WATCHDOG OR LAPDOG? A
BEHAVIORAL VIEW OF THE MEDIA AS A CORPORATE GOVERNANCE MECHANISM
The media has the ability to reach a large audience and influence their views. The media makes their own judgments and can portray firms in both favorable and unfavorable ways. The media will shed negative light on firms that they believe do not have good corporate governance, but they can also put firms with good corporate governance in a positive light. It is believed that this kind favorable and unfavorable media coverage can have an effect on corporate governance of a firm.
According to the agency logic,
mechanisms must be put in place to control self-interested managers and hold
them accountable for their actions. Among these control mechanisms, the board
of directors is viewed as one of the most important (Fama & Jensen, 1983).
This article talks about two different
kinds of independence, formal and social, for boards. The media is mostly
concerned with formal independence but the author feels that social independence
is also important. Though there may not be any family or business ties on the
board, social similarities between the board members and CEO can affect the
decisions of the board and the performance of the firm.
This
research used model building to test four different hypothesis regarding the correlation
of media coverage to corporate governance/ board of director changes, CEO dismissal,
CEO compensation, and the formal independence of the board of directors.
According to Bednar’s study,
increasing the number of formal independent directors on the board is
positively related to positive media coverage. The study also proved that
negative coverage from the media was positively correlated to dismissal of the
CEO, while positive media coverage was negatively correlated to CEO dismissal.
This means that when the media negatively viewed certain management issues the
CEO was terminated.
This study shows how favorable and
unfavorable media coverage affects CEOs and the board of directors for firms.
CEOs should avoid unfavorable media coverage because it can result in an
increase in the percentage of at-risk compensation or job termination. The
board of directors should be made up of formal independent members and increase
the formal independence to receive favorable media coverage.
Fama, E. F., & Jensen, M. C. 1983.
Separation of ownership and control. Journal of Law and Economics,
26: 301–325.
Lindsay,
ReplyDeleteI agree with the author who conducted the study that negative media coverage of a company could have severe disadvantages to the CEO as well as the company as a whole. It is important that the CEO as well as the Board of Directors maintain a positive image in the public eye to remain a key business player in that specific market they do business in. It would be very difficult for anyone who watches the mainstream media to forget about something negative that a company did more than something positive. Thankfully, if a company is publicly owned the shareholders have the ability to vote out the CEO and have the right to make changes if he or she is harming the company's reputation.
People tend to forget the positive things a company does, but they away remember the negative things.
ReplyDeleteI understand what the study is saying about the media and how negative news coverage can change a company’s image. That said I think it’s fair to say that all too often we see the media press their agenda instead of just reporting the facts on the event that cast a bad light on the company. What I really get out of this study is how easily the sheeple are swayed to the opinions and views of those in the media, instead of doing their own research. If you pay any sort of attention you will see how the media jumps to conclusions that fit their agenda, and have to later back track with news that was not as severe as originally stated. By that time the company is already doing damage control and the minds are already made up……..
ReplyDelete