Murdoch Cleanup Effort Draws Fire Over Independence, Mandate

News Corp. (NWSA)’s Rupert Murdoch told British lawmakers he’s the “best person” to clean up the company after a phone-hacking scandal. Fifteen days later, it isn’t clear how he’ll accomplish that.

The committee the New York-based media company set up to address the allegations isn’t sufficiently independent and lacks a clear mandate to investigate wrongdoing, said corporate governance experts and investors. News Corp., led by Murdoch, has structured the new “management and standards committee” around too many insiders, said Jeffrey Sonnenfeld, a professor at Yale University’s School of Management.

“There really should be outside investigators doing all of this,” Sonnenfeld said in an interview. “News Corp. has a history, obviously, of disappointing internal reviews.”

Two members were executives at News International, the unit that included the tabloid where the hacking took place, until they resigned to work on the committee. Though attorney Anthony Grabiner was hired as independent chairman to oversee the committee’s work, he reports to Joel Klein, a News Corp. executive vice president and board member.

The Interfaith Center on Corporate Responsibility, which represents about 300 organizations with assets of more than $100 billion including News Corp. shares, also said the committee may not be independent and transparent enough.

Photographer: Simon Dawson/Bloomberg

Rupert Murdoch, chief executive officer of News Corp. Close

Rupert Murdoch, chief executive officer of News Corp.

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Photographer: Simon Dawson/Bloomberg

Rupert Murdoch, chief executive officer of News Corp.

“The credibility of what comes out of News Corp.’s committee is going to be immediately suspect if the reporting mechanism in place isn’t truly independent,” Seamus Finn, a member of the ICCR’s board of directors, said in an interview.

Scandal’s Fallout

News Corp. has been dealing with fallout from the phone-hacking scandal since July 4, when the Guardian newspaper reported that News of the World had accessed the voice mail of murdered teenager Milly Dowler. The controversy has prompted the resignations of two executives, the shutdown of the 168-year-old newspaper and the termination of News Corp.’s 7.8 billion-pound ($12.8 billion) bid to buy the 61 percent of British Sky Broadcasting Group Plc (BSY) that it does not already own. At least 11 people have been arrested.

Murdoch, 80, and his son James, 38, were questioned by British lawmakers for three hours about allegations the tabloid had hacked the phones of murder victims and paid police for stories. James, News Corp.’s deputy chief operating officer, is likely to be called back to Parliament to defend testimony that has been disputed by three former employees, John Whittingdale, chairman of the Culture Committee said last week.

Committee Structure

Rupert Murdoch was asked during the hearing why he hadn’t considered resigning.

“Because I feel that people I trusted, I’m not saying who, I don’t know what level, have let me down and I think they behaved disgracefully, betrayed the company and me, and it’s for them to pay,” he said. “I think that frankly, I’m the best person to clean this up.

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

News Corp. established the management and standards committee last month to address phone-hacking allegations at News of the World and related issues. In a statement, the company said the new committee’s primary duty is to work with law enforcement authorities who are investigating the phone hacking charges. The committee can also conduct its own internal investigations, and will compile and implement new operating policies and practices, News Corp. said.

The executive members of the committee include William Lewis, News International’s former general manager, and Simon Greenberg, News International’s former corporate affairs director. The third executive member, Jeff Palker, will remain in his job as News Corp.’s general counsel for Europe and Asia.

Independent?

Grabiner, 66, is a veteran commercial lawyer and member of the U.K. Parliament’s House of Lords. He reports to Klein, the former New York City schools chief who joined News Corp. earlier this year. Klein, in turn, reports to Viet Dinh, an independent member of News Corp.’s board.

Charles Elson, the director of the University of Delaware’s Center for Corporate Governance, says it will be ‘‘tough” for Grabiner to be perceived as totally independent, because he’s reporting to Klein.

“You really want to go way outside, and have the outside lawyers report directly to a professional committee of the independent directors,” Elson said in an interview.

In addition, since Grabiner’s work has largely been in commercial, rather than criminal, law, it’s unclear whether he has the experience to lead the committee’s efforts, Sonnenfeld said.

“No one has made the case for how Lord Grabiner has the right skill set for this,” he said.

No Investigation

Klein, Grabiner, Dinh, Palker, Lewis and Greenberg all declined to comment, according to Paul Durman, a spokesman at Powerscourt, a London-based public relations firm hired by News Corp.’s committee. He also provided a statement that the committee is not planning to investigate, despite News Corp.’s initial statement.

“The MSC, chaired by an independent Chairman, is not investigating the News of the World,” the statement said. “That has never been its mandate. The police and other authorities are investigating the News of the World and are trying to establish the facts. One of the MSC’s foremost roles is to co-operate with and facilitate those investigations.”

In recent days, committee members have held regular conversations with law enforcement authorities, addressing requests for information by outside investigators, said a person familiar with the matter. The committee’s leaders are in the process of establishing staff and budget needs, said the person who wouldn’t be identified because the details aren’t public.

Hollinger Precedent

Some companies beset by internal troubles, such as Hollinger International Inc., have had exemplary investigations conducted by outsiders, Elson said. Richard Breeden, the former head of the Securities and Exchange Commission, helped publish a 500-page report on Hollinger as part of special investigation of the publishing company and its CEO, Conrad Black.

“The more independent the investigation is, the greater the likelihood that the public and regulatory authorities will be receptive to their findings,” Elson said.

The California State Teachers’ Retirement System, a News Corp. shareholder, said the company’s board needs to exert more independence to oversee management and the phone-hacking cleanup.

“We believe that News Corp.’s board may need to step in and exercise their fiduciary duty and do right by shareholders,” Patrick Hill, a spokesman for the fund, said in an interview.

Report on Findings?

News Corp., owner of Fox News and the Wall Street Journal, fell $1.05, or 6.7 percent, to $14.56 at 4 p.m. New York time in Nasdaq Stock Market trading. The Class A shares are little changed this year.

News Corp.’s committee, in its current structure, may be sufficient as a first step aimed at producing a report and then determining if greater independence is needed, said Espen Eckbo, director of the Center for Corporate Governance at Dartmouth University’s Tuck School of Business.

“The mandate should be to get some sort of report quickly,” Eckbo said in an interview. “The ultimate report may be subject to some questions, and then at that point they can step up the independence. I wouldn’t expect this to be the last thing.”

News Corp. hasn’t yet said whether the committee will issue any reports or findings. They are expected to outline their plans in more detail in the coming weeks.

---With assistance from James Nash in Sacramento. Editors: Peter Elstrom, Rob Golum

To contact the reporters on this story: Brett Pulley in New York at bpulley@bloomberg.net; Alex Sherman in New York at asherman6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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