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Wednesday, 20 July 2011

Murdoch - 'Willful Blindness' or just plain old Diseconomies of scale?

The professed lack of knowledge possessed by Rupert Murdoch and James Murdoch of phone hacking at News International demonstrated either that their company is too big for them to co-ordinate and control successfully, or that they are guilty of "willful blindness".

Diseconomies of scale are easy to explain. Economies of scale are where firms produce more efficiently as output grows. This can be because they can for instance buy in bulk, use the best technology or have access to the best finance terms. Diseconomies of scale are where firms produce more inefficiently as output grows. It happens past a certain point which is different in every industry. It certainly appears to have happened at News Corp.

Diseconomies of scale can happen for a variety of reasons but suffice it to say that the bigger a firm is, the harder communication and co-ordination of all the firm's resources are. In order to deal with this, the firm may put in certain safeguards (for instance, the reason Rupert Murdoch didn't hear about the payoffs to Max Clifford and Gordon Taylor in 2007 was because it wasn't for large enough sums for him to be told about it). No-one who watched or read the reports of the select committee inquiry yesterday could fail to be amazed at just how much wrong-doing the Murdochs weren't aware of within their family company. Rupert Murdoch said that the News of the World is only 1% of his company which is why he wasn't aware of it. But because he and James weren't aware of it, their company is paying to the tune of billions off their valuation. This is diseconomies of scale, and a very good example of it.

But there is another explanation, and committee member Adrian Sanders brought it up yesterday in the inquiry. He asked whether the Murdochs were aware of the term "wilful blindness". Rupert Murdoch indicated he had 'heard of it'.

As Margaret Heffernan has suggested in an excellent article in the Huffington Post (click here to read full article) every institutional debacle features the same arguments from those in charge - that 'it was just a few bad apples. Nobody at the top was to blame.  A few rogue, or over-zealous employees just went off piste'. As the crisis deepens the explanation moves to "no one could possibly have seen this coming". Both arguments were used in Abu Ghraib, Enron, WorldCom, BP and Lehman Brothers. Both were wrong then and are wrong now.

Heffernan believes that the phone hacking scandal, and the enormous price paid for it by News Corporation, isn’t the unfortunate byproduct of a few naughty freelancers. Nor was it an unpredictable, unforeseeable event. Rather, it was the product of a series of systemic failures any one of which was visible, but each one of which Rupert Murdoch and his UK-based chose to ignore.

She goes on to define 'Willful blindness' as a legal term, cited in the trial of Enron’s Skilling and Lay (about this here) . It states that if there is knowledge that you could have had and should have had but chose not to have, you are still responsible. The causes of organizational willful blindness are many but News International demonstrated most of them.

Ideology - Murdoch believes in political power and the importance of economies of scale. This had once made him successful but now blinded him to the British public's recently acquired distates for politics (MP's expenses) and foreign takeovers (Cadburys).

Obedience - As Murdoch's power increased, people wanted more and more to please him - for instance by getting big exclusives, however so acquired - and no one will intervene as non-compliance looks like disharmony.

Conformity - people in large organisations become so determined to 'belong' that they will give the wrong answer rather than be left out. So no-one would tell Murdoch what that something was wrong.

Money - there have been many experiments to show that large amounts of money undermines our social connections - making a person like Murdoch 'blind' to their customers, markets and political mood swings.

Power - the more powerful people become, the more likely they are to take big risks, think in abstract terms, and be absolutely certain they are right.

Affirmation - It is always nice to be surrounded by people just like us, confirming our sense that we are good and right. Murdoch's children surround him and may have blinded him to the full ramifications of what was going on.

'Willful blindness' is convenient. It means you can create an atmosphere and culture in which people will do absolutely anything to please you get noticed yet take no responsibility for their actions. As the executives at Enron found out (and sit in jail because of it) and the Murdochs may be about to find out, it is no excuse.

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