Is News Corp. suffering from “Cookie Jar Syndrome”?…

August 16, 2011

Never underestimate the power of a scandal.

Two years ago (almost to the day), we footnoted about News Corporation’s (NWS) new agreement with a former Chief Operating Officer. At the time, Michelle wrote that it “sets new standards for saying so little.”

Fast forward two years, and we’re seeing a dramatic difference in the 10-K that News Corp. filed yesterday, as well as the press release attached to an 8-K that the company filed last week. Both SEC filings devoted a fair amount of space to the phone hacking scandal that resulted in members of Britain’s Parliament grilling Rupert Murdoch and his son last month.

The phone hacking scandal has actually been unraveling for more than 5 years now – people have gone to jail and been fired over it – yet News Corporation never included the words “phone hacking” in a regulatory filing until last week. (It did refer to it in other ways in filings last month, but more on that in a minute.)

In the August 10 earnings release, the company included a paragraph in the “Other Items” section which described the mess as follows:

“In July 2011, the Company announced that it would close its publication, News of the World, after allegations of phone hacking and payments to police. As a result of these allegations, the Company is subject to several ongoing investigations by U.K. and U.S. regulators and governmental authorities, including investigations into whether similar conduct may have occurred at the Company’s subsidiaries outside of the U.K. The Company is fully cooperating with these investigations. In addition, the Company has admitted liability in a number of civil cases related to the phone hacking allegations and has settled a number of cases. The Company has taken steps to solve the problems relating to News of the World including the creation and establishment of an independent Management & Standards Committee, which will have oversight of, and take responsibility for, all matters in relation to the News of the World phone hacking case, police payments and all other connected issues at News International Group Limited (News International), including as they may relate to other News International publications.”

And in yesterday’s 174-page 10-K, News Corp. includes 18 references to the “phone hacking” debacle, starting on page 1. In addition to reiterating the disclosures from last week’s press release, the filing adds:

“…The [Management & Standards Committee, or “MSC”] appointed an independent Chairman, Lord Grabiner QC, and will report directly to Joel Klein, Executive Vice President and a director of the Company, who in turn will report to Viet Dinh, an independent director and Chairman of the Company’s Nominating and Corporate Governance Committee. Both directors will update the Company’s Board of Directors. The MSC will ensure full cooperation with all relevant investigations and inquiries into News of the World matters and all other related issues across News International and will conduct its own internal investigations where appropriate. The MSC will also be responsible for reviewing existing compliance systems and for proposing and overseeing the implementation of new compliance, ethics and governance procedures at News International. The Company has engaged outside counsel to assist it in responding to U.K. and U.S. governmental inquiries.”

Variations of the disclosure appear seven other times in the filing, including the disclosure that News Corp. “is not able to predict the ultimate outcome or cost associated with these investigations.” It warns investors (a few times) that the investigations could “damage our reputation and might impair our ability to conduct our business,” that it’s “probable” that more claims will be filed, that it can’t predict how big of a financial hit the company may take; furthermore, it adds that “civil, administrative or criminal fines or penalties” may be assessed before it’s all over.

What’s noteworthy is that until last week, News Corp. never specifically disclosed details about the scandal to investors who took the time to read the company’s filings. Starting in July, just before the incident exploded, the company issued a few press releases, such as this one, filed July 7, that referred to it with such phrases as “very serious problems” and “sullied” behavior. But if you, as an investor, didn’t already know what the company was talking about, you certainly wouldn’t understand it – or the gravity of the problem – from News Corp.’s SEC filings.

It will be interesting to watch as Murdoch and his leadership team attempt to resolve this mess over the coming months and, perhaps even years. The good news for investors is that the stock has begun to bounce back from its scandal-ridden lows. More good news comes from the fact that the company seems to have finally realized that it got caught with a hand in the cookie jar, and has decided that the best policy going forward is ‘fessing up to investors, rather than trying to pretend the whole thing never happened.

Image source: Buenos-Aires via flickr

————

Risk avoidance is critical in the current market environment. Over on FootnotedPro, we shine a spotlight on potential problems well in advance of the market. For more information or to inquire about a trial subscription, please contact us.

Leave a Reply

You must be logged in to post a comment.