Case Overview On 10 July 2011, News of the World (NoW) ended its 168 years of ex
ID: 424538 • Letter: C
Question
Case Overview
On 10 July 2011, News of the World (NoW) ended its 168 years of existence when it published its final edition. The paper was one of the many casualties of the phone hacking scandal which engulfed News Corporation (News Corp).
Investigations have shown that the newspaper’s practice of phonehacking started as early as 2005. The matter was closed when there was no evidence to suggest that it was more than an isolated event. Subsequently, other newspaper publications alleged that the victims of phone hacking included many other celebrities and politicians. It was also alleged that NoW’s senior management was aware and condoned these activities. This prompted shareholders to question whether the Board was doing their job. In October
2011, many News Corp investors voted against the re-election of James and
Lachlan Murdoch at the annual general meeting. However, they were re-elected onto the Board because of News Corp’s dual-class share structure, which gave the Murdoch family 40% of the votes even though they owned only 12% of the total outstanding shares. The objective of this case is to allow a discussion on issues such as ethics and tone at the top, dual-class share structures, board independence and effectiveness, and shareholders’ activism.
The Making of an Empire
Rupert Murdoch was born in Melbourne in 1931. Young Murdoch inherited his first newspaper, The Adelaide News, from his father in 19521. Murdoch initially focused on the Australian market, by starting up new publications and acquiring several newspapers and television channels in Australia. In 1968,
Murdoch entered the United Kingdom (UK) market by buying News of the
World Organization for £26 million, which owns News of the World and several other publications. He was quoted saying, “We see opportunities to participate in media developments across Europe.” Then in 1973, Murdoch entered the United States (US) market. After acquiring and buying a string of newspapers during the 1970s in the US and in the 1980s in Australia, Murdoch established News Corp as a global holding company. In February 1981, News International plc (NI), the UK newspaper publishing division of News Corp, was established2.
In early 2011, News Corp was valued at about US$48.29 billion, and its product portfolio includes newspapers, magazines, books, movies, sporting events, websites, cable programming and satellite television3.
Corporate Governance
Shareholding Structure
Despite the Murdoch family collectively owning only about 12% of News Corp’s shares, they effectively control News Corp due to the dual-class share structure which News Corp had adopted. Under this dual-class share structure, the Murdoch family owned 40% of the Class B shares which have voting rights, even though Class B shares only made up 30.4% of the total outstanding News Corp shares4.
Board Composition
The Board of Directors comprised of 16 directors, 8 of whom were classified as independent. Murdoch is the Chief Executive and Chairman, while his sons, Lachlan and James, were also on the board. James was also the Deputy CEO.
Four of the other directors were executive directors. The independent directors included an opera singer named Natalie Bancroft, and Jose Maria Aznar, the former Spanish Prime Minister. Only two of the independent directors have media industry experience, and both had worked for companies belonging to the media conglomerate during their careers. The independence of News Corp’s directors complied with the listing rules of NASDAQ, which News Corp was listed on5. In 2011, James Breyer replaced Tom Perkins as an independent director on the Board. Perkins, who sat on News Corp’s Board for 15 years, had previously resigned from the Hewlett Packard Board in protest against an unethical leak investigation ordered by the then Chairperson. Perkins was dubbed as “the closest thing to a truly independent director” on the Board of News Corp and the “best hope” for improving its governance by a columnist at Reuters. Another independent director who left the Board in 2011 was Kenneth Cowley, a long-time director and chairman of an Australian clothing firm.
Board Committees
The Board consists of three committees – the audit committee, compensation committee and the nominating and corporate governance committee. None of the audit committee members is a Certified Public Accountant, have significant experience in accounting, or risk management expertise.
According to a 2011 interview with Nell Minow, the co-founder of The Corporate Library, which rates companies on their corporate governance, News Corp had received an F grade for the past six years “only because there is no lower grade”6.
Origins of the Phone Hacking Scandal
In 2000, Rebekah Brooks, Rupert Murdoch’s top aide was appointed as the editor of NoW. During her tenure at NoW, she reported on the case of Milly
Dowler, a 13-year-old girl who was kidnapped and murdered. The murder was described as one of the most notorious of the decade7.
Brooks was subsequently promoted to be the first female editor of the tabloid
The Sun in 2003, and was later promoted to chief executive of NI in September 2009.
At the same time, Andy Coulson, Brooks’ deputy editor since 2000, replaced her as the editor of NoW.
NoW’s phone hacking practice was first detected in November 2005, when
Clive Goodman, NoW’s royal editor, wrote a story about Prince William’s knee injury. The leakage of this confidential information prompted complaints by royal officials about voicemail messages being intercepted. It was reported that Goodman hired a private investigator, Glenn Mulcaire, to tap phone lines, and paid him more than £100,000 a year for his services8. In 2007, Goodman and Mulcaire were jailed for four and six months respectively.
The Press Complaints Commission, the newspaper regulation watchdog, published a report in May 2007, saying that no evidence of wrongdoing was found at NoW. Moreover, a review of internal emails between Coulson and executives showed that they were not aware of Goodman’s action. It subsequently led to the conclusion that the royal family phone hacking case was strictly a one-off event which was orchestrated by the duo. Furthermore,
Coulson accepted full responsibility for the scandal and resigned as the editor of NoW. He was later appointed by David Cameron as his communications chief.
The Unravelling of the Scandal
Everybody in News Corp thought the worst was over. That was hardly the case when James Murdoch, CEO of News Corp’s European and Asian Operations, reportedly made a dubious payment of £700,000 to Gordon Taylor (a former English professional footballer) in April 2008. This was made in exchange for a confidentiality agreement. It was revealed later that Taylor’s phone was hacked by NoW reporters, and the agreement barred Taylor from reporting the phone hacking to the authorities.
The Guardian, a competitor newspaper publication in the UK, revealed that there were other victims, many of whom were also paid off in exchange for confidentiality agreements. It also alleged that these victims included many other celebrities and politicians and that NoW’s senior management was aware of and condoned the phone hacking. However, NoW’s senior management denied knowledge of such activities.
Two months after Coulson’s repeated denial of the knowledge of widespread phone hacking in NoW, Sean Hoare, an ex-NoW reporter, admitted to a New
York Times reporter that phone hacking was encouraged at the tabloid and
Coulson had actually asked him to do it. Soon after, another ex-NoW reporter
Paul McMullan also confessed to The Guardian that other illegal reporting techniques were also prevalent in NoW9.
In January 2011, British police opened a new investigation into the allegations of phone hacking at the tabloid, called “Operation Weeting”10. The truth was eventually exposed when Mulcaire was ordered by the High Court to provide more information regarding the people behind the scenes11. Three former NoW journalists - Edmondson, chief reporter Neville Thurlbeck and senior journalist James Weatherup - were arrested in April 2011 on suspicion of conspiring to intercept mobile phone messages and unlawfully accessing voicemail messages.
NoW had no choice but to admit its role and apologise for its actions. NI set up a website for compensation seekers and made several compensation payments to victims who were involved in the scandal12. Upon further investigation, some 300 NoW emails from NI solicitors Harbottle & Lewis were given to Scotland Yard13. They allegedly showed that Coulson had authorised payments to police officers.
In July 2011, The Guardian revealed that NoW had hacked Milly Dowler’s phone to gain access to more information about her kidnap. Subsequently, Brooks reaffirmed her stand that she would steer the company in the right direction and ensure that they would appropriately resolve the issue14.
Rupert Murdoch, who had hitherto remained silent about the controversy since British politicians called for an investigation, broke his silence one day after Brooks made her statement. He called the hacking accusations “deplorable and unacceptable” and vowed to cooperate with any police inquiries15. On the same day, he appointed his advisers, Joel Klein (an executive director of News Corp) and Viet Dinh (an independent director of News Corp) to investigate the phone-hacking allegations16. He continued to back Brooks to lead NI17.
The Descend from the Gutter to the Sewers
“This is the most humble day of my life18.”
– Rupert Murdoch
Many years have passed since the first phone hacking incident before Murdoch decided to initiate a formal investigation into the allegations. These actions were taken too late. On 7 July 2011, James Murdoch announced that NoW will publish its last paper on 10 July after 168 years of circulation19. Within the first two weeks of July, the market responded with a massive sell-off of News Corp’s shares. The share price fell by about 13% and the volume of shares traded during this period spiked as well.
The next day, Coulson was formally arrested on suspicion of conspiring to intercept communications and of making illegal payments to police officers.
At a separate South London police station, Goodman was also re-arrested for questioning on corruption. Both arrests came after NI handed a series of emails to police in June which allegedly detailed illegal payments made to Scotland Yard officers for sensitive information20. A letter from Goodman to NI executives revealed that phone hacking had been widely discussed in the daily editorial conference, until explicit reference to the phone hacking was banned by the editor. Since News Corp is listed in the US, it was required to comply with US laws and rules. The payments made may have violated the Foreign Corrupt Practices Act21. Members of Congress urged the US government to hold investigations on these payments as well as the alleged purchase of phone records of 9/11 victims22. Bogged down by the phone hacking scandal, News Corp had to give up the proposed acquisition of satellite broadcaster BSkyB. It had already owned 39 percent of the shares and wanted to make a bid for full ownership of the broadcaster. Unexpectedly, on news of the failed bid, shares in News Corp rose 3.8% in New York23.
After repeated calls for Brooks to take responsibility for the scandal, she finally bowed to pressure and resigned as the CEO of NI on 15 July 2011. The share price fell by 4% in the next 3 days. Brooks was subsequently arrested. On 19 July 2011, Rupert and James Murdoch were questioned by British Members of Parliament over the phone hacking scandal. Rupert Murdoch reportedly told the MPs: “I am not responsible”. He claimed that he was not aware of the extent of phone-hacking and had been misled by staff. Similarly, James Murdoch was “surprised and shocked” when he learnt that NI had still been paying the legal fees of Mulcaire – the private investigator that was involved in the royal family phone-hacking scandal24.
The Parliamentary Select Committee cited the event in April 2008 where James Murdoch reportedly made dubious payments to Taylor and two other footballers25, in exchange for barring them from reporting the phone hacking cases to the authorities. This revelation suggests that senior management knew of the pervasiveness of phone hacking within NoW. To reassure the public, Viet Dinh (an independent director) issued the following statement on behalf of the independent directors of News Corp on 20 July:
“The News Corporation Board of Directors was shocked and outraged by the allegations concerning the News of the World, and we are united in support of the senior management team to address these issues. In no uncertain terms, the Board and management team are singularly aligned and committed to doing the right thing.”26
The following month, Rupert Murdoch endorsed deputy chairman Chase Carey as his successor rather than James Murdoch27. In September 2011, amendments and extensions were made to a lawsuit initiated in March 2011 against News Corp’s acquisition of Murdoch’s daughter’s company, due to the development of the phone hacking scandal28. The shareholders accused the Board of not doing their job properly and said that these revelations showed a culture that ran amok within News Corp and a Board that provided no effective review or oversight29.
Thereafter, the Murdoch family faced increasing pressure and disapproval from shareholders. On 25 October 2011, one third of News Corporation shareholders voted against allowing James and Lachlan Murdoch to continue serving on Board, while 14% cast ‘no’ votes against Rupert Murdoch30. Newscorp’s share price rose by 5% over the next three days. Matters worsened in February 2012, when court documents revealed that NoW journalists had actually asked Mulcaire to hack phones. In total, the number of phone hacking incidents amounted to 2,226 within a period of five years31. James Murdoch also eventually resigned as NI’s Chairman32.
Recent Developments
Since the scandal, many arrests have been made under Operation Weeting33 and Operation Elveden – the investigation into police officers accepting inappropriate payments34. In total, US$224 million in legal and related professional fees had been incurred for the year ended 30 June 2012 in relation to the scandal35. In July 2012, News Corporation confirmed that it will be split into two separate companies, with Murdoch serving as Chairman in both companies but only as Chief Executive in one36. During the shareholders’ meeting held in October 2012, a shareholder proposal demanding that Murdoch step down as Chairman of News International was defeated. Despite their unhappiness, shareholders were still unable to force significant changes in the corporate governance of News Corp. The impetus for change may have been lost as the share price had risen 44% during 201237.
Brooks and Coulson have been formally charged with conspiracy38. Both have denied these allegations and insist that they were unaware of the phone hacking incidents. It was estimated that the prosecution process will last for at three years39. Other publications under NI are also under fire, with 21 of The Sun journalists being arrested. This has stirred the fear of arrest amongst the remaining journalists – especially the investigative journalists – who are now unwilling to take on investigative stories40. Finally, this issue has sparked debate about the need for media plurality – reducing the concentration of media power in the hands of a few. However, the issue of media plurality will ultimately be decided by the British Parliament41.
Going Forward
With mounting public anger over its unethical practices, Murdoch had to make a swift decision to conduct further internal investigations to determine the pervasiveness and severity of the unethical conduct in the organization as part of damage control. Concurrently, the embattled organisation faces a daunting task in rebuilding its faltering public image. Many have expressed their optimism that News Corp will be able to weather the storm eventually, but the important question is, at what cost? Nobody, not even Murdoch, has an answer to that, at least for now.
Discussion Questions
1. Discuss the importance of the tone at the top and corporate culture in
influencing a company’s standard of conduct. What do you think is News
Corp’s tone at the top and corporate culture? How has this affected ethical
standards, implementation and enforcement of the code of conduct at
News Corp?
2. Do you think a whistleblowing policy would have helped to reduce the
prevalent illegal reporting techniques? If you were to recommend a
whistleblowing policy for News Corp, how should it be implemented?
3. Analyse the role of the Board in handling the phone-hacking scandal. Do
you believe it was adequate? What should the board have done to prevent
an escalation of the scandal?
4. Comment on the true independence of News Corp’s Board. Is it sufficient
to just follow the guidelines in corporate governance codes? Should there
be a deeper review of the threats to a director’s independence?
5. Although News Corp is a public multinational corporation, the decisionmaking
processes of the company seem to lie solely in the Murdochs’
hands. Why is this so? How does this affect the level of involvement of
other shareholders in monitoring News Corp’s performance?
6. What are the pros and cons of a dual-class share structure? On balance,
do you believe that regulators should permit such structures for publiclylisted
companies?
Explanation / Answer
One has to understand that the way top management works employees under them follow it. In this case top management followed unethical practice of phone hacking to gain sensational information to improve newspaper circulation. This encouraged employees to follow unethical practices and neglect code of conduct.
Whistle blower policy if it needs to be implemented should follow following frame work
Any employee who thinks company is practicing bad practices should first report to HR manager regarding the issue. HR manager should communicate to top management. If HR manager fails then employee should directly communicate it to independent directors. Company should set up employee problem solving cell were employees can share their concerns. Company should also share email IDs of top management with employees.
The company should have acted tough when it found that one of company’s employee is using unethical techniques like phone hacking to get information. This would have stopped escalation of scandal.
Yes,there should be deeper review of independent directors to increase corporate governance. In this case, it is evident that independent directors were not eligible to be members of the board. They were just selected because they had good connect with shareholders. Independent directors should be nominated either by market regulator in public company or minority shareholders in unlisted company.
This discourage other shareholders from taking strong decision against majority shareholders. This also prevent minority shareholders from actively participating in company.
Pros
Cons
No, I don’t recommend dual class shares in public listed company. This is because voting power in a company would be concentrated in few hands who might exploit minority shareholders.