Shareholder anger threatens Murdochs' hold on News Corp

US investors lead lawsuit to stop alleged corporate governance anomolies committed by Rupert's clan
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The Independent Online

Small shareholders and furious corporate governance campaigners in the US are stepping up their effort to shake the Murdoch family's grip on News Corp, after the British newspaper phone-hacking scandal finally spread across the Atlantic.

The crisis of the past two weeks – which swept away any immediate chance of the company's acquisition of BSkyB, forced the closure of one of its bestselling newspapers, and culminated in the departure of two of the executives closest to chairman Rupert Murdoch – has made dissident investors even more determined to rectify corporate governance anomalies that they have tolerated for years. But not any more.

A legal assault on alleged nepotism by Rupert and his son James, and dereliction of duty by the rest of the board, was first launched earlier this year after News Corp spent $615m (£381m) to buy Shine, the television production company controlled by Elisabeth, James's sister.

Mr Murdoch said when he announced the acquisition that Elisabeth would join the News Corp board after the transaction was completed, but that has not happened. News Corp will have to decide in the next few weeks if she is to be nominated as a director at the company's annual meeting in the autumn, which is expected to become a focal point for corporate governance protests.

Last week, the attorneys behind the lawsuit dramatically increased its scope, alleging that the hacking scandal would never have got out of control if the board had been able to stand up to the Murdochs.

The lead plaintiffs in the suit – being brought in Delaware, and intended to become a class action on behalf of all News Corp shareholders – are a trio of activist investors with a long history of campaigning for reforms at companies they say are being poorly run. As new developments in the hacking scandal unfolded, one of them, the Central Laborers' Pension Fund in Illinois, said that News Corp was not living up to its responsibilities to outside shareholders.

The fund's involvement was the suggestion of the campaigning law firm Bernstein Litowitz. Class action lawyers with specialised corporate governance practices look for corporate targets, and then recruit lead plaintiffs to front the lawsuit.

The Central Laborers' Pension Fund represents 500,000 building workers from 12 unions. Dan Koeppel, its executive director, said: "We review the facts of an individual case, and we act where a board is not doing what it is supposed to be doing, where they are not representing shareholders but representing one or two of the company's primary people and acting only in their best interests."

The lawsuit alleges that Mr Murdoch "habitually uses News Corp to enrich himself and his family members at the company's and its public shareholders' expense". And it goes on: "Murdoch did not even pretend that there was a valid strategic purpose for News Corp to buy Shine. Rather, Murdoch publicly proclaimed that his purpose in causing News Corp to enter into the transaction was to bring Elisabeth back to the family business and to put her on News Corp's already conflicted and dominated board of directors."

Since 2010, the board has "inexplicably" allowed Elisabeth to participate as a non-voting observer, it says, revealing the acquisition as little more than an attempt to ensure that Mr Murdoch's children are in a position to run the empire after their father.

The suit also criticises the promotion of James, now deputy chief operating officer and No 3 in the company hierarchy. Lachlan, another Murdoch son who James has displaced as heir apparent, has been paid more than $4.3m for serving on the board since 1996, plus $8m in executive compensation and $8m as a severance payment when he quit his day-to-day role at the company in 2005, it says.

The other plaintiffs are Amalgamated Bank, which manages $12bn for institutional investors and is trustee for funds that hold nearly one million News Corp shares, and the retirement fund of New Orleans's public-sector employees.

"The amended complaint documents a seemingly endless stream of self-dealing and disregard for corporate governance by News Corp's board," said Mark Lebovitch of Bernstein Litowitz. "The latest revelations serve as the final straw for News Corp shareholders, who are now fighting to keep another Murdoch family member from joining the board and perpetuating the culture that has made News Corp a family fiefdom for so long."

News Corp's large board includes political grandees, former executives from across the corporate world, and long-time employees of Mr Murdoch. The former British Airways boss Rod Eddington, as the lead non-executive director, is the formal conduit for shareholder concerns, but the company has tapped the former New York City schools boss Joel Klein, its newest – and most ostensibly independent – director, to oversee the internal investigation into the hacking scandal.

Anger at the weak board – some have been in post since the Seventies – was concentrated last year into a rebel shareholder motion demanding a say on executive pay, which was nearly passed. News Corp will post meeting materials to shareholders in a few weeks, setting out which shareholder proposals have been included on the ballot this year. The meeting is expected to be held in October.