More Murdoch Trouble Ahead

By Mike Giglio, The Daily Beast

01 March 12

ver since the phone-hacking scandal forced Rupert Murdoch to shutter his News of the World tabloid last summer, there had been a general consensus among London’s media observers: James Murdoch, Rupert’s youngest son and heir apparent, wouldn’t last long at the helm of News International, the U.K. arm of the family’s News Corp. media empire. But few expected he would go so soon. It was announced today that James had stepped down as News International’s executive chairman, leaving behind a tempest of succession rumors and speculation over how deeply the phone-hacking crisis has affected the Murdoch family and their prized U.K. newspaper chain.

According to News Corp. the resignation is part of a longstanding plan to move James to the company’s New York headquarters and have him focus on pay-television business and international operations. "We are all grateful for James’s leadership at News International," Rupert Murdoch said in a statement announcing the move. James was named News Corp.’s deputy chief operating officer last year.

Analysts say today’s move suggests deep changes in the elder Murdoch’s succession plan, as well as increasing concern over News International’s mounting public-relations problems. The Leveson inquiry—which convened in the wake of the phone-hacking scandal to investigate press ethics—has been unearthing damning testimony about what Scotland Yard’s lead investigator called a "culture" of wrongdoing among Murdoch journalists, and police have recently arrested several top reporters and editors at News of the World’s sister paper, The Sun, as part of an investigation into illegal payments to public officials. These tremors, as well as nascent staff unrest at The Sun, seem have put Rupert Murdoch on the defensive: he flew to London to reassure his employees and to announce the rushed launch of a Sunday version of the paper, in what seemed like a bid to display his strength. Some experts suspect that James’s resignation reflects these recent woes—while others say the younger Murdoch’s move could also suggest that more damning information could be about to surface.

Says a Westminster source who has been following phone hacking closely for years: "Maybe they know there’s worse stuff to come."

Of late, the crisis gripping Murdoch’s tabloids has shown no sign of abating.

Fueling the fire is the company’s own internal investigation, which is being led by board member and former New York City schools reformer Joel Klein. The company has painted its internal inquiry as an effort to come clean about past practices at the newspapers—and also to show it is fully cooperating with authorities such as Scotland Yard and the FBI, the latter of which is reportedly investigating whether News Corp. violated the U.S.’s Foreign Corrupt Practices Act (FCPA). The internal committee is in the process of digging through hundreds of millions of emails and passing them on to police who are stationed within News International’s Wapping headquarters.

A source close to the internal investigation famously described the process as "draining the swamp." One person close to the family furthered that analogy today. "As the swamp recedes to reveal more dangerous and disgusting creatures in the mangroves, the man who said he had no idea of their existence has to go," the person told The Daily Beast, referring to James’s testimony to Parliament last summer that he was not aware that phone hacking was allegedly rampant at the company’s tabloids. Former News Corp. executives contradicted James’s assertions at the time, insisting they had informed him in 2008 that phone hacking was widespread. Since then, emails have surfaced that indicate top News Corp. executives knew of the extent of phone hacking and that they had clued James in as well. And last month it was revealed that James was forwarded a chain of emails—later deleted from his account by an IT worker—that suggested hacking went beyond a single rogue reporter, as the company had previously claimed (James now claims he never read the entire email chain).

"Since the publication of the email trail, it was a bit of a foregone conclusion that the criticism of James Murdoch would lead to him stepping down," says London-based media analyst Claire Enders, who follows News Corp. closely.

Meanwhile, information coming out through the courts and the Leveson inquiry promises to create more headaches for the Murdochs and their company. Last Friday, court documents were released in which phone-hacking plaintiffs claimed a senior executive at News of the World had discussed an "email-deletion policy" after the first reports of phone hacking at the paper surfaced in public. On the heels of the documents’ release, Scotland Yard top cop Sue Akers testified to the Leveson inquiry (PDF) that Sun journalists made "illegal payments"—in one case, to the tune of more than £80,000 over several years—to public officials in the country’s police, military, health service, government, and prisons; and that the payments were often hidden, rerouted through a friend or relative of the source, and authorized "at a senior level within the newspaper." There was, Akers testified, "a culture at The Sun of illegal payments."

The real question now, experts say, is which executives may have known about the payments—or, more important, approved them. Says the source close to the Murdoch family: "The more police talk up the seriousness of this, the higher up the executive had to be who signed off on it."

If executives did know of corrupt payments, says Mike Koehler, an expert on the Foreign Corrupt Practices Act at Butler University, then "the FCPA-relevant question thus becomes: What did the executives and lawyers at News of the World do with that information? Act upon it, report it to their superiors, implement remedial measures, or sweep it under the rug, ignore it, and allow it to continue?"

When James took the reins at News International in 2007, fresh off a stint as CEO of BSkyB, the phone-hacking scandal was already brewing at the company’s tabloids. Even back then, critics claimed James was in over his head in his new role at the company. During his years at BSkyB, he was the youngest CEO of a FTSE 100 company and was still viewed as something of a wild card: a Harvard dropout who had seemed more interested in his hip-hop label and Internet ventures than in running his father’s kingdom.

"With the successful launch of The Sun on Sunday and new business practices in place across all titles, News International is now in a strong position to build on its successes in the future," James Murdoch said today.

News Corp.’s shares hit a new 52-week high Wednesday morning during news of James’s resignation, even as Rupert released a statement saying his son would still play a key role at News Corp.

After the phone-hacking scandal erupted, many critics and even reportedly some Murdoch family members blamed James for the crisis—as well as former News of the World editor Rebekah Brooks, who was called a "surrogate daughter" to the elder Murdoch and who also resigned in the wake of the scandal last summer. (The British press has been gleefully pursuing a story this week that Brooks may have had her own odd ties to public officials: she was apparently "loaned" a retired police horse by the Metropolitan Police to ride and keep at her country home, though the Met says this is common practice for retired horses.)

While Brooks seemed to have the support of James and Murdoch’s oldest son, Lachlan, Murdoch’s daughter Elisabeth was reported to be a vociferous opponent of the flame-haired Lois Lane. Last July, Murdoch biographer Michael Wolff tweeted that Elisabeth had been overheard saying that "James and Rebekah f**ked the company" at a book-launch party. (The family dismissed the claim as "lies.")

The Sunday Times reported that Elisabeth, who allegedly argued for Brooks’s resignation, "felt the company really needed to show it was sorry if it was to start restoring its integrity."

While Elisabeth seemed to be an early contender to take over the mantle of heir apparent, now some observers are betting on Lachlan, the once and perhaps future king of his father’s holdings. Lachlan was Rupert’s uncontested successor when, in a move that was by some accounts shocking to the elder Murdoch, he resigned in 2005 to "do my own thing" and "be my own man," as he was reported to have said at the time. Lachlan returned to Australia—his spiritual home—where he started his own private investment company and is currently acting CEO of Ten Network Holdings. Sources say he is happy with his life Down Under—but may be open to returning to News Corp. "Lachlan has kept his nose clean," says the source close to the family. "The real kicker is [Lachlan’s] wife, who couldn’t stand the Americans in New York and has dragged him back to the beach in Sydney. But there is a feeling that Lachlan is getting a little tired of [that life]."

The source notes that "everyone was interested" when Lachlan accompanied his father to London on his recent high-profile visit to The Sun. But, the source emphasizes, "Lachlan has to square it with his wife, because if she didn’t like New York, she’ll sure as eggshells hate London."