July 20 (Bloomberg) -- Rupert Murdoch’s refusal to take responsibility for the hacking scandal that has slashed $5.5 billion from the market value of News Corp. may undermine his credibility as chief executive officer.
Governance experts who heard Murdoch’s performance before the U.K. Parliament yesterday said that by blaming underlings and saying he wasn’t responsible he didn’t do enough as CEO to acknowledge his accountability.
“If he didn’t know what was going on, he’s doing a lousy job as CEO and the board should replace him,” said Jay Lorsch, a Harvard Business School professor. “The board should be asking, ‘Where were you?’ The buck stops with him.”
Chief executive officers who don’t hold themselves responsible for crises at their companies often have stepped aside under pressure. While Murdoch’s almost 40 percent voting control makes an involuntary ouster unlikely, the weight of the crisis may ultimately persuade him to give up the CEO post, said Sydney Finkelstein, a professor of management at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire.
“Based on the pattern we’ve seen in other major scandals, it’s likely we’ll see Murdoch resign,” said Finkelstein, author of “Why Smart Executives Fail.” “They all end up resigning.”
Murdoch, 80, withstood three hours of questioning yesterday with his son James. He denied any knowledge of phone-hacking and payments to police at the now-closed News of the World tabloid. Both Murdochs said they didn’t know about employees intercepting voicemails or paying police for stories.
“The News of the World is less than 1 percent of our company,” Murdoch told Parliament’s Culture, Media and Sport Committee. He said he may have “lost sight” of the paper because it was “so small in the general frame of the company.”
Murdoch showed parallels to Hank Greenberg, the former chairman of American International Group Inc., when he said he is “the best person to fix” the scandal, Finkelstein said.
“That’s the same thing Greenberg said as AIG was going down the drains,” he said.
Another CEO who was forced to resign was Tony Hayward, who ran London-based BP Plc when the company had a massive oil spill in the Gulf Coast last year. Hayward initially downplayed the disaster, and he attended a yacht race in June 2010 while the crisis was still unfolding. BP directors replaced him the following month.
Costs of Scandal
Greenberg is still fighting a 2005 reinsurance fraud charge brought by then-New York Attorney General Eliot Spitzer. Neither Hayward nor Murdoch has been charged with wrongdoing.
Julie Henderson, a spokeswoman for News Corp., declined to comment.
The July 10 closure of 168-year-old News of the World cost about 200 employees their jobs. The public outcry and political backlash from the scandal also prompted News Corp. to drop its 7.8 billion-pound ($12.5 billion) bid for British Sky Broadcasting Group Plc. At least 10 people have been arrested, including former News International CEO Rebekah Brooks and ex-News of the World editor Andy Coulson.
News Corp. shares have declined 12 percent since July 4, when the Guardian newspaper reported that the newspaper hacked into the voicemail of a murdered teenager. The New York-based media company’s market value has dropped to $42.2 billion, including about a $650 million loss for Murdoch family members, according to data compiled by Bloomberg.
In what he described as “the most humble day of my life,” Murdoch insisted that wrongdoing at the newspaper and efforts to clear it up were far below his level.
The blame for the phone-hacking scandal lies with employees, Murdoch told U.K. lawmakers.
“Do you accept that ultimately you are responsible for this whole fiasco,” lawmaker Jim Sheridan asked.
“No,” Murdoch answered.
“You’re not responsible? Who is responsible?” Sheridan said, according to a Roll Call transcript.
“The people that I trusted to run (the tabloid), and then maybe the people that they trusted.”
When Murdoch was asked if he was guilty of “willful blindness” or ignoring “knowledge that you could have had and should have had,” he said: “We were not ever guilty of that.”
“What struck me yesterday was that so much wrongdoing seemed to happen without the knowledge of the people at the top,” Culture Secretary Jeremy Hunt told BBC Radio today. “That will have worried a lot of people.”
Murdoch’s testimony cast doubts about his leadership abilities and judgment, said Finkelstein, the Dartmouth professor.
“You can’t just say you’re humbled,” Finkelstein said. “There’s no world-class company around that doesn’t want a CEO who demands to hear about these types of things in real time. Rupert didn’t seem the least bit concerned about that.”
Investors reacted positively to the testimony, which produced no new headlines that were immediately damaging to the company. News Corp. Class A shares rose 6.4 percent over two days to close at $15.93 today in Nasdaq Stock Market trading.
James Murdoch, 38, enhanced his credibility and put himself in better position to eventually take the helm, David Bank, an analyst RBC Capital Markets in New York, said in an interview with Bloomberg Television.
News Corp. Director Viet Dinh issued a statement after the testimony on behalf of outside board members, saying they supported Murdoch and the management team.
Kingdom Holding Co.’s Prince Alwaleed bin Talal al Saud, the largest outside holder of News Corp.’s voting stock, reiterated his support for Rupert and James Murdoch’s leadership while saying U.K. lawmakers’ hearings are “part of a necessary process to address the unacceptable practices that developed at the now closed News of the World.”
“There is a lot of uncertainty that is going to continue around the stock but I think basically the probability of it being contained to the U.K. is pretty solid,” Bank said. “And the assets are so ridiculously cheap that we just, we really like the stock.”
Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
Murdoch’s testimony that he isn’t responsible for the scandal isn’t acceptable, said Julie Tanner, assistant director of socially responsible investing for Christian Brothers Investment Services in New York. The organization holds 30,755 Class B voting shares on behalf of Catholic institutions.
“He needs better policies in place and to have a better grasp of what people in the company are doing,” Tanner said.
Christian Brothers filed a petition with News Corp. on July 15 that seeks to permanently split the CEO and chairman positions, Tanner said. The firm made similar proposals at Time Warner Inc. and Goldman Sachs Group Inc., she said.
News Corp. is considering elevating Chief Operating Officer Chase Carey to CEO, people with knowledge of the situation said this week. A decision hasn’t been made and Murdoch would remain chairman, said the people, who weren’t authorized to speak publicly.
A change to Carey as CEO would “likely be applauded,” said Barton Crockett, an analyst at Lazard Capital Markets in New York, said in a research note yesterday.
News Corp.’s dual-share structure also was criticized by Calpers, the California state pension fund, according to reports in the Financial Times and the Guardian.
“The situation is very serious and we’re considering our options,” Anne Simpson, a Calpers senior portfolio manager, told the Financial Times in an interview. “We don’t intend to be spectators -- we’re owners.”
Calpers owns 4.87 million nonvoting News Corp. shares and 1.49 million voting shares, according to Bloomberg data.
Voting control makes it likely Murdoch will survive as CEO, said Yale School of Management professor Jeffrey Sonnenfeld.
“If what he’s saying is true and he has that little command of the facts, this is a terrible failure of management oversight,” Sonnenfeld said. “Only his living mother and his directors could love that testimony, but monarch CEOs like Murdoch pack the board with cronies. He’ll only go out of office feet first.”
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