News Corp. Board Challenged

By RUSSELL ADAMS And JOANN S. LUBLIN

News Corp.'s board, under scrutiny for its supervision amid a reporting-tactics scandal at the U.K. newspaper division, is expected to sit tight for at least the next couple of weeks, comfortable that the steps the company has taken so far are appropriate for addressing the crisis, barring other significant developments, according to people familiar with the matter.

Critics, however, contend the board lacks the level of independence it needs to ensure the mess is cleaned up properly.

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Reuters

Chairman Rupert Murdoch testified last week.

A week ago, News Corp. formalized a management and standards committee tasked with cooperating on investigations into voicemail interceptions and alleged improper police payments at its U.K. newspaper unit, "conducting its own enquiries" and proposing new standards. The committee ultimately reports to independent director Viet Dinh, who was an assistant attorney general under President George W. Bush.

However, the structure of the management committee, which reports through News Corp. Executive Vice President Joel Klein, raised questions about the board's ability to properly police the company. It also bolstered longstanding criticism about the lack of truly independent oversight at News Corp. overall.

Corporate-governance experts say any investigation into the company's conduct can't pass muster if it is overseen by a senior executive who reports to the chief executive and controlling shareholder, Rupert Murdoch.

"The probe cannot be conducted effectively while Mr. Murdoch is in charge," said Nell Minow, a corporate-governance specialist.

A spokeswoman for News Corp. said Mr. Klein, who is also a director, is reporting to the independent directors, not to Mr. Murdoch, on this investigation.

Ms. Minow is former editor of the Corporate Library, a governance research firm that recently merged with GovernanceMetrics International and has given News Corp. an "F" for its governance and board effectiveness every year since 2003. "I don't think there is such a thing as an independent director on that board.''

The board's independent directors are looking ahead to a previously scheduled meeting in Los Angeles before News Corp. reports quarterly earnings Aug. 10, according to the people familiar with the situation. Nine of News Corp.'s 16 directors are considered independent.

Though the independent directors have been holding regular Friday calls in recent weeks, next month's meeting will be the first time the group convenes in person since the phone-hacking scandal flared earlier this month, precipitating the closure of News Corp.'s News of the World tabloid and putting key executives on the firing line.

Board members have been discussing Elisabeth Murdoch joining the News Corp. board following News Corp.'s acquisition of the TV production company she runs, Shine Group, according to people familiar with the matter. One of those people said the plan is still for her to join the board.

One of the people familiar with the matter said despite the criticism, the board is "very comfortable" with the level of independence associated with how it is approaching the inquiry and believes wresting control from management at this time would only hobble the process.

News Corp. owns The Wall Street Journal.

News Corp. tapped Lord Grabiner, a commercial lawyer, to head the management committee reporting to Mr. Klein, who in turn reports to Mr. Dinh, the chairman of the board's Nominating and Corporate Governance Committee.

Another person familiar with the matter said the board has "full authority to make all decisions that are warranted" and noted that the committee is being advised by the law firm Linklaters LLP, which has no relationship with News Corp.

Board members have been discussing a wide range of options but are settling in for a long, drawn-out process, according to other people familiar with the matter.

Another person familiar with the matter cautioned that any significant developments in the next few weeks could compel the board to take additional steps in the short term, but that no substantive decisions are expected until at least next month's meeting.

A possible wild card is James Murdoch, News Corp.'s deputy chief operating officer and a board member. The son of Rupert Murdoch is facing increasing pressure over his handling of the scandal and, in particular, his comments to a parliamentary committee last week. Two former News of the World employees have come forward with claims that James Murdoch misled Parliament about when he learned illegal reporting practices at the tabloid were more widespread. James Murdoch has said he stands by his testimony.

Corporate-governance experts have long criticized the board for being beholden to the company's leadership but it is unclear whether the company would consider changing the makeup of the board.

Some of News Corp.'s nine independent directors have close ties to the company. Sir Roderick Eddington, the board's lead independent director and head of its powerful audit committee, is a former top News Corp. executive. Kenneth Cowley and Andrew Knight also used to work for the company.

"You are not going to drive Murdochs out of News Corp.,'' said John J. Keller, a vice chairman of recruiters CTPartners. The board should recruit new members from business, education and public policy, and thus broaden its makeup "beyond the scope of being Murdoch-centric,'' he said.

In Monday trading on the Nasdaq Stock Market, News Corp. shares were down 20 cents, or 1.2%, to $16.22.

Write to Russell Adams at russell.adams@wsj.com and Joann S. Lublin at joann.lublin@wsj.com