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The buck stops here

Themes: Corporate governance and ethics

Professor Simon DeakinCorporate governance is under the microscope in the investigation into the activities of News International, owners of the defunct tabloid newspaper, News of the World

The parliamentary and police investigations into phone-hacking and corrupt practices involving journalists and their police sources will also call into question the corporate governance of not just News International but its parent, News Corporation.

According to Professor Simon Deakin, Fellow in Corporate Governance at Cambridge Judge Business School, if investigations show that the companies’ executives were unaware of illegal practices, the focus must then fall on the internal audit process and controls within the companies.

“It points to the importance of boards making sure, as far as possible, that their companies do not break the law and do not pursue business strategies which create an undue risk of either criminal or civil liability.

“The board must strike a balance between risk-taking for profit on the one hand and taking into account a wider range of relevant interests on the other. In doing so they must look to the long-term interests of the shareholders and to the need to maintain the company’s reputation.”

He comments that a major question facing News International is around ‘reputational risk’ and whether, if the investigations go against the company, it will be able to maintain its existing activities.

“News Corporation has withdrawn its bid for BSkyB, but a number of companies within the News Corporation group continue to operate in various media contexts where they require regulatory licenses and/or wider public trust and support.

“The executives will have to prove to the public that they dealt with these issues as quickly and effectively as possible.”

Professor Deakin suggests that the statements of Rupert Murdoch, James Murdoch and Rebekah Brooks, to the effect that they were not aware that illegal acts were being committed, are not the end of the story as far as corporate governance is concerned.

“Why didn’t corporate officers know what was happening? Were executives at News International wilfully turning a blind eye to what was often illegal activity to boost the profits of a paper?

“That becomes an important issue. If the profits are in some way tied in with behaviour or conduct which touches on illegality that’s a serious issue not just for senior corporate officers but also for the board more generally, because the board cannot be seen to condone an approach to business which inevitably involves illegality even if it doesn’t condone that illegality as such.”

Professor Deakin is a founder member of the Centre for Business Research at Cambridge Judge Business School and leads the research in their Corporate Governance programme.