19 Jul 2011  Views on News

Rupert Murdoch and the Seeds of Moral Hazard

Harvard Business School faculty Michel Anteby, Rosabeth Moss Kanter, and Robert Steven Kaplan explore the moral, ethical, and leadership issues behind Rupert Murdoch's News of the World fiasco.

 

The News Corporation/News of the World scandal has been described as a case study in bad management. What was there about the company's organizational culture that led to "Murdoch's Mess"? Professor Michel Anteby, who studies how meaning is built at work and how moral orders are sustained, provides an answer. And what is there about Murdoch himself that leaves him such a scorned and isolated figure in the midst of all this? Professor Rosabeth Moss Kanter, an authority on innovation and change, adds her insights. Finally, what are some lessons for boards of directors? Professor of Management Practice and leadership expert Robert Steven Kaplan comments on these issues.

Michel Anteby

Many companies today operate like Russian nesting dolls, where one large figure is actually made up of many smaller ones. These organizations present a unified face to the outside world, but rely heavily on other, usually smaller, companies or external individuals to conduct many of their activities.

What part of your iPad is made by Apple? Is the Verizon customer representative you're talking with really part of that company? How many parts of the Airbus or Boeing plane you're flying on are actually built by these firms? Many would argue that answers to these questions are irrelevant. As long as services are performed and products manufactured, they say, such organizational configurations are beneficial. They allow companies to remain lean and react to shifting demands. Yet the associated moral hazard often goes unnoticed. Such a risk can prove even greater when the various elements of the "delegation chain" obey different standards.

What does this have to do with the ongoing Rupert Murdoch case? Journalists at News of the World apparently hired people outside the company to illegally hack into the phones of select individuals. That these hackers seem not to be News of the World employees illustrates the Russian nesting doll model, which contains the seeds of moral hazard, since it allows for the plausibility of denial. While we readily recognize such a hazard in the food and apparel industries and the need to "secure" all elements of their production chain, most other industries have yet to recognize such a hazard.

In the media business, news items require fair and secure sourcing, despite the fact that a freelancer—or small doll—may be crafting the story. But at the News of the World, the people who were asked to hack the phones were apparently hired by journalists, but were not journalists themselves. This gave them the freedom to obey norms different from those of their employers. Needless to say, journalists are not supposed to act illegally. The 1993 Council of Europe's Resolution 1003 on the ethics of journalism clearly states that "In the journalist's profession the end does not justify the means; therefore information must be obtained by legal and ethical means." The hired hands at News of the World, however, did not have to respect this code of ethics.

When media groups employ external private investigators, health-maintenance organizations hire outside medical doctors, and governments occasionally rely on private mercenaries, people can plausibly deny knowledge of illegal activities. In addition, each professional group's distinct standards can create a false impression that all is well. Yet the Murdoch case teaches us that nesting dolls require our full attention. Although these configurations may seem nimble, they can also be highly problematic. Because professional groups are working separately for a common cause does not mean that the production line is secure. In fact, the nesting dolls model may be the best way to go wrong while seemingly doing the right thing.

Rosabeth M. Kanter

The frail, forlorn face of Rupert Murdoch in the news exposes the vulnerability at the heart of his News Corporation media empire: his reputation for ruthlessness. Murdoch is on the line for the phone-hacking scandal in the UK and faces potential bribery charges that reach to the US under the Foreign Corrupt Practices Act. He might be sued by the Bancroft family, who sold him the Wall Street Journal and other Dow Jones assets, under an integrity clause included in the deal: that News Corp must preserve the integrity of DJ and all of the company's publications and newsgathering services.

Emperors, including media emperors, don't expect to be caught with their pants down. They expect to remain arms-length, letting underlings take the fall. And they certainly don't expect to be trapped by integrity clauses that require honorable behavior.

Murdoch is the latest in a series of CEOs who become the story when their companies are caught in scandals, because their rise has been accompanied by shoving, bullying, and disdain for the concerns of others. Each act of indignity lengthens the line of offended parties who are eager to join the vigilante squad seeking punishment for the moguls. LOL, other news outlets.

Remember the classic admonishment: Be careful whom you injure on the way up, because you might need their help on the way down.

Ruthlessness in pursuit of success might work for a while. But when there is the merest hint of a problem, a history of callous, cold-blooded, critical behavior means that there is no one left to lend support. The emperor, dictator, or CEO finds himself increasingly isolated and abandoned to the wolves. This happens despite success, and sometimes because of how success was achieved. It happens to results-producing CEOs pushed out of companies; for example, Mark Hurd of Hewlett Packard, who fudged expense reports but whose real sin perhaps was making enemies within the company by ruthless cost-cutting rather than investment.

Speaking of investment, the best investment anyone can make at any career stage is to behave honorably and make friends. Graciousness, even in victory, goes a long way to make people want to help rather than trash when problems emerge. Integrity in all dealings means taking the interests of other parties taken into account, operating with a long-term perspective rather than short-term greed or sensationalism. Anything for a deal or anything for an advantage is just as bad as anything for a story, even if it violates moral, ethical, and legal standards.

A well-regarded financier I know routinely beats out others for deals while remaining a very gracious winner who doesn't swagger and always has a little something to share. His competitors or opponents up end up becoming his good friends, leaving open the possibility for alliances later. "Co-optition," an awkward term for knowing how to cooperate with competitors, is the operating mode in rapidly changing industries. This requires a dash of humility as well as honor and integrity.

Graciousness has benefits for survival, too. A new study of baboons reported in the New York Times shows that the number two, the beta male who is theoretically the "nice guy" rather than the alpha male bully-ruler, has lower levels of disease-causing stress hormones—and also lower than those below. Ivan Seidenberg's willingness to go from number 1 to number 2 twice—first when NYNEX, where he was CEO, merged with Bell Atlantic, and then when the successor company, Verizon, bought GTE—was associated with a leadership style responsible for the emergence of Verizon at the top of the industry and Seidenberg's long tenure as CEO. He could go from the alpha role to beta mode and back. He put the integrity of the institution above his own CEO ego.

Executives are not baboons. But sometimes they act like 800-pound gorillas, throwing their weight around. And sometimes they stumble and get crushed under their own bulk, showing that they are vulnerable like the rest of the pack. For empire-builders like Rupert Murdoch, defenders appear to be non-existent, but gorilla-hunters are everywhere. The lesson for the rest of us is to make a few more friends, avoid injuring others, and remain on an honorable course.

This blog originally appeared on www.hbr.org on July 18, 2011

.

Robert Steven Kaplan

Much has been written and said regarding News Corp and its activities in the UK, and serious questions have been raised about the leadership and culture of this company. Some of these questions have been directed at the company's board of directors: did it properly fulfill its independent fiduciary responsibilities in overseeing this global organization? While there is a temptation to pile on, I would prefer to comment on what can be learned from this situation.

This and other leadership crises of the past few years raise several key questions for boards of directors. In particular, how does a board really know the leadership style of its senior operating management and the culture of the company for which it has fiduciary responsibility?

Most boards do a good job of evaluating their CEOs and senior leadership teams based on specific operating metrics. Unfortunately, these same boards often have very little process in place to judge the leadership style, daily behaviors, and cultural norms being established by their senior operating leadership. As a result, board judgments are frequently based on observing senior management in relatively formal presentation settings and receiving narrative information regarding company culture—typically from the CEO. Too often, by the time directors realize there is a culture or leadership style problem at the company, it is too late to have prevented real damage to the business, reputation, and careers of senior executives.

I would suggest that boards need to regularly ask themselves whether they have a firm grasp on the operating style and role modeling behaviors of their senior leadership teams. If after candid debate and discussion they realize they don't have a firm grasp on these questions, they need to assert their independence and consider actions which would allow them to get a better reading.

Among various options to address this issue, several boards have decided to conduct 360-reviews of the CEO and other senior leaders. This type of review is typically conducted by an outside professional firm that discreetly interviews (not for attribution) a number of employees who interact with the senior executives being reviewed. I have directly observed this board-directed process in several situations and, in my experience, it has given the boards of directors a much clearer understanding of the developmental issues, cultural challenges, and other qualitative issues that are critical to assessing senior leadership.

This approach is not without controversy. Some boards and senior leaders are reluctant to take this step. They feel it's too invasive or disruptive to the operations and culture of the company. In other cases, the directors would prefer to simply spend more time with employees of the company in order to achieve greater insight and information. These decisions often require a trade off between overcoming some CEO reluctance and board hesitance to be "meddling" versus the board knowing enough to fulfill its independent governance responsibilities.

I have observed that improved director insight invariably clears the air, reduces behind-the-scenes speculation about senior management deficiencies, and gives the board better ability to coach the CEO and flag emerging cultural problems. This and similar types of constructive steps taken by the board can serve to preempt issues before they become a threat to the company and the CEO's career.

I would not presume to suggest to a board what specific actions it should take. I would suggest that your board of directors should ask the critical questions and debate whether it has sufficient visibility into the CEO's leadership style, interpersonal skills, and norm-setting/role-modeling behaviors. This debate will allow the board to assess its degree of knowledge and take appropriate actions that will help it better fulfill its critical fiduciary responsibilities.

This blog originally appeared on www.hbr.org on July 18, 2011.

Post A Comment





By hitting “Submit” you agree that your comment, in whole or in edited form, may be posted online. Comments are selected on the basis of relevancy and variety; not all will be posted.

 

Comments

    • Max
    • Staff Researcher, Harvard Business School

    Very interesting note Professor. In this particular case, one important issue of note is the intent of the organization constructing itself through "nesting." With regards to News of the World, it could be argued that the intent was to find sources that would not be subject to the same ethical standards as staff reporters or freelance journalists.

    While this is an example of the technique backfiring, it seems that there would also be cases where creating "nesting" would be more efficient. My assumption is that not all parts of all organizations should have the same values systems and ethical standards. Thoughts?

     
     
     
    • Tom Dolembo
    • Founder, NewNorth Institute

    Murdoch's successful model is a manufacturing system based on mass production of news, delivered through distributed outlets with powerful brand names based on now obsolete standards and trust. If journalistic standards do not fit the Murdoch model, the stories are built as needed to suit the market. A public with attention spans shorter than a gnat remains greedy for news as entertainment, whatever the source or veracity. The nested doll anology assumes that deterioration is progressive, the healthy onion peels to a rotten center.

    A willing host, an organism able and willing to feed on it, and an amazing adaptability is more like a viral pandemic than a doll. Murdoch is neither amoral nor evil, his company is simply reflecting its host/audience. Like any virus, the host must remain whole to sustain the ever mutating tumor. If we do not value truth, journalism is already dead, Mourn it but don't blame Murdoch. He is supplying something else, at a profit, efficiently and well. This is not a nested doll, this is a prospering malignancy.

     
     
     
    • Taat Subekti
    • Chairman, Dharma Shanti Foundation

    It's right! I think, this current trend in business activities is to, by any means, legal or illegal, ethical or unethical, gain profit whatever it takes.

    We have been specifically intrigued by the moral issues that occur in the business world. It seems almost impossible today to read a newspaper without finding an article about corporate predators conducting business with unethical, not to mention illegal acts. Many companies have played roles in bribery, excessive executive compensation, degradation, violation of human rights and many more. The vast majority of managers proclaim their intentions to run ethical organizations, yet corporate corruption seems endless. Perhaps the pressure to maximize profit triggers such actions. But we cannot help but wonder whether these are really the only ways in order to prosper. Has it truly come to the point where in order to gain greater profits, corporations need to become ruthless in their means?

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    This is a glaring eye opener confirming the loss of reputation due to employment of dubious means to achieve ends. Once discovered, the perpetrator(s) lose their face and are unable to answer queries put to them. When asked, James Murdoch repeatedly declined to provide information about News of the World employees who might have participated in phone hacking on grounds that disclosure would prejudice police enquiries. During enquiries going on, a Labour M.P. remarked that criminality was endemic and this flared up elder Murdoch; he used the shield of "confidentiality" to fend off queries about how large the pay-offs would be to departing senior executives and added that the figures were confidential. How a well going business suffers thus is evident from the trials in action. We need to understand that there is no substitute for high standards of ethics, morality and compliance with law as well as common sense expected of a prudent management.

     
     
     
    • Anonymous

    Agree with Max, it will take a genuinely genius lawyer to nail scumbags such as Murdoch, but we are all guity all the same ...because..we have been allowing it all this while.

     
     
     
    • James Armour

    Professor Anteby is looking too far afield for the moral hazard at News Corp operations. The moral and ethical standards of business organization are set at the top. The message gets to the rest of the organization on a day-to-day basis. We really don't have to look at outside contractors, or "nesting dolls" to understand the moral and ethical standards by which News Corp conducted its business we simply need to observe the people at the top of the organization. The very top.

     
     
     
    • Dorn Williams
    • Director, Welltrek, LLC

    This onion structure of corporations may drastically increase moral hazard as chemical plants, pipeline, or nuclear plants conceal their true risks. While at the same time punishing corporations who explicitly state or address the likelihood of a significant expensive failure; the LLC that builds a dangerous plant may be able to have the government cover the expenses of a catastrophic failure while paying their owners up to the date of the failure.

     
     
     
    • Geoff Smyth
    • MD, Oxis Consulting Ltd.

    Moral hazard is a wonderful term. Perhaps it is the fact that the term "hazard" implies that it is a risk and not a downside certainty that so many individuals in senior positions in organisations are prepared to live with that risk and ignore the issue of morality in their pursuit of short term gains. Murdoch's organisation felt, almost immediately, the economic chill of its engagement with the immoral as high profile advertisers abandoned the morally crippled brands and sought to distance their brands from the contagion. But this is hardly just an issue for business organisations involved in what used to be relatively simple "make or buy" decisions. Who could have imagined that an Irish Prime Minister would stand up in the Irish parliament and publicly castigate the Vatican for its efforts to frustrate the exposure of child abuse in the Catholic church in a very Catholic country. Sadly, if individuals believe that they will get away with wrongdoing, irrespective of the kind of organisations they belong to, they will try it on. This, for personal gain, for recognition or just for the thrill of operating "on the edege". Leaders, whether business, government or other, need to ensure that the ethics of the organisations over which they preside are not just encapsulated in wordy (and worthy) codes but are reinforced by effective enforcement measures and appropriate consequences are seen to be applied to those who transgress. So much for the proponents of "light regulation" to ponder. You have taken us closer to the abyss and have undermined much of what you sought to promote. This is not just an issue for the business world but one that will impact on the society in which we and future generations will have to survive and prosper.

     
     
     
    • Carole Diamante
    • Research Faculty, Assumption College Phils

    Moral hazard indeed. Coming from a country seemingly dependent on outsourcing and dollar remittances of overseas contract workers, I agree that this newly-coined term, moral hazard is something that we must be cautious of. Subcontracting, outsourcing companies do live by certain ethical and moral rules. We are a predominantly Catholic country and morality had been truly been compromised due to globalization, consumerism and survival. Professor Anteby, thanks for this article. Could someone also write on moral and ethical norms of outsourcing and subcontractors? Are they too fluid, too amoral or simply made a scapegoat of big companies whenever these companies are questioned on matters of command responsibility?

     
     
     
    • Anonymous

    If we hold companies accountable for the moral and ethical behavior of it's employees, should a different stand hold for the actions of companies they contract to? In my experience, more and more large US companies are requiring contractors to hold equivalent standards, and this is as it should be.

    Whether or not one is an employee is not the issue, rather, it is who do we hold accountable, or do we hold anyone accountable for corporate misconduct. Not holding contracting company accountable for the conduct of its contractors is no different than not holding them accountable for the conduct of their employees.

    Leadership cannot pass the buck simply due to lack of an employment contract, particularly in a global marketplace.

     
     
     
    • Praveen Zala
    • PM, Hewlett Packard

    It is very timely that you bring up this point. In all earnestness - I want to point to something very important in this discussion.

    The 'nesting doll' structure that you mention above is a very good analogy to draw and impress upon people what you really mean. The 'moral hazard' that we are noticing is not as a result of the 'structure' alone - it may or may not contribute. It is more than that.

    Consider this - each inner doll needs to have the same outer look/texture/feel/exterior design elements to it - only then it would be a 'Compliant nested doll'. Even a small imperfection would appear glaring and that is what is being mimicked in the external world today. For instance - The 'Vision' from the largest of dolls needs to percolate down the innermost, smallest doll - to be 'in line and aligned'. This does not happen in today's world. Sub-contractors and suppliers do not realize the importance of Client's vision and never strive to align to it. End result - all kinds of moral hazards!! A simple question by the spying agencies whether the tapping is for a ethically, legally permissible purpose would have barred RM and Co to get illegal access to phone records etc. My 2 cents.

     
     
     
    • Adam Hartung
    • Managing Partner, Spark Partners

    Ethics can seem so vague - so situationally specific - and not so important to a business intent upon achieving goals. Murdoch follows the lead of Ebbers (Worldcom), Skilling (Enron) and Black (Sun Times Group) in reinforcing loyalty to those who apply hard work and ingenuity - even if illegal - to accomplishing the company goals.

    Unfortunately, all too many leaders (and organizations) fall into the trap of working so hard to accomplish goals that they jeopardize the organization's future. Forbes offers 10 questions we can ask to discern if any company (even our own) is headed toward the problems now seen at News Corp. http://onforb.es/mRfgUo