What Murdoch Can Teach Us About Corporate Governance

At this point, most of us are quite aware of the problems that Rupert Murdoch is having in Great Britain. There has been a seismic shift in the power that Murdoch has over politics and law enforcement in England. Up until a few short months ago, most people in power there were afraid to openly criticize Murdoch for fear of retribution in the press.

Weeks ago, Murdoch has been forced to close down the News of the World tabloid. This newspaper, though it contributed very little to the Murdoch media empire’s profits, was widely thought to have been the “apple of his eye.”

The question that some of us are now asking is, could have this debacle been avoided through sound corporate governance?

Who Owns the Bulk of News Corp.’s Stock?

Based upon what we have been reading of late about the power that Murdoch has over News Corp., one might think that he and his family own a true controlling interest, namely at least 51 percent of the outstanding stock of the company. Nothing could be further from the truth.

New Corp. has a so-called dual share structure which carries with it unequal voting rights. This effectively gives Murdoch and his family total control over the entire company.

A business writer for the Washington Post, Allan Sloan, describes the situation this way in a recent article: “The Murdoch family owns only about 12 percent of News Corp., but Rupert Murdoch sure runs the place like a wholly owned family candy store.” Sloan goes on further to write: “How can Murdoch do this with only about a 12 percent stake in a giant public company? Because only about 30 percent of News Corp.’s shares have voting power, and Murdoch and a family trust own 40 percent of them. And because he’s Rupert Murdoch.”

Is this situation patently illegal? Not at all! It’s completely legal. The problem is that with such awesome power comes a lack of objectivity and perspective. The company, in effect, becomes a personal fiefdom.

Avoiding a Runaway Board of Directors

In past articles that I’ve written for the E-Commerce Times, I talk about the board of directors acting as a firewall between management and stockholders, thereby striving to create value for the shareholders and protecting that value from unwarranted and unwise managerial decisions.

I realize that it is only human nature for a CEO of a company to want a great deal of control over his or her board of directors, thereby virtually assuring that the CEO remains in power and continues to garner a healthy salary, plus perks. However, it is in the CEO’s best long-term interest to have a proactive board of directors who are focused on adding value and continued growth for the company.

The best way I know of protecting shareholder value as well as assuring the long-term success of a company is through the appointment of an independent board.

Who Really Chooses a Board of Directors?

Theoretically, the shareholders choose who is going to sit on a board. Practically speaking, however, there are two main impediments to this ideal.

First of all, if there is more than one type of stock, voting shares could be concentrated in a minority of shareholders, as in the case of the News Corp., where only about 12 percent of the company’s stock is owned by the Murdoch family, yet still giving effective control of the company to the family.

The second consideration is that a board of directors is usually selected by management. Management in turn proposes a slate of directors to the shareholders. In the vast majority of cases, the shareholders wittingly or unwittingly vote for the proposed directors. The major exception to this rule is when a group of shareholders get together to oppose management’s selection and runs a slate of its own to oppose management’s selection. The fact is, however, that the latter example is an exception to the rule.

An ‘Ideal’ Board of Directors

Though each board has its own strengths and weaknesses, if one had to choose a so-called ideal board, it would consist of the following:

  1. A securities attorney or someone familiar with securities law. This, of course, assumes that the stock of the corporation is publicly traded.
  2. A financial person, preferably a CPA, who would most likely be chairman of the Audit Committee.
  3. A person who is intimately familiar with the industry where the corporation derives the bulk of its sales.
  4. A member of the management team. This person usually is the CEO of the company.
  5. A prominent person who would be trusted by both the shareholders and the general public. Several friends of mine sit on corporate boards and some of them are prominent professors, retired politicians who had an impeccable record while in office, and even a president of a well-known university.
  6. A person who is serving on or who has served on corporate boards in the past.

An ideal number of directors, based on my experience, is eight. Once you get much beyond eight directors, boards seem to become a bit unmanageable, and the board meetings tend to go on for too long a time, thus losing focus as the clock ticks on.

Situations, like the unfortunate situation that News Corp. finds itself in can be avoided by choosing an independent board that is looking after the interests of shareholders. In the long run, everyone benefits from an independent board of directors.

Good luck!

Theodore F. di Stefano

Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at [email protected].

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