Watch CBSN Live

How News Corp. Became An Enron-Sized Disaster

News Corporation now sells for less versus earnings than any of its rivals; that's the cost - so far - of the phone hacking scandal that Rupert Murdoch has handled with such clumsiness, denial and vanity. Whether this means that the fiasco will cost Murdoch his job is unclear; after all, the family controls most of the voting shares of the company.

But it has already cost the careers of News International executives, editors and journalists. And yesterday it claimed the head of London's Metropolitan Police force - Sir Paul Stephenson - who has resigned because of his close links with former News of the World employees. His assistant, John Yates, resigned today. Given that Prime Minister David Cameron enjoyed even closer links with that paper's employees, some are suggesting that Cameron should go, too. With each new development, the news story gets a fresh lease of life, making it impossible for Rupert Murdoch, his family and executives to calm or tame the market. Meanwhile in the U.S., investigations by the FBI and Department of Justice, together with the resignation of Dow Jones CEO Les Hinton and rumors surrounding Piers Morgan, makes it clear that the scandal can't be contained in the U.K. Institutional investors are calling for a change of governance as they watch both Rupert and James Murdoch struggle to limit the damage to the company's reputation, stock price and brands.

After Enron, WorldCom, Lehman Brothers, AIG and Countrywide, this is shaping up as one of the corporate car crashes of the century.

But what can be learned from it?

1. Beware the Bubble of Power
Murdoch has always been insular and it has hurt him - never more than now. He is surrounded by people who are just like him (family members) and yes, men and women who communicate what the boss wants to hear. Advisors like Joel Klein aren't any more objective; he may not be a family member but Klein is a News Corp. board member, albeit a recent one. This is a classic problem of power that besets all CEOs. How do you ensure you know what you need to know? Leaders always need independent advisors and thinking partners who have no agenda, who are and can remain independent. Murdoch, by contrast, is famous for creating legions of dependents who owe everything to him. That is always dangerous.

2. The CEO isn't the Company
In theory, once a company is publicly traded, its first priority is the business, not the CEO. But that has never been true of News Corp. It has always been clear that the company was Murdoch and would do what Murdoch wanted, regardless of shareholders. While that proved profitable, shareholders appear not to have minded the fact that they had invested in a family firm. But now we are seeing how the interests of the CEO aren't always aligned with the business. One of the biggest mistakes any leader can make is to think that he or she is the business. That is always untrue - but especially wrong and risky when the company depends on public money and public trust.

3. Success is Dangerous
Rupert Murdoch has been one of the most successful media moguls in history. But success is intrinsically dangerous. It can mean you lose touch. Certainly, Murdoch appears not to have noticed growing distaste for the role of large, heavy-handed corporations in British political life (the Kraft takeover of Cadbury demonstrated this) and public distaste for overly cosy relationships between elites. Having railed for decades against the British habit of deference, Murdoch should have noticed its decline. But he didn't. He'd always been right in the past and clearly failed to notice change.

4. Live by Politics, Die by Politics
Murdoch has also always made it clear that the fun of newspapers lies in the exercise of power. He's visibly enjoyed access to power and influence over it. But any serious student of politics knows how volatile depending on power can be, and that no power lasts forever.

5. Good Crisis PR Advice is Critical, and Hard to Find

Much play has been made of the fact that Murdoch has been seen and photographed in public always grinning. His crisis communications team probably thought that was a great idea; if they did, they were wrong. It has made him look insensitive and rather senile. Showing him jogging didn't make him look youthful; it provided images for headlines suggesting he was on the run. Next to his father, James Murdoch looks too young to be in charge of a multi-billion dollar global business. What that tells us is that the rules of crisis communication are written in sand.

It's important to remember that News Corporation still is a big, strong, rich company. And Murdoch has weathered huge crises before. But there isn't a CEO in the world who can't - and shouldn't - watch this epic with care and reflection. The only thing that's special about media companies is that they always, bizarrely, imagine they understand the media.

Further Reading

Could Murdoch Survive?
How to Survive a Narcissistic Leader
Murdoch's Plausible Deniability