News Corp’s weak governance looks chronic

July 5, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Chris Hughes

The latest allegations in the phone hacking scandal at News Corporation’s tabloid have shocked the British public. But they should also alarm investors in News Corporation. The U.S. media group’s handling of this crisis has been inexcusably weak. If the allegations now being made are true, they strongly reinforce the impression of chronic weakness in the governance of Rupert Murdoch’s empire.

The London-based Guardian newspaper says evidence exists that a private investigator working for the News of the World allegedly hacked into voicemail messages of a missing schoolgirl later found murdered. The development doesn’t just raise the severity of the scandal to a much more serious level. It suggests that the group’s own internal investigations have been ineffectual. News International, the News of the World’s parent, had already admitted phone hacking occurred between 2004 and 2006. This case relates to 2002 — when Rebekah Brooks, chief executive of News International since 2009, was editor.

An initial internal investigation into phone hacking at the paper was conducted in 2007, after the paper’s royal editor was convicted of illegally intercepting messages. An external law firm, Harbottle & Lewis, assisted with that probe. But the investigation found no evidence demanding further action. However, a second internal investigation was begun in January this year, after fresh allegations surfaced. That led to an astonishing mea culpa in April, and prompted settlement proceedings with a host of celebrities whose phones were hacked. But in spite of the admission of earlier investigatory failings, no senior executives’ heads have rolled. The latest allegations, if true, suggest that even this second probe has not got to the bottom of the affair.

The impression is of a company that is either reluctant to delve too deeply into the matter — or doesn’t have the systems in place to do so. In its defence, News Corp may not have access to the same evidence that the police does — the allegations involve some individuals who were not directly employed staff. And belatedly, News Corp has put a heavyweight U.S. legal team on the case. But outsiders will still wonder why a company that specializes in unearthing information about others has been so slow in examining itself.

The mishandling of the News of the World affair is the biggest symptom of weak governance under Murdoch. But it may not be the only one. Arguably the ill-disciplined and expensive vanity acquisition of Dow Jones and the nepotism, which has seen Murdoch groom one of his sons as his successor, are others. The latest development may not derail News Corp’s bid to buy out BSkyB’s independent shareholders. But it weakens its negotiating hand. After the agonising process Murdoch has been through to gain regulatory approval for the deal, he would suffer an astonishing loss of face if he still couldn’t buy it. Other shareholders therefore to some extent have him over a barrel in driving the price higher.

There is also a direct commercial impact in the cost of settlements and, potentially, lost readers. Shareholders are by no means the biggest victims in all this, but they do bear a financial cost.

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