The phone hacking scandal in Britain shines a light on lax corporate regulation. Ben Eltham explains how this helped the Murdochs maintain such a firm grasp on News Corp around the world.
Stop for a moment and ask yourself: how can one family control one of the most powerful media organisations in the world?
A family that owns less than a eighth of the company, by the way, but which still effectively controls its board and executive by virtue of its ownership of around 40 per cent of the so-called “Class B” shares. We’ll get to the Class B shares in a minute.
Media companies are notorious for being family businesses. The Packer and Murdoch families have controlled their respective media empires for three generations. Over at Fairfax, John B. Fairfax can trace an even older lineage. The controlling interests in these powerful shapers of public opinion can tell us many things about contemporary society: the role of the media in shaping power in our democracy, the enduring advantage of inherited wealth, and the sham that is “corporate social responsibility”.
Much of the media coverage of the phone hacking scandal — and there’s been some very good coverage, from this piece by Guy Rundle to the thoughtful commentary of the Guardian journalist, Nick Davies, who pursued the story for so many years — has revolved around media ethics, and the rights and responsibilities of media organisations to gather material and intrude on lives. Today in New Matilda you can read journalist Wendy Bacon’s analysis the phone hacking scandal in the context of media ethics and press regulation in Australia.
With the arrest of Rebekah Brooks and the resignation of Les Hinton, News Corporation has plenty of questions to answer on this front. But the story of how one man has been able to control the corporation so ruthlessly is also an illuminating story of how lax corporate regulations can aid and abet corporate malfeasance.
Throughout his turbulent career, Murdoch’s corporate manoeuvres have always shown tactical flexibility combined with a disdain for the normal ethics — if any really exist of managerial behaviour. As Jeff Bercovici writes in a Forbes blog, Murdoch is “more akin to a monarch than an ordinary CEO“. Any and all legal — and as we are finding out, illegal — measures have been exploited to the full.
News Corporation, as the holding company, owns or part-owns many subsidiaries around the world, such as News Limited here in Australia and News International in Britain. The corporation is an enthusiastic user of tax havens and corporate secrecy jurisdictions: Paul Barry reported in February that, according to US regulators, “News Corp had 152 subsidiaries, with a big flock in those delightful Caribbean holiday spots, the Cayman Islands and British Virgin Islands. This was more than any other major UScompany apart from the two big banks, Morgan Stanley and Citibank.”
The scale of some of this corporate tax dodging was highlighted recently in a long-running case between the Australian Capital Territory and News Limited, which had issued News with a $84 million stamp duty bill after a shady $9 billion share transfer to the Bermuda Stock Exchange via a Murdoch-owned company called Karlhoft. The ACTeventually won the case, with News settling with the ACT’s Revenue Department for $77 million. News, however, kept the settlement secret and didn’t report it in its December accounts.
Long-time Murdochologist Neil Chenoweth has extensively documented the ability of Murdoch’s various corporate restructures to minimise tax while maintaining an iron grip on management control of the empire. In his book Virtual Murdoch, Chenoweth wrotethat News Corp paid an average corporate tax rate of 6 per cent between 1986 and 2000.
The reason Murdoch can continue to control News Corp with only around 12 per cent of the shares is because of the structure of News Corp’s share registry, which divides its shares into two classes, “A” and “B”. The A class shares are anything but top of the class, conferring no voting rights at the Annual General Meeting and hence no say in who sits on the board. The B class shares, around 30 per cent of the total, are the only ones that confer voting rights, and Murdoch and his family control by far the largest stake. As a result, Rupert Murdoch is not only the Chairman and Chief Executive of News Corp, he also effectively controls who the other directors are.
And the reason News Corp can issue Class B shares is because of lax corporate regulation.
Like the majority of the top 500 US banks and corporations, News is incorporated in the American state of Delaware, a notorious corporate haven. The role of Delaware corporate law in allowing corporate manoeuvres like poison pills and anti-takeover statutes is well known. According to British financial journalist Nicholas Shaxson, who investigated tax havens in his recent book Treasure Islands, the state of Delaware grants “corporate bosses extraordinary freedoms from bothersome stockholders, judicial review, and even public opinion.”
The scale of the Murdoch family’s ability to do what it likes with the corporation was graphically demonstrated in the recent acquisition of Elizabeth Murdoch’s film and television production company, Shine. The deal, worth £415 million, sees News Corp acquire 100 per cent of Shine, and will give Elizabeth a seat on the News Corp board.
Investors were not happy. Despite the legal hurdles facing stockholder action against Delaware-registered corporate management, a lawsuit is indeed in the works. The suit alleges that News Corp didn’t even pretend the deal was about the best interests of shareholders. Instead it argues that “Murdoch publicly proclaimed that his purpose in entering into the transaction was to bring Elisabeth back to the family business.” As Alison Frankel at Reuters reports, the suit has since been revised to incorporate material related to the News of the World scandal.
“The board’s refusal to inquire into whether Murdoch loyalists had implicated News Corp [in phone hacking and bribe paying] further confirms its complete inability and unwillingness to cross him, much less to make the hard but necessary decisions independent of Murdoch’s personal demands and desires,” the complaint says.
The web of influence that Murdoch and his family are able to wield through the octopus tendrils of News’ various controlling interests is vast.
Take Lachlan Murdoch, who has not been involved in any of the British shenanigans. Lachlan remains a director of News Corporation, and was Rupert’s former CEO of the Australian newspaper subsidiary News Limited. He also owns and effectively controls two of the most significant radio and television networks in Australia in DMG and the Ten Network. In fact, he remains the acting CEO of Ten.
All of this is legal. But is it good for Australian democracy? As the University of Technology Sydney’s Thomas Clarke argues today, “Australia’s cross-media ownership regulation simply is not working to achieve the principles of media access, freedom and diversity that it is supposed to protect.”
Let’s not believe News Limited boss John Hartigan that everything is fine in the Australian arm of the organisation. As I argued last week, News is a rogue organisation. It has lost its social licence to operate. It should be broken up, sold off and divested, for the good of democracies across the western world.
While we’re at it, Australia’s cross-media regulations must be strengthened, and Communications Minister Stephen Conroy must find someone willing to use the media regulator ACMA’s considerable regulatory power to actually enforce its own rules.
Originally published at New Matilda.