By Georgina Prodhan
LONDON (Reuters) - It was one of many strange moments in a hearing rich in absurdity. As British lawmakers questioned Rupert Murdoch last month over whether his News of the World journalists broke the law by hacking into mobile phones, the 80-year-old Australian-born boss of media giant News Corporation began to reminiscence about his late father.
"I just want to say that I was brought up by a father who was not rich, but who was a great journalist, and he, just before he died, bought a small paper, specifically in his will saying that he was giving me the chance to do good," Murdoch said.
Member of Parliament Damian Collins tried to get the hearing back on track, but Murdoch, sitting beside his son James, the head of News Corp's non-U.S. interests, continued: "That just addresses the question of it being a family business. I would love to see my sons and daughters follow that route -- if they are interested."
What Murdoch's children are interested in may no longer matter. Seasoned Murdoch-watchers and corporate crisis experts say Murdoch's dream of having one of his own take over his media empire is fading, and could be the next casualty in a crisis that has already killed a newspaper, cost two of Britain's top police officers their jobs and left British Prime Minister David Cameron struggling to explain why he hired a former News of the World editor as his communications chief.
The scandal has also opened up splits in the family. On August 5, News Corp said Elisabeth Murdoch, Rupert's eldest child from his second marriage to Anna Torv, would not take a seat on its board as expected. A company insider said Elisabeth's position had become untenable after she lashed out at her brother James and ex-News of the World editor Rebekah Brooks, blaming them for the crisis, before flying out of Britain on holiday just as the rest of the clan was gathering in London to deal with the crisis.
"At some point, the whole family becomes more of a liability than an asset," says Sydney Finkelstein, professor of management at Dartmouth College and author of the book "Why Smart Executives Fail."
Murdoch has spent decades grooming his three children from his second marriage to inherit the company built on the foundations that his father Keith left him.
In the past few years it was James who emerged as the favorite. After dropping out of Harvard, Murdoch's second son helped start hip-hop record label Rawkus Records -- which News Corp soon bought, returning James to the family fold. After turning around StarTV in Asia he became chief executive of British satellite broadcaster BSkyB, in which News Corp owns a large minority stake.
His appointment at age 30 to run a FTSE-100 company sparked complaints about nepotism, but he proved a capable executive. In 2007, he took over as head of News Corp's operations in Europe, Asia and the Middle East.
James, now 38, was far away in Hong Kong when the worst of the phone hacking so far uncovered happened, but he has been drawn into multiple investigations connected to the affair because of suspicions the company later covered up its activities.
In particular, British lawmakers want him to explain when he discovered that the hacking, which included listening to the voicemails of a missing school girl who was later found murdered, was more widespread than a single "rogue reporter," a line the company maintained until earlier this year.
MP Tom Watson, Murdoch's most dogged parliamentary questioner, asked him whether he knew about a crucial email that proved more than one reporter was involved.
James replied: "No, I was not aware of that at the time."
Two days later, however, News International's recently departed chief counsel of 26 years' standing, Tom Crone, and ex-News of the World editor Colin Myler released a statement saying they had told Murdoch about the email at the time. Murdoch said he stood by his statement and is expected this week to submit a written clarification of his evidence to the parliamentary committee. The committee may recall him in person.
Despite the heat, BSkyB directors voted unanimously last month to keep James as chair. His performance in parliament was generally applauded by U.S. shareholders -- although it was less well received in Britain, where commentators thought him at times evasive and arrogant.
"Leaving aside any question of moral culpability -- and we don't know the answers to all these questions yet -- even if you give him all the benefit of all the doubt going, it's not a very competent performance," says British writer and media consultant Steve Hewlett. "The picture that James presented of himself was essentially as a dupe. Would you trust this man with your pension fund? Irrespective of what emerges, it's very hard to see how James succeeds his father."
The News Corp insider said there was now "a degree of uncertainty" over the succession but no major changes expected in the short term, although the person acknowledged that the company had been repeatedly surprised by the developments of the past weeks and could be surprised again.
Top crisis PR guru Richard Levick, who has advised companies and governments on crises including Guantanamo Bay and the recent Wall Street crash, says: "They're wise not to be moving the deckchairs right now because they don't know what's going to be happening next. They have not been in front of this crisis. They have been behind it all along."
A News Corp official declined to comment on the record for this article.
Earlier this year, Rupert paved the way for Elisabeth to rejoin the company as a senior executive by agreeing to buy her television company Shine for 415 million pounds ($675 million).
The deal -- brokered before the News of the World scandal really blew open -- sparked a shareholder lawsuit by a trustee for several retirement funds.
"Murdoch is causing News Corp to pay $675 million for nepotism," said the lawsuit filed in Delaware's Chancery Court, which News Corp is contesting, adding that Rupert was treating the company "like a family candy jar."
On Friday, Viet Dinh, the board member in charge of corporate governance, issued a statement saying Elisabeth's nomination to the board would be "delayed" at her own request. "Both Elisabeth and the Board hope this decision reaffirms that News Corp aspires to the highest standards of corporate governance," he said.
Elisabeth, 42, has successfully run her own company and perhaps more importantly is untainted by the hacking scandal. She quit BSkyB, where she had been managing director, in 2000 after falling out with executives at the British broadcaster.
In the years since, she built Shine TV into one of Britain's biggest television production companies through an aggressive acquisition strategy as well as hit shows like Masterchef and critically acclaimed dramas such as Spooks.
Elisabeth and her second husband, public relations guru Matthew Freud, the great-grandson of Sigmund Freud, form the core of a powerful web of friends that includes Prime Minister Cameron and ex-News of the World editor Brooks.
She and her husband sometimes departed from the company line before last month's falling-out. Last year, Freud told the New York Times he was "ashamed and sickened" by the journalistic standards of Roger Ailes, head of News Corp's conservative U.S. network Fox News, and said he was "by no means alone within the family or the company" in his views.
And while Elisabeth may be an accomplished businesswoman, it would be a huge leap from running a 300-million-pound privately owned company to a $33 billion public corporation, says Finkelstein. "I can't imagine another company's board of directors feeling confident about Liz Murdoch as CEO. If it happens, it would be a royal ascension to the throne, not world class corporate governance," he says.
Lachlan, Rupert Murdoch's eldest son, has also distanced himself from the family firm -- although he did fly into London for the gathering of the clan at the height of the crisis last month, and still has a seat on the News Corp board.
Seen as Rupert's most likely successor for a time after Elisabeth left BSkyB, Lachlan, 39, resigned from his executive positions at News Corp in 2005 after he lost out in a power struggle with Ailes and then-Chief Operating Officer Peter Chernin. Lachlan has never commented on his reasons for leaving but people personally and professionally close to Lachlan and Rupert at the time said he felt his father had undermined him by going over his head in important decisions relating to Fox TV.
Of the three, Lachlan has been the most involved with the newspaper business. He took summer jobs working at newspapers while he was at school, and went straight from Princeton to work for News Corp in Australia before joining his father in New York at age 29 to become deputy chief operating officer. He later became chairman of Star TV.
A tattooed extreme sports enthusiast, he has some experience of running a public company -- this year he stepped up as interim CEO of Ten Network Holdings, a billion-dollar commercial TV network. But he has also lost millions in two business ventures in Australia.
"It looks like Lachlan has come out of this (the News of the World scandal) OK," says Australian investigative journalist Neil Chenoweth, who has written two books about Rupert Murdoch and his business. "But I think Lachlan's refurbishment and corporate redemption have a little way to go yet."
A POST-MURDOCH NEWS CORP
Rupert Murdoch has three other children but none are likely to take over -- at least any time soon. His eldest daughter Prudence, the only child from his 11-year first marriage, has had little to do with running the family business although she does sit on the board of Times Newspapers, part of News International. Rupert Murdoch's two youngest children, Grace and Chloe, with third wife Wendi, are just eight and 10.
A post-Murdoch News Corp would probably look a lot more like an ordinary company. A new CEO would likely come under pressure from shareholders to sell off the newspaper business. Chief Operating Officer Chase Carey is known to have no love for the newspapers, which accounted for $530 million of the company's $4 billion operating profit last year, and 20 percent of revenues.
"Investors have long hoped that News Corp would divest its newspaper assets," wrote Richard Greenfield, a BTIG analyst and long-time News Corp watcher in a recent blog. "The division is causing far more pain to News Corp's valuation than the division is worth. Despite Rupert Murdoch's love of newspapers, maintaining the status quo may not be possible."
Part of the problem is that Murdoch is so closely identified, both by others and by himself, with News Corp. This makes it almost impossible for him to step aside -- even for one of his children. He considered relinquishing the CEO role a year ago to Carey but decided against it, according to the News Corp insider. On Wednesday, Murdoch plans to take part in a News Corp quarterly earnings call for the first time in a year: Carey has been handling Wall Street's questions. Asked in last month's parliamentary hearing whether he had considered resigning, he answered simply: "No."
(Additional reporting by Kate Holton; editing by Simon Robinson and Sara Ledwith)