News Corporation's key investors are - for the moment - standing behind Rupert Murdoch. Kingdom Holding Company, the largest external shareholder, is owned by the Saudi prince Alwaleed Bin Talal, who has come out strongly in support of Murdoch, saying: "The crisis does not make Kingdom Holding blink at all. It makes our partnership stronger." The investment guru Donald Yacktman, whose company has a 3.2 per cent stake in News Corp, also backed Murdoch. According to one of the portfolio managers at the Yacktman Funds, the hacking scandal will be "a short-term reputational hit".
Other investors are less sanguine. A group of US shareholders led by Amalgamated Bank is suing the firm for its handling of the crisis. The complaint, filed in a Delaware court, alleges: "It is inconceivable that Murdoch and his fellow board members would not have been aware of the illicit news-gathering practices [at the News of the World]." The shareholders criticise the culture of nepotism at News Corp, saying: "Murdoch has treated News Corp like a family candy jar, which he raids whenever his appetite strikes."
News Corp's share price has consistently traded with a so-called Murdoch discount - a recognition, perhaps, that shareholders in the firm do not have many of the powers that they would have if they owned the stock of a rival firm. Murdoch engineered News Corp's equity to ensure that much of the publicly traded shares are "non-voting", meaning that even if investors disagree with his decisions, many are virtually powerless to challenge them.
Any company formed in the image of its CEO will suffer unless it has a very clear succession plan. James Murdoch's fumbling attempts to manage the crisis in the UK will only heighten the market's suspicion that the heir apparent is a lightweight. His father's dictatorial style has discouraged activist investors from backing News Corp, which is one of the reasons for the shares' poor performance, compared to both the S&P 500 and its US peers: Disney, Time Warner and Viacom.
News Corp shares fell steeply on 11 July as the company referred its bid to take over BSkyB to the Competition Commission, buying time to push through the purchase of the 61 per cent of BSkyB it doesn't already own. More worrying for Murdoch was the spreading of the privacy-violation scandal to other News International titles. Rumours are now circulating that Murdoch is considering disposing of the entire News International business. News Corp shares sank by 13 per cent between 5 and 11 July, with daily trading volumes up to ten times the historical average.
What is at stake here is the issue of corporate governance. A comparison with Enron may seem alarmist. Enron was cooking its books to overstate its profitability; News Corp is "merely" suffering reputational damage in one regional outpost of its global media empire. Given the steep decline in News Corp's share price, however, and the sense of panic coming from analysts, investors and the wider media, Murdoch will have to act quickly to stave off an Enron-style crisis.
When a company suffers a sudden loss of investor confidence, all former certainties about the firm are called into question. To cite another recent example, sub-prime exposure was not enough to bring down Lehman Brothers; it was what the sub-prime exposure revealed about the firm's management practices, as well as the suggestion that there might be other skeletons in the closet. The optimistic platitudes that continue to pour in from some US investors about the relatively minor role of newspapers in the News Corp media portfolio miss the point entirely. The problems at News International carry a serious message about the way Murdoch runs his business. Just as the issues at Enron and Lehman seemed localised and containable at first but gathered momentum as investors lost faith in the management, all other Murdoch-run organisations have been tainted by the hacking scandal.
Corporate crisis management is like medieval surgery: you hack off infected limbs and hope that the damage will not be terminal. This corporate amputation is usually directed at management responsible for the crisis but it can include whole business divisions. Shutting the News of the World may have seemed a bold move but this kind of decisive statement works only if the problem is contained. If News International is next to go, and the long-time Murdoch lieutenant Les Hinton is also sacrificed, it may be that the news cycle will move on. If not, then companies within the News Corp stable, from the Wall Street Journal and BSkyB to Fox Broadcasting, will come under threat.
Murdoch's other big problem is that the scandal has highlighted previous missteps. One of the focuses of the US investor lawsuit is Murdoch's purchase of his daughter Elisabeth's Shine Group for £415m in February, a move that the plaintiffs claim was engineered merely to bring his daughter "back into the News Corp fold". Meanwhile, MySpace was purchased for $580m in 2005 and sold recently for $35m. While the Dow Jones purchase may still bear fruit, it is certain that the $5.6bn price was far too high.
This scandal reminds us that there is something very old-fashioned about Murdoch. His management style, his obsession with print news in an era of digital media, the MySpace fiasco . . . Some have suggested that Chase Carey, the News Corp chief operating officer who looks increasingly likely to become Murdoch's successor, believes that the company should shed its print titles. What is certain is that the News of the World won't be the last corporate victim of a crisis that could still bring down a media empire.