News Corp. investors should vote against the re-election of 13out of 15 board members to establish more independent oversight ofmanagement, said the proxy advisory firm Institutional ShareholderServices.

News Corp. has suffered financial consequences from aphone-hacking scandal at one of its newspapers that reflect a lackof oversight, said ISS, which advises more than 1,700 investors oncorporate governance issues. It recommended investors vote againstChief Executive Officer Rupert Murdoch, his sons James and Lachlan,and 10 other directors.

“The company's phone hacking scandal, which began its publicdenouement in July 2011, has laid bare a striking lack ofstewardship and failure of independence by a board whose inabilityto set a strong tone-at-the-top about unethical business practiceshas now resulted in enormous costs,” ISS said in its report.

ISS has recommended against 3.6 percent of the directors atcompanies in the Standard & Poor's 500 this year, according toISS spokesman Ted Allen. Shareholders will vote on board membersand other issues at News Corp.'s annual meeting Oct. 21.

Glass Lewis & Co., another proxy advisory firm, also saidthe company needs a more independent board. The firm, which advisesinstitutions with over $15 trillion in assets, said shareholdersshould vote against James and Lachlan Murdoch and four otherdirectors.

Strong Disagreement
Phone-hacking at thecompany's News of the World tabloid in London is part of a “mosaicof failures” in the board's independence, oversight andresponsiveness, ISS said. Executive pay is another area of concern,according to the firm, citing the elder Murdoch's cash bonus of$12.5 million in fiscal 2011, compared with $4.4 million the yearbefore.

Teri Everett, a spokeswoman for New York-based News Corp., saidthe company strongly disagrees with ISS's voting recommendationsand that the proxy advisory firm failed to consider the company'sfinancial performance. The company reported $4.85 billion inoperating profit for the year ending in June, a 23 percent increasefrom the year before.

“News Corp. believes the recommendations put forth in the ISSanalysis are not in the best interest of the company'sstockholders,” Everett said in an e-mail statement. “The companytakes the issues surrounding News of the World seriously and isworking hard to resolve them.”

Business Lost
The hacking scandal has led tothe loss of revenue and business deals, according to ISS. Closingthe News of the World will hurt profit at the company's newspaperunit, the firm said. Dropping its bid for the remaining shares ofBritish Sky Broadcasting Group Plc caused News Corp. to pay a $63million breakup fee and to lose out on potentially significantfuture earnings, it said. In addition, News Corp. in August lost a$27 million no-bid contract to build an education data-systemtracking student performance for New York due to the scandal, theadvisory company said.

“Despite the protestations of the Chairman/CEO in hisParliamentary testimony, ultimate accountability for theperformance — and particularly the self-inflicted wounds — of thecompany must rest with the senior management and the board ofdirectors,” ISS said.

Rupert's Control
Murdoch's 40 percent stakein the company's Class B voting shares would make it difficult toenact board changes that differ from his wishes. Prince Alwaleedbin Talal, a friend of the Murdoch family, owns 7 percent of votingshares.

“I can see a substantial minority voting against some of themanagement's proposal, but seeing a majority voting againstmanagement seems unlikely,” Paul Hodgson, senior research associateat Governance Metrics International, said.

James, 38, who appeared in July before a U.K. Parliamentarycommittee to explain how much he knew about phone hacking at Newsof the World, was recalled to answer further questions later thisyear. He said repeatedly that he didn't know of widespread hacking,testimony that has been challenged by former executives at the U.K.newspaper unit.

The only two directors that ISS recommended investors elect areJoel Klein, the former chancellor for New York City schools, andJames W. Breyer, a partner at venture capital firm AccelPartners.

Votes for the two “are warranted in light of their short tenureon the board,” the firm wrote.

Klein, 64, is now head of News Corp.'s education division.Breyer, 50, is a partner at Accel in Palo Alto, California, andsits on the board of Dell Inc. and Wal-Mart Stores Inc. In 2005, heled Accel's investment in Facebook Inc. at a $100 millionvaluation. The social-networking website is currently worth morethan $65 billion on private exchanges.

News Corp. rose 4.2 percent to $16.93 at the close in New York.The Class A shares had gained 16 percent this year.

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