Investors demand higher standards at News Corp

Institutional investors in the United States and Australia have called for governance changes at News Corporation in the wake of the scandal surrounding allegations of phone hacking by News of the World journalists.Among its most strident critics has been US pension giant CalPERS, which this week issued a strong condemnation of News Corp’s corporate governance, particular its two-class share structure.

The Australian Council of Superannuation Investors (ACSI), an organisation representing superannuation funds that advises on ESG issues, has also joined the call for wide-ranging governance changes when the board faces shareholders at its next annual general meeting scheduled in New York in October.

“It doesn’t have an appropriate board and it is a board that never challenges its CEO and the CEO is its chairman,” ACSI chief executive Anne Byrne said.

“From the comments of Rupert Murdoch to the English Parliament recently it would appear he thinks the buck does not stop with him. We, like many other institutional investors, think that there has to be changes.”

News Corp is listed on both the NASDAQ and the Australian Stock Exchange. The top 500 companies on the Australian market have a combined market capitalisation of more than $1.35 trillion, of which News Corporation represents less than one per cent.

NASDAQ lists 85.5 per cent of News Corporation’s total share ownership as being held by 496 institutional investors.

Vanguard Group is the third biggest share-holder, with State Street Corp its fifth biggest. Its biggest institutional shareholder is US-based advisors Dodge & Cox which holds more than 149 million shares for clients.

News Corporation has 16 board members, nine of which are listed by the company as independent.

ACSI had previously locked horns in 2004 with Rupert Murdoch when it won a three-year legal battle with News Corporation over corporate governance.

Previously, ACSI had reluctantly backed a proposal to move the company from the more stringent corporate governance environment of Australia to Delaware. The legal dispute ensued after ACSI alleged News Corporation had gone back on commitments it had made around corporate governance and its move to Delaware.

CalPERS’ global equity and corporate governance chief, Anne Simpson, hit out this week at News Corporation’s shareholding structure, calling it: “a corruption of the governance system”.

“Power should reflect capital at risk – CalPERS sees the voting structure in a company as critical,” Simpson said.

“The situation is very serious and we’re considering our options. We don’t intend to be spectators – we’re owners.

CalPERS has almost seven million News Corporation shares as of June 30. This consisted of 5,492,998 restricted voting rights class A shares and 1,381,390 full voting rights B class shares.

A spokesman for CalPERS said that no decision had been made on what action it planned to take towards its News Corporation holdings.

CalPERS had not raised duel share structure concerns at News Corporation shareholder meetings in the past.

But Simpson said that one-share/one-vote had been a long-running corporate governance concern for CalPERS across its equity portfolio.

“One-share/one-vote is a CalPERS core principle because we believe that the control of a company should reflect its ownership,” Simpson said.

“That’s capitalism – it’s a design feature that is vital. Dual class voting is one way to pervert the alignment of ownership and control.

“The serious situation is the hacking scandal, and the market reaction shows how seriously this is being taken. I can’t say what the options are at the moment, but we have strong experience in governance reform.”

There has also been disquiet among institutional investors in Australia.

On the edges of a Russell Investment conference in Sydney last week there was also talk of the current crisis engulfing News Corporation and the likelihood of protracted regulatory and criminal investigations on both sides of the Atlantic.

One investor who declined to be named said their fund had decided to sell its stake of News Corporation.

“It is a small part of our overall portfolio and we just decided it wasn’t worth the trouble,” she said.

Other Australian investors such as the $6.1 billion Local Government Super had already been shorting the stock as a long-running policy to hedge ESG risk in its portfolio.

LGS chief investment officer Craig Turnbull said its ESG consultants had flagged News Corporation as a potential ESG risk. While the stock formed part of its passive indexed investments, the fund hedged its risk by shorting the stock.

Other institutional investors with passive mandates could find it more difficult to reduce their exposure to a company.

“Some investors with passive mandates do not have an option to sell out of the stock so it is imperative that there is more independence on the board,” Bryne said.