News Corp. board is far from independent

Associated Press
FILE - In this Nov. 9, 2010 file photo, outgoing Chancellor of New York City Public Schools Joel Klein listens during a news conference at City Hall in New York. Klein serves on the News Corporation's board of directors.(AP Photo/Seth Wenig, file)

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FILE - In this Nov. 9, 2010 file photo, outgoing Chancellor of New York City Public Schools Joel Klein …

NEW YORK (AP) — A corporate board is supposed to answer to shareholders. At News Corp., it answers only to the Murdoch family.

The 16-member board that governs one of the world's most powerful media companies is dominated by Rupert Murdoch's relatives, confidants and hand-picked executives — a group that has sometimes let him make questionable business moves.

The phone-hacking scandal at a British newspaper owned by Murdoch has focused new attention on the News Corp. board, which is so cozy with the Murdoch family that one corporate watchdog group gives it an "F'' for governance.

"This isn't just a dysfunctional board. It's a nonfunctional board," says Paul Hodgson, a spokesman for GovernanceMetrics International, an independent research firm that rates corporate boards and has given News Corp. a failing grade since 2003.

News Corp., which owns the Fox television network, the 20th Century Fox movie studio, The Wall Street Journal and the New York Post, among other media properties around the world, is a public company.

That would usually mean it's controlled by the investors who hold its common stock. But almost none of the shareholders of News Corp. have a say. Decisions about who sits on the board and other corporate matters fall almost exclusively to the Murdochs.

The company is one of just 44 in the Standard & Poor's 500 that divide stock into two classes. One is for select investors who have sole voting power. The other is for individual stockholders and institutional investors, who have no voting power.

In the case of News Corp., Murdoch controls almost 40 percent of the voting stock, most of it through a family trust. Others own so little that they have no influence. The second-largest owner of voting stock, the investment firm of Saudi Prince Alwaleed bin Talal, has just 7 percent and no representation on the board.

Some of the biggest shareholders of the other type of News Corp. stock are money management companies, including BlackRock and Vanguard. But they have no say in who's on the board or what the board does.

"If you are buying shares in this company, it's buyer beware," says Sydney Finkelstein, a professor at Dartmouth's Tuck School of Business and author of the book "Why Smart Executives Fail." ''There is no management or leadership reason to have two classes of stock except to retain control."

The News Corp. board's charter says a majority of the company's directors must be considered independent, with the board conducting a review once a year to make sure they qualify.

Today, the board has seven insiders, including Murdoch, 80, his two sons, three News Corp. executives and one adviser to Murdoch.

The other nine are considered independent. On Tuesday, for example, the company put out a statement on behalf of the "independent directors," saying they were "shocked and outraged" by the allegations against Murdoch's News of the World newspaper.

But the group of independent directors includes two former company executives and three people with whom Murdoch or his family has done significant business. One, for instance, used to be the chairman of an Australian airline where Murdoch had a stake. That leaves only four of 16 board members with no clear link to Murdoch or the company.

Some investors say a lack of board oversight has contributed to poor decisions.

Murdoch has remained at the helm even though News Corp.'s stock returns haven't been stellar. Over the last decade, its return with dividends has been about 10 percent, compared with a 32 percent rise in the S&P over the same period, according to data provider FactSet.

There have been a few bad deals, too. Last month, News Corp. offloaded social networking site MySpace for $35 million. The company paid $580 million for it in 2005. It had lost more than $1 billion total over about three years.

In 2009, News Corp. was forced to write down $2.8 billion of the value of Dow Jones & Co. Inc., which it bought two years earlier for $5.7 billion. The deal allowed Murdoch to seize the U.S. newspaper he prized, The Wall Street Journal, and came after an expensive courtship of the Bancroft family.

"I think there's a lax ethical culture," says Julie Tanner, assistant director of socially responsible investing at Christian Brothers Investment Services, which invests on behalf of Catholic institutions like dioceses and hospitals and owns 30,755, or less than one hundredth of 1 percent, of voting shares of News Corp. "It appears to be a severe lack of effective review and oversight."

The board has kept mostly quiet since the phone-hacking scandal broke, even during the closure of News of the World, the resignation of two top News Corp. executives and an appearance before Parliament this week by Rupert and son James.

When they have spoken out, directors haven't wavered in supporting Murdoch.

Thomas Perkins, who has been on the board since 1996 and is a partner at a venture-capital firm, told The Associated Press on Monday that Murdoch has the full support of the board as CEO.

The statement on behalf of the "independent directors," issued Tuesday by board member Viet Dinh, said they were shocked and outraged about the hacking but "united in support of the senior management team to address these issues."

That Perkins and Dinh are speaking for the board and have fully backed Murdoch caught the eye of Yale management professor Jeffrey Sonnenfeld. Five years ago, he says, both had a very different view on phone hacking.

In 2006, Perkins quit the board of Hewlett-Packard over the company's attempts to obtain phone records from journalists and directors. The company was trying to find out who on the board was leaking corporate information to reporters.

The controversial method used was called "pretexting," which meant the company pretended to be someone else in order to get confidential records.

Perkins discovered his personal information had been accessed. The lawyer who represented him against H-P was Dinh, whom Perkins knew from the News Corp. board.

Neither Dinh nor Perkins immediately responded to messages seeking comment on Wednesday. On Monday, Perkins said the H-P case was different.

"This is the opposite of the Hewlett-Packard scandal, which I was involved in, where the bad stuff was occurring at the chairman of the board level. This is the opposite of that," Perkins said.

When the board has taken action, its efforts haven't been as independent as they may initially seem. The company this week named attorney Lord Grabiner as the new independent chairman of the company's management and standards committee.

Instead of reporting to an independent director, the committee will report to Joel Klein, a former chancellor of New York City schools and assistant U.S. attorney general, who now works for News Corp. Klein will report to Dinh, an independent director.

Independent directors have hired corporate law firm Debevoise & Plimpton LLP to advise them on how to oversee the internal committee set up to investigate the hacking and allegations of police bribery.

If board members didn't support Murdoch, the family could always replace them. A more independent board might still demand his resignation.

Some News Corp. investors, including some with voting shares, think the board should at least start to loosen Murdoch's grip by separating the roles of chairman and CEO. That could add an independent voice to the board room.

Christian Brothers on Friday filed a shareholder resolution, to be voted on at the annual meeting, calling on News Corp. to separate the roles.

Murdoch could also step down, as a way to draw attention back to the business and away from himself.

"To the extent that the legacy of this company means something to him, this could be a necessary step," Finkelstein says.


Associated Press writer Chip Cutter contributed to this story from New York and Ryan Nakashima from Los Angeles.

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