News Corp. investors seeking to curb Chairman and Chief Executive Officer Rupert Murdoch’s authority will use tomorrow’s annual meeting to press for reform, looking to persuade a board they can’t force to act.
Christian Brothers Investment Services Inc. will introduce a resolution to separate the chairman and CEO roles held by Murdoch, 80, who has run the New York-based media company for more than five decades. The California Public Employees’ Retirement System, the California State Teachers’ Retirement System and Institutional Shareholder Services all have taken stances aimed at loosening Murdoch’s control.
At least five investor groups and two proxy advisory firms have called on Murdoch and his two sons, Deputy Chief Operating Officer James and Lachlan, a former News Corp. executive, to step down. The rare confluence of dissent is unlikely to compel change, since Murdoch owns about 40 percent of the Class B voting shares and an ally, Saudi Prince Alwaleed Bin Talal, holds 7 percent. The goal is to convince the board that reform would instill confidence on the part of investors.
“It will be difficult to get a majority on the issues,” Julie Tanner, director of socially responsible investing for New York-based Christian Brothers, said in an interview. “If News Corp. (NWSA)’s directors were savvy, they would announce sweeping changes and should disclose more about the internal investigations into the hacking scandal.”
The situation may be similar to the situation at Walt Disney Co. in 2004, said Doug Creutz and Jason Mueller, analysts at Cowen & Co. Michael Eisner exited the chairman role after shareholders withheld 43 percent of their votes from him and later the CEO position.
“A large enough ‘No’ vote by independent shareholders could pressure the board to split the chairman and CEO roles and/or create an explicit succession plan that does not contemplate one of Rupert’s offspring in the CEO role,” the analysts wrote in a research note today.
Reports of hacking at the now-closed News of the World tabloid in London have raised questions about News Corp.’s management and the board’s independence.
The company formed a management and standards committee to aid outside inquiries. Police have arrested at least 16 people, including Andy Coulson, Prime Minister David Cameron’s former communications chief and an ex-News of the World editor.
The company also said it is investigating other U.K. titles. Testimony of James Murdoch, who heads the News International unit, on when he learned of the hacking was contradicted by former employees, and he has been asked to testify again in Parliament.
Tom Watson, the U.K. lawmaker who has led attacks against News Corp.’s British newspapers over phone hacking, will try to speak at the meeting in Los Angeles. He recently purchased shares in the company with the intention of addressing investors.
“I want to make sure the shareholders are fully informed about the things their company is doing in the U.K.,” Watson, a member of the opposition Labour Party, said in an interview. “For an organization that believes in freedom of speech, it would be pretty extraordinary if they tried to stop me being heard.”
‘Lack of Stewardship’
Institutional Shareholder Services, or ISS, which advises more than 1,700 investors on governance issues, is recommending votes against 13 of the 15 directors, including the Murdochs, citing a “lack of stewardship and failure of independence” by the board.
Hermes Equity Ownership Services also seeks the ouster of Rupert Murdoch and his sons. Two other advisory firms, Glass Lewis & Co. and Egan-Jones Proxy Service, recommended James and Lachlan be removed. Their concerns include a slow response to phone-hacking and executive compensation.
ISS’s recommendations “are not in the best interest of the company’s stockholders,” said Teri Everett, a News Corp. spokeswoman. She didn’t comment on other advisers’ efforts.
Shareholder fights against owner-dominated public companies usually fail and investors may not fare much better with this campaign.
News Corp.’s shares are split into two classes. The Class A shares, which represent about 70 percent of the economic interest, have no voting rights.
“With dual class shares of stock, there’s not much power for shareholders and it’s unlikely the company is going to give it up because they hold all the cards,” said Charles Elson, director of the University of Delaware’s Center for Corporate Governance. “Shareholders in that structure have very little influence.”
News Corp. has spent about $1.64 billion buying back the Class A shares, out of a $5 billion repurchase authorized by the board on July 12.
The shares rose 1.1 percent to $16.89 at 1:22 p.m. New York time. The stock had gained 15 percent this year before today.
An instance in which investors prevailed was the New York Times Co. (NYT)’s decision in 2008 to seat representatives of outside funds that had pressured the newspaper company to focus more on the Internet and questioned that company’s dual-stock structure, Elson said.
In many cases, the two share classes were created to insulate media companies from investor pressure on news coverage, Elson said.
“It’s a bad system and I think we need to get beyond dual structure for all companies,” Elson said.
In addition to News Corp., 26 other companies in the Standard & Poor’s 500 feature a dual-class stock structure that limits voting power, according to an ISS analysis. They include Warren Buffett’s Berkshire Hathaway Inc. (BRK/A), Google Inc. (GOOG), and Sumner Redstone’s CBS Corp. (CBS) and Viacom Inc. (VIA/B) media companies.
News Corp. amended its bylaws in April to provide for a majority vote to elect directors, and those who do not win a majority are required to resign. The board’s nominating committee, however, can reject the resignation, overriding the vote.
While shareholders lack power, they could “make so much noise that they embarrass Murdoch or maybe it starts to affect him financially,” said Jay Lorsch, a corporate governance professor at Harvard Business School in Boston.
Power of Spotlight
The hacking scandal has led to the loss of revenue and business deals, according to ISS. Closing the News of the World will hurt profit at the company’s newspaper unit, the firm said. The company also dropped its bid for the remaining shares of British Sky Broadcasting Group Plc (BSY), costing News Corp. a $63 million breakup fee and the loss of potential future earnings, the ISS said.
News Corp. in August also lost a $27 million no-bid contract to build an education data-system tracking student performance for New York due to the scandal, the advisory company said.
Murdoch may face additional scrutiny over the Wall Street Journal Europe, which boosted circulation by selling issues at one euro penny a copy to third parties, according to documents obtained by Bloomberg News.
“Shareholders have to wonder whether there could be something else to come out in the future,” said Christian Brothers’ Tanner.
Calstrs, which manages $155 billion for California teachers, is withholding its votes for all News Corp. directors because the board fails to meet its test of being two-thirds independent, Anne Sheehan, director of corporate governance, said in an interview.
Sheehan said she has expressed her concern directly to at least one unnamed News Corp. director. Calstrs, which holds 6.1 million Class A shares and 35,200 Class B, will continue to oppose dual-class voting structures, she said.
“The success of this effort is still unknown,” Sheehan said. “If they are concerned about their reputation, both individually as directors and corporate wide, and if the ‘opposition’ vote is quite high, they may consider some steps to modify their governance and hopefully this policy.”
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