Some questions for News Corp analysts

August 10, 2011

Dear analysts identified on the News Corp website as followers of the company (and a few other interested parties),

the 2010-11 full year News Corp analyst conference call on Wednesday night US time (Thursday morning Australian time) will be a very important opportunity to question the company's corporate governance and financial direction after the biggest global media blitz of negative publicity ever suffered by an S&P500 company.

I'm a former News Corp journalist turned shareholder activist who is a director of the Australian Shareholders' Association and will be flying from Melbourne to attend this year's News Corp AGM in New York in late October. (See transcript of last year's exchanges and accounts of the 9 previous shareholder meeting exchanges with Rupert over the past 12 years.)

I've been appointed News Corp "company monitor" by the ASA board with an explicit mandate to pursue governance improvements which would benefit all News Corp shareholders. Hence this email to financial analysts who have considerable influence over the company, access to key executives and the opportunity to question the management 4 times a year on the earnings conference calls.

The upcoming conference call will be the most important in News Corp's history with many thousands of people listening to the webcast.

In light of the UK hacking scandal and market underperformance of News Corp in recent years, the three governance changes being pursued by the Australian Shareholders' Association are as follows:

1. The appointment of a clear majority of independent non-executive directors to represent the 87% of News Corp's total issued capital owned by non-Murdoch shareholders.

2. Clear separation of the role of CEO and chairman in line with the UK and Australian governance model of having an independent non-executive chairman.

3. An unwinding of the dual class voting gerrymander which denies a vote to 70% of News Corp's shares and entrenches the existing 39.6% voting control of the Murdoch family.

Strong support for previous attempt to unwind dual class voting structure

Acting alone, I put up the following shareholder resolution at the 2007 News Corp annual meeting which can be seen on page 18 of the relevent proxy statement lodged with the SEC.


That the News Corporation board of directors submit a proposal to holders of class A and B shares within the next 12 months which, if approved, would create a company with just one class of share.


When News Corporation first announced its reincorporation proposal on 6 April, 2004, it justified the move, in part, on the following grounds:

“The reincorporation is expected to benefit all shareholders by increasing the scope and depth of the shareholder base, improving trading liquidity, enhancing access to the capital markets and making the Company's shares eligible for inclusion in a variety of US-based indices.”

Unfortunately, the move initially caused considerable share price weakness as News Corporation was ejected from the Australian indices, triggering large sales by Australian funds.

Whilst both classes of share were included in the Australian indices, unfortunately Standard & Poors only allows one class of share from each company to be included in the S&P500 index on the New York Stock Exchange.

Given this has to be the most populous share on issue, News Corp's B Class voting shares are not included in the S&P500 index. Therefore, many index funds are compelled to buy non-voting A Class shares and holders of the B Class voting shares suffer a lower than necessary share price.

Having a single class of share would add almost 1 billion News Corp shares into the S&P500 index, lifting the total to more than 3 billion shares.

Creating a single class of share, possibly giving A class shareholder full voting rights, would also serve the purpose of diluting Murdoch family control from approximately 39% of the voting stock to less than 15% of the total stock. This would likely trigger a re-rating of the stock as investors build in a potential takeover premium.

The Grant Samuel report accompanying the Liberty Media Exchange proposal noted the “adverse” consequences of not having Liberty as a counter balancing force to the Murdoch interests on the News Corporation share register. Creating a single class of share would dilute Murdoch family control and allow the independent shareholders to appoint a majority of directors and determined key future issues such as a succession management.

As News Corporation discovered when it first approached Dow Jones & Company, a two tier voting system can appear highly undemocratic and discourage attractive takeover bids. News Corp's suite of strategic assets would be highly attractive to private equity bidders, yet the two-tier voting structure discourages their interest.

News Corp is a company which passionately promoted the idea of spreading democracy to places like Iraq, so it seems inappropriate that our own system of democracy is severely gerrymandered with almost 70% of the shares on issue not having voting rights.


At the time, 60% of the independent News Corp B class shareholders (ie excluding the Murdoch and Malone interests) who voted, chose to support this shareholder resolution despite the clear articulated opposition of the bull board.

During the debate at the 2007 annual meeting, Rupert Murdoch defended the gerrymander on the basis that it provided "management stability". Indeed, the board statement in the proxy statement spelt this out in great detail.

Since then, this "management stability" has included substantial losses for shareholders through the $6 billion acquisition of Dow Jones and clear failures of governance when it came to responding to the hacking scandal since charges were first laid against a company employee and a contractor more than 5 years ago.

This year we also had a $US600 million related party transaction with Elisabeth Murdoch over the Shine acquisition which delivered company cash to Rupert Murdoch's daughter without seeking approval from independent shareholders - something which would have been required under Australian law. Unsurprisingly, class action litigation has followed.

Similarly, the transaction to swap Liberty Media's equity stake in News Corp for the company's controlling stake in DirecTV has also clearly damaged shareholder value given that DirecTV is now capitalised at $US32 billion, whereas the whole of News Corporation is only worth $US38 billion.

Substantial underperformance over past 4 years

Rupert Murdoch claimed at the 2007 annual meeting that News Corp had just achieved the milestone of surpassing all its traditional US media rivals in terms of market capitalisation.

Four years later, Disney has a market capitalisation of $US64.4 billion - almost double News Corp - and even Comcast is capitalised at $US57 billion.

Such financial under-performance would be reduced if genuine governance reforms were pursued and the dual class voting structure unwound.

It would be appreciated if some of the issues raised in this email could be raised on the conference call. Some specific questions could be as follows:

1. Given the strong shareholder support in 2007 for moving to a single class capital structure, is this something management would consider if it would clearly help deliver better financial returns for shareholders?

2. What governance changes at board and management level is being contemplated after the events in the UK?

3. The hacking scandal would obviously have been discussed at the two day board meeting held in LA this week, is there anything to report on where the independent directors sit on this issue?

4. The hacking scandal ended the proposed BSkyB mop-up bid, what are the prospects of resurrecting this over the coming years?

5. In light of the closure of the News of the World, the reputational damage caused by the hacking scandal and the diminishing profits of newspapers worldwide, why are shareholders still footing the substantial losses incurred by papers such as The Times, The New York Post and The Australian? Does it now make sense to restructure or separate out the newspaper division?

Finally, below is a package of other articles I've written over the past month about the Murdoch governance challenges:

Murdoch board leaks ahead of crucial analyst conference call
Crikey, Wednesday, August 10 (pay)

Murdoch hypocrisy over free speech campaign
Crikey, Thursday, August 4

Q&A panel discussion
ABC1, Monday, August 1

Blair, Murdoch and the Iraq war - a study in power
Crikey, Wednesday July 27, 2011

Interview on BNET about Australian media regulation
BNET, Monday, July 25, 2011

What would a break up of the Murdoch empire look like?
The Drum, Friday, July 22, 2011

Blocking Foxtel's Austar bid opens the door for pressure on the Murdoch gerrymander
Crikey, Friday, July 22 (pay)

If Glenn Mulcaire sings, Rupert can kiss goodbye to The Sun
Crikey, Thursday, July 21

Interview on Murdoch testimony with Eleanor Hall on The World Today
ABC radio, Wednesday, July 20

No smoking gun and great advertisement for an Australian inquiry
Crikey, Wednesday, July 20 (pay)

One last trip to New York for a Rupert AGM show down
Mayne Report, Tuesday, July 19

How to cross-examine Rupert Murdoch
Crikey, Tuesday, July 19

Ranking the 16 News Corp directors for independence
Crikey, Monday, July 18

Why Australia needs an inquiry into expanding Murdoch domination
ABC website The Drum, Monday, July 18

Is it time for Rupert to go
Crikey, Friday, July 15

Interview with SBS TV news
SBS, July 14, 2011

With BSkyB bid dumped, why isn't Foxtel's Austar offer under pressure?
Crikey, Thursday, July 14, 2011

Rupert's crisis blows up $6 billion in a week
ABC website The Drum, July 13, 2011

Murdoch kills paper, bodycount rises
ABC website The Drum, July 8, 2011

Why hacking scandal should impact on Australia Television bid
Crikey, Tuesday, July 5, 2011

There will be thousands of people listening in to the conference call, so good luck in the first News Corp cross-examination since those extraordinary parliamentary committee hearings last month.

If anyone has any queries on this material, please email or send a direct message through Twitter to @maynereport.

Kind regards, Stephen Mayne
Director, Australian Shareholders' Association