Readers and shareholders unite! Britain's hacking scandal, newspaper governance and history

Marc Flandreau 07 July 2012



The Leveson inquiry into the practices of the British press, prompted by revelations of the hacking scandal at News of the World, has set out general guidelines for reform of the industry. The new regulation would have to be effective and cheap, encompassing and protective of media freedom and intended to support the vulnerable. While most newspapers welcome a reform that would somehow restore public confidence in their products after the phone-hacking scandal, some do not seem overly eager to see the regulator stepping in – as shown by a recent article published in the Financial Times (Financial Times 2012). In an editorial of 1 July 2012, the newspaper suggests that regulation should be broad and tough but, principally, independent, and that is about it as far as ideas are concerned.

Curiously, however, given its ideological orientation, the finance newspaper does not mention other possible aspects of reform, namely governance, which may be dramatically improved without setting up a new watchdog (whose creation may nonetheless be valuable). This could go a long way towards improving the performance of newspapers as instruments to bolster democracy rather than undermine it.

Current policymakers may be well-advised to study some historical precedents with failure of the press and democracy. As I have found in a recent paper with Vincent Bignon, the record of the press in interwar France provides valuable perspective (Bignon and Flandreau 2012). At that time the French press suffered from problems that were not unlike those experienced by the British press today. In particular, the relations between the political class and the main media were, well, very cosy. Politicians ran newspapers and newspapers ran politicians. New entrants in the newspaper industry were punished by incumbents, using their many useful connections in France’s political machinery. Distribution of newspapers was a monopoly controlled by this the political-media nexus. The situation deteriorated gradually and led to a total collapse of quality and credibility that coincided with France having to deal with the Nazi threat. The result was not successful.

While the circumstances that gave rise to this situation were quite different from those of Britain today, the parallel between France’s interwar predicament, which led to collapsing circulations and loss of credibility, and the current situation in Britain is striking.

In this article, we make two main findings:

First, we argue that readers of newspapers (and thus 'democracy') belong to the same incentive group as the newspaper’s minority shareholders. Majority shareholders, who control the editorial line of the journal, have an incentive to exploit the value of the newspaper as an instrument for political and industrial trafficking. This may provide them with political favour, which can then be transformed into economic benefits. In Figure 1 below, I show the evolution of the control premium for two leading French newspapers in the interwar period (Le Temps, a French counterpart to The Times, and Le Petit Parisien, a mass daily).

Interestingly, we see that the value of the voting premium (the percentage difference between an ordinary voting stock and a non-voting one) became huge during the 1930s precisely at the time when political and media corruption is reported by historians to have skyrocketed. In particular, we see that the control premium became enormous (in the 400-500% range) for Le Temps around the Munich crisis, when cover-up of France’s deviant policies towards Nazi Germany was most 'valuable' for politicians (a point at which Hubert Beuve-Mery, a future editor-in-chief of Le Monde, resigned from Le Temps).

Figure 1. Voting Premium as a Percentage of Non-Voting Share Price

Source: Bignon and Flandreau 2012

This evidence suggests that rules to protect minority shareholders may be valuable to foster the quality of journals, leading to our second finding. We compared the commercial value and influence value of France and Britain’s leading conservative newspapers (Le Temps and The Times) in the 1920s when both changed hands. Because we have an estimate of their ‘economic’ value as plain news-selling firms at that date, we can infer the value of ‘goodwill’, which is nothing but the influence value. Results are shown in Figure 2 and they are striking. As can be seen, poor corrupt Le Temps is dominated by The Times both in terms of commercial and influence value.

This makes sense – using a newspaper for political trafficking etc. reduces the number of readers. This is bad for outside investors who are reluctant to invest in such a newspaper. Equally, if collusion with politicians prevents entry and the full revelation of the truth, then the newspaper becomes mostly an instrument for traffic, but influence is limited by the newspaper's overall lack of credibility. In our joint work, we describe this phenomenon as a debasement cycle. That is, people take control of newspapers to buy entry and once they have done that they dump the newspaper, leaving readers and minority investors to foot the bill.

As we also explain, one reason for the better record of The Times was a new constitution that was precisely intended at safeguarding the interests of minority investors (a friend of the Conservative Party, who did not have his say over editorial policy or daily management of the newspaper). Such arrangements were actually pervasive in British press groups and intended to reassure readers and investors alike. This did not prevent The Times from having its own biases but at least it did not lead to the same extensive quality debasement a was observed in France.

Figure 2. The commercial vs. the influence value of The Times and Le Temps

Source: Bignon and Flandreau 2012; In the case of The Times, we offer two alternative decompositions. See text for details.

We are struck by the parallel with today’s crisis of the press in Britain. As Rupert Murdoch himself revealed, when his press group changed tack in the 90s and began supporting Labour after having supported the Conservative Party, they lost a large number of readers. Losing readers may make sense, if you buy entry: thus the 200,000 daily readers who were lost would be a measure of the value of political entry. Likewise, among the most vocal critics of Murdoch’s ways are shareholders. Recently, lawyers representing shareholders in News Corporation filed a complaint alleging "rampant nepotism and failed corporate governance" against Murdoch. So again, readers and shareholders are in the same incentive group.

The implication is that it is not enough to have a formally 'free press' for truth to out and transparency to prevail. What we argue is that a closer look at the evidence and at the underlying issues may suggest that the failure of newspapers is not to be solely addressed by creating a regulatory agency. Enforcing specific standards of corporate conduct in what is a specific industry could go a long way towards mending the British press. This is an effective, cheap, encompassing type of reform, and one that would be protective of media freedom and intended to support the vulnerable. On top of the rest, it derives from age-old wisdom, something British journals used to know about.


Financial Times (2012), “Britain’s media and regulation”, 1 July.

Bignon, Vincent and Marc Flandreau (2012), “The Price of Media Capture and the Looting of Newspapers in Interwar France”, CEPR DP9014.



Topics:  Economic history Politics and economics

Tags:  media, Press, British press, Leveson

Professor of Economic History at the University of Pennsylvania and CEPR Research Fellow


CEPR Policy Research