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28 Jul. 2011 | Comments (0)

I couldn’t help but notice the similarities between the accounting scandals of the late 1990s, early 2000s at Enron, Tyco and WorldCom and the News Corp. phone hacking scandal that was brought to light this year. True, the use of illegal electronic gizmos to eavesdrop on news sources is more similar to the wiretapping authorized by the Hewlett-Packard chairman in 2005 to track down a news leak. But in the governance lens, the two actions are really quite different since once involved the board chairman and the other involved employees. The allegations made that News of the World employees somehow hacked the phones of sources to gain an unfair advantage in its newsgathering is more akin to fraud than Hewlett-Packard’s former chairman Patricia C. Dunn authorizing a third party to tap the phones of directors on her own board. (The incident eventually led to Dunn's exit from the company.) And more importantly the News Corp. employee actions are indicative of a serious “Tone at the Top” problem as was the case at Enron, Tyco, and WorldCom. While the phrase is used by many in the corporate governance space as a way to describe the culture senior management sets for the entire organization, its importance is often played down. Many people use it as a catch phrase to describe good corporate governance. But not many really understand what it is and why it is so important. Maybe the best way to describe Tone at the Top is to look at it as another risk – that being “management risk.” For example, if the top executives of Enron, Tyco and WorldCom had not fostered a culture of greed and winning at any cost then maybe the accounting scandals that brought them down may have never happened. In the case of News Corp., it isn’t an accounting scandal but rather an integrity scandal that so far has taken down the jewel of that company’s empire, the News of the World British tabloid. As investigations continue to see how widespread the phone hacking was, the News Corp. board has come under attack for being a “rubber stamp” panel for the Chair and CEO Rupert Murdoch. What hasn’t helped matters is a statement from the independent directors on July 20 that said the following: “The News Corporation Board of Directors was shocked and outraged by the allegations concerning the News of the World, and we are united in support of the senior management team to address these issues. In no uncertain terms, the Board and management team are singularly aligned and committed to doing the right thing.” The Tone at the Top issue involving the News Corp. situation is one that was front and center when Murdoch testified to a United Kingdom parliamentary committee earlier this month. Also, it has been raised by corporate governance experts and fellow directors. Recent blog posts from Lucy P. Marcus, founder and CEO of Marcus Venture Consulting and a non-executive independent director , and Suzanne Young, director of corporate responsibility at LaTrobe University, raise the Tone at the Top issue and the need for good independent directors as it pertains to the News Corp. phone hacking scandal. In addition to those blog posts, I thought a post by David A. Graham of The Daily Beast where he writes about the recently revised News Corp. Code of Conduct are Worth Reading …
  • Independent Directors Need to Step Up or Step Off, Lucy P. Marcus, HBR Blog Network, July 19. Excerpt: News Corp. independent board member Thomas Perkins (79), a director since 1996, said this on July 18: “I have a lot of faith in Rupert Murdoch. He’s a great guy, he’s a friend of mine. He's a genius. And I know he's devastated by this. Just devastated. And I worry about him, you know, physically, being about the same age.” News Corporation and the actions — or as some would note, the inactions — of its board highlight several important directions in the way that boardrooms need to be, and indeed are, moving. No longer will boards be able to conduct themselves behind closed doors without consequences. Investors have been loath to make waves when all was going well, but with the banking crises, HP, and now News Corp, investors are waking up to the fact that it is better to make changes in the good times than to be caught without trunks when the tide goes out.
  • Corporate Governance 101: the buck stops with Rupert Murdoch, Suzanne Young, The Conversation, July 22. Excerpt: News Corporation shareholders would have been justifiably disturbed when James and Rupert Murdoch told this week’s UK parliamentary committee hearing that they could not be held responsible for the behaviour that led to the scandal currently engulfing their company. As anybody with a basic understanding of corporate governance will tell you, the buck ultimately stops with the chairman and chief executive. Just because Murdoch Sr. was not made aware of the claims of wrongdoing early, as both the chairman and chief executive of News Corp he is ultimately responsible. He and his board of directors are there to serve the company’s shareholders, while acting in accordance with all legal and regulatory standards and diligently applying risk management. Responsibility for the governance and culture of a corporate reside with the board and chair. They must delegate responsibilities to management, but also ensure that management is accountable to them.
  • News Corp’s Damning Code of Conduct, David A. Graham, The Daily Beast, July 19. Excerpt: During his testimony before the Parliamentary Select Committee on Culture, Media, and Sport, James Murdoch repeatedly referred to News Corp.’s “code of conduct,” setting up the code as the cornerstone of ethics at the company, and potentially a “paragon” for journalists across the globe. His father, too, referred to it in a prepared statement that he was not allowed to read, saying, “Let me be clear in saying: invading people's privacy by listening to their voicemail is wrong. Paying police officers for information is wrong. They are inconsistent with our codes of conduct and neither has any place, in any part of the company I run.” Indeed, a look at the code of ethics reveals a series of alleged violations of the rules that would make a lesser media mogul blanch: Murdoch père called the hearing his “most humble day,” but remained defiant in the face of some questions and refused to take responsibility for crimes. James Murdoch, under questioning by a member of the committee, seemed unable to describe how employees were informed of and educated about the code. (News Corp. says all employees are sent the code.) But the code is relatively fresh—having last been updated in May of this year. “We have revised this Standards of Business Conduct to make it easier to read and use, and to clearly outline what we should all expect of ourselves as colleagues,” Rupert Murdoch, News Corp.’s CEO and chairman, wrote then—even as the scandal was looming and near to breaking open. “It’s an important responsibility and I’m honored to share it with you.”
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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