Shareholders' hands tied by News Corp. structure

Some institutional shareholders of News Corp. are steaming mad over perceived board failures in corporate oversight revealed by the phone hacking scandal, but they are virtually powerless to compel any change.

That's because of the company's dual-class stock structure and the controlling shares held by Chairman and CEO K. Rupert Murdoch and his family.

“There is very little shareholders can do” to strengthen the News Corp. corporate governance, said Charles M. Elson, professor of finance and legal studies at the University of Delaware, Newark, and director of its John L. Weinberg Center for Corporate Governance.

Under News Corp.'s corporate governance structure, the 1.8 billion class A shares have no vote; only the 798 million class B shares have voting power. The Murdoch Family Trust, Reno, Nev., owns 38.4% of the class B shares.

Paul Hodgson, Portland, Maine-based managing director and chief communications officer of GovernanceMetrics International Inc., said, “While shareholders are free to suffer from a drop in the stock price because of the scandal, they really cannot do anything but sell the stock. They have no control over the board or the CEO.”

Still, some institutions are not taking it sitting down.

Anne Simpson, senior portfolio manager-global equities, at the $241.3 billion Sacramento-based California Public Employees' Retirement System, said in a statement, “News Corp. does not have one-share/one-vote. This is a corruption of the governance system. Power should reflect capital at risk. CalPERS sees the voting structure in a company as critical. The situation is very serious and we're considering our options. We don't intend to be spectators — we're owners.”

Others are taking a legal path in directing their anger over the apparent directors' breaches of fiduciary duty revealed in the News of the World newspaper phone hacking scandal.

The $700 million Massachusetts Laborers' Pension and Annuity Funds, Burlington, filed suit July 15 against Mr. Murdoch and the other News Corp. directors, seeking corporate governance reforms along with recovery of millions in losses caused by a breakdown of internal controls and the company's directors' breaches of fiduciary duty revealed by the scandal.

Michael W. Stocker, partner with the law firm Labaton Sucharow LLP, New York, said, “The bottom line here is Rupert Murdoch has turned board independence into a joke, and shareholders are paying the price.”

“Lawsuits brought by the company's current shareholders are trying to hold directors' feet to the fire,” added Mr. Stocker, whose law firm is representing the Massachusetts Laborers' funds in the suit.

In a separate action, another group of institutional investors — the $814 million Central Laborers Pension Fund, Jacksonville, Ill.; the $310 million New Orleans City Employees' Retirement System and Amalgamated Bank — on July 15 amended its suit, also filed against Mr. Murdoch and the other News Corp. directors. Their amended complaint claims breaches of fiduciary oversight and corporate governance failures in the phone hacking scandal caused losses of “hundreds of millions of dollars if not billions” in shareholder value.

Still others are working behind the scenes.

Colin Melvin, CEO of Hermes Equity Ownership Services Ltd., said the London-based shareholder advisory services firm has “a long-standing engagement with News Corp. as we have significant concerns about governance and ethics at the company.”

Hermes EOS, which provides advice to clients with a combined £80 billion ($130 billion), is a division of Hermes Fund Managers Ltd., which manages the £35 billion BT Pension Scheme, London. The amount of News Corp. shares Hermes owns was unavailable.

Mr. Melvin pointed out the poor ownership structure of the company. The Murdoch family, while holding 38.4% of the voting shares, has only 12% of the economic interest in the company, he said.

“We've filed a shareholder proposal at News Corp.'s (annual general meeting) to facilitate board access,” Mr. Melvin said in an e-mailed response to questions. “Further to our filing the proposal, we held a meeting with a director who is widely regarded as being among the more independent members of the board. As a result of this, we were able to obtain some concessions — which will appear in the company's next proxy statement — and, more importantly, a commitment to ongoing discussions.” He wouldn't provide details.

CalPERS' Ms. Simpson, in her statement, said: “One-share/one-vote is a CalPERS core principle because we believe that the control of a company should reflect its ownership. That's capitalism — it's a design feature that (is) vital. Dual-class voting is one way to pervert the alignment of ownership and control.”

“The serious situation is the hacking scandal, and the market reaction shows how seriously this is being taken,” she said in the statement.

The class A shares, trading at a recent high of $18.13 on July 5, the day after a U.K. newspaper broke a story about an investigation into the phone hacking, fell to a low of $14.97 on July 18. In midday trading July 22, the shares were priced at $16.26.

CalPERS owned 5.4 million class A shares and 1.3 million class B shares, as of June 30, according to an e-mail from fund spokesman Clark McKinley.

Officials at the C$107.5 billion (U.S. $113.1 billion) Ontario Teachers' Pension Plan, Toronto, the $158.8 billion Florida State Board of Administration, Tallahassee, and the $140.6 billion New York State Common Retirement Fund, Albany, declined to comment on the company. The Ontario teachers' plan holds an undisclosed amount of A and B shares; the FSBA holds about 4.9 million shares, all class A; and the New York fund, just less than 9.7 million class A shares.

Despite the headlines, other investors say the company — with strong entertainment and film studio assets — remains attractive, with the phone hacking scandal affecting only a small fraction of the overall business. But even they acknowledge the challenges posed by the company's governance structure.

Yacktman Asset Management Co.'s biggest single holding as of the end of June was News Corp., said Donald Yacktman, president and co-chief investment officer. The Austin, Texas-based firm owned 58.4 million class A shares, valued on that date at $1.03 billion. The shares were valued at $949 million based on midday trading July 22. Those shares amount to 9.3% of the total $11 billion Yacktman has under management.

“Illegal activity should not be condoned,” Mr. Yacktman said of the phone hacking scandal.

But the scandal might have benefited shareholders, he said, because it caused the company to withdraw its proposal to acquire the 60% of British Sky Broadcasting Group it doesn't own, a deal that Mr. Murdoch could price too high, Mr. Yacktman said.

While the scandal also caused the company to close the News of the World newspaper, that is “a very small reduction in cash flow” of the overall company, Mr. Yacktman said. “You have a little bit more uncertainty” in the company as an investor because of the scandal, he added.

News Corp. now is undertaking “a massive share repurchase, which would make shareholders wealthier,” Mr. Yacktman said. “Shareholders might end up better off under this scenario,” he added.

Mr. Yacktman believes Mr. Murdoch will stay in command at the company. “You have to be impressed with the long-term record,” he said.

News Corp. shareholder performance has been “spectacular,” he said, noting his firm began buying the stock in fall 2009.

At Morningstar Inc., Chicago, Michael Corty, equity analyst, continues to have the same $17-per-share valuation on the stock as he has had for most of the year.

“This hacking thing in the U.K. doesn't affect the main business — entertainment networks and film studio” for TV and movie production, which together generate 75% of the company's cash flow, Mr. Corty said. Newspapers and other business generate the rest, he added. “It's a black eye on how they run newspapers, but it's in the U.K.”

In terms of corporate governance, “it's not ideal anytime you have the chairman and CEO as the controlling shareholder,” Mr. Corty said. “Investors know that going in. But any concern about corporate governance is overshadowed by the quality of entertainment assets of News Corp.”

Patrick McGurn, special counsel at Institutional Shareholder Services Inc., a Rockville, Md.-based corporate governance research and proxy-voting advisory unit of MSCI Inc., speculated that separation of the chairman and CEO positions could emerge as an issue at the next News Corp. annual meeting.

“They have the same structure as the majority of public companies in the U.S.,” he said, adding that the scandal raises questions about board leadership and oversight.

News Corp. likely will be one of the focal points of the fall proxy season, he said.

London Bureau Chief Thao Hua contributed to this story.