Murdoch Fights Off the Wolves

The media and politicians are descending on Rupert Murdoch like a pack of ravening wolves. There are many quadrants of the media that have little sympathy. Is anybody surprised? You should ask what you might take away from it as an investor.

After all, many great business leaders have fallen from grace. And even the most powerful companies are susceptible to failure and attack.

Murdoch and News Corp. (NYSE: NWS) are a case in point. They are now under siege, and potentially rightfully so, after the organization decided the thing to do was hack Jude Law's phone mail to get the scoop on the celebrity's transgressions. And then it did it again, with more people. And again. And tried to settle the matter privately. With a whole lot of cash.

It's a good story, but, as they say in the news business, be careful not to make yourself the story. The big question is whether Rupert Murdoch, the founder, long-time CEO, and chairman of News Corp., and his son, James Murdoch, 38, the deputy chief operating officer and heir apparent, will be able to retain control of the company that Rupert Murdoch has been building for 50 years.

It's a crisis of confidence, calling into question the very integrity of a news organization. Talk about brand control. The News Corp. practices were often criticized, and now we know they included non-traditional editorial procedures such as hacking citizens' phones and possibly trying to influence public officials, including police.

In Parliament today, the Murdochs were subject to your basic grilling by lawmakers: What did you know and when? How could you let this happen? Do you have any responsibility? The big question of course, is whether the Murdochs engaged in a massive cover-up. After all, the phone-hacking charges and private settlements date back as far as 2008 and 2009. Didn't either Murdoch know enough of what was going on to have responsibility?

In one particularly revealing moment, Murdoch the Elder was asked if he had responsibility. The answer: "No." Who did? The people he trusted who worked for him, he said.

The scandal has been debilitating for the company, resulting in the shutdown of one of its London tabloids and the resignation of high-profile executives, including the Publisher of the Wall Street Journal, Les Hinton. The company had to withdraw its bid to acquire its remaining stake in British broadcasting company BSkyB and lost about $15 billion in stock-market capitalization. Some estimate that News Corp. has spent as much as $700 million on lawyers and defense on the matter.

When watching the inquisition of British lawmakers this morning, I couldn't help thinking about another scandal at a corporation that would not take responsibility: British Petroleum (NYSE: BP). At the time in 2010, BP was presiding over one of the largest oil spills in history after the failure and explosion of its Deepwater Horizon drilling platform. Its stock was plummeting and financial analysts were chattering about bankruptcy.

Meanwhile, in the media, its CEO Tony Hayward came on television to make surreal proclamations of the company's innocence and his own lack of culpability, pointing the finger at everybody but himself.

Of course, Hayward soon left. He was assigned to working in Siberia and was last seen dabbling in oil wells around the world (scary thought).

These high-profile implosions and resultant public-relations disasters of executives in denial demonstrate one thing: how quickly even the greatest companies can spiral downward during a crisis of confidence. While the News Corp. disaster is not yet on the scale of Enron or even BP, it's immensely damaging to the company's long-term value.

Investors should be reminded that these types of events can happen to anybody, anywhere. Nobody is bullet-proof.

As Warren Buffet famously said, it takes 20 years to build a reputation and five minutes to lose it.