Veritas: The cost of corruption to investors

Today there is much attention in the UK and elsewhere on events in the media sector, but more specifically on alleged phone hacking crimes committed by people at News International, the UK arm of US media company News Corp.

The market price for News Corp stock is down about 20% since the scandal started dominating the headlines. That market cap fall translates into losses of about $1bn for the Murdoch family alone, according to certain calculations, and much more for all shareholders combined. Ratings agencies are warning that further share price falls could prompt a downgrade of the company.

Funds investors have also been taking a hit. Data from FE suggests falling returns in the 10 days to 18 July from three funds with exposure to News Corp stock: Janus Capital US Twenty, Lazard Select Australian Equity, and St. James’ Place THS Partners Managed Distribution.

What the entire episode truly emphasises, however, is the cost of corruption and poor corporate governance, which can eat away the value of any investment. Investors in UK assets may be further unsettled by other events taking place today beyond the pale that is the storm around illegal intercepts of telecommunications.

Because, while most attention is on the expected statements from Rupert Murdoch, his son James and former chief executive of News International Rebekah Brooks – the schedule of UK parliamentary committee meetings illustrate the scope of the problem.

The morning of 19 July also sees the UK’s lower parliamentary chamber, the House of Commons’ International Development Committee interviewing BAE Systems and the UK’s Serious Fraud Office. The UK’s former prime minister Tony Blair infamously ordered the SFO to drop an investigation into BAE’s role in alleged corruption involving a £40bn arms deal signed in the 1980s between the UK and Saudi Arabia – known as al-Yamamah.

Then there is the House of Lords’ (the UK parliament’s upper chamber) Science & Technology Committee asking questions about nuclear research and development capabilities in the UK. Given the response of some parts of the nuclear industry to events in Japan earlier this year, it is fair to say that the UK’s Energy and Climate secretary Chris Huhne faces some tricky questions. Incidentally, Huhne himself has been investigated for allegedly asking somebody else to take a speeding penalty to avoid points on his driving licence.

Finally, there is not one, but three scheduled hearings by the House of Commons Home Affairs Committee and the House of Commons Culture, Media and Sport Committee into various elements of illegal telephone hacking in the UK, allegedly carried out by people employed by or on behalf of News Corp, News International, and with alleged collusion of corrupt police officers in the UK’s biggest police force. Two of the country’s most senior police officers, including a top anti-terrorism officer, resigned yesterday as a result of the scandal.

Given the importance of defence and media industries to the UK economy, these issues clearly illustrate the dangers of corruption and poor corporate governance. The volatily in News Corp shares arguably shows up the market cost of these issues as risks to investors, and why investors should become more active in pursuing wrongdoers.

 

To view the day’s parliamentary proceedings visit www.parliamentlive.tv

 

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