‘Transparency’ was a recurring refrain during the Murdochs’ parliamentary testimony in July, yet many questions on the phone hacking scandal remain unanswered. As global corporate governance laws strengthen, IBA Global Insight asks how accountable and transparent multinationals – and the lawyers who advise them – really are.
‘It’s only when the tide goes out that you discover who is swimming naked,’ Warren Buffett famously observed. Now, following one of the biggest scandals to hit the media world, the Murdoch empire seems highly at risk of exposing a slew of skinny dippers among its ranks, from editors and investigators to politicians and lawyers.
Described by some as Britain’s Watergate, the phone-hacking saga does not look like going away any time soon. Rupert and James, certainly, must be worried about their future at the company. Despite their protestations of innocence and ignorance during the Commons Culture, Media and Sport Committee questioning in July, the pair seemed scantily clad beneath the waterline. They did not know about widespread phone hacking; they did not know about bribery of police officers; they did not know about legal bills being paid for former royal correspondent Clive Goodman and private investigator Glenn Mulcaire, both of whom have served prison terms for unlawful phone interception.
With the hang-dog dolour of a Shar Pei puppy, Murdoch senior offset responsibility onto those he ‘trusted’: ‘They let me down and behaved disgracefully. They betrayed the company and they betrayed me and it’s for them to pay.’
Yet who pays may not ultimately be for Murdoch to decide. Under the US Foreign Corrupt Practices Act (FCPA), his avowed ignorance is no excuse; News Corporation as a corporate entity could find itself culpable for bribes paid to UK police officers simply for failing to maintain an adequate system of internal accounts and records, risking a US$25m fine. Had the UK Bribery Act been retrospective, the company would almost certainly have fallen foul of its corporate provisions too, which require companies to have ‘adequate procedures’ in place to prevent overseas bribery.
The company’s internal auditing system is just part of the story, however. With its hybrid CEO/chairman structure, dual voting share system and cosy clique of none-too-independent directors, it is clear that accountability is not News Corp’s forte. Investors may well be wondering whether a family fiefdom lorded over by an octogenarian czar with minimal oversight is the most efficient way to run a business – especially a czar who blames everyone but himself for a scandal that threatens to engulf his entire empire.
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‘Ten years ago, even five years ago, compliance was a backwater. Now the position has transformed.’
Indeed, whether News Corp is fit for purpose is a question no doubt being asked by law firm Harbottle & Lewis, which found itself projected brusquely into the limelight after Murdoch accused it of making a ‘major mistake’ when it found no evidence of widespread phone hacking at News of the World in 2007. Released from its shackles of client confidentiality, Harbottle fought back, making clear that its remit was limited solely to Goodman’s employment dispute and not intended to cover wider instances of criminality.
Few would deny Harbottle have a case for disgruntlement, and there is nothing to suggest the firm did anything untoward. Yet the issue is far from black and white. For some, unease surrounds the role of lawyers where large multinational clients are concerned, and valid questions remain to be asked. Namely, are counsel always bound by the confines of their remit, even if excessively restrictive? Should a contract be terminated if there is evidence of suspicious activity or criminality beyond this remit? And should the board of directors ever be approached in such a situation?
In short, where is the line between good client relations and legal ethics – and does any clear line truly exist?
If News Corp does find itself on the wrong side of the FCPA, it will be in fairly prestigious company. BAE Systems, Halliburton, Daimler AG and Siemens are just a few of the corporations forced to pay hundreds of millions of dollars in settlements and penalties for alleged corruption in recent years.
The Act, which makes the bribery of foreign officials by both US citizens and corporations unlawful, may have been around since 1977, but it is only now that it is really finding its feet. From 1998 to 2000 there were six enforcement actions under the FCPA; from 2008 to 2010 there were 91.
With the UK Bribery Act coming into force this July, making any company that ‘carries on a business or part of a business’ in the UK liable for overseas corruption by its employees, it is perhaps understandable that the corporate world is rushing out to buy itself bathing trunks. Add the OECD Anti-Bribery Convention, which entered into force in 1999, and the United Nations Convention Against Corruption, which did so in 2005, and it suddenly seems the world is closing in on ‘white-collar’ corporate criminality.
‘Ten years ago, even five years ago, compliance was a backwater,’ says Tommy Helsby, Eurasia chairman at Kroll. ‘It was very much: if you can, do; if you can’t, teach; and if you can’t even teach, become a compliance officer. Now the position has transformed.’
‘If transparency and accountability are missing you will eventually get big problems.’
Freshfields partner Paul Lomas, who specialises in commercial and financial services litigation, believes the business world is experiencing a ‘sea-change’ in anti-corruption enforcement. ‘When a company as reputable as Siemens has to pay US$1.4bn, it makes everyone sit up and think. Couple with this the fact that business is internationalising, and you have business driving you to risky areas while regulators force you into a more conservative area. It’s changing the way clients conduct their business.’
Bribery, once viewed in some regions with a wry smile and shake of the head, is swiftly becoming a global pariah. Whereas other regulatory measures, such as the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, are seen by many Americans as unnecessarily restrictive – and indeed have split the political sphere to near breaking point – the FCPA has had hardly a negative word said against it. Corruption is corrosive, it has finally been agreed among consumers and corporates alike, undermining development and economic growth. For evidence, one need look no further than the tattered finances of Greece, where each person paid an average of US$1,830 in bribes in 2009 for public services, according to a study by Transparency International (TI).
‘Every region has committed to corruption being rooted out,’ says Neill Stansbury, co-founder of the Global Infrastructure Anti-Corruption Centre and former head of TI UK’s anti-corruption initiative in the international construction industry. ‘You can no longer say it’s a cultural or economic issue; it is purely seen as a criminal issue.’
Yet some feel the corporate world needs to go further. Good governance, they say, is not concerned with the lower common denominator of legality, but with an ethical ‘best practice’ regime that cuts across jurisdictions. As chair of the TI Business Advisory Board and former PwC global managing partner, Jermyn Brooks has had feet in both camps and feels strongly on the matter. ‘It is not just an issue of legal compliance, it is an issue of compliance with a set of principles that are applicable everywhere you operate. You have to have a set of standards that apply if you’re going to be measured to a high level wherever you do business.’
With government regulation forcing change from above and the Facebook generation driving transparency from below, companies may find themselves subject to a pincer attack where there is no escape but compliance. Some multinationals are already ahead of the curve, busy developing multi-stakeholder approaches to a diverse range of corporate governance issues, from sustainability and corruption to investor rights.
Whether this means the beginning of the end for corporate bribery is perhaps another matter. The 2002 Enterprise Act has not seen an end to cartels, after all, and until cases begin to hit the courts the deterrent effect remains tantalisingly in the abstract. Yet the signs are hopeful. Brazil has ratified the OECD Anti-Bribery Convention, while Russia is due to join imminently; China and India have both signed up to the UN Anti-Corruption Convention; and in the Middle East, crooked dictators continue to be deposed by angry civilians whose patience has worn thin.
‘It will take a long time to wipe out,’ says Lomas. ‘But if you cut the big, hi-tech civil engineering companies out of the game because the risk is no longer worth it, you start to create two markets: a clean market for global business and a dirtier market for domestic businesses. That is already a lot of progress.’
Keith Oliver, senior partner and head of commercial litigation and fraud at Peters & Peters, has a slightly more cynical view, however. ‘You can have tightly controlled corporate behaviour in certain parts of the world – in the UK, the US, certain parts of Europe. But the suggestion it has to be uniform throughout the world is a fallacy. You are not going to change human behaviour overnight.’
Indeed, should corporate bigwigs suddenly retract their horns and grow halos, it is as yet unclear whether enforcement can live up to rhetoric. In the UK the budget of the Serious Fraud Office (SFO), responsible for overseeing the UK Bribery Act, has fallen 26 per cent since 2008–9 and is due to drop another 25 per cent to £30m by 2014–15.
On top of this are 20 per cent budget cuts to the police. The plan, according to former SFO director Robert Wardle, is to get companies to self-report, leaving the government to go in and beat up the odd one as an example’. But the idea, he admits, has limitations.
‘You have to have a system whereby self-reporting can be made to work. Whether there are the resources is a concern. At the end of the day, investigations are time-consuming and difficult. It will be a very nasty balancing act.’
Tone at the top
For Wardle, the Murdoch case could act as a ‘wake-up call’ for the UK to realise corruption is a domestic as well as an overseas concern. He admits that when he became director at the SFO in 2003, soon after the Anti-terrorism, Crime and Security Act had been updated to comply with the OECD Anti-Bribery Convention, he and his colleagues shared such naivety. They believed there would be ‘very, very few’ bribery cases to investigate, and even went as far as telling the Treasury to stop bolstering their resources. By the time Wardle left in 2008, there were over 50 cases on the books.
The SFO is currently assisting the US with their FCPA investigation into the phone-hacking scandal. Whether News Corp escapes prosecution will depend not only on whether those high up the chain had knowledge of police bribery, but also on whether their internal audit controls were sound and the books were clean.
‘There is something called Tone at the Top,’ says Richard LeBlanc, US law professor at York University and specialist in corporate governance. ‘Good boards have separate sessions with the external auditor without the CEO, and they ask about the internal controls over the material business risks of the company, including information technology. They would want evidence the code of conduct has been complied with, and whether there are adequate whistleblowing procedures.’
Yet audit systems are one thing; a transparent regime that extends right to the pinnacle of the corporate hierarchy is another. For the past six years, research company The Corporate Library has given News Corp an F grade on governance, on a scale of A to F. At first glance, three significant problems are apparent: Murdoch is both CEO and chairman of the board, meaning the directors owe their position to him; he owns almost 40 per cent of the class B shares, which are the only ones with voting power; and the board itself has the dubious distinction of containing a hat-trick of Murdochs – Rupert, James and Lachlan – alongside four current and two former News Corp employees. Of the seven other directors, Natalie Bancroft comes from the family that owns Dow Jones, which News Corp purchased in 2007, and two others – Thomas Perkins and Kenneth Cowley – have both recently resigned.
A look at some of the most notorious scandals of recent years – Enron, Worldcom, Parmalat – reveals that a high concentration of power under one man is asking for trouble. ‘It is the perfect storm,’ says LeBlanc. ‘Do you think Murdoch would not have been fired if he had been the CEO of a widely held company with an independent board?’
Due to various ethical codes, in the UK it is rare to have a dual CEO and chairman role. In the US, LeBlanc estimates, around 50 per cent of companies have the roles combined. Changing such a structure seems unlikely to happen overnight, if at all – though many US companies have started employing a ‘lead director’, widely viewed as a compromise between the two systems, who chairs executive sessions without the CEO present.
Dual share structures are more commonplace in Europe, and equally difficult to reform. If shares are sold on the basis the investor will have no control, it constitutes a transfer of value to suddenly endow those shares with voting rights. ‘Attempts to flatten those shares have usually run into human rights problems because they are an expropriation,’ says Lomas. ‘And you can’t expropriate people’s property without compensation.’
Ultimately, where corporate governance is concerned, it may have to be investors who take the bulls by the horns and hold management to account. ‘Think of all the blow-ups of the last ten years, from Enron to the financial crisis,’ says Matt Orsagh, director of Capital Markets Policy at CFA Institute. ‘Most of these arose from some kind of system where accountability was missing, whether that is a board not standing up to management, the board not understanding a company’s risk profile or misaligned incentive structures etc. If you are an investor you want to understand those risks. If transparency and accountability are missing you will eventually get big problems.’
If corporations are being told to take responsibility for their actions and put principle alongside profit, what about the lawyers who advise them? After all, they are at the centre of the compliance system, and perhaps know better than most where the grey areas of law and ethics lie.
‘We often see lawyers “doing the minimum” in order to comply with regulation, whether it is in disclosure or compliance,’ says Orsagh. ‘This leads to disclosures that don’t give the investors what they need, or disclosures that are written in lawyer-speak and are obtuse to the average investor.’
Stansbury goes further. For him, lawyers have a duty not only to stakeholders but to society more generally. ‘Lawyers should start playing a more vocal leadership role in raising their ethical standards. Ten years ago, very few UK lawyers paid any attention to the damage caused by overseas bribery by UK companies. On the negative side, I am sure that many lawyers played a part in assisting companies draft agency agreements that concealed bribes.’
Pressure on lawyers to bill more hours and bring in more clients is partly to blame, Stansbury believes, as it has helped create a ‘corruption incentive’ to overcharge, advise a client to go to court unnecessarily or avoid asking the difficult questions.
‘Going out on a bit of a limb, I think there has been a drop in ethics in the legal profession in the past 30 years,’ he adds. ‘I’m not sure if that’s true, but it’s a feeling more than anything else. Lawyers have been very, very slow ethically.’
So where do Harbottle & Lewis fit in this debate? Certainly, there is no suggestion that the firm gave misleading advice, nor acted against the Solicitors Regulation Authority Code of Conduct. As the firm points out in its stringent 24-page defence, its instructions comprised looking through five sub-folders of e-mails to see whether two News International employees (names redacted) knew of Goodman’s phone hacking and whether others were carrying out similar procedures. Following a two-week review, the firm reported that no evidence had been found.
Yet during questioning by the Home Affairs Committee in July, former Director of Public Prosecutions Lord Macdonald said he found ‘blindingly obvious’ evidence of bribes to police after studying the e-mails. Having been called in by solicitors acting for News Corp, Macdonald said it took him ‘three to five minutes’ to decide that the material had to be passed to police.
Whether a firm put in Harbottle & Lewis’ position should have mentioned such extraneous material to News Corp or broken their contract with the company seems a matter of opinion. The firm declined to comment when approached by IBA Global Insight regarding this point. Indeed, it is quite possible they never even found such evidence, considering they were searching for something else. After all, Burton Copeland were brought in after the Mulcaire arrest in 2007 to conduct a far wider investigation, and – according to News Corp – found nothing either.
‘It is hard to ask a lawyer to stand up with an X on his shirt and say, I think you should be disclosing more,’ says LeBlanc. ‘The client will simply fire the lawyer, internal or external, and find another. The system is not designed for that.’
Quite. Yet LeBlanc makes an interesting point regarding the nature of lawyer/client relations. Whereas ten years ago the Sarbanes-Oxley Act stipulated that the client of external auditors was not management, but the audit committee, and in 2010 Dodd-Frank outlined that compensation consultants’ clients were not the CEO but a compensation committee, the exact nature of a lawyer’s client remains to be clarified. ‘Perhaps the client of independent counsel should be a committee of the board of directors. So if you become aware of wrongdoing you are obliged to go to them.’
Of course, for most lawyers this is a moot point. They are adamant their advice is good and honest; bad advice inevitably results in bad outcomes, not to mention possible charges of negligence. ‘The legal world is not a campaigning organisation – that is the role of NGOs and activist groups’, says Lomas.
Yet the idea of lawyers as potential crusaders persists. As former chair of the American Bar Association (ABA) Section on International Law and current vice-president of the World Justice Project (WJP), James Silkenat is a strong believer that lawyers have a responsibility to stand up and be counted. ‘A variety of organisations – the International Bar Association, ABA, WJP, Law Society – have all played a role in keeping lawyers sensitised to what their special role in society is,’ he says. ‘I don’t really see lawyers by and large as part of the problem; I probably see them as part of the solution.’
Problem or solution, when it comes to lawyers and their clients, it is being made ever more difficult to get away with underhand activity. And it may be high time for those who have spent years eagerly kowtowing to the emperor – whether Murdoch or equivalent – to finally turn around and admit he is clad in little more than a birthday suit.
Shareholders bring corporate misconduct cases against News Corp
News Corporation is facing a costly lawsuit from three major shareholders alleging widespread corporate misconduct at the company.
The complaint, lodged in the Delaware courts, was filed by Amalgamated Bank, the Central Laborers Pension Fund and the New Orleans Employees Retirement System. Filed in September, it updated a claim filed in March, which objected to News Corp’s US$615m acquisition of Shine, a television production company created by Rupert Murdoch’s daughter Elisabeth Murdoch.
The investors suggest Rupert Murdoch has been running his ‘own personal fiefdom’. They are seeking compensation for scandals that they believe have damaged the reputation and value of the company. Alongside the phone-hacking scandal at News of the World, the complaint includes allegations of wrongdoing at News Corp’s advertising arm News America Marketing (NAM), and at NDS, a company that manufactures satellite TV smart cards and which was until recently controlled by News Corp.
Lawyer Jay Eisenhofer, representing the claimants, says: ‘These cases establish a pattern of misconduct that extends far beyond the UK subsidiary. It demonstrates a corporate culture that allows this sort of misconduct to take place over a very long period of time.’
News Corp is yet to file a response to the suit and declined to comment when approached by IBA Global Insight..
NDS, which had James Murdoch on the board when the allegations first came to light, was alleged to have illegally extracted coded software from competitors’ cards. In court documents, Amalgamated Bank says NDS posted one of the codes on the internet, allowing hackers to break into broadcasts and inflict more than US$1bn in damages on its rival.
NAM has reached settlements worth over US$600m with three separate competitors. In a trial involving advertising company Floorgraphics, evidence was presented that NAM had broken into its secure computer systems at least 11 times between October 2003 and January 2004.
The investors also criticise the board for ‘improperly authorising’ a ‘Buyback’ scheme that could increase Rupert Murdoch’s control of the company’s voting shares to over 50 per cent ‘at no expense to himself’. He currently controls 40 per cent.