Rupert Murdoch and the Seeds of Moral Hazard

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.