though Rupert Murdoch and his son James survived the humiliation of MPs’ questioning at the UK’s Culture & Media parliamentary select committee, the 80-year-old media mogul’s refusal to accept any responsibility for illegal activity at the company – blaming instead the “people I trusted to run it and maybe the people they trusted” – and his claim he knew nothing of the scandal until very recently stretched his credibility to breaking point.

Labour MP Chris Bryant said of Rupert Murdoch: “If he didn’t know, he’s incompetent. And if he did know, he’s a liar.”

James Murdoch also denied responsibility, while at the same time admitting he had authorized payments to settle hacking claims against the company. By this point, Murdoch’s bid to fully acquire the satellite TV broadcaster BSkyB was scuppered. At its worst, the value of News Corp’s B-class voting shares had plunged 19% and were trading at below $14 in New York as fears spread that the scandal could harm more valuable assets in the US. This fear strengthened when the FBI began investigating allegations that the phones of 9/11 victims’ families had been hacked. News Corp has also been hit by divestments from major shareholders and faces lawsuits for millions over breaches of fidiciary duty.  

But the fact that News Corp became embroiled in a scandal at all came as no surprise to those who rank companies according to their corporate governance. They say its board’s lack of independence and conflicts of interest, and its dual-class share structure, were simply asking for trouble.

Rupert Murdoch is both chairman and CEO, and his sons James and Lachlan are on the board. Many of the other members owe their place to links with the Murdoch family. Had the scandal not broken, they would almost certainly have been joined by Elisabeth Murdoch after she sold her TV production company Shine Group to News Corp for £415m. She may still yet be appointed. And then there is Natalie Bancroft, a fully-trained opera singer who was recruited to the board as part of News Corp’s purchase of Wall Street Journal publisher Dow Jones from her family. She has no experience of either business or journalism.

“If you wanted to make up the sort of company that will fail, this is the sort of board you’d put together,” said Paul Hodgson, managing director at New York-based GovernanceMetrics International, a governance consulting firm and rating service that tracks 3,000 publicly held companies. GMI has given News Corp an F, its lowest rating, since it began grading in 2003.

Nine board members have little power because there is no one-share-one-vote structure in place. Class A shares do not carry voting rights and the Murdochs control nearly 40% of the class B shares that do.

News Corp says it is “committed to strong corporate governance and sound business practices”. Indeed, Eiris, the global provider of business environmental, social and governance (ESG) data, says News Corp does have “an advanced code of ethics which commits it to obeying laws and regulations, which prohibits giving and receiving bribes, restricting facilitation payments and addressing conflicts of interest”. But this code has not been implemented.

Mark Robertson, of Eiris, said: “The News Corp scandal is perhaps another example of how a series of ESG failings can have an immediate and very negative impact on a company.

“The shortcomings at NoW offer investors a sound basis for urgent engagement with News Corp to improve performance on issues around code of conduct, bribery and corruption, and transparency.” Eiris gives News Corp a ‘basic’ rating for its ability to implement its code of ethics.

Giles Gibbons, CEO of Good Business, concurrs. “NI ticked a lot of the CSR boxes and has done some great things with Sky. However, you can have as many CSR reports as you like, but if there is a different set of core values determining how the business is actually run, they are irrelevant. The search for the best stories is what drove NI.”

Last May, three academics at the Harvard Business School published a study on the links between CSR performance and corporate value, entitled Corporate Social Responsibility and Access to Finance. Its authors Beiting Cheng, Ioannis Ioannou and George Serafeim argue that an effective CSR commitment creates value in itself, and that its absence inhibits growth.

They found that strong CSR performance is associated with higher levels of transparency of reporting, strengthening the trust of investors and increasing their likelihood to invest. This releases it from managing speculative factors to focus on long-term goals.

This effect has already been seen in relation to News Corp. According to Bloomberg, if each of News Corp’s business units are valued separately, the aggregate value falls somewhere between $62bn and $79bn, when its current market capitalisation is estimated at around $42bn. for investors holding class B shares, that would be a price per share of $22, $8 above its trading level during the height of the scandal. This difference has often been called the ‘Murdoch discount’.

But News Corp has thrived despite this ‘discount’, and many fund managers believe its BSkyB bid has been merely delayed. In an article on 13 July, Yahoo Finance quoted two unnamed fund managers who said the scandal does not represent a financial ‘nuclear bomb’ and, consequently, will not affect long-term financial performance. Indeed, it is expected to generate around $7bn in operating cash next year.

So where it goes from here seems to depend on the success of any proceedings it faces in the UK and US, and whether News Corp continues to generate huge revenues without a Murdoch resignation.

Whatever happens, Giles Gibbons is clear that CSR is a process that News Corp should embrace. “It’s a great organisation. It has supported some very high quality journalism, even when the business model suggested closure. CSR is about changing organisations for good.

“The most important thing here is that NI gets better, not that it goes away.”