Sun arrests threaten News Corp
The arrests over the weekend of a further five journalists employed by The Sun suggest that News Corp is entering a new phase of the crisis that started last July.
The arrests of the journalists, along with a police officer, member of the armed forces and a Ministry of Defence employee, were part of Operation Elveden. This is Scotland Yard’s investigation into bribery of police officers (though the weekend’s arrests indicate that not only the police may be involved). Significantly it appears that senior News Corp executives and The Sun’s editor Dominic Mohan were not aware that the arrests were going to take place. But it appears the company’s Management and Standards Committee (MSC), which is leading the internal clear-up, gave information to the police that led to the arrests.
The immediate threats to News Corp are clear. Already there has been speculation over the future of The Sun. The company has already issued a public defence of the paper and a commitment to its future but this is unlikely to steady nerves. No-one expects that these arrests will be the last. The role of the MSC is also creating divisions within the company, with some journalists seeing it as selling them out. More broadly the arrests will further damage the image of the company, especially if they lead to action in the US under the Foreign Corrupt Practices Act. Labour MP Tom Watson has already linked the scandal to Ofcom’s test of whether News Corp is ‘fit and proper’ as an owner of BSkyB. This is something investors in both companies need to keep an eye on.
The arrests have also already led some to express concerns that the police investigations have overstepped the mark. Some fear that the press will become more cautious. There is merit in this argument, but we need to remember how we got here. The conflation of “the public interest” with “what the public is interested in” is a recurring theme in this scandal. Anyone can think of examples where phone-hacking could clearly have a public interest defence. Similarly obtaining sensitive information in order to expose corrupt practices may sometimes involve practices the public might be uncomfortable with. The line to be walked on these issues is not clear, and probably never can be defined with finality. However, to say that it is difficult to define where the line should be drawn is not to say that we can act as if it doesn’t exist. Unfortunately that seems to have been what has happened too often, and the threats now facing News Corp lead directly from this.
Shareholders might ponder whether there is a question of organisational culture here too. News Corp is a company that has routinely flouted well established governance principles, and has insulated itself from independent shareholder pressure through its dual class share structure. Its approach seems informed by a kind “never retreat, never apologise” mindset, as seen in its aggressive (and mendacious) attacks on politicians and rival papers when the allegations of widespread phone hacking first emerged in 2009.
For investors it is at board level that reform may still be required. James Murdoch’s name again cropped up in a number of articles on the crisis over the weekend, with some hinting that further dangers lay ahead. Certainly he is inextricably linked to the company’s failure to deal with the hacking issue much earlier, with questions still outstanding over what he knew and when.
Investors might also want to consider whether any directors could face charges under the Regulation of Investigatory Powers Act (RIPA). Former News of the World reporter Clive Goodman and private investigator Glenn Mulcaire were both charged with RIPA offences in 2006. The arrests set the wheels in motion to expose phone hacking. Notably Section 79 of the Act includes a direct reference to the role of directors. Charges under RIPA and a negative decision by Ofcom on the ‘fit and proper’ test might currently be risks with a low probability. But they are potentially very severe, and with each new arrest the threat posed by them to shareholder value increases.