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Tue May 1, 2012
Media

News Corp. Contrite In Wake Of Scathing Report

Originally published on Tue May 1, 2012 4:04 pm

News Corp. executives Rupert and James Murdoch can give a small sigh of relief, perhaps, that U.K. lawmakers investigating the tabloid hacking and bribery scandal did not conclude they misled Parliament in earlier testimony.

But that may be just about the only relief the Murdochs receive.

The scathing report accuses the company and several of its former top British executives of lying to Parliament and of seeking to cover up widespread phone hacking, computer hacking and bribing of government employees.

James Murdoch, who stepped down in recent months as chairman of the company's British units, was accused by MPs of "willful blindness" in failing to realize he was authorizing a cover-up by making a huge confidential payment to a hacking victim. Rupert Murdoch, still CEO and chairman, was deemed "not a fit person" to lead a major international corporation.

The father and son find themselves bloodied at a time they are seeking to restore calm and show they still can assert control over the corporation.

News Corp. has its headquarters in New York City and is publicly traded on NASDAQ. But it is effectively run as a family concern. Despite the scandal, James Murdoch retains his role over global television operations as News Corp.'s deputy chief operating officer. The Murdoch family controls about 40 percent of shareholder votes; a friendly Saudi prince holds another 7 percent of votes. That makes it nearly impossible for shareholders to dislodge the family's control.

The conclusions of the panel were near-unanimous — except for the assessment of Rupert Murdoch's "fitness," which was arrived at by a majority vote. Conservative lawmakers voted against that language. That phrase has particular resonance because the U.K. media regulator Ofcom is reviewing whether News Corp. is a "fit and proper" controlling owner in the British pay TV giant BSkyB.

News Corp. had expected to win the government's approval for a full takeover of the broadcaster in a deal valued at more than $12 billion until the scandal erupted in earnest last summer.

"We all felt that was wildly outside the scope of the select committee," Conservative MP Louise Mensch said Tuesday at the release of the report. She and other Tories said they felt it was an inappropriate effort to influence Ofcom's decision.

In a sense, it is to the younger Murdoch's advantage that so much attention was focused on his father's fitness to lead the corporation. It has allowed the company to question that judgment, characterizing it this way in a statement released Tuesday: "some commentary that we, and indeed several members of the committee, consider unjustified and highly partisan."

Overall, however, News Corp. struck a more contrite tone.

"Hard truths have emerged from the Select Committee Report: that there was serious wrongdoing at the News of the World; that our response to the wrongdoing was too slow and too defensive; and that some of our employees misled the Select Committee in 2009," it stated.

The company has cited the work of its internal Management and Standards Committee, which has turned over voluminous email exchanges and other records in an effort to show authorities in the U.K. and the U.S. that it has changed its behavior and is being cooperative.

As Rupert Murdoch wrote to employees on Tuesday: "We have gone beyond what law enforcement authorities have asked of us, to ensure not only that we are in compliance with the law, but that we adhere to the highest ethical standards."

The parliamentary committee concluded, however, that the company had only changed its stripes when it had no other choices left.

More than 1,700 people are now believed by police to have been targeted for phone hacking. In addition, more than a dozen journalists with links to Murdoch's favorite newspaper, the tabloid The Sun, have been arrested on suspicion of bribing public officials for information. Police officers, active duty military personnel and a staffer for the British Ministry of Defense have also been arrested.

Top executives and journalists from the company's British arm have been among those arrested. The publisher of the Wall Street Journal, Les Hinton, also had to resign. The parliamentary committee concluded Tuesday that Hinton had repeatedly misled MPs while he was CEO of News Corp.'s U.K. newspaper division. Among the others found to have misled Parliament was the final editor of the News of the World tabloid, Colin Myler. He is now editor in chief of the New York Daily News, which competes with Murdoch's New York Post.

Pressure has also been building for change at the top of the company. A clear majority of non-Murdoch shareholders voted last fall against retaining Rupert Murdoch's sons James and Lachlan on the corporation's board of directors.

The elder Murdoch's leadership and drive in building the global conglomerate has often been praised. But investors have tolerated rather than endorsed his lifelong love of newspapers, which are seen to inhabit a declining financial sector. And some dissident institutional investors have also pointed critically to a series of acts taken at his personal impulse.

News Corp. has already written off more than half the $5.5 billion price of acquiring the Wall Street Journal. The company bought his daughter Elisabeth's Shine production company for a $675 million price tag that some outside analysts argued was several times its worth. And the cost in the U.K. for the phone hacking and police bribery scandal has reached hundreds of millions of dollars.

The parliamentary inquiry has been long delayed and long awaited. But its assessment is far from the final word.

The judicial inquiry led by Judge Brian Leveson is ongoing. So too are the related police investigations — into phone hacking, bribery, computer hacking, obstruction of justice. There is a fifth investigation into the question of who's been leaking information about the other four. And there are new waves of phone hacking victims coming forward to file suit.

The likelihood of consequences in the U.S., while somewhat faint, is rising as well.

A leading British lawyer on hacking in the U.K. has announced that he intends to file cases in the U.S. against News Corp. on behalf of several clients who believe their cellphone messages were hacked on American soil by its British papers.

American authorities are monitoring the British bribery allegations, one of the major strands of criminal investigation in the U.K. That would seem to fall afoul of U.S. statutes forbidding American firms from bribing foreign officials and requiring publicly traded companies to disclose such illegal payments to investors if they do.

Columbia Law professor John Coffee, director of the Center on Corporate Governance, argues that any effort to force the Murdochs to step aside will ebb unless their television holdings — and especially Fox News — come under significant attacks.

"If the hacking investigation were to bring a criminal proceeding in the U.S. based on U.S. hacking or if the Foreign Corrupt Practices Act produces evidence that could support an indictment, then the pressure becomes enormous, because a conviction could place in jeopardy News Corp.'s ability to hold U.S. TV licenses," Coffee wrote in an email. But, he added, it's not yet clear whether either will happen.

And indeed, liberal interest groups opposed to Murdoch's share of American news media are seizing the moment. While Murdoch's control of the Wall Street Journal, the New York Post and Fox News gain the greatest share of attention, News Corp. owns 27 local television stations, historically cash cows.

The Citizens for Responsibility and Ethics in Washington, a watchdog group, wrote to Federal Communications Commission Chairman Julius Genachowski on Tuesday morning to demand a review of News Corp.'s right to hold those licenses.

"It is abundantly clear both Rupert and James Murdoch lack the requisite character to retain the 27 broadcast licenses News Corp. currently maintains," said CREW's executive director, Melanie Sloan.

Such challenges to Murdoch's holdings in recent years have found little success.

Rupert Murdoch testified last week before a wide-ranging judicial inquiry on abuses by the press that his newspapers were his sole commercial interest. But to a large degree they represent the company's gloried and swashbuckling past.

It is in entertainment and pay TV in which News Corp. commands great profits — more than $1.6 billion a year from its minority stake in BSkyB alone. It gets another $1 billion in profits from Fox News.

A furor arose last week over the disclosure of evidence suggesting top officials at the British Culture Ministry colluded privately with a News Corp. lobbyist to get its bid for BSkyB approved, even though Culture Minister Jeremy Hunt was publicly saying he had not made up his mind.

Both James and Rupert Murdoch were sharply questioned over whether they had struck a deal with Cameron, then-Prime Minister Gordon Brown and the Labour Party involving the BSkyB bid and their newspapers' editorial support. The Sun dropped Brown in 2009, and he viewed it as a betrayal. Cameron took office in 2010. The Murdochs denied any such deal, and so has Cameron, most recently Monday on the floor of the House of Commons.

Some Wall Street investors and analysts suggest it may be time for the company to be led by its chief operating officer, Chase Carey, notably not a newspaper devotee — and notably not a Murdoch. But it has been Rupert Murdoch's crusade to ensure the company he inherited as a single paper in Australia ends up in the hands of a third Murdoch generation.

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