James Murdoch's Resignation Raises Leadership Question

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- The resignation of James Murdoch as executive chairman of the U.K. newspaper arm of News Corp. ( NWS), which was announced today , comes at a point in time when the news for the entire Murdoch media empire just keeps getting worse.

In what should have been a good week for the Murdoch clan, who just days ago released a new publication, the Sun on Sunday , they instead confronted new and damning allegations that the Sun -- Britain's most popular daily paper -- has engaged in a pattern of corrupt payments to British officials, including representatives of the police department, the military, and other branches of government in exchange for information.
James Murdoch

James Murdoch's resignation also underscores the unanswered leadership issues that have plagued the company since the scandal began. That scandal shuttered the News of the World last year and now seems to similarly threaten other flagship holdings as it broadens in scope from phone hacking to bribery.

The worst of it may be that it was entirely predictable, especially for veteran media professionals like the Murdochs. By failing to establish a strong leadership position from the get-go, by relying on quick and sporadic PR fixes instead of a credible and proactive company-wide audit, the Murdochs have left the remnants of their media fortress unprotected.

The lesson is ominous. It's not how you handle the crisis; it's how you handle the peacetime that matters most. If you fail to lead long enough and conspicuously enough, you will exhaust all the crisis management tools that may once have been at your disposal.

Consider recent events. Earlier this month, police arrested five senior Sun staff for alleged bribery of police and other public officials. It was the public testimony by deputy assistant commissioner Sue Akers, who is spearheading the UK criminal investigation into Murdoch's holdings, which touched off the latest round of negative press about the Sun's culture of corruption. All told, dozens of News Corp. executives have been arrested or forced to resign as a result.

At the same time, Murdoch's woes relating to the original hacking scandal continue to shock. Just last week it was revealed that former Sun editor and News International CEO Rebekah Brooks was informed by authorities that the police had evidence of widespread phone hacking by a News of the World investigator as early as 2006, belying the company's public claims that the hacking was far more limited in scope.

With salacious details about the scandal continuing to emerge, and Murdoch now facing bribery charges under U.K.'s domestic anti-bribery laws, the days of quiet on the U.S. side of the pond could rapidly draw to a close.

Reports indicate that, in recent weeks, U.S. authorities, including the Federal Bureau of Investigation, have intensified their investigation into whether Murdoch employees may have violated the U.S. Foreign Corrupt Practices Act (FCPA), the law that prohibits companies and individuals from bribing officials to obtain or retain business abroad. Aker's testimony is sure to bolster that effort. The cost of a full-scale FCPA battle in terms of fines, legal fees, and associated shareholder derivative suits could be enormous, potentially doubling the nearly US $1 billion that commentators estimate Murdoch has already spent to fight his companies' legal battles. But the Murdochs have more than money to lose. Thus far, their U.S. holdings, including the Wall Street Journal and Fox News, have not been implicated in the hydra-like scandal. To date, there is no hard evidence that they will be, although one may wonder if the FCPA investigation might spawn a sweep of the entire news media industry, not unlike those we have seen in other industries such as pharmaceuticals, medical devices, and financial services.

Certainly, the tepid coverage of the scandal by Murdoch's stateside outlets has not burnished the corporation's U.S. image. Nor did Murdoch's $1 million donation to the U.S. Chamber of Commerce in the months leading up to its now high-profile campaign to reform the FCPA.

Meanwhile, a recent Wall Street Journal editorial entitled "Justice's Bribery Racket" legitimately questions whether FCPA enforcement may have gone too far. But the appearance of conflict, however unfair, can only stoke the simmering fire.

If Rupert Murdoch wants to safeguard his properties from the same fate that befell News of the World, and now the Sun, he must do what he would not do seven months ago. The challenge for Murdoch, and other foreign companies facing an FCPA prosecution, is to use the critical time before charges are filed to lead rather than to simply react.

Murdoch must designate a credible leader, probably from outside the organization, to determine if the corporate house needs further cleaning and, if it does, that anointed leader must spearhead the effort.

He or she must assure the public that immediate corrective action will be taken if problems are found. The white knight must personally communicate to all stakeholders that News Corp. intends to comply with the law in every jurisdiction where it operates, and that the compliance programs at all Murdoch holdings are best-in-class.

Good corporate citizenship starts at the top and the message must be delivered from there. And, finally, the new leader must continue to cooperate with the investigation, as companies that do so have historically received credit for their efforts.

The news media lives and dies on public trust. Whether the Murdoch brand can survive a frontal FCPA assault may depend on his remembering that fact. Rupert and James Murdoch have already seen the consequences of failed leadership. To knowingly repeat that failure at this juncture would be tantamount to self-immolation.

Follow Richard Levick on Twitter@richardlevick
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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