In April 1992, The Wall Street Journal published a full-page ad containing a silhouette of the board of directors of Sears, Roebuck and Co, with the title ?The non-performing assets of Sears?. The ad was paid for by dissenting shareholder activist Robert Monks, and identified all directors by name, claiming that they were responsible for the poor performance of Sears? stock. Greatly embarrassed by the ad and facing public scrutiny, the directors chose to adopt many of the proposals advanced by Monks. The market rewarded these changes with a 9.5% excess return the day the changes were announced, and a 37% excess return the following year, increasing shareholder value. Can the media have such a positive corporate governance role?
We certainly know that politicians care deeply about the image that the media projects about them. However, do corporate managers and board of directors care about the image that the media projects? Does their being conscious about their media image lead to better firm-level policies and thereby good corporate governance? In an interesting piece of research, Luigi Zingales of the University of Chicago Booth School of Business and his co-author Alexander Dyck find that trustworthy media can play a crucial role in shaping the public image of corporate managers and thereby pressure corporate managers and directors to act not just in shareholders? interest but also in ways that are ?socially acceptable?.
Traditional finance theories about ?reputation? are based on the argument that managers do care about their reputation in the labour market, and will behave in ways that maximise shareholder value in order to receive better compensation in the future. The authors conceptualise a broader notion of reputation where managers also care about their public image and where the media plays a fundamental role in shaping this public image.
The media can play a role in corporate governance by affecting the reputation of managers and board of directors in at least three ways. First, media attention can drive politicians to introduce corporate law reforms or enforce corporate laws in the belief that inaction would hurt their future political careers or shame them in the eyes of public opinion, both at home and abroad. Second, media attention could affect managers? and board of directors? reputation by influencing shareholders? and future employers? beliefs about whether the managers will attend to their interests in those situations where they cannot be monitored. Third, media attention affects managers? and board members? reputations in the eyes of society at large. As Monks describes the Sears advertisement: ?We were speaking to their friends, their families, their professional associates. Anyone seeing the ad would read it. Anyone reading it would understand it. Anyone understanding it would feel free to ask questions of any board member they encountered.?
Sears? directors acted in part to protect their public image. They did not want to be harassed by their children when they went home or to feel embarrassed when they went to public gatherings or to their local club. Nell Minow, Robert Monks? business partner, mentions that to this day Sears? directors hate Robert Monks, because at their local country club they are still snickered at as a result of Monks? advertisement. No insurance policy for managers or directors can protect them from such permanent damage to their reputations; neither can it compensate them for such character mutilation.
In the Indian context, business media can play an important role in shaping corporate policy in the country?a role that should not be ignored in the analysis and reform of India?s corporate governance system.
The author is an assistant professor of finance at Emory University, Atlanta, and a visiting scholar at ISB, Hyderabad