Murdoch’s empire under fire

The it-gets-worse-by-the-minute phone hacking scandal that has engulfed Rupert Murdoch’s News Corporation took another ugly turn last night with The Guardian and Independent newspapers claiming Murdoch’s newspapers tried to access the voice mails, bank records and family medical records of former British Prime Minister Gordon Brown.

According to one particularly ugly story in The Telegraph reporters from The Sun illegally obtained medical records disclosing that Brown’s infant son had cystic fibrosis.

Could Rupert and James Murdoch have another newspaper in serious need of a thorough investigation or a News of the World style closure?

Whatever the case, the news out of Britain is clearly spooking investors.

News Corporation shares were down 4.4% in initial trade this morning – just after 11:00 AEST – following a drop of 3.7% yesterday to $16.55, when the company was the worst-performing stock in the ASX top 50.

What seems to be worrying investors is how far the scandal might spread up the News Corporation executive ranks.

Stephen Bartholomeusz of Business Spectator argues that Murdoch has survived a number of tough spots in his career and his priority will be confining the damage to Britain, where it has already claimed the scalp of his the popular and reportedly profitable News of The World.

The longer the scandal runs the more difficult it is becoming.

Mounting pressure on former News of the World editor Rebekah Brooks, now chief executive of News Corp’s British subsidiary News International, has been well documented.

But we can expect that pressure to increase now that the Brown story is out – Brooks was the editor of The Sun at the time the paper “broke” the story about Brown’s child.

Rupert Murdoch apparently describes Brooks as being like one of his daughters and remains firmly behind his executive, saying yesterday that looking after her is his number one priority in the scandal.

One of the theories doing the rounds in the British press – and it is ironic that this journalism scandal has produced some great pieces about the Murdoch empire – is that Brooks provides the Murdoch family with a buffer.

If Rupert was to dump her his son James could be next in the sights of an outraged community. And if James was forced to step down who would then become the target of the public outcry? Rupert himself?

As more and more senior News Corporation executives are being dragged into this scandal – Brooks, Murdoch and now Les Hinton, one of Rupert’s closest advisers, are all implicated – the damage to the global News Corporation empire is growing.

The fact that the share price is falling and that crucial deals – such as News Corp’s buyout of British television company BSkyB – could be blocked as a result of the hacking scandal is proof enough of that.

What’s hard to see right now is where it ends for the Murdoch family.

If questions continue to be raised about Murdoch’s management and governance styles could the push eventually come for him to cede some of his power, as has been suggested by some commentators?

And if that transfer of power was forced on Murdoch who would control of News Corp be passed to?

James Murdoch, the man seen as Rupert’s likely heir, has been tarnished by this scandal and few other succession options have been publicly discussed – it’s hard to even name a potential new leader.

It’s highly unlikely that the Murdochs could find themselves forced out of News Corp – Rupert is much too smart and far too experienced for that.

But the scandal highlights the danger for companies that are so closely associated with the controlling individual or family.

When reputations are damaged the company and investors inevitably take a hit.