News Corp. Scandal: Why Investors Also Are to Blame

Last Updated Jul 18, 2011 5:08 PM EDT

According to Bloomberg, institutional investors are starting to question whether Rupert Murdoch should continue to lead his News Corporation. This change of heart, however, strikes me as disingenuous, given that corporate governance has always been weak at News Corp.

Murdoch's Iron-Clad Control
Despite going public in 2004, New Corp continues to be run as if it were a family firm. As BNET blogger, Nell Minow, notes, News Corp. has routinely received failing grades when it came to corporate governance. While Rupert Murdoch may own only 29 percent of traded shares, he does own 40% of voting shares, effectively giving him control of the business. Prince Alwaleed bin Talal al-Saud, who has not heretofore been an activist shareholder, owns a further 7%. That has left institutional shareholders such as Invesco, DFA and John Hancock without meaningful influence.

Of the 17 directors, four are members of the Murdoch family. The 6-man Office of the Chairman (and yes it is all men) is dominated by Rupert and his son James. The likelihood of vigorous debate within either of these groups is slim to negligible. One has only to look at the structure of the business to see that it is not designed to protect shareholders, nor has Murdoch himself ever paid much lip service to them.

Lots of Yes-Men
Murdoch may have demonstrated what Don Yacktman calls 'kingdom building skills' but he hasn't demonstrated the ability to attract and retain independent thinkers. The brilliant and steadfast Peter Chernin left in 2009, reportedly disenchanted by his inability to be valued within the family firm. Years earlier, John Evans did likewise, conscious that no outsider would ever gain recognition within the company. Outstanding executives of this caliber aren't easily spared by any organization.

News Corporation has always been like this. And as long as the company did well, scant attention was paid to its bizarre corporate governance. What that means, though, is that the institutional investors haven't really been doing their job either. A governance structure like this always represents a risk.

Further Reading:

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

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    Margaret Heffernan has been CEO of five businesses in the United States and United Kingdom. A speaker and writer, her most recent book Willful Blindness was shortlisted for the Financial Times Best Business Book 2011. Visit her on www.MHeffernan.com.