Rupert Murdoch is not strictly the founder of News Corp – it started life as News Limited, the owner of an Adelaide newspaper, under his father – but he has embodied it for the past 59 years. The media empire is built around his gambles and opinions, with little regard to what others think.
Mr Murdoch is thus – although they might not want to acknowledge it now – a role model for the younger generation of internet entrepreneurs who are bringing their businesses to the stock market through initial public offerings. They too want to keep control while raising capital from others.
Mr Murdoch this week tried to placate his restless shareholders, some of whom are suing him about the phone-hacking debacle in the UK, by announcing a $5bn share buy-back. It is a bit late to start behaving sensitively toward them, given the way that he has overridden their interests since the depth of misbehaviour at News International emerged.
No one at News Corp, not even Mr Murdoch himself, bothers to pretend that it is managed according to any other principle than what the chairman wants. Any publicly owned company that took seriously investors’ wishes – never mind those of politicians and regulators – would have forced Rebekah Brooks, chief executive of the UK paper operations, to leave immediately.
Instead, Mr Murdoch flew to London to stand by her side and declare that she was “the priority”. He made it appear as if he would rather lose both the News of the World and the first delayed and now abandoned effort to acquire 100 per cent of British Sky Broadcasting than sacrifice her.
Mr Murdoch not only behaves as if News Corp is still the family business but has also displayed erratic judgment.
His boldest recent moves – before the attempt to scoop up BSkyB – were to acquire MySpace for $580m in 2005 and then sell it for $35m, and to spend $5bn on Dow Jones in 2007, later writing it down by $2.8bn.
No wonder the shareholders – or rather the holders of its A shares with limited voting rights – are unhappy. But there is little they can do, since the Murdochs exercise control through News Corp with a 38 per cent stake in the B voting shares, just as they largely control BSkyB through News Corp’s 39 per cent stake.
This should stand as a warning to the investors who are flocking to IPOs of social networks and internet companies. Since Google’s IPO in 2004, it has become de rigueur for Silicon Valley enterprises not only to adopt a dual-class share structure to grant the founders voting control but also to declare that this is good for the disenfranchised shareholders.
Zynga, the online games company, which filed for an IPO last week, is the latest internet company to adopt a share structure to assure continuing management control to its founders – in this case a triple class structure in which only Mark Pincus, Zynga’s founder, will own C shares. Facebook has already set up a dual class structure, and LinkedIn and others have dual class equity.
Marc Andreessen, the internet entrepreneur and venture capitalist, has argued that “the interests of public shareholders will often be better served by ceding voting control to the founders and key leaders of the company” because that enables the latter to focus on building a business without being distracted by the short-term “noise” of stock markets.
In some ways, News Corp is testimony to the benefits of having a strong-willed entrepreneur in charge. Mr Murdoch has built some very large businesses from scratch – including BSkyB and Fox News – by defying conventional wisdom and taking on the establishment. As a disruptive force, he is hard to match.
Lately, however, investors have lost more than they have gained from allowing him control. Rather than building a business that will eventually repay their patience, Mr Murdoch has made poor acquisitions, given control of a large – and, as it transpires, very troubled – division of the company to his son James, and given unstinting support to executives who have badly mismanaged things.
“Founders talk about the long-term interests of the company but you can always blame your errors on the long term,” says Charles Elson, a professor at the University of Delaware. “By the time the long term arrives, the founder is dead and so are his long-suffering shareholders.”
Mr Murdoch, who is 80, wants to hand on control of the business to his children, which promises to be (at best) more of the same. Before the Fleet Street debacle, James had earned respect from investors when he ran BSkyB, and Elisabeth built up Shine Group, a television production group, before it was acquired by News Corp this year.
But there is no sign that they would run News Corp, however power gets divided between them, much differently from the way their father has done so over the past six decades. They would inherit his grand ambition and his view of the company as their family’s fief.
Some investors and analysts still place their faith in Chase Carey, the company’s chief operating officer, and the other professional executives around the Murdochs, to tone down their swashbuckling instincts and to take the shareholders’ interests into account. But, in the end, they work for the family.
The theory of family-run, dual-class share structure companies such as News Corp is that they are good for their investors in the long run. After almost 60 years of Rupert Murdoch, it has not turned out that way.
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