What began as a phone hacking scandal in the U.K. for News of the World
has now mushroomed into a much larger scandal covering several countries and upper levels of News Corporation management. In a model of brevity, Viet Dinh issued a statement on behalf the independent directors of News Corp. today: "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."
In light of all that is happening, this brief statement is an excellent summary of what independent directors of a corporation should strive to do. Let's spend a few minutes thinking about the different facets of the scandal facing News Corp.
1. Dual role: Murdoch's dual role of CEO and Chairman cannot continue. Even in the best of times, combining these two roles places too much power into the hands of a single individual. And because that individual controls what information makes it to the full board, the full board is not able to fulfill its fiduciary duties to shareholders effectively.
2. Independent directors: One challenge that corporations controlled by founding families who remain significant shareholders often have is identifying directors who will be truly independent. When a single person or family is responsible for your appointment to a board and could easily oust you from a prestigious and lucrative board appointment, there is a tremendous temptation to pull punches. It is critical that a board's nominating committee identify individuals who aren't afraid to speak up and to ask questions.
3. Board reorganization: News Corp. took the step of establishng an independent committee, the Management and Standards Committee, described as outside of News Corp. The MSC is charged with recommending compliance, ethics and governance procedures. However, the MSC will, according to the press release "report directly to Joel Klein" a News Corp. EVP and a member of the board of directors. As Klein is a News Corp. EVP, this MSC will not be as indpendent as it might be if it reported to a board committee or to the full board.
4. Succession planning: As heads roll, it will be interesting to see whether News Corp. has successors in place and whether the board has confidence in those who have been groomed to take the positions of those who resign or are terminated.
5. Email and document retention policies: The scandal has been a front page reminder of the need for companies to review their email and document retention policies on a regular basis and to ensure compliance with those policies.
6. Internal and external investigations: At this point in time, I would expect that outside firms hired by the independent directors of News Corporation have been engaged and are actively investigating the facts to determine the nature and extent of wrongdoing. Both the internal investigations and the government investigations will take many, many months to complete. This kind of under-the-microscope scrutiny should, in the long run, lead News Corp. and other companies watching News Corp. to make a number of changes with respect to newsgathering, governance and compliance practices.
Earlier today, in a three-hour long hearing a committee member referenced Enron and reminded the Murdochs of the concept of "willful ignorance," suggesting that this scandal could perhaps rival the Enron scandal. The reaction of financial regulators and governments to these types of high-profile scandals will require regulators to face a difficult balancing act. How much regulation is needed? How little can we have, while still providing appropriate protection to the innocent?