The NY Times reports that:
In a startlingly damning report after months of investigation into the hacking scandal at Rupert Murdoch’s British newspapers, a parliamentary panel here concluded on Tuesday that he was “not a fit person” to run a huge international company, amplifying a public outcry against him, but threatening further bruising divisions within the political establishment. ...
“On the basis of the facts and evidence before the committee,” the report said in one passage, “we conclude that, if at all relevant times Rupert Murdoch did not take steps to become fully informed about phone hacking, he turned a blind eye and exhibited willful blindness to what was going on in his companies and publications.”
“This culture, we consider, permeated from the top throughout the organization and speaks volumes about the lack of effective corporate governance at News Corporationand News International,” its British newspaper subsidiary.
“We conclude, therefore, that Rupert Murdoch is not a fit person to exercise the stewardship of a major international company,” the report said. ...
The parliamentary panel’s report on Tuesday said that, by ignoring “evidence of widespread wrongdoing,” News Corporation and its British newspaper subsidiary News International exhibited “willful blindness, for which the companies’ directors — including Rupert Murdoch and James Murdoch — should ultimately be prepared to take responsibility.”
The question I want to take up here is whether News Corp's board of directors will be obliged "to take responsibility" for the mess as a matter of corporate law.
In an April 20 post, I explained that:
You'll recall from our earlier coverage that News Corp reincorporated in Delaware a few years ago, so any corporate law claims arising out of the scandal will be subject to Delaware law. ...
Since the Caremark decision the board of directors of a Delaware corporation has had a duty to ensure that appropriate “information and reporting systems” are in place to provide the board and top management with “timely and accurate information.” Accordingly, the board of directors’ duty to be attentive to the business of the corporation “includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards.” (In re Caremark Intern. Inc. Derivative Litigation, 698 A.2d 959, 970 (Del. Ch. 1996).) ...
[In bringing a Caremark-based claim,] plaintiff might allege that red flags were raised by such systems or otherwise that the directors ignored. ...
All of this, of course, must be considered in the shadow of the Delaware Supreme Court's strong emphasis that “a claim that directors are subject to personal liability for employee failures is ‘possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.’” Stone v. Ritter, 911 A.2d 362, 372 (Del. 2006). The Supreme Court further emphasized the need for proof of a sustained or systematic failure by the board and the “quite high” bar to liability thereby established:
In the absence of red flags, good faith in the context of oversight must be measured by the directors’ actions “to assure a reasonable information and reporting system exists” and not by second-guessing after the occurrence of employee conduct that results in an unintended adverse outcome.
But this just brings us back to the question ...: Did the phone hacking scandal throw up red flags that were "numerous, serious, directly in front of the directors, and indicative of a corporate-wide problem"?
I reviewed the UK report. Unfortunately, while it provides evidence from which one might infer that that Rupert and James Murdoch were (or, at least, should have been) aware of serious red flags, it is unclear as to the knowledge of News Corp's board members. The word board appears only three times, while the word director(s) appears only 4. In context, moreover, those references seem to go solely to the board of News Corp subsidiary News Group Newspapers Ltd.
In assessing whether the alleged red flags were brought to the attention of the News Corp parent holding company board, one fact jumps out at me:
Rupert Murdoch explained his claimed lack of direct involvement in the News Group Newspaper titles as follows: “the News of the World is less than 1% of our company. I employ 53,000 people around the world”. In November 2011, James Murdoch said that “this is a company of over 50,000 employees globally, and—appropriately so—senior management in the company, myself included, rely on executives at various levels in the business to behave in a certain way”.
Caremark claims have had little success when based on claims arising out of misdeeds by subordinate managers of economically insignificant subsidiaries. OTOH, one can argue that the newspapers are a crown jewel whose significance in the context of News Corp's firm culture is not just economic. As the report observed:
Rupert Murdoch’s close involvement with his newspapers is entirely understandable: he built his empire from a single publication in Australia and print and ink, it can be said, are in his blood.
But, even so, red flags in an operation amounting to less than 1% of a company need to be especially visible before the board can be held responsible for having missed them. After all, if liability arises it does so because of a pervasive "corporate-wide problem," a 1% subsidiary doesn't cut it.
For example, the report states that "Within the corporate culture of News International, it seems clear to us that there were no incentives to convey unwelcome news, if problems could be contained ...." This might suggest that the News Corp board failed to ensure that an adequate "corporate information and reporting system" existed. Again, however, it is important to remember that after Stone v. Ritter, the "necessary conditions" for Caremark liability are "(a) the directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention." It seems doubtful problems at a 1% subsidiary rises to those levels.
In sum, while the report is damning with respect to Rubert and James Murdoch, I don't think it gets us any closer to reaching conclusions about the News Corp's board of directors as a whole. At this point, I'd still bet that there will be no Caremark liability for the non-Murdoch directors.
