A titan challenged

This was not how media titan Rupert Murdoch envisioned the final chapters of his storied career.

With his family-controlled company engulfed in a phone hacking scandal in Britain, Murdoch’s legacy has been sullied and his plan of handing over the reins of News Corp. to his children is in jeopardy.

Murdoch’s son James, who just six months ago was seen as the heir apparent to succeed his father as chief executive, could be pressured to resign from senior management. Statements he made to the British Parliament in July about his knowledge of the extent of the eavesdropping have been called into question. In pursuit of juicy scoops, a News Corp.-owned tabloid hacked into cellphone messages left for celebrities, soccer stars, royalty and even crime victims.

On Friday, the 80-year-old Murdoch will face angry shareholders at the company’s annual meeting in Los Angeles. Two influential shareholder advisory firms and the nation’s largest pension fund, the California Public Employees’ Retirement System, are campaigning to remove Murdoch and his two sons, James and Lachlan, from News Corp.’s board. They say Murdoch’s handpicked board does not provide proper oversight of a company that has a questionable ethical culture. Some shareholders plan to call for Murdoch’s resignation as chairman.

Adding to the drama will be British lawmaker Tom Watson, who flew to Los Angeles from London to challenge Murdoch’s leadership.

“This is not just about phone hacking,” said the Labor party member who led efforts in Britain to expose the hacking scandal and hopes to speak at the annual meeting. “This company is facing criminal charges for bribing police officers, and potentially their executives will be charged with perjury,” he told reporters.

With 47% of the company’s voting stock in his or his close allies’ hands, Murdoch is not likely to lose control of the conglomerate that owns the Fox broadcast network, Fox News and other cable channels, 20th Century Fox movie studio and a stable of newspapers worldwide, including the Wall Street Journal.

But a significant vote of no confidence by investors could lead to someone other than a Murdoch running News Corp. for the first time in its history. Under one scenario discussed in recent months, President Chase Carey may be elevated to CEO, leaving Murdoch in a diminished role.

“This is not something you want late in your life after building such a great company,” said veteran media analyst Harold Vogel. “But now Murdoch must live with this blotch, this stain on his reputation, and it won’t be easy to erase.”

Since it erupted into front page news this summer, the scandal has been costly for News Corp. It forced the closing of the company’s 168-year-old News of the World tabloid, the resignation of key executives and the collapse of a $12-billion deal to buy the remaining shares of British Sky Broadcasting satellite service. It also prompted investigations into the company’s conduct by authorities in Britain and the U.S.

If criminal probes find that the company’s operatives bribed British police officers for news tips, there could be repercussions in the U.S., including the possibility that News Corp.’s valuable U.S. television licenses would be revoked.

In an embarrassing comeuppance, James and Rupert Murdoch were hauled before members of the British Parliament in July to explain the News of the World’s questionable conduct and their knowledge of the alleged misdeeds. James authorized large settlements to hacking victims but maintained that he was not aware that the eavesdropping was widespread until after making those payments. After two former underlings disputed James Murdoch’s account, members of Parliament have asked him to return next month for further questioning.

James Murdoch, 38, has overseen News Corp.’s European and Asian operations since 2007. In March, he was promoted to deputy chief operating officer, the third-ranking executive in the company, and was expected to move from London to headquarters in New York.

The scandal has galvanized shareholders, who long have accused Murdoch of running the publicly traded News Corp. as his personal fiefdom, with little accountability to shareholders. The odds are long that disgruntled investors will have the votes to topple the mogul or force out pliant directors. But they are demanding changes.

One investor group plans to call for Murdoch to relinquish his chairman title and be replaced by an independent director. Others want more independent voices added to the board.

In a particularly harsh rebuke of News Corp. management, Institutional Shareholder Services last week said the company’s handling of the hacking fiasco “has laid bare a striking lack of stewardship and failure of independence” by its directors. The firm urged investors to vote against 13 of the 15 board members, including Murdoch and his sons.

News Corp., which declined to comment for this story, dismissed ISS’ concerns, saying the firm’s “disproportionate focus” on the scandal was “misguided and a disservice to our stockholders.”

Also over the last week, CalPERS, the nation’s largest pension fund, which holds 1.4 million shares of News Corp.’s Class B stock, said it had withheld its votes for the Murdochs’ reelection to the board.

Analysts said that even if shareholders fall short of unseating the Murdochs from the board, a strong showing could force News Corp. to come up with reforms to mollify shareholders. They say the 43% “No” vote for Michael Eisner in a “Save Disney” shareholder campaign in 2004 laid the groundwork for the longtime Disney CEO to leave the company 20 months later.

“For shareholders, this is a blessing in disguise,” said Kevin Holt, senior portfolio manager at Invesco Ltd., one of the largest institutional shareholders in News Corp. He said he supports the promotion of Carey to CEO but declined to say whether Invesco would back Murdoch in the proxy vote.

Murdoch had figured the scandal was fading away, people close to the company said. But last week, new allegations of wrongdoing emerged when it was revealed that newspaper executives had inflated circulation figures of the European edition of the Wall Street Journal.

“Do the directors really know what’s going on there? Do they have a handle on the culture of the company?” asked Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System, which also withheld its votes to reelect Murdoch, his sons and the other board members.

“We are hopeful the company will step up and make some necessary changes,” Sheehan said.

All of this could derail Murdoch’s dream of handing the company to his children after building it from a newspaper in Australia inherited from his father.

“I just can’t see how he pulls it off,” said Stephen Mayne, an activist investor from Australia who worked at one of Murdoch’s papers. “Rupert continues to put up different children to run the company, but they continue to fall by the wayside.”

A decade ago, Murdoch tried to groom his elder son, Lachlan, 40, to take over. But he clashed bitterly with two top News Corp. executives and left the company in 2005.

In April, Murdoch moved to bring his daughter Elisabeth, 43, back into the family fold by buying her London-based TV production company, Shine Group, for $674 million -- a price tag that resulted in a shareholder lawsuit alleging the amount was excessive. She received $214 million from the sale.

Murdoch has beaten back challenges to his empire many times before.

By the early 1990s, Murdoch’s spending spree to bulk up the company with the Hollywood film studio, TV stations, satellite TV operations and book publishing had dug a debt hole of $3.2 billion. Restive banks moved to call in their loans.

“He was ambitious and aggressive -- and way overextended financially,” Vogel said. “He came within a hair’s breadth of losing the entire company.”

After months of tense negotiations with banks, Murdoch restructured the loans.

A few years later, he won a tough fight with the Federal Communications Commission, which had investigated whether News Corp. was in violation of government regulations regarding foreign ownership of TV stations. Although the agency ultimately found that News Corp. had violated foreign ownership rules of broadcast licenses, it granted the firm a permanent waiver.

“But those were business challenges and conditions,” Vogel said. “This is different. It’s a moral and ethical crisis for the company.”

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meg.james@latimes.com

joe.flint@latimes.com