As Scandal Swirls, News Corp. Shareholders Call For Reduced Murdoch Influence

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David Moir / Reuters

James Murdoch resigned Tuesday as chairman of U.K. satellite TV company BSkyB, in the latest fallout over the phone-hacking and policy bribery scandal that has engulfed media giant News Corp.

James Murdoch’s resignation as chairman of British satellite giant BSkyB is just the latest development in a slow-moving saga that continues to roil one of the most powerful media companies in the world. Now, ahead of a widely-anticipated U.K. government report that could further tarnish the 39-year-old Murdoch, News Corp. faces growing calls for governance reform that could loosen his family’s iron grip on the company.

A prominent shareholder group, Christian Brothers Investment Services, has called for News Corp. to appoint an independent chairman to allow it to better distance itself from the still-unfolding phone-hacking and police bribery scandal the group calls evidence of “a lax ethical culture and a lack of effective board oversight.”

If successful, Christian Brothers’ proxy proposal would replace Rupert Murdoch as chairman of the board, though the 81-year-old News Corp. patriarch would remain CEO of the company. Christian Brothers’ call comes amid the continuing fallout of a scandal that has already forced News Corp. to close one of its flagship U.K. papers, News of the World, and doomed the media giant’s plan to take full control of BSkyB.

“This pervasive and continuing scandal has led to an erosion of public confidence, helped to scuttle a critical business acquisition, and threatened the journalistic reputation and viability of News Corporation’s UK publications,” Christian Brothers, which manages about $4 billion, said in its proxy resolution. “It also has made clear the need for independent board leadership to steer the company through a process of reform.”

(More: Are Rupert Murdoch and David Cameron Locked in a Death Spiral?)

News Corp.’s existing 39% stake in BSkyB could also be at risk. The U.K. communications regulator, Ofcom, is investigating whether BSkyB satisfies the “fit and proper” ownership requirement to hold a national broadcast license, given News Corp.’s sizable ownership stake. James Murdoch’s resignation as BSkyB chairman could help mollify regulators, Canaccord Genuity analyst Thomas Eagan told Reuters. “I think it makes it easier for News Corp to pass the fit and proper test and it is a gesture made by Sky and News Corp. for them to keep their license,” he said.

Christian Brothers’ proxy motion follows an early shareholder lawsuit by Amalgamated Bank and several public sector pension funds that accused News Corp. of nepotism and charged that Rupert Murdoch “habitually uses News Corp. to enrich himself and his family members at the company’s and its public shareholders’ expense.” The lawsuit was originally focused on News Corp.’s $615 million acquisition of British TV production company Shine Group Ltd. — a deal that brought a $250 million windfall to Murdoch’s daughter Elisabeth — but has since been expanded to include other alleged wrongdoing, which the plaintiffs said highlighted “a culture run amuck within News Corp and a Board that provides no effective review or oversight.”

Just last week, News Corp’s former pay-TV security unit, NDS — which it recently sold to Cisco for $5 billion — was accused of hiring hackers to pirate rival services, including in the United States. News Corp. denied the charges, but the mere association with “hackers” was another black eye for a company already deeply embroiled in the U.K. phone-hacking and police payments scandal.

(More: Who’s Who in the U.K. Phone-Hacking Scandal)

News Corp., a U.S. company, could also face exposure under the U.S. Foreign and Corrupt Practices Act, which prohibits bribing foreign officials. And the FBI is investigating whether any of News Corp.’s U.S. properties engaged in phone-hacking. In a statement, Christian Brothers cited was it called “shareholder discontent” with News Corp.’s current board structure, noting that during the company 2011 annual meeting, the group won the support from proxy voting firm Glass Lewis and “prominent investors with over $400 billion in assets under management,” including CalPERS (the giant California public employee pension fund) and the Church of England, among other shareholders.

For years, Rupert Murdoch has controlled News Corp. with an iron grip and made it clear that he favors one of his children to assume command of the media giant. But as James — the one-time heir apparent — steps away from another key role at the company, that’s looking less likely. (On February 29th, James resigned  as executive chairman of News International, which runs The Sun and Sun on Sunday, and The Times and Sunday Times of London.)

Still, given the Murdoch family’s 40% voting control of News Crop, it’s also unlikely that a shareholder effort will completely dislodge them from power. (Last fall, Institutional Shareholders Services, a shareholder advisory firm, waged a largely symbolic attempt to have Murdoch and his sons step down from the company board.) In lieu of that, an independent board chairman may be the most realistic measure that shareholder critics can hope for. “Given the dual-class share structure and level of family control, it is particularly important for News Corporation to have an independent chair who is empowered to challenge management, to foster a culture of accountability, and to reflect the interests of the wider shareholder body,” Christian Brothers said in its motion.