Bloomberg News

News Corp. Investors Should Reject 13 Directors, ISS Says

October 10, 2011

(Updates with Breyer’s background in 14th paragraph.)

Oct. 10 (Bloomberg) -- News Corp. investors should vote against the re-election of 13 out of 15 board members to establish more independent oversight of management, said the proxy advisory firm Institutional Shareholder Services.

News Corp. has suffered financial consequences from a phone-hacking scandal at one of its newspapers that reflect a lack of oversight, said ISS, which advises more than 1,700 investors on corporate governance issues. It recommended investors vote against Chief Executive Officer Rupert Murdoch, his sons James and Lachlan, and 10 other directors.

“The company’s phone hacking scandal, which began its public denouement in July 2011, 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,” ISS said in its report.

ISS has recommended against 3.6 percent of the directors at companies in the Standard & Poor’s 500 this year, according to ISS spokesman Ted Allen. Shareholders will vote on board members and other issues at News Corp.’s annual meeting Oct. 21.

Glass Lewis & Co., another proxy advisory firm, also said the company needs a more independent board. The firm, which advises institutions with over $15 trillion in assets, said shareholders should vote against James and Lachlan Murdoch and four other directors.

Strong Disagreement

Phone-hacking at the company’s News of the World tabloid in London is part of a “mosaic of failures” in the board’s independence, oversight and responsiveness, ISS said. Executive pay is another area of concern, according to the firm, citing the elder Murdoch’s cash bonus of $12.5 million in fiscal 2011, compared with $4.4 million the year before.

Teri Everett, a spokeswoman for New York-based News Corp., said the company strongly disagrees with ISS’s voting recommendations and that the proxy advisory firm failed to consider the company’s financial performance. The company reported $4.85 billion in operating profit for the year ending in June, a 23 percent increase from the year before.

“News Corp. believes the recommendations put forth in the ISS analysis are not in the best interest of the company’s stockholders,” Everett said in an e-mail statement. “The company takes the issues surrounding News of the World seriously and is working hard to resolve them.”

Business Lost

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. Dropping its bid for the remaining shares of British Sky Broadcasting Group Plc caused News Corp. to pay a $63 million breakup fee and to lose out on potentially significant future earnings, it said. In addition, News Corp. in August 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.

“Despite the protestations of the Chairman/CEO in his Parliamentary testimony, ultimate accountability for the performance -- and particularly the self-inflicted wounds -- of the company must rest with the senior management and the board of directors,” ISS said.

Rupert’s Control

Murdoch’s 40 percent stake in the company’s Class B voting shares would make it difficult to enact board changes that differ from his wishes. Prince Alwaleed bin Talal, a friend of the Murdoch family, owns 7 percent of voting shares.

“I can see a substantial minority voting against some of the management’s proposal, but seeing a majority voting against management seems unlikely,” Paul Hodgson, senior research associate at Governance Metrics International, said.

James, 38, who appeared in July before a U.K. Parliamentary committee to explain how much he knew about phone hacking at News of the World, was recalled to answer further questions later this year. He said repeatedly that he didn’t know of widespread hacking, testimony that has been challenged by former executives at the U.K. newspaper unit.

The only two directors that ISS recommended investors elect are Joel Klein, the former chancellor for New York City schools, and James W. Breyer, a partner at venture capital firm Accel Partners.

Votes for the two “are warranted in light of their short tenure on the board,” the firm wrote.

Klein, 64, is now head of News Corp.’s education division. Breyer, 50, is a partner at Accel in Palo Alto, California, and sits on the board of Dell Inc. and Wal-Mart Stores Inc. In 2005, he led Accel’s investment in Facebook Inc. at a $100 million valuation. The social-networking website is currently worth more than $65 billion on private exchanges.

News Corp. rose 4.2 percent to $16.93 at the close in New York. The Class A shares had gained 16 percent this year.

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

--With assistance from Jeff Green. Editors: Peter Elstrom, Ville Heiskanen

To contact the reporters on this story: Edmund Lee in New York at elee310@bloomberg.net

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


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