A privately commissioned report into corporate governance at Independent News & Media (IN&M) has claimed there are “substandard practices” in board independence at the company, which are undermining investor confidence.
The report by Davis Global Advisors, published this evening on the eve of the IN&M agm, is the second such report commissioned by businessman Denis O’Brien, who has been actively acquiring shares in the group and now holds a 25 per cent stake.
Even where company performance may be hitting on all cylinders, the market is likely to price the stock at a discount to maximum potential owing to risks investors see in a ‘crony’ board Davis Global Advisors
The author, Yale academic Dr Stephen Davis, claims in his report that the IN&M board is too large and that it has too few independent members.
He claims the board’s own judgment on the independence of its non-executive directors has been “comprehensively repudiated” by four analysis services that advise institutional investors on voting at the annual meeting.
Dr Davis’s report also says that IN&M’s 20 directors is a “conspicuously higher” figure than the global average of 10 and the media industry average of 11.
“Newscorp, with a market capitalization of almost 18 times greater and operating in eight industry segments globally, for instance, has 16,” the report states.
In addition, the report claims the company’s board audit committee, and the board nomination committee, are “too closely affiliated with management”.
The report says: “INM describes itself as fiercely committed to world-class business success. But it harbours substandard practices in board independence at INM, which unnecessarily undermine investor confidence, contributing to a likely rise in the cost of capital through a discounted stock price.”
“In other words, even where company performance may be hitting on all cylinders, the market is likely to price the stock at a discount to maximum potential owing to risks investors see in a ‘crony’ board.”
Citing various international standards on corporate governance, the Davis report says weaknesses in corporate governance “can impair the company’s ability to grow through acquisition, placing it - and its shareowners - at a possible disadvantage in relation to rivals whose lines of accountability are perceived as more constructive”.
IN&M, the report claims, is operating in "an already perilous industry with a self-imposed governance handicap”.
It claims to illustrate “the extent to which market watchdogs perceive a quality gap in governance between practices in place at INM and expectations of the investor community”.
“In short, sustained investor anxiety about the dominance of insiders is grounded in fears of misalignment of interests between the O’Reilly family and other shareowners,” the Davis report concludes.
“Despite improvements in governance, INM’s board maintains essential features that attract charges that amount to ‘cronyism’ by market parties that act as the eyes and ears of many institutional investors.”
The board of IN&M recently issued its own report by Professor Jay W Lorsch of Harvard Business School.
He found that while the IN&M board was not perfect, it functioned well when judged by the yardstick of the company's financial results. In particular, he noted a "healthy culture of open debate".
Prof Lorsch dismissed Dr Davis's report as a one-sided attack from a corporate governance guru.
Mr O’Brien is the second largest individual shareholder in IN&M, with a 25 per cent stake and his ongoing acquisition of shares in the group is viewed as an ambition to take control from Dr Anthony O’Reilly, who holds 27 per cent.