Peter Chernin to Exit Murdoch’s News Corp., Who Wins?

We wouldn’t have predicted such a move with the succession plans of most studio heads being ‘muddled’ at best, but Rupert Murdoch (Innovator/Benefactor) has made a industry-loud judgment call. Based on Murdoch’s legacy plan for his son, James Murdoch, to take over from Chernin, News Corp. President & COO, this leaves Chernin with a 6-year production deal, $40M in severance and a number of other high-flying amenities. So, who wins? Chernin or Murdoch? More after the jump…

From our perspective, the vantage point is both Murdoch’s and Chernin’s – we’ll break down the pluses/minuses, and dig into the inner dealings, the biographical hints and give a perspective of how innovation has touched the big studio/media company mindset. Namely, innovation in power struggles (during recessions) – who profits, stays onboard, gets offboarded/(outfoxed?) and ultimately marches onward?

From Michael Wolff’s The Man Who Owns the News (Murdoch bio tied to WSJ acquisition, aka great ‘media baron’ read):

Chernin has succeeded at News Corp. precisely because he never wanted to succeed in the terms in which he seems to have now succeeded. he has been a man content making many millions a year. But suddenly Chernin’s affable Everyman style has become all the rage. [...] He is by nature and temperament not quite even a number two, just a supernumerary. That’s how he’s described by virtually everybody – or, at least, that’s how he’s described until he became many people’s candidate for number one at other companies.

From a relative outsider, i.e., non-familial, position of leadership, Chernin has done exceedingly well with the company over the past decade, while also growing his compensation to even outpace his boss in Murdoch. Working with Roger Ailes and even with Murdoch’s kin – although Michael Wolff places Chernin behind the scenes with Ailes in derailing Lachlan Murdoch’s ascendancy.

Now that Fox is down; well, now that every media company is down, it’s time to either reconfigure and save on a big compensation and benefits’ package or have supreme planning and maintained management for when the economic shine comes back. In the case of Chernin’s value to the system, it’s a clear case of ably handled management and pristeen Hollywood image measured against economic turn of events and not letting James Murdoch get pushed around, Tinsel-style.

Murdoch Sr’s wife, Wendi Deng, has been more Hollywood-friendly, but Chernin has the industry cred that Rupert seems loathe to wade into immediately. In politics as usual, removing Chernin during less depressing times would have certainly hammered company stock; now, that it’s already low, the financial loss or wound will be less bloody. On the other hand, Chernin’s management prowess is hard to find on the market, and Murdoch has been more primed to discover deals than to actually integrate them into his companies. The right and left management brains need to fit well together.

So in the spirit of communicating a little studio thinking, here’s a theoretical playbook – bringing in the nature of innovating within the corporate corridors. With Chernin’s departure, there’s a clear sense that both parties profit in terms of family and in terms of exit compensation. And, given that the market benefits Murdoch, it still allows Chernin to create something great and well-integrated with a number of companies looking for strong leadership both inside and outside media. But, onto the News Corp. playbook:

Murdoch’s Point System:

• + Gains corporate freedom/protection for son James to take over the News Corp. empire
• + Saves on stock hit, as it’s already happened…
• + Saves $30M+/year in compensation package; pay yourself a fraction more and family double that
• - Murdoch loses a chief lieutenant who has been recruited for Disney, Yahoo!, i.e., the big management jobs
• - Severance package is big write-off
• - Company integration going forward is less well-oiled
• -/+ Requisite power struggle at Fox (begins)

Chernin’s Points:

• + Tough economic time, but great time to start a new company with comp riches
• + Leaves with a great reputation, e.g., ending WGA strike, well-liked exec
• + Peter’s been there a while, good time to sabbatical into something with more equity/less patronage
• -/+ Bad economy, but then again, the production package allows a great focus play and use of the company jet doesn’t crimp style
• - Does Chernin have a pool of talent he can count on to back him up in new venture? Has he prepped?

Last, some further background from the Alley Insider (and Ron Grover’s Businessweek column), WSJ, LAT and Variety trade:

If he does step down, he’ll collect a huge retirement package, according to Ron Grover from Business Week, who has the details on what Chernin will get if and when he leaves:

• $27 million in deferred compensation
• $11 million in various pension funds, going back to when he ran the Fox film studio and TV network before moving up to the presidency, according to News Corp.’s proxy filing with the Securities & Exchange Commission.
• The right to “require” the company to enter into a six-year deal to buy films or TV shows from him.
• Fox would be required to buy “at least” two movies a year from him, paying a fee “at least as favorable as the most favorable agreement” the studio had with a producer in 2004, when he signed the agreement.
• He would continue to receive credit during his six-year production deal for the company’s pension plan, building up his nest egg as if he had remained an employee.
• His stock awards would continue to vest.
• He would have the right to use the company jet for up to 50 hours a year (a six-year benefit estimated by the company to be worth $1.65 million),
• Could make use as well of a company car (another $210,000) while making deals around Hollywood.

From the WSJ:

Speculation has swirled for months about the future of Mr. Chernin, 57 years old, who runs News Corp.’s television and film production businesses in Los Angeles. The division is one of the largest within News Corp, which also owns The Wall Street Journal. [...] Mr. Chernin’s contract expires at the end of June, and negotiations over a new contract were a closely guarded matter, even among the senior ranks at News Corp.

From Deadline Hollywood’s Nikki Finke:

Rupert back in 2006 did announce a succession plan in which all 4 of his children from his 1st and 2nd marriages — James, Elisabeth, Lachlan, and Prudence — will assume control over the family trust that owns 30% of News Corp after he dies. (His 2 daughters by 3rd wife Wendi Deng will not assume any control of the trust, nor will Deng have a voice in how News Corp is run. His assets, however, will be divided equally among all 6 children.) But Murdoch himself wouldn’t name a heir apparent at that time. Instead, he said: “If I go under a bus tomorrow, it will be the four of them [that] will have to decide which of the ones should lead them.”

From Variety:

There’s much speculation internally that although Murdoch wanted Chernin to stay for at least another few years, his departure now clears the way for his son James Murdoch to eventually come in as his No. 2 – not immediately, but within a year or two. James Murdoch, who now serves as CEO of News Corp.’s Europe and Asia operations, has seen his turf expand steadily within the company during the past decade.

Finally, from the LA Times’ Dawn Chmielewski, Meg James and Claudia Eller:

Chernin, 57, has been highly regarded for his oversight of both the creative and business sides of News Corp. and has been the company’s ambassador on Wall Street and in Hollywood.

And Murdoch’s letter to News Corp. employees:

February 23, 2009

Dear Colleagues:

Today, we are announcing that Peter Chernin, our President and COO, will not be renewing his employment contract. Peter will be taking up the opportunity to start a new motion picture and television production venture with Fox.

Many of us who have worked with Peter over his 20 years with the company can attest to his leadership, his diligence, and his wisdom. I can also testify to Peter’s friendship, dedication, and honesty. He has been a close colleague and an ally to me for many years.

While Peter has distinguished himself at News Corp, he has also, increasingly and tirelessly, circled the globe in support of Malaria No More, which has achieved nothing short of remarkable results. Let us all wish him the best of luck, and the greatest success, as he embarks on this new chapter of his career, both as a professional and as a role model for an executive who gives back.

As you all know the downturn we are operating in is more severe and global than anything we have seen before. No company is immune to its effects. I want to take this opportunity, today, to write to you about how we will manage such an important leadership transition, and why I am convinced that today our company is not only well-positioned financially and competitively, but is on the cusp of a new phase of growth. Remember, we began priming ourselves for a weakening economy over a year ago. We have managed expenses and capital expenditure prudently, and strengthened our balance sheet. Following the partial sale of NDS, we will have over five billion dollars in cash, and this year we should exceed $3.5 billion in adjusted operating income.

In the past, we have met downturns with vigor, often departing from the herd. We have emerged much stronger.

Achieving our ambitions will require change and renewal. So throughout 2009, I will continue to work closely with all of our companies to make sure that we are organized and resourced in the best20way to take advantage of this extraordinary point in time. We will press our advantages and invest in our great franchises. And, of course, we will keep our eyes on big prizes, some of which may arise only once in a generation.

Across News Corp. we have a broad and deep reservoir of extremely able executives.

Over the years we have accomplished great things. People understand, and have acknowledged, our entrepreneurial spirit as well as our doggedness; our willingness to take risks, our contrarian investment style; and our commitment to long-term development and shareholder value.

Many of you have told me how hungry you are to work more closely across our companies. Many of us have been frustrated by the things that can get in the way of that. From systems that don’t talk to each other to incentives that struggle to capture the opportunity and aspiration of our total group. These obstacles are obvious to us all. There will be a streamlined management structure between our Los Angeles-based business units and the rest of the company. Peter and I will be communicating more on this over the next few months. For the time being, of course, the talented executive team at the Fox Group will continue to report to Peter.

Now is also an ideal opportunity to streamline and enhance many of the corporate and administrative functions of the business. There will be cost savings as a result, but the more important aim is to be leaner so that we can better leverage our collective talent and expertise. For instance, and beginning immediately, H.R. functions throughout all our units will report to Beryl Cook in New York as well as their division heads.  Beryl reports directly to me.

We have worked hard to develop and advance the best among us. The renewal of great companies begins within themselves. Pursuing an edge through superior talent is a priority. This will be a key focus for us in 2009.

In the coming months, I will be reaching out to you with new questions, and with new plans.

We are in the midst of a phase of history in which nations will be redefined and their futures fundamentally altered. Many people will be under extreme pressure and many companies mortally wounded. Our competitors will be sorely tempted to take the easy beat, to reduce quality in the search for immediate dividends.

Let me be very clear about our company: where others might step back from their commitment to their viewers, their users, readers and customers -– we will renew ours.

The direction of the business now and over the next few years will define the character of our company for decades.

We have always thrived on change and challenge. This was true when we began building a newspaper business in Australia. Just as it was when we created BSkyB and developed a fourth U.S. network, the Fox Network, when conventional wisdom dictated that there was room for only three players. It was true when we launched Star, now the leading network in India, and the Fox News Network and Sky Italia.

The best things we have done, and there are many examples, have defied conventional wisdom, often in the teeth of fierce opposition and near universal disbelief in our capabilities.

Over the past 12 months I have spent time with you in India and China, in Italy and the UK and many other countries. We have brought Dow Jones into the fold, extended our influence in Europe, and been at the center of reporting the arrival of a new American president and the impact of the global financial crisis. We’ve told extraordinary stories, in theaters around the world and on page and screen from Mumbai to Malibu.

Our own international reach is a profound strength. We have intelligent, creative and highly motivated colleagues around the world who are ambitious for themselves, for their countries, for our customers and for our company. The result is that where others simply seek distribution, we are building durable businesses at scale. We are also creating large franchises in marketplaces that will grow at a faster pace in the coming years and, increasingly, our businesses are based on direct customer relationships.

We must always be acutely aware of our responsibility to shareholders, and to create real value for them. This is entirely consistent with, and in many cases inseparable from, the enormous social value we have created over the decades. We provide information and entertainment to billions, enabling them to improve their lives and those of their families.  There is genuine value in the values of our company -– these are values that are even more important in a world confronting so much today

We believe in communities. The very idea of community is broad, and encompasses interests that cross national, ethnic and demographic borders. We are all members of many different communities, whether it be of people who are passionate about Hollywood films, or care about living in a healthy environment, or use a local jobs website, or trade commodities in Chicago and London, relish soccer whether in China or Nigeria. These communities are our communities, as they read, evaluate and create everyday.

That is why, most of all, I believe in the community that is our company.

Rupert Murdoch