Friday, 9 March 2012

BSkyB and ownership

The news that Ofcom now has a project running specifically looking at 'fit and proper' as applied to BSkyB is not surprising in one sense given the scale of wrongdoing at its controlling shareholder. It does, however, further up the pressure on the board, and the chair in particular. The sentiment in the investment community towards Murdoch Jnr seems to be split between an active desire on the part of some to get rid and for others, latterly, reluctant acknowledgment that he may have to fall on his sword. Forthright defenders are much harder to find now. But why, really, has it taken this long?

Since the hacking scandal erupted last July, I have often been surprised by how little some investors seem to know about what is going on or understand the likely ramifications of unfolding events. I think the idea that a 'fit and proper' test might be problem for BSkyB has only recently started to trouble some investors, when it should have been obvious for months that this was in the post. And of course Ofcom isn't the only problem. There is still the DCMS committee report to come, Murdoch is also potentially exposed under the Regulation of Investigatory Powers Act, and, of course, Sue Akers might want a word with him at some point. The threats to James Murdoch, and by extension to those companies where he sits as a board director, are varied and potentially very significant. So shouldn't shareholders have realised this, and a lot earlier?

In this context the quote below from this Reuters piece is particularly revealing:

A UK shareholder at a large fund manager, speaking on condition of anonymity, agreed that Murdoch was vulnerable.

"It's probably likely that James Murdoch will have to end up leaving, which will be a bloody great shame," the shareholder said.

"What may happen is there will be enough mud thrown around by Ofcom, but not enough to force News Corp to sell its stake down, but Murdoch could say almost as a trade-off 'I'm out'."

I think this is probably indicative of an old school mainstream asset manager mindset. But more broadly if this is an accurate reflection of their understanding of the situation and views on it I am not surprised we struggle to make ownership work effectively. What is implied is that James Murdoch is a valuable to BSkyB and that he could leave or be forced out because of 'mud' being chucked around (which suggests groundless accusations that damage nonetheless). The conclusion drawn is that this would be a loss for the company. I think this is mistaken on numerous points.

For one, it is obvious to those willing to acknowledge it that what we see at News International is a full-on corporate scandal. There was wide-spread illegal activity of various kinds, which some senior NI executives were aware of and yet repeatedly denied knowledge of, including to Parliament. The company also destroyed evidence, and in earnest when it became clear that its public denials were not holding out. The cover-up at NI continued under James Murdoch's watch, and some of those involved are likely to go to jail. This is not 'mud', this is what is emerging from the police investigations, DCMS committee's inquiry and Leveson. Ofcom doesn't need to throw mud, this stuff is already out there, and damaging information about the former NI regime turns up in the papers most weeks. So our mystery manager is mistaken on that point.

But more worrying to me is the idea that even if you don't believe that James Murdoch was directly involved in the cover-up that he should be able to just carry on as normal. (NB - If you look at RIPA - very relevant to hacking, obviously - directors don't actually need to have known about illegal actions to be held responsible, they can be done for neglect too.) When we look back on this in a few years it will be obvious that this was a major corporate scandal. The cover-up took place when James Murdoch was in operational control. The scandal in turn blew up News Corp's bid for BSkyB. That should be enough for him to go, and if he isn't willing to do so voluntarily he should be forced out. Yet our unnamed fund manager says it would be a "bloody great shame" if this does happen.

Thinking wider, maybe this sort of mindset a sign that some (many?) fund managers, running portfolios with dozens of stocks in them, have a pretty narrow understanding of investee companies. They apply valuation models, look at the numbers, but don't necessarily think about the broader issues surrounding them. Note this fund manager thinks that a negative judgment is purely something that Ofcom does to BSkyB or James Murdoch, not some that arises from the behaviour of News International and its executives. Maybe when they're running a large portfolio they don't have the time/headspace to get into the broader questions, and so focus purely on the immediate numbers, unless they think a particularly large shock could be coming (though as I say I think BSkyB's current predicament has been obviously in the works since last summer).

Clearly it does take time and effort to keep on top of this stuff and if you only expect the impact to be limited (in valuation terms) maybe it just isn't worth the effort. Certainly my experience of the hacking scandal is that some investors have only given the issues raised by it a cursory look, which makes the comments from the mystery fund manager unsurprising to me.

But the scary bit for is for me is that this person is somewhere managing money, perhaps even my money, and getting a vote on the election of directors. With this kind of approach still out there in the investment world how confident can we be that stewardship - which will be largely carried out by asset managers - will deliver positive outcomes? If our fund manager can't even believe that James Murdoch deserves to held accountable, what do you think they do at all the other companies they invest in, where the wrongdoing is far less stark?

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