Phone hacking and ERM

The British phone hacking scandal is a classic tale of how reputational risk can cripple a company. Even so, I don’t think News Corp. will be ramping up an ERM program.

Background: Rupert Murdoch’s News Corp. since 2005 has been fighting allegations that its News of the World newspaper hacked into the cell phones of newsmakers, up to and including the British Royals.

Phone hacking is illegal; one reporter goes to jail. The company pays a settlement to a prominent soccer player over another hack. The company says these were isolated events.

They weren’t. The practice dates back to 2002, when the company hacked into, and deleted, the phone messages of a missing 13-year-old. The child had been murdered, but the hacking gave the parents forlorn hope – their child must be alive, they reasoned. She was checking her messages.

And the company had been paying hacking victims secret settlements for years.

The scandal blew up this summer. So far, top News Corp. executives have resigned, a major acquisition (BSkyB) has been called off, and News Corp. stock is reeling.

CEO Rupert Murdoch and his son faced a grilling before Parliament. They pleaded ignorance.

Usually, ERM is associated with financial companies, but here is a nonfinancial company that could have used it.

But would it have wanted it? Long before this summer, an ERM program would have aggregated all the hacking settlements and presented them on a spreadsheet. It would have labeled the incidents as key reputational risks. It would have been labeled as likely to emerge. (Believe me, journalists gossip.) And the size of the emergent risk would have been considered great.

All of this information would have been reported to the board, regularly, for several years. Given all that, would Rupert Murdoch be able to testify thus:

The 80-year-old billionaire described himself as “absolutely shocked, appalled and ashamed” when he first heard allegations two weeks ago that the tabloid had ordered the hacking of a cellphone belonging to a 13-year-old British schoolgirl who was kidnapped and later found slain in 2002.

But he refrained from describing such illegal tactics as “endemic” at News International, the British subsidiary of his media giant News Corp., and when asked if he bore ultimate responsibility, as News Corp.’s chairman, for what happened at the News of the World, he replied succinctly: “Nope.”

Those responsible, he added, were “the people that I trusted to run it and then maybe people they trusted.” He described himself as the best person to lead his company through the crisis.

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