News Corp. Shareholder Meeting: Analysts See Room for Changes Over Time
NEW YORK - News Corp.'s Friday annual shareholder meeting on LA's Fox studio lot will be this year's most anticipated in the entertainment industry - and likely its most confrontational. After all, it is the first such meeting since the phone hacking scandal re-erupted this summer, which has put a spotlight on what critics have assailed as weak corporate governance and chairman and CEO Rupert Murdoch's cozy board relations.
Observers say Friday’s meeting is likely to yield no immediate changes, but could cause shareholder-friendly steps over the medium-term.
“Clearly there is call for the removal of the board, but less extreme outcomes could be a splitting of the CEO and chairman positions, introducing truly more independent directors and/or removing [James Murdoch],” said David Becher, a corporate governance expert at Drexel University.
A split of the chairman and CEO titles could lead to the elevation of president, COO and deputy chairman Chase Carey, who is popular on Wall Street, to the CEO role/ Wall Street analysts also see the potential for continued stock buybacks, which would further boost earnings per share. A slew of recent recommendations from shareholder advisors to vote against the Murdochs and other board members to push for more independent board members has led several institutional investors to vow to withhold their votes for them. Institutional Shareholder Services recommended a vote against 13 of 15 board members, including Rupert, James and Lachlan Murdoch; Glass-Lewis recommended votes against six board members, including the Murdoch sons; and Egan-Jones recommended votes against four board members, including the sons.
As a result, the nation’s two most powerful pension funds, California Public Employees’ Retirement System (Calpers) and California State Teachers’ Retirement System (Calstrs), have said they would withhold their votes for the Murdochs just like Hermes Equity Ownership Services. Observers agree that all this will not lead to immediate changes. Given that Murdoch controls 40 percent of the shareholder vote and ally Prince Alwaleed bin Talal of Saudi Arabia holds 7 percent, Wall Street observers don't expect any of the Murdochs or other board members to be removed by Friday’s shareholder vote.
Directors only need a majority vote to be confirmed for their board seat. While those who get no majority must resign, the board’s nominating committee can also overrule a resignation.
But depending on the size of the protest vote, observers see the meeting as a potential chance to affect longer-term change at News Corp. – even if just by being a thorn in the side that the leadership decides to address. Cowen & Co. analyst Doug Creutz, who has an "outperform" rating on News Corp. shares, said in a report Thursday that there is a perfect storm of sorts that could allow critics of Murdoch's control to get attention at the meeting and affect longer-term changes. In addition to the phone hacking scandal, which highlighted control and corporate governance concerns and will come into focus again with Monday’s scheduled parliamentary testimony by former Dow Jones CEO Les Hinton, News Corp. has more recently also faced allegations that the Wall Street Journal Europe inflated subscriber numbers.
"While News Corp. has denied that anything improper took place, the situation has added to questions about management's focus on proper business ethics," Creutz explained. "Although we expect the board to be re-elected given CEO and chairman Rupert Murdoch controls 40 percent of voting shares, we also believe a significant enough "no" vote could pressure the board into making meaningful corporate governance changes, which we would view positively," Creutz said .
He felt reminded of Roy Disney's "Save Disney" proxy campaign in 2004. While it failed to secure enough votes to remove then-Disney CEO Michael Eisner from the conglomerate's board, the 43 percent "no" vote "was enough to prompt Eisner to step down as chairman immediately and exit the CEO role 20 months later," Creutz said. While he doesn't expect that drastic a step to happen at News Corp., he said it could accelerate changes that observers expect to happen over time anyway.
"In this case, we think a large enough "no" vote by independent shareholders could pressure the board to split the chairman and CEO roles and/or create an explicit succession plan that does not contemplate one of Rupert's offspring in the CEO role," said Creutz.
“With the Murdochs having near 40 percent voting control and 7 percent owner Prince Alwaleed in tow, the status quo will nominally remain intact but political concerns for the most global media company will inevitably foster changes over time,” echoed Wunderlich Securities analyst Matthew Harrigan in a research note on Thursday.
“The high-profile Friday shareholder meeting on the Fox studio lot should eventually prod corporate governance moves even as the abysmal phone hacking scandal in the U.K. lingers,” he added. “Any eventual Chase Carey CEO period is now likely more than an interregnum, as News deputy COO/BSkyB chairman James Murdoch works to regain the accolades he won while BSkyB CEO.”
The percentage of shareholder approval for board members will be a closely watched figure as it will show the extent of dissatisfaction with the status quo.
Given Murdoch’s level of control and the existence of two classes of stock, only one of which has voting power, makes predictions of the size of the anti-Murdoch vote difficult, according to experts. It is “hard to tell, especially with two classes of stock,” said Prof. Jay Lorsch, a corporate governance expert at Harvard Business School.
“I am really not sure how big the vote against them will be,” echoed Becher. “Institutions and mutual funds hold directly less than 15 percent and indirectly influence a little over 35 percent.”
Harrigan on Thursday suggested the News Corp. board member slate may end up getting only 75 percent or slightly less approval, “although Australian and U.K. holders are more restive” than U.S. investors.
Would a 25 percent protest vote send a message? “Considering the high percentage apart from Murdoch and Alwaleed, yes,” said Harrigan.
Some near the company say the protest vote could end up much smaller than all the attention leading up to Friday may suggest. A spokeswoman declined to comment on likely voting percentages.
But Becher pointed to News Corp.’s recent letter to shareholders that touted the conglomerate’s strong business momentum. “They must be concerned enough to lobby shareholders,” he said.
Still, some on Wall Street remain resigned to the fact though that Friday will most likely not change anything immediately. “It just won't matter,” said one Street observer who didn’t want to be named.
Most expect the Murdochs and the company’s board to present a united front Friday and highlight the company’s financial growth and recent stock performance that has been better than at peers. But all eyes will be on body language and any signals or promises to address the recently voiced shareholder concerns.