Everyone's favourite hate figure is in the news again. Rupert Murdoch, along with all the directors of the US-based News Corp., is facing a lawsuit brought by shareholders about the board's decision in February to buy Shine Group of the UK for £413 million. Shine, a television production and concept company, was the creation of Murdoch's daughter, Elisabeth. The suit, brought by Amalgamated Bank as trustee for a variety of mutual and pension funds, alleges nepotism in no uncertain terms. Indeed, the language of the complaint is robust, even by the standards of litigious America: "Once the prodigal daughter is back into the News Corp fold, she will vie with her brothers, Board members James Murdoch and Lachlan Murdoch, for the position of successor to Rupert Murdoch's global media dynasty. In short, Murdoch is causing News Corp to pay $675 million for nepotism," it alleges. The quote comes from the second page of a 46-page filing with the Chancery Court of Delaware, where News Corp. has its nominal seat. The suit claims that the board approved the merger "without question or challenge to Murdoch". The deal was "unquestionably unfairly priced", based on comparable transactions elsewhere. "Further, even if there were some business justification for News Corp to acquire a television production company, there is no reason for it to acquire Shine in particular except to reward Murdoch's family member and to perpetuate his family's involvement in the senior management of News Corp," it continues. News Corp. is a special company in a special business. That doesn't put it above the law, and the courts will now have to decide what the law – the law in Delaware, that is – really means concerning managerial and board discretion and the rights of "minority shareholders", who in this case own a majority of the shares. But there are other issues at work here, however, concerning value creation, entrepreneurship, and – yes, even this – integrity in news gathering.
- Value creation: Under the elder Murdoch's direction, News Corp. has been an extraordinarily successful if maverick company. A small Australian newspaper chain morphed into the global owner of television platforms, movie studios and some of the most prominent titles in the news business, including The Times in the UK and The Wall Street Journal. It achieved that through strategies that fund managers often hail in public – involving the sacrifice of short-term "performance" for the long-term benefit of the business. But fund managers – including ones like the mutual funds in this lawsuit – are themselves judged by their beneficiaries for their short-term success. It is ironic, therefore, that a management capable of long-term vision without the slightest fuzziness of focus should come under this attack.
- Entrepreneurship: It is what has distinguished News Corp. from the crowd of media companies around the world now worried about their survival. The Murdochs – father, children, stepmother – are relentless in making something out of nothing. When Lachlan and Elisabeth left the business, they didn't drop out of life. Elisabeth in particular built a business from the ground up. Whether it's worth £413 million is certainly open to question. But as anyone who has studied strategy and accounting knows, past financial performance is a poor indicator of future direction. There, management is the key.
- News integrity: Yes, even this: Rupert Murdoch is a figure of hate for many in the news media. His Fox News network in the US is loud, irritating and full of often air-headed vitriol. His newspapers are aggressive, often beyond the pale and sometimes at the edge of the law or beyond, as the phone-hacking cases at the News of the World suggest. His political stance (libertarian, perhaps, more than just "right-wing") rouses the rabble as it comes through in the publications and on Fox, probably more through his selection of editors than through his personal interventions in news coverage. And yet, there's a maverick integrity to it. Let's recall that the First Amendment to the US Constitution guaranteed freedom of speech and of the press precisely to permit rabble-rousing libertarians – not merely the proponents of moderation – to exercise their voices in public. The public, like it or not, likes it.
So it comes down to this: Are Rupert Murdoch and his "unquestioning" board abusing the rights of minority shareholders and extracting personal rents for the Murdochs from the corporate chest? The Murdoch family own less than a third of News Corp. shares, and yet they act as if it was their property. The same was said of the Bancroft family and The Wall Street Journal before Murdoch convinced them that his entrepreneurship and his value creation were better for the title than their complacent attitude based just on the integrity of the news. Nor are these the only news organisations with special ownership restrictions. Thomson Reuters is majority owned by the Thomson family trust, and its minority shareholders are further constrained by the Reuters Founders Share Company, which can veto decisions affecting editorial integrity. The New York Times Company has a complex shareholding structure that limits outsiders' influence. Its recent financial plight forced the Sulzberger family to yield some control – but to a single outside provider of capital, not to those institutional investors who hold a majority of the stock. There are more examples of this around the world. News is, historically, a special business.
Moreover, institutional investors – including the mutual and pension funds for whom Amalgamated Bank acts – knew what they were getting when they bought shares of News Corp. The anti-Murdoch press has been full of stories for 30 years calling the company "Rupert Murdoch's News Corp." At a certain point – right at the beginning – the rule of caveat emptor applies. News Corp. shares should, in theories of finance, sell at a discount to the market on the basis of the likelihood of rent-seeking behaviour by the family. If the suit succeeds, might then Amalgamated Bank and its institutional investor clients be guilty of extracting rents from the Murdochs? Isn't the lawsuit then about power and money, and not about rights? And if the shares don't trade at a discount, then it's a statement of faith – in the family's sense of value creation, its entrepreneurship, and its integrity once the father, now aged 80, is no longer on the scene.
Whether the lawsuit succeeds is (just) a matter for the courts. Whether the business succeeds is probably still down to the Murdochs – children and stepmother, and probably father as well, for a while.
Source document: The lawsuit is a 46-page pdf file, courtesy of the LawProfessors blog.
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