Murdoch Struggles to Control News Corp. as Scandal Escalates

News Corp. (NWSA)’s Rupert Murdoch is struggling to control the destiny of the company he began building six decades ago after a trusted deputy was arrested and Scotland Yard’s top official quit over ties to a suspect in the phone-hacking probe.

Independent directors of New York-based News Corp. have begun questioning the company’s response to the crisis and whether a leadership change is needed, said two people with direct knowledge of the situation who wouldn’t speak publicly. Rebekah Brooks, the former News International chief who Murdoch backed until last week, was arrested yesterday in London.

“The shell of invulnerability that Rupert Murdoch had around him has been cracked,” said James Post, a professor at Boston University’s School of Management who has written about governance and business ethics. “His credibility and the company’s credibility are hemorrhaging.”

Murdoch and his 38-year-old son, James Murdoch, are spending most of their time with advisers preparing for tomorrow’s hearing before a U.K. parliamentary committee. They will face questions over their role in and responsibility for phone hacking that took place at their now-defunct News of the World tabloid. The company took out advertisements in national U.K. newspapers this weekend to apologize for the scandal.

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Independent directors of New York-based News Corp. have begun questioning the company’s response to the crisis and whether a leadership change is needed. Close

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Photographer: Paul Taggart/Bloomberg

Independent directors of New York-based News Corp. have begun questioning the company’s response to the crisis and whether a leadership change is needed.

Shares Slump

News Corp. (NWS) fell 66 cents, or 4.2 percent, to $14.98 on the Nasdaq Stock Market at 11:18 a.m. New York time. Before today, it had lost 13 percent since July 4, when the Guardian reported that News of the World employees had intercepted the voice mail of Milly Dowler, a schoolgirl who was later found murdered. The tabloid is also alleged to have hacked into the phones of terror victims and dead soldiers, as well as politicians and celebrities.

The slump has shaved more than $6 billion off the combined value of the Class A shares and the Class B voting stock that gives the Murdochs control over the company.

“Apologising for our mistakes and fixing them are only the first steps,” News International said in the ads. The company vowed to cooperate with the police and compensate those affected, saying it is “committed to change.”

Board Stirrings

On the board, venture capital executive Tom Perkins and Viet Dinh, a law professor at Georgetown University who was the chief architect of the USA Patriot Act, are leading the efforts of independent directors, according to one of the people. Dinh also represented Perkins, a former Hewlett-Packard Co. director, during a scandal at that company.

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News Corp. chief executive officer Rupert Murdoch is driven from his apartment in London, U.K., on Monday, July 18, 2011. Close

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News Corp. chief executive officer Rupert Murdoch is driven from his apartment in London, U.K., on Monday, July 18, 2011.

News Corp.’s independent directors, who hold nine of 16 board seats, have expressed frustration over the quality and quantity of information they’ve received about the scandal and concern about management’s ability to handle the crisis given how slowly the company has responded, the person said.

Some directors said Murdoch, the company’s 80-year-old chairman and chief executive officer, appeared to be in denial over the fallout from the scandal in an interview he gave last week to the Wall Street Journal, one of News Corp.’s newspapers.

“People’s faith in the family’s management is diminished,” said Claire Enders, founder and CEO of media researcher Enders Analysis in London, whose clients include the U.K. government and the broadcast regulator Ofcom. “That too may be very hard to restore quickly,” she said in an interview.

Brooks Resignation

In April, News Corp. said it would settle lawsuits and offer compensation to some of the celebrities and politicians that had sued the company. That followed a settlement related to a phone-hacking lawsuit in 2010 in which, according to the Guardian, News Corp. paid celebrity publicist Max Clifford more than 1 million pounds ($1.6 million) to drop his case.

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News Corp. chairman and chief executive officer Rupert Murdoch, third left, speaks to members of the media outside Number One Aldwych hotel. Close

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News Corp. chairman and chief executive officer Rupert Murdoch, third left, speaks to members of the media outside Number One Aldwych hotel.

In the past three years, News Corp. paid more than $600 million to settle cases in which it was accused of competing unfairly. In February, News Corp. said it will pay $125 million to Insignia Systems Inc. in a case related to the U.S. in-store advertising market. Last year, it agreed to pay $500 million to Valassis Communications Inc. (VCI), and in 2009 it paid $29.5 million to settle a claim brought by Floorgraphics Inc., which also compete in in-store advertising and promotions.

As allegations of phone-hacking escalated this month, Murdoch abandoned a 7.8 billion pound bid for all of British Sky Broadcasting Group Plc (BSY), shut the 168-year-old tabloid on which his U.K. media business was founded and lost the support of all Britain’s main political parties.

Brooks resigned on July 15, a week after Murdoch voiced his “total” support for the U.K. newspaper executive at a media conference in Sun Valley, Idaho, and flew to London to address the growing crisis.

Brooks Released

Les Hinton, CEO of Dow Jones and previously chairman of News International for 12 years, resigned the same day. The 67- year-old newspaper man had worked for 52 years for Murdoch, starting as a copy boy at the age of 15.

In developments yesterday, Brooks, 43, went to a London police station voluntarily by appointment, her spokesman David Wilson said in a phone interview. As head of the unit that runs Murdoch’s U.K. newspaper operations, she is the most senior News Corp. employee detained in the probe.

“Undoubtedly she should have been arrested,” said Mark Lewis, a lawyer for victims of phone-hacking including the parents of the murdered schoolgirl. “She was editor of the newspaper at the time that Milly Dowler was abducted and killed. The police undoubtedly have to ask her questions about what happened and what she knew or doesn’t know.”

Brooks was released on bail around midnight, police said.

Special Committee

Hours after the arrest, Metropolitan Police Commissioner Paul Stephenson announced his resignation over speculation about his force’s links to another former journalist at the tabloid. Neil Wallis, a former editor who was arrested last week, was a paid communications consultant for the police in 2009 and 2010. Another senior Met officer, Assistant Commissioner John Yates, resigned today.

A News Corp. spokeswoman reiterated the company’s intention to fully cooperate with the police. Brooks, in a memo accompanying her resignation, said leaving would give her “the freedom and the time to give my full cooperation to all the current and future inquiries.”

News Corp. will take over from News International a committee set up to work with police investigating the scandal. The company today appointed Anthony Grabiner, a U.K. lawyer and chairman of retailer Arcadia Group Plc, to lead the management and standards committee.

Simon Greenberg, corporate affairs director at News International, and General Manager Will Lewis will be employed full-time by the committee, which will report to Joel Klein, Murdoch’s top adviser, who in turn will report to Dinh. Both Klein and Dinh will update News Corp.’s board.

Independent Directors

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

With the FBI in the U.S. beginning a preliminary probe of the company, News Corp. has hired criminal defense lawyer Brendan V. Sullivan Jr. of the Washington law firm Williams & Connolly LLP, according to a person familiar with the situation. Sullivan’s clients have included former Alaska Senator Ted Stevens, ex-New York Stock Exchange Chairman Richard Grasso and Reagan White House aide Oliver North. Sullivan didn’t return a phone and e-mail messages from Bloomberg News seeking comment.

The company also began interviewing large public relations firms last week in New York to serve as its outside crisis communications adviser, said two people familiar with the matter. News Corp. has already retained Rubenstein Associates in New York and Edelman in London.

Family Control

News Corp.’s independent directors, including Dinh, Perkins and former British Airways CEO Rod Eddington, may have limited influence, given the Murdochs’ stock holdings, said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Murdoch controls News Corp. through a 38 percent stake in the Class B voting shares, according to company filings and data compiled by Bloomberg. Those shares represent a 12 percent economic interest in the company, when non-voting shares are counted as well.

In addition to Rupert Murdoch, News Corp.’s board includes his son Lachlan, 39, as well as James, the company’s deputy chief operating officer. Murdoch’s daughter Elisabeth, 42, was set to become a director after selling her Shine Group TV production outfit to News Corp. for $673 million in February.

“Rupert Murdoch controls the votes of the company through the Class B shares,” Elson said in an interview. “He can just replace them if he wants. They may do something, but it will be temporary. Maybe he becomes chairman, but this is still his company and he can do what he wants. When he controls the stock, he controls the board.”

To contact the reporters on this story: Carol Hymowitz in New York at chymowitz1@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Amy Thomson in London at athomson6@bloomberg.net

To contact the editors responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net

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