Murdochs Run a Family Business
Murdoch is protected from angry investors by an obscenely nepotistic shareholding structure
Last week while I was in New York, I had the unusual experience of being interviewed about the implications of the phone-hacking scandal in the newsroom of Fox News for Sky TV. So I was being interviewed in the centre of Rupert Murdoch's news empire in America for the satellite TV channel where his son James is chairman and in which, at least until last week, his News Corp master vehicle was trying to buy out the outside shareholders. What happened in the interview was revealing about some aspects of this scandal which have yet to come into full focus.
In my view, the Sky News interviewer, Anna Jones, demonstrated a pro-Murdoch bias. I suggested to her that, as the CEO of a public company, I think the shareholders would have had me fired if I had indulged in the following: 1 Paid $580m (£360m) for MySpace and then sold it for $35m (£22m); 2 Paid $5.7bn (£3.5bn) for Dow Jones and written off $2.8bn (£1.7bn); 3 Paid $615m (£382m) for my daughter's business in an example of what has been described as “blatant nepotism”; 4 Seen my company's shares underperform the S&P 500 Index for 15 years; and 5 Been in charge when several of my staff had engaged in criminal phone hacking and bribing police officers, activities which had been covered up by my management.
So, I asked, why hasn't Murdoch been fired? The answer, of course, is that nobody can fire Rupert Murdoch because the Murdochs control News Corp through differential voting rights.
News Corp has two classes of share capital: A shares which carry no votes, and B shares which have all the votes. The Murdochs own 40 per cent of the B voting shares. The much more numerous A shares have no votes, so the Murdochs are able to control a company in which they own only 13 per cent of the total issued share capital being the total of the A and B shares.
So when News Corp paid $615m for Elisabeth Murdoch's business, Shine, her father was literally buying it mainly with other people's money — which as we all know is much easier to spend than your own. Similarly, the impact in terms of lost value of the other disasters which I mentioned has mainly fallen on those long-suffering but non-voting A shareholders in News Corp because they are putting up most of the money.
My responses about the Murdoch situation were clearly not what the Sky interviewer was expecting, or wanted to hear. She mounted a defence of Rupert Murdoch's achievements in building a “big empire.” I reminded her that to qualify as a business empire, News Corp would need to generate, for example, a decent return on capital — something which it has failed to do.
Return on capital employed is one of the most important measures of corporate performance — it is the profit return which the management earns on the capital shareholders provide. News Corp has managed a decidedly poor return on capital employed of just 10 per cent a year in the past five years. Comparable companies have done much better: the U.S. media company Viacom managed a return of 20 per cent a year and Daily Mail & General Trust 30 per cent a year.
The interviewer ended by cutting me off after she said she would like to take me through the achievements of James Murdoch and Elisabeth Murdoch. I would welcome that debate on live TV. Of course the clip of the interview on the Sky website omits the interviewer's questions and comments.
If this is the standard of editorial independence and integrity at Sky before the Murdochs owned the company outright, one can only cringe at the thought of what would have followed if they gained outright ownership.
The whole litany of phone hacking, police bribery, and cosiness with politicians of both major parties who competed to see who could engage in the greatest pandering to the Murdoch acolytes is, in general terms, an example of an abuse of power. So is the shareholder voting structure at News Corp.
News International published an apology in U.K. newspapers for the phone-hacking scandal. Rupert Murdoch should apologise in person to his shareholders for the damage he has wrought and, since actions speak louder than words, he should enfranchise the class A non-voting shares which the Murdoch family does not own. Then the owners of News Corp can pass judgment upon his actions. (Terry Smith is chief executive of Tullett Prebon and Fundsmith.) — © Guardian Newspapers Limited, 2011