As the President, COO and number two executive at News Corp for the last twelve years, Peter Chernin has long been counted among the most powerful men in the media industry but his position has always had a footnote. Unlike other executives in similar roles, outsiders have rarely considered Chernin a likely candidate to ascend to the company’s CEO throne. The honor of one day leading News Corp, though ultimately a board decision, has generally been assumed reserved for one of Rupert Murdoch’s sons. This lack of upward mobility has fueled consistent rumors about Chernin’s eventual departure. Today, they’re now fact.
Reports are confirmed that when Chernin’s five year old employment contract expires June 30th, it won’t be renewed. Both Chernin and Murdoch have issued memos to staff making the announcement. (The letters are reprinted below in their entirety as is the company’s description of his employment agreement).
Chernin joined News Corp in 1989. After heading up Fox Broadcasting and Twentieth Century Fox, he became President and COO in 1996.
After twenty years at the company, Chernin characterized his decision as a difficult one saying ultimately that he’s “ready for new entrepreneurial challenges.”
Murdoch in a long memo to staff (see below) acknowledged Chernin’s service and hinted a management restructuring will likely follow to streamline reporting between the company’s LA based businesses (Fox) and the rest of its operations. Calling Chernin a “close colleague and an ally,” and deeming his contributions “immeasurable,” Murdoch said “now is also an ideal opportunity to streamline and enhance many of the corporate and administrative functions of the business.”
In his departure, the next phase of Chernin’s career will begin with the activation of a six year movie production deal built into his original contract. Under the terms, News Corp will be required to buy “at least two motion pictures per year.” News Corp will get “first look” on the TV and movie projects and during the six year term of the production agreements, Chernin’s equity in News Corp will continue to vest or be paid out on its original schedule.
Also as part of his departure, Chernin will receive some cash compensation. In an initial online report, the Wall Street Journal first reported this would be a payment of $40m. The report of that payout, however, was most likely incorrect. A review of Chernin’s compensation as described in a filing with the SEC in 2004 (and reprinted below) characterized this $40m balloon payment as available only in the event of “termination without cause” or “resignation for Good Reason.” Here, with Chernin’s resignation coming because the Employment Agreement’s simply expired, it wouldn’t likely trigger (unless the explicit contractual definition of Good Reason surprisingly included the contract’s expiration).
The WSJ has since edited its initial article to remove the reference to the payment. Language that had read “Chernin’s contract also calls for him to receive $40 million in cash if he leaves News Corp” is gone.
[Editing procedures for online articles at the WSJ is a subject Conde Naste Portfolio's Felix Salmon reported on in January and February. According to Salmon's review, the WSJ, which still runs on a traditional "daily paper" printing cycle, treats the version of its articles printed in the paper as final but allows earlier published online drafts to be re-edited prior to being inked to the newsprint. The process and timing for online article edits, and disclosure practices about them, are subjects routinely debated among journalists. Opinions differ as to whether its necessary to explicitly acknowledge changes to any published article/post, to acknowledge only changes of facts, or not necessary to acknowledge anything at all.].
Rolling back to Chernin’s compensation, the cash payment Chernin will receive isn’t entirely clear. From SEC filings it looks like a check in excess of $22m could be due. This money would come from accumulated payments paid to an account at a rate of $358,334 per month since August 1st, 2004 and listed as due in full on his departure (See the underlined SEC excerpt below for more information on this). It is possible, however, that this money could be deferred based on the language and terms of the movie production agreements or for tax reasons. It’s also possible the employment agreement terms may have been restructured or some of the accumulated money withdrawn since the original agreement was made. (Editors Update: further review of SEC documents shows Chernin’s employment agreement was amended August 10, 2005, September 8, 2005, August 8, 2005 and Dec. 16, 2008. The principle payment structure doesn’t appear changed).
News Corp has made no announcements about Chernin’s successor. There is some expectation Murdoch’s youngest son James who runs News Corps’ European and Asian operations will eventually take over some responsibilities but that could be a ways off. In the nearer term, executives from Fox may take on additional responsibilities for some of the company’s film and TV assets.
(Copies of the Memos from Rupert Murdoch and Peter Chernin Follow Below as does the description of Chernin’s expiring employment agreement filed with the SEC in 2004)
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•Peter Chernin Employment Agreement Information from News Corps 2004 8-K (The Most applicable sections are underlined)•
Summary of Peter Chernin’s Employment Agreement. After review and approval of the terms and conditions of the agreement by the Company’s Compensation Committee and Board of Directors, the Company entered into the Amended and Restated Employment Agreement described below with Peter Chernin, the Company’s President and Chief Operating Officer, effective August 1, 2004 through June 30, 2009. Mr. Chernin’s agreement provides that he will receive a base salary of $3,800,000 per year, and he is eligible to receive an annual performance-based bonus based on the Company’s achievement of financial performance targets determined by (i) calculating the percentage change in adjusted earnings per share (as defined in the agreement) of the Company for the fiscal year then ended compared to the prior fiscal year and (ii) then determining the required amount (as defined in the agreement) of bonus payable in amounts ranging from $0 to $25 million based on guidelines in the agreement setting forth the required bonus amount for the corresponding percentage change in adjusted earnings per share (as defined in the agreement). Pursuant to the terms of the agreement, the first $5 million of the annual performance-based bonus will be payable in cash and one-half any remaining balance will also be payable in cash and the other half will be payable in restricted stock units (paid in three equal annual installments except for any restricted stock units earned in the fiscal years ended 2007 and 2008 which are required to be paid in two equal annual installments and one installment, respectively). The number of restricted stock units to be delivered is equal to the applicable value divided by the average market price (as defined in the agreement) of the Class A non-voting common stock. Any bonus earned for the period ending June 30, 2009 will be payable solely in cash.
Pursuant to Mr. Chernin’s agreement, in August 2004, he received a grant of stock appreciation rights on 500,000 shares of Class A non-voting common stock. In addition, Mr. Chernin is also eligible to receive grants of annual equity-based awards in the form of stock, stock options or other stock related grants in amounts equal to and on terms at least as favorable as grants made to other Company executives. Mr. Chernin may participate in the Company’s pension and welfare plans that are applicable to the Company’s senior executives, which generally include retirement plans, supplemental and excess retirement plans, group life insurance, accident and death insurance, medical and dental insurance, sick leave and disability plans and any plan or program providing fringe benefits or perquisites to the Company’s executive officers. In addition to these pension and welfare benefits, Mr. Chernin is entitled to monthly Company contributions of $41,667 through November 15, 2004 to a pension account, which earns a guaranteed annual rate of return and, commencing on August 1, 2004, a savings account with monthly Company contributions of $358,334, which earns a rate of return equal to his investments in the 401(k) plan which both shall be fully vested at all times. The pension and savings account shall be paid in cash in a lump sum to Mr. Chernin, upon his termination of employment with the Company or at a time otherwise elected by Mr. Chernin in accordance with procedures developed by the Company. Pursuant to the terms of the agreement, the Company will continue to pay premiums under Mr. Chernin’s existing variable universal life insurance policies with a death benefit of $5 million. Mr. Chernin is also entitled to reimbursement in accordance with the policies of the Company for traveling and other expenses incurred in the performance of the Company’s business, including, to the extent available, use of the Company jet for business travel.
If Mr. Chernin’s employment is terminated by the Company for cause, by reason of death or if Mr. Chernin resigns without good reason (as defined in the agreement), he is entitled to receive (i) a payment equal to his base salary accrued through the date of such termination or resignation, (ii) a payment of the pro-rata portion of his annual bonus, (iii) a payment of any bonus earned but not yet paid for any period ending prior to the date of such termination or resignation, (iv) a payment of the total accrued amount in Mr. Chernin’s pension account and savings account (as defined in the agreement), (v) a grant of stock appreciation rights or other equity-based awards that he may be eligible to receive prior to the date of such termination or resignation to the extent not yet granted and (vi) other benefits such as enhanced SERP benefits, lifetime medical and life insurance and lifetime health and welfare benefits. Unvested equity awards would be forfeited upon such termination unless Mr. Chernin elects to enter into a post-termination production agreement. Good reason is defined under the agreement to include, among other things, any material reduction in Mr. Chernin’s benefits under any employee benefit plan or any material reduction in fringe benefits and perquisites provided to Mr. Chernin (unless failure to reduce such benefits would constitute a violation of applicable law), the assignment to Mr. Chernin of any duties inconsistent with his positions, duties and status with the Company, a change in Mr. Chernin’s reporting responsibilities, title or offices and if any person other than Mr. K. Rupert Murdoch is Chairman and Chief Executive Officer of the Company. If Mr. Chernin terminates his employment without good reason to become the chief executive officer of another company engaged in material business that is competitive (as defined in the agreement) with the business conducted by the Company and such company is not a listed company and its direct or indirect parent is a listed company, the Company and its affiliates will have no claim for damages against Mr. Chernin or any other person or entity if Mr. Chernin has provided six months notice to the Company and obtained the consent of the Chairman.
If Mr. Chernin’s employment is terminated by the Company without cause, for reason of disability, or if Mr. Chernin resigns for good reason, he is entitled to receive the payments listed as (i) through (v) above in addition to: (a) full vesting and exercisability of outstanding unvested stock appreciation rights, stock options and other equity-based awards granted to him prior to, on or after his termination, and the ability to exercise such stock appreciation rights or options for their full 10-year term, as well as payment of all restricted stock units, (b) a lump sum cash amount equal to $40,000,000, (c) payment of all restricted stock units paid in accordance to the terms of the agreement and (d) other benefits such as continued medical, disability, dental and life insurance coverage. If Mr. Chernin becomes subject to golden parachute excise taxes the Company will pay him a “Gross-up Amount” (as defined in the Agreement).
Unless Mr. Chernin resigns after declining to replace Mr. K. Rupert Murdoch as Chief Executive Officer of the Company (a “CEO Termination”) or Mr. Chernin becomes a full-time employee of an entity that derives more than 10% of its revenue from film or television production, within 30 days following the termination of Mr. Chernin’s employment for any reason (including for cause), he may require that the Company enter into separate six-year motion picture and television production agreements. The motion picture agreement will provide for the purchase by the Company of at least two motion pictures per year, and both the motion picture and television production agreements will contain terms relating to guarantees, fees and compensation at least as favorable as the most favorable agreements entered into by the Company and any other producer. The production agreements will provide the Company with the first look with respect to any television programming or motion picture projects developed thereunder. During the term of the production agreements, Mr. Chernin’s equity awards under the Employment Agreement will continue to vest or be paid out on their original schedule and Mr. Chernin will continue to receive credit for age and service for the purposes of post-retirement benefits. During the term of the agreement and for one year thereafter, Mr. Chernin may not induce any employee of the Company or its affiliates to leave his or her employment or to provide services for any other person or entity.
•The Departure Memo from Peter Chernin•
I wanted to let you know that I have decided to leave News Corporation when my contract expires on June 30th.
This is not a decision that came easily, but after more than 12 years in my current job, 20 years at Newscorp, and 30 years of corporate life, I am ready for new entrepreneurial challenges. I would not be making this difficult decision if I were not confident in the superb management team we have at Fox and in the visionary leadership of Rupert Murdoch. I have worked closely with Rupert every day, and I know he shares my belief that Fox executives are the best in the business.
I want to thank Rupert for his remarkable support, encouragement and friendship over the years. No company in our industry can match News Corporation’s track record of creating opportunities for employees and there is no better example of that than the opportunities Rupert has given me over the years.
I also want to thank all of you for the privilege of working side by side with such a talented and deeply principled group of colleagues. I am not only deeply proud of your achievements, but even prouder of the character and integrity of the company.
Over the next several months, Rupert and I will work closely to make sure this is a smooth transition for everyone. Thank you for the dedication and enthusiasm that you have always shown and I know will continue to show as the company moves forward to even greater heights.
• Rupert Murdoch’s Letter to Staff Announcing Cherin’s Departure•
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.