News Corp. Shareholders Irate, But Can They Remove Murdochs From Board?

Another major shareholder advisory service has called for Rupert Murdoch and his sons to step down from the board of directors of News Corp. (NYSE: NWS), the media giant still reeling from accusations that many of its employees have engaged in the illegal act of phone-hacking.

Hermes Equity Ownership Services, which is connected with the British Pension Fund, has expressed its concerns with the phone hacking scandal that brought down the News of the World tabloid, the arrest of a number of News International employees, and t5he resignation of certain employees. Hermes, which has also raised questions about the independence of the company’s board, reportedly wants News Corp. to name an independent chairman of the board, replace existing board members with outside directors and appoint an independent third party to conduct an investigation and report findings publicly.

Hermes is following in the footsteps of two other shareholder advisory groups that have also recommended that certain members of the Murdoch family (and others) be removed from the board of directors.

“The company’s phone hacking scandal… has laid bare a striking lack of stewardship and failure of independence by a board whose inability to set a strong tone at the top about unethical business practices has now resulted in enormous costs,” said Institutional Shareholder Services (ISS) in a report.

Another firm, Glass Lewis & Co., advised that News Corp. shareholders should vote against James and Lachlan Murdoch (Rupert’s sons) and four other directors.

Shareholders have long criticized the Murdochs for the way they run the company and for making decisions that are not always in the best interests of other shareholders. As a result, analysts have complained that the company trades at a significant discount to its actual value.

In July (during the height of the hacking scandal at the “News of the World” tabloid in Britain), Michael Morris, an analyst at Davenport & Co. in Richmond, Va., told Bloomberg: “There’s just sort of this generic Murdoch discount, which encompasses the concern that he will make decisions that are not consistent with other shareholder interests. The sum of the parts [of] News Corp. is huge compared with where the stock trades.”

However, given that the Murdoch family owns almost 40 percent of the corporation’s voting rights, it may be difficult to unseat them from the board.

News Corp. shareholders will vote on board members and other subjects at the company’s annual meeting on October 21.

International Business Times recently spoke with an expert on corporate governance to discuss the turmoil surrounding News Corp. and the Murdoch family.

Anna N. Danielova is assistant professor of finance at DeGroote School of Business in Hamilton, Ontario.

IBTIMES: Some proxy advisory firms have recommended that News Corp. shareholders should vote to remove certain members of the Murdoch family, including Rupert and his sons James and Lachlan (among others) from its board. Is this an unusual step, or do these advisory firms often make such suggestions?

DANIELOVA: Sometimes advisory boards recommend shareholders vote differently than what is suggested by the management, including voting against directors.

Back in the 1980s and 1990s, urging the removal of a director was rare.

However, in recent years, with increased shareholder activism, these recommendations are becoming more frequent. With respect to News Corp., the belief is that to save the stock it is only logical to remove those who are closely associated with the phone-hacking scandal from positions of visible power [i.e., the Murdochs].

IBTIMES: Do these advisory firms have any real influence over company shareholders?
DANIELOVA: Yes and no. They do not have a real influence, in particular, over small shareholders (i.e., those that have 100-200 shares, or even those who own 1000 shares through a mutual fund). Indeed, it is very difficult to organize thousands of small retail investors, who probably even do not bother to vote, thinking that their 100 shares will not matter in the final vote tally.
However, what advisory boards are suggesting might be in line with what the big institutional investors are thinking, and this might prove to be a game-changer.
For example, the Australian Council of Superannuation Investors has also called on its members to vote for the removal of several News Corp. executives [including Rupert Murdoch’s sons].
Coupled with similar advisory board recommendations, this may actually organize and influence the final vote.

IBTIMES: Can you think of other examples where the entire (or most of a) board have been removed by shareholder vote?

DANIELIOVA: No, I cannot. I am going to speculate that in recent history it probably has not happened (that is, the removal of a whole board).
But the ability of shareholders to nominate their own director candidates onto boards has been a hot topic for the past several years. In fact, on Aug. 1, 2009, the state of Delaware (where 50 percent of big and mid-size firms are headquartered) passed amendments to its General Corporation Law, including a new Section 112 related to shareholder proxy access.
Section 112 permits (but does not require) a company to adopt bylaw provisions that allow both company and stockholder nominees to be included in the company’s proxy statement.

IBTIMES: Doesn’t the Murdoch family have control of the company through its domination of voting shares? Thus, would any such moves to remove them be futile?
DANIELOVA: Actually, a lot of companies have the dual-class share structure that News Corp. has, including Estee Lauder (NYSE: EL), Ford Motor (NYSE: F), and Berkshire Hathaway (NYSE: BRK.A), among many others.
This is a way for the founding family to keep voting control in their hands. Typically, one share class, call it class A, has one vote per share, whereas another share class, class B, has 10 votes per share.
In the case of News Corp, it is slightly more interesting. Based on their recent proxy statement: “holders of Class A Common Stock are not entitled to vote on the matters to be presented at the Annual Meeting (meaning class A holders have no voting rights whatsoever).
As of the record date, there were 798,520,953 Class B common shares outstanding held by approximately 1,259 holders of record. Murdoch's family controls 39.7 percent of voting shares.

IBTIMES: But if this effort to remove the Murdochs is ultimately successful, could you foresee shareholders of other major companies removing unpopular boards -- like at Hewlett-Packard (NYSE: HPQ)?

DANIELOVA: In light of the new legislation, this is not impossible to imagine. But, HP is not the similar case. In fact, HP’s board seems to be acting in the shareholders' interests, albeit with too much unnecessary publicity.