Tuesday, September 13, 2011

#Hackgate : Rupert #Murdoch's board too weak to stand up to him OR FOR HIM now.

Rupert Murdoch is finally on the wrong side of the tipping point — make that the “tipping over” point — and it’s his own fault. Not for allowing the violations of law, ethics, and privacy at his newspapers, but for setting up a governance structure so ineffective that major failures were inevitable.

The phone hacking scandal is not a matter of some rogue reporters pushing a prank too far. It is just the latest in a series of outrageous breaches by a man who thinks the rules don’t apply to him and has gotten away with it so far.

Rupert* packed the board with family and friends to make sure no one would challenge him. But now that they are feeling some real pressure, they have no choice but to throw him under the bus. Maybe the various investigations and a compelling shareholder lawsuit will inspire them to develop some courage.  More likely, a few calls to their lawyers will scare them into doing the right thing.

My company, GovernanceMetrics International, rates the effectiveness of boards of directors for director and officer liability insurers, investors, headhunters, accounting firms, and law firms. We’ve consistently given News Corp an F, only because there is no lower grade.

Here’s the board makeup and a related drinking game. Take a swig any time you see the words “News Corporation” and two when you see the name Murdoch:
  • Rupert Murdoch (insider)
    Chairman and Chief Executive Officer
    News Corporation
  • José María Aznar
    Former President of Spain
    FAES — Foundation for Social Studies and Analysis
  • Natalie Bancroft (described by the Financial Times as “a 27-year-old opera singer“)
    News Corporation
  • Peter Barnes
    Ansell Limited
  • Chase Carey (works for Rupert)
    Deputy Chairman
    President and Chief Operating Officer
    News Corporation
  • Kenneth E. Cowley (formerly worked for Rupert)
    R.M. Williams Holdings Pty. Limited
  • David F. DeVoe (works for Rupert)
    Chief Financial Officer
    News Corporation
  • Viet Dinh
    Professor of Law
    Georgetown University
  • Rod Eddington (formerly worked for Rupert, now at company paid for services by News Corp)
    Non-Executive Chairman for
    Australia and New Zealand
    J.P. Morgan
  • Joel Klein (works for Rupert)
    Executive Vice President
    CEO, Education Division
    News Corporation
  • Andrew S.B. Knight
    Rothschild Investment Trust C.P
  • James Murdoch (Rupert’s son and employee)
    Deputy Chief Operating Officer
    News Corporation
    Chairman and CEO, International
    News Corporation
  • Lachlan Murdoch (Rupert’s son and employee)
    Executive Chairman
    Illyria Pty Ltd
  • Thomas J. Perkins
    Kleiner, Perkins, Caufield & Byers
  • Arthur M. Siskind (works for Rupert)
    Senior Advisor to the Chairman
    News Corporation
  • John L. Thornton (former head of Goldman Sachs)
    Professor and Director of Global Leadership
    Tsinghua University of Beijing
The company’s recent proxies have included an astounding 6000+-word series of “related party transactions” disclosures. Let’s just say it’s a very family-friendly company, as long as you are a part of the Murdoch family. Rupert’s wife, daughters, and sons-in-law are among those who have given the term “related party transactions” its literal meaning.

The board recently approved the purchase of a company owned by Elisabeth Murdoch (Rupert’s daughter) in a transaction, according to the complaint filed in a recent shareholder derivative suit, that personally nets her at least $250 million and gives her a seat on the board starting in 2012, bringing the Murdoch family members on the board up to four of seventeen seats.

A board is made of wood

News has two classes of stock, a problem I have described in another post. The Murdoch family has a minority ownership stake but majority voting control, so they decide who is on the board — and thus who gets a $220,000 annual fee for a few weeks of work a year (a significant portion of which is forfeited if they leave or are kicked off).

How can even those who are ostensibly “independent” say no to Rupert when he can boot them off the board at at any time? No wonder the board is Murdoch family friendly but decidedly less friendly to those whose interests they are legally obligated to protect: the shareholders.

Normally, a transaction involving a conflict of interest requires the approval of a committee of independent directors. But this board doesn’t have enough independent directors to fill a committee.  As the complaint points out:
Sir Roderick I. Eddington (“Eddington”) is News Corp’s lead “independent” director and the Chair of the Audit Committee that ostensibly approved the Transaction. Besides being a long-time friend of Murdoch, Eddington has served as J. P. Morgan Chase’s Non-Executive Chairman for Australia and New Zealand since 2006. Putting aside the millions of dollars in fees that J.P. Morgan and its affiliates have received from News Corp over the years, J.P. Morgan served as Shine’s advisor on the Transaction. A more clear conflict is hard to fathom.
Normally, the investigation of a serious pattern of ethical and legal violations like the phone hacking scandal is assigned to a committee of independent directors. News assigned this important task to board member and former NY City Schools Chancellor Joel Klein.

Klein is very able and accomplished, but he is also an employee of the company. He reports to Rupert Murdoch. How is he supposed to investigate him? How is this “investigation” or the approval of the Shine deal going to come across in depositions for a lawsuit alleging a failure of independent oversight?

Rupert has broken too many promises and too many rules for too long to survive this latest mess. He may have the legal right to boot them off the board if they try to push him off, but for the first time this latest scandal has given the board some leverage to push back.

They should push hard and de-Murdoch-ize the boardroom thoroughly and add some real independence.  Remember: when a fiduciary picks a new CEO, the job is to look for the best candidate in the world, not the best candidate in the family.

*I call him Rupert not out of disrespect but to distinguish him from the other Murdochs at the company.