Dr. Carmen Stoian is a Lecturer in International Business, Kent Business School , University of Kent, and comments on the following BBC news item: http://www.bbc.co.uk/news/business-18605086
The news about the potential split of News Corporation’s assets into two distinctive companies has been very well received by investors, with shares in the corporation soaring. Despite Mr. Rupert Murdoch’s long standing attachment to the publishing division and regardless of his reluctance to break up his vast global media empire, this move appears to be the necessary ending to the recent troubles of the News Corporation.
This is good news for investors for several reasons. First, the demerger would separate the publishing division- the smaller and less profitable arm of the company- from the bigger and more profitable one- the entertainment division, allowing investors to chase higher returns by investing in the newly formed entertainment company. Second, the move would also improve financial performance by containing within the publishing corporation the reputational damage which resulted from the phone- hacking scandal. This would potentially minimise the impact of reputational loss on the new entertainment corporation.
Research shows that reputational risk is one of the main risks that firms consider as part of their risk management and that there is a strong link between company reputation and financial performance. Furthermore, unethical corporate behaviour such as the phone-hacking scandal often has significant adverse effects on financial returns. Studies also show that whilst reputation is difficult to built, once damaged, it is very difficult to restore. In such circumstances, crisis management is crucial in rebuilding company reputation. In the case of the phone-hacking scandal at the News Corporation, the response to the crisis has been quite slow, but has included some important actions such as the closure of the News of the World, several high profile resignations and an apology offered by Mr. Murdoch to the Leveson Inquiry. The decision to break up the media empire is but another one of this list of measures, and in order to be effective, it needs to be followed by more substantive changes.
As the entertainment division has not been spared from courting scandal and as the Murdoch connection is likely to continue, to ensure a ‘clean slate’, the new company would need to concentrate on pro-active measures of reputation building. This should include decisions regarding the new management structure and their ethical standing and conduct. Conflict of interest should be avoided and relationships with stakeholders, including politicians, should be conducted in a professional and ethical manner. An independent Chairperson and a new, ‘untarnished’ management team may help ensure this ‘clean slate’. Better governance across the firm should be encouraged, with proper checks and balances and supported by a code of ethics that is not only well publicised across the company, but it is also well implemented. Communication within the company should be facilitated through establishing proper channels, so that any unethical practices are detected early and dealt with effectively. Finally, the management should regularly audit the codes of conduct and their implementation, so that unethical practices and their negative impact on reputation and financial performance are avoided in the future.