Why News Corp.’s Board of Directors Is Clearly Still Under Rupert Murdoch’s Control

This Tuesday, August 9^th, the directors of Rupert Murdoch’s News Corp. gathered in Los Angeles.  It was the first face-to-face meeting of the full board since the Watergate-like scandal regarding cellphone hacking erupted in the UK at News of the World.  One publication that follows the company’s affairs described the meeting as a “crisis” conference, with no less than the continued fate of Murdoch as Chairman of the Board and CEO of his own company at stake.  The crisis claim, however, was not even close to the truth.

Murdoch’s board of directors at News Corp. has always been totally under his control, and the UK scandal has changed nothing. This board is a model of everything that the directors of a contemporary publicly-traded American corporation should NOT be.  Indeed, many believe that the cozy, in some cases sycophantic, and in all cases conspicuously cronyish relationships between Murdoch and his board are the reason for the scandal—which is still spreading.

News Corp.’s Dependent And Murdoch-Friendly Board

The board of directors at News Corp. is so noticeably chummy with Murdoch that the news media frequently makes note of it.  For example, when the New York Times reported that Murdoch’s daughter Elizabeth would not be joining the board as planned (after News Corp. paid $674 million for a company she started—a decision that produced a lawsuit from angry shareholders), the Times addressed the lack of a truly independent board.  Nine of the sixteen board members of News Corp. are not officers or employees of the company.  Yet the Times reported, in an article entitled “Murdoch’s Board Stands By as Scandal Widens,” on how remarkably passive even the independent board members have been since the UK scandal unfolded.  Why the passivity?  Times reporter Andrew Ross Sorkin accurately described the board as “Friends of Rupert.”

Indeed, New York Times media reporter Jeremy Peters—when he examined the independent members of the board—found that all had “deep and personal ties to Rupert Murdoch.”  Peters’s article acknowledged that since the so-called “independent directors” were not officers or employees of News Corp., the company was in technical compliance with the NASDAQ stock exchange’s criteria, as well as with the legal requirements, for a publicly- traded company.  But these standards are so broad and loose that, in fact, Murdoch’s so-called independent directors are probably closer to him than those who are actually employed by News Corp. This reality has not gone unnoticed by shareholders, with one group currently demanding that the board “improve its governance standards.”

As long as Rupert is at the helm, that is not likely to happen. Probably the most independent member of this dependent group of Murdoch friends is a thirty-year-old aspiring opera singer with absolutely no business experience or prior relationship with Murdoch: Natalie Bancroft.  She is an heiress, part of the Bancroft family from whom Murdoch acquired the Wall Street Journal and related properties, so her qualification was, apparently, her surname.  Murdoch needed to honor his purchase agreement by placing a Bancroft family representative on the board, and it seems he selected one whom he was sure would give him no trouble.  And so far, she has not.

But if Natalie is inclined to sing, now might be the time.  (Or if she prefers not to, she may wish to double-check the coverage of Murdoch’s directors and officers liability-insurance policy.)  Presumably, the board was given the same broad assurances that everything was fitting and proper within News Corp., and that the illegalities of the UK operation are limited to the UK, that Murdoch gave to financial analysts and the press in a scripted telephone call following the board meeting.  To me, the conference call sounded like a classic whitewash.

The Broad Assurances that Murdoch Gave During the Question-and-Answer Session

I listened to the call (streamed from News Corp.) and tweeted it live on Twitter (mostly paraphrasing, but adding occasional quotes).  It lasted an hour. Most of the call was related to spinning the financials of the company in the most favorable of terms, while ignoring the hit the stock has taken because of the UK scandal.  The call began with Murdoch giving a very brief explanation of the UK scandal.  Without being specific, he said the hacking of telephones by employees at News of the World was conduct that “should not be tolerated.”  He claimed he was “shocked” by what he has learned.  While explaining how they were still investigating the UK matter, he slipped in the fact the News Corp. board thought that he should remain as Chairman and CEO, and then proceeded to add, regarding the scandal, that they would “put things right.”

Murdoch addressed the widely reported fact that Joel Klein (the former chancellor of the New York City Schools, who recently joined News Corp. to take them into the for-profit education field) was handling the investigation—by both cooperating with authorities and conducting an internal inquiry.  Klein is a former Deputy White House Counsel (he served during Clinton’s “Whitewater” scandal) and a former Assistant Attorney General for Antitrust (he prosecuted Microsoft).

Murdoch added that Klein—whose credentials he did not mention, for they have been prominently discussed in the press—was reporting to independent News Corp. board member Viet Dinh (an attorney and law professor; we’ll return to this director shortly).  Murdoch assured those listening that they would do “the right thing” in the UK scandal; they would “hold people accountable,” for they are “committed to ethics.”  He further assured everyone that this illegal conduct was limited to the UK; that nothing untoward had occurred in other parts of the company; and that the scandal had not had any negative financial impact on the company.

Presumably, this scripted statement had been cleared by Murdoch’s newly hired team of attorneys, who are now monitoring the scandal, both in the UK and the USA.  It was a remarkably (maybe dangerously) broad and blanket assurance that all was well, and that News Corp. is clean.  As I listened, I wondered if similar assurances were being given to the Securities and Exchange Commission? In fact, the SEC filing is far less assuring, and a very narrow of statement on the matter.

Sweeping assurances of the type given in the conference call have been know to later return to haunt companies like Arthur Andersen, Enron, Tyco, WorldCom, etc., etc.  There was more caution in Murdoch’s answers to questions than in his prepared statement—which was only restrained in its refusal to give any specific details, but only generalities, about the official and in-house investigations.

Notwithstanding a growing number of hints to the contrary, and not to mention my own deep suspicions because of the ruthless way Murdoch and his operatives conduct business, I thought as I listened that it was not impossible that Murdoch was giving his best version of the truth, as he understood it.

But I was only able to suspend disbelief briefly.  As the questions came to an end, with the moderator only permitting about four questions relating to the scandal, Murdoch offered a gratuitously distorted statement about News Corp.’s corporate governance that caused me to think that his entire defense is likely a façade, as I will explain.

Murdoch’s Distorted Statements About News Corp.’s Governance and Independent Director Viet Dinh

The last question addressed the comment that Murdoch had slipped into his opening remarks: the comment that the board had total confidence in Murdoch’s remaining as Chairman and CEO.  The questioner noted the widespread news-media consensus that News Corp.’s board was not really independent.  But Rupert, with a scolding voice, cut off the questioner, proclaiming, “That’s not true.”

As an example, he said, “Viet Dinh’s a completely independent” director.  I barked “Baloney” at the computer screen.  And then, as if he could hear my comment, Murdoch added, “We are in compliance with the standards of good governance.”

In fact, of all the News Corp. directors he might have selected to claim “independence,” and the pickings are slim to none, Viet D. Dinh might the most outrageous choice.

Viet Dinh was born in Saigon in 1968, where he spent the first ten years of his life, before his family emigrated to the United States when the North Vietnamese reunified the country under Communist control.  He was educated at Harvard, from which he received both his undergraduate and law degrees.  He served as a law clerk to one of the most conservative judges on the U.S. Court of Appeals for the District of Columbia, Laurence Silberman, and then clerked for Justice Sandra Day O’Connor.  He remained in Washington, working first on Capitol Hill, and then for the Bush Justice Department, as an Assistant Attorney General. (His confirmation vote was 96-to-1, with the sole “No” vote coming from Senator Hillary Clinton).

I first noticed Viet Dinh when I found he was largely responsible, along with John Yoo, for drafting the infamous Patriot Act.  Today, Dinh is a Washington, DC attorney at Bancroft Associates (which he founded) and a professor at Georgetown University Law School.

Ironically (or tellingly) one of Dinh’s areas of expertise is corporate governance.  Apparently, he finds no problems whatsoever with his service on the News Corp. board as an “independent” director, notwithstanding reports like the following from Business Week: “Dinh has been a friend of Chief Executive Officer Rupert Murdoch’s oldest son Lachlan since 2003 and is godfather to Lachlan’s second child.  In 1992, a decade before they met, the South China Morning Post, then owned by Murdoch, helped Dinh free his sister from a Hong Kong refugee camp.”  Lachlan Murdoch has been an executive director on the News Corp. board since 1996.  Dinh joined the board in 2003.  It appears that Dinh became godfather to Lachlan’s second son in May 2006.

Rupert Murdoch seems to find Viet Dinh an ideal outside director.  He is paid about $250,000 a year, and qualifies as an independent director because he is not an officer or employee of the corporation, notwithstanding the fact that he plainly has great loyalty and closeness to the Murdoch family.

While such family ties are not a technical violation of the requirements for independent directors, they do raise serious questions to outsiders.  It is not clear how Viet Dinh can have such a different view. But, to most extreme conservatives—and Viet is surely that—questionable conduct is never wrong when they themselves do it, rather only when others do, for they know in their hearts that they are pure.

As Business Week pointed out, however, the fact that Dinh is the point man on the News Corp. corruption investigation at the board level causes other corporate-governance professionals concern.  “Usually it’s required that an investigation like this is undertaken by a committee of independent directors,” said Jay Lorsch, a Harvard Business School professor who has served on the boards of four publicly-traded companies, when commenting on the situation to Business Week.  Lorsch added, “It’s very hard to be objective if you’re involved in any way—financially or emotionally—with the family of the chief executive you are supposed to be supervising.”

The New York Times’s Indictment of News Corp.’s Corporate Governance

Overall, the New York Times has found News Corp.’s corporate governance to be strikingly bad.  Times reporter Andrew Sorkin interviewed a leading authority on corporate governance, Nell Minow, a member of the board of GovernanceMetrics International (GMI) which is in the business of rating the governance of companies, on the issue.  Minow said: “This is a board that qualifies for an ‘F’ in every category,” adding without any hesitation, “It is the ultimate crony board.”

When Viet Dinh announced that Elizabeth Murdoch would not be joining the board, it provoked Paul Hodgson—CCO and Senior Research Associate at GMI—to blog: “She’s agreed to delay her nomination? Three Murdoch family members on the board isn’t enough?  Wow, they really don’t get it, do they?  They may aspire to the highest standards of corporate governance, but they either don’t know what these are, or they just have a long way to go.”

Sorkin also interviewed Fred Tannenbaum, an attorney who specializes in the governance issues of companies large and small. Tannenbaum said that the News Corp. board “allowed the fox to guard the chickens.” Yes, the pun, he said, was intended. Tannenbaum is amazed by the passivity of the News Corp. board, particularly that of the purported independent members.

There are even more complex problems—which, if appropriate, I will address in a later column—facing Viet Dinh, concerning his ethical responsibilities as an attorney in the situation in which he finds himself.  One of the leading experts on such ethical responsibilities and legal professionalism, Chapman Law Professor Ronald Rotunda, told me in a recent conversation (which was unrelated to this subject) that lawyers must always think about how things look to others.  By implication, he was saying that, if things look bad to others, they probably are bad.  And Viet Dinh’s role at News Corp. looks awful.  But, I must add, Rupert Murdoch’s efforts to paint over these problems with references to Dinh and the other “independent” directors looks even worse.

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