A recent shareholder lawsuit against Fox Corporation filed by New York City Pension Funds and the State of Oregon could reopen the debate about the responsibility corporate board members have when determining how much risk is appropriate when acting in the best interest of shareholders. As companies continue to grapple with the possibility of a slowing economy and ever-changing ESG concerns, the decisions boards make to maintain profitability are coming under sharper scrutiny. “Ethics versus profits” may become a major decision for some corporate boards.
The Fox Corporation board has been heavily scrutinized since Fox News agreed to a $787.5 million settlement of a defamation lawsuit by Dominion Voting Systems in April. Dominion accused Fox News of hurting its reputation by knowingly broadcasting falsehoods about the 2020 election. Smartmatic, another election technology company, has filed a $2.7 billion lawsuit against Fox News that is still pending.
The New York City Pension Funds and the state of Oregon filed their lawsuit in large part because of the damage the defamation lawsuits by Dominion and Smartmatic are causing Fox Corporation and its shareholders. In a press release, New York City Comptroller Brad Lander said the Fox board, “failed to put safeguards in place despite having a business model that invites defamation litigation. A lack of journalistic standards and a proper strategy to mitigate defamation has clearly harmed Fox’s reputation and threatens their bottom line and long-term profitability.”
Shareholders allege that the Fox Corporation board decided to chase ratings and profits by promoting former President Donald Trump’s false claims of a rigged election after viewership decreased when Fox News didn’t initially support those claims. The board’s failure to intervene when it knew Fox News was broadcasting falsehoods increased risks to the company. The lawsuit states: “Defendants chose to invite robust defamation claims with potentially huge financial liability and potentially larger business repercussions, rather than disappoint viewers of Fox News.” As a result, Fox Corporation:
• could be liable for hundreds of millions of dollars more in legal fees and damages from fighting lawsuits from its shareholders and others;
• has suffered damage to its reputation as a trusted news source;
• has regulators questioning whether to revoke its broadcast license.
What would your board do?
Faced with the choice of acting unethically to reap financial gain for shareholders or adhering to ethical standards and risking company losses, which would your board choose? It’s a situation any board could face at any moment.
As the corporate governance community watches how the Fox Corporation board deals with the repercussions of its decisions regarding the 2020 presidential election, it might be a good exercise for boards to consider how they might react in a similar situation where ethics and profits were at risk. For those boards that have an environment where members can have an open discussion about such delicate issues, it might be a good time to review the following questions:
• Do we have safeguards in place to ensure that all employees will adhere to our current ethical standards? How can we hold ourselves accountable?
• What measures do we have in place to ensure that we are in compliance with all industry standards and laws? How can we strengthen our systems to monitor and prevent compliance lapses?
• What is the risk tolerance level of our board and management team, and are these levels appropriate for current market conditions?
If tougher economic times are ahead, some companies may be pushed toward making decisions that might teeter on the edge of compliance or even break ethical standards. While it seems like an obvious choice, deciding whether to choose ethics over profits should not be ignored by any corporate board.