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Scandal sparks News Corp investor backlash

September 2011

A spate of divestments and shareholder lawsuits has added to widespread public criticism of News Corporation in the wake of the UK phone-hacking scandal.

The company faces calls to overhaul its corporate structure and pay out for investors’ losses due to gross corporate irresponsibility.

This has the potential to cause damage well beyond the company’s UK subsidiary News International, which has seen its BSkyB takeover plans scuppered, a national boycott and the loss of advertisers.

Investors, from the huge Californian public-sector pension fund Calpers to the Church of England, are threatening to pull out of News Corp unless radical changes are made in light of the hacking controversy. Many more have sold their holdings.

Executives are accused not only of complicity in hacking activities at the UK’s News of the World, but also of systematically trying to cover them up through mass email deletions, the payment of hush money to convicted journalists, and political corruption through the company’s involvement with the Metropolitan police and Conservative Party politicians.

A number of prominent News International figures, including former chief executive Rebekah Brooks, have been arrested. However, shareholders are not concerned just with the British subsidiary’s tribulations, but with the undemocratic nature of its entire corporate structure.

News Corp’s ‘dual stock classes’ result in nearly 1.8bn of the group’s 2.6bn shares having no voting power. Of the shares with voting power, a controlling proportion is held by Rupert Murdoch and his family despite their 12% stake in the group.

Many investors already avoid the company because of its share structure, though others have taken action as a result of huge recent losses on investments in News Corp.

Calpers, which has a $110m (£66m, €76m) stake, said in a statement: “Power should reflect capital at risk. Calpers sees the voting structure in a company as critical. The situation is very serious and we’re considering our options. We don’t intend to be spectators – we’re owners.

“Dual class voting is one way to pervert the alignment of ownership and control.”

There seems little that owners of non-vote shares can do but divest. Paul Hodgson, managing director of US-based GovernanceMetrics International, said: “While shareholders are free to suffer from a drop in the stock price because of the scandal, they really cannot do anything but sell the stock. They have no control over the board or CEO.”

Some institutional investors have gone further. The Massachusetts Laborers’ Pension & Annuity Funds is suing Murdoch and other News Corp directors. The $700m fund is seeking compensation for losses caused by breaches of fiduciary duty during the scandal.

Other shareholders, including the Central Labourers Pension Fund and the New Orleans public-sector pension fund, have made similar, separate claims, calling the company’s behaviour “an egregious collection of nepotism and corporate governance failures”.

Elisabeth Murdoch, Rupert’s daughter, herself a subject of other lawsuits claiming nepotism in News Corp’s $675m purchase of her Shine Group, has since refused to join the group’s board, saying a directorship would be “inappropriate”. Her brother James remains in charge of the group’s European operations and at the centre of the hacking scandal.

Though the hacking affair is of peripheral importance to News Corp’s overall business, there are signs that even this could be spreading to Australia, where further arrests have been made, and the US, where politicians have demanded an investigation into the company’s activities.  

Analysis




News Corp | Global | Corporate governance

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