What Investors Can Learn from News Corporation's Tabloid Debacle

Britain's unfolding tabloid scandal has taken a heavy toll on the country. Employees of News Corporation's NWSA tabloid, The News of The World, have been exposed for hacking into numerous voicemail accounts of private individuals. Editors have been jailed, the tabloid was shut down, and new inquiries are under way to find the complete nature of the hacking. Even Prime Minister David Cameron has suffered criticism, as his former chief spokesman, Andy Coulson, was arrested last week for his role in the hacking when he was Editor of the tabloid. The news was especially unnerving to the public, as everyone from celebrities and Royal family members to average Joe's were hacked. Parliament has asked that a full investigation is undertaken. Rupert Murdoch's News Corporation has taken a devastating blow in its reputation, which could possibly block its bid to gain full ownership of British Sky Broadcasting, known also as BSkyB, for $12 billion. Investors have responded quickly to the turmoil, dumping the stock en masse. Trading above $18 on July 5th, the stock is now near $15. The company's market capitalization now stands at $40 billion. The News of the World's sudden drop in popularity is proof positive of the fast currents of public opinion. Trust was broken, and many citizens have demanded that those responsible are made to pay. Investors should take a big lesson from this drama. Every company - from Goldman Sachs, to Coca-Cola, to News Corporation - is only as strong as the confidence in its future prospects. If a reputation is irreparably damaged, a company's investors can flee in with little notice. The result can send a stock into nosedive. News Corporation can recover from this mess, but it must act quickly to acknowledge tremendous mistakes and rectify them without hesitation. If it doesn't, questions will begin to be raised about senior management.