The Corporate Governance role of the Media Alexander dyck Harvard Business school And igi zingales University of Chicago August 2002 Abstract In this paper we discuss the role of the media in pressuring corporate managers and directors to behave in ways that are "socially acceptable. Sometimes this coincides with shareholders' value maximization others not. We provide both anecdotal and systematic evidence that media affect companies' policy toward the environment and the amount of corporate resources that are diverted to the sole advantage of controlling shareholders. Our results have important consequences for the focus of the corporate governance debate and for the feasibility of reforms aimed at improving corporate governance around the 4 We thank Mehmet Beceren for assistance in preparing the data and rakhesh khurana, Jay Lorsch, Forest Reinhardt, Richard Vietor, Andy Zelleke, and seminar participants at the Harvard Business School for helpful comments earlier draft Alexander Dyck gratefully acknowledges financial support from the Division of Research of Harvard Business School and luigi Zingales from the George Stigler Center at the University of Chicago
The Corporate Governance Role of the Media Alexander Dyck* Harvard Business School And Luigi Zingales University of Chicago August 2002 Abstract In this paper we discuss the role of the media in pressuring corporate managers and directors to behave in ways that are “socially acceptable”. Sometimes this coincides with shareholders’ value maximization, others not. We provide both anecdotal and systematic evidence that media affect companies’ policy toward the environment and the amount of corporate resources that are diverted to the sole advantage of controlling shareholders. Our results have important consequences for the focus of the corporate governance debate and for the feasibility of reforms aimed at improving corporate governance around the world. * We thank Mehmet Beceren for assistance in preparing the data and Rakhesh Khurana, Jay Lorsch, Forest Reinhardt, Richard Vietor, Andy Zelleke, and seminar participants at the Harvard Business School for helpful comments on an earlier draft. Alexander Dyck gratefully acknowledges financial support from the Division of Research of Harvard Business School and Luigi Zingales from the George Stigler Center at the University of Chicago. 1
In April 1992 the Wall Street Journal published a strange advertisement. It was a full-page picture of a silhouette of the board of directors of Sears roebuck with the title: " The non-performing assets of Sears. The advertisement, paid for by shareholder activist Robert Monks, exposed all the directors, who were identified by name, as responsible for the poor performance of Sears'stock. The directors, greatly embarrassed by the advertisement, chose to adopt many of the proposals advanced by Robert Monks, even though he had received only 12 percent of the votes in the previous election for board members and had failed to get a seat on the board. The market welcomed this change with a 9.5 percent excess return the day these changes were announced and a 37 percent excess return during the following year(Monks and Minow 1995, pp 399-411) On March 8, 1988, all the major U.S. networks broadcast a tape of a Panamanian tuna boat, the Maria Luisa, killing hundreds of dolphins while fishing for tuna. Building on public outrage, the Earth Island Institute, Greenpeace, and the Humane Society launched a boycott of tuna. Restaurant chains took tuna off the menu and school boards across the country stopped using tuna until it was dolphin safe that is, fished with nets that were not killing tuna. On April 12, 1990, Heinz announced that it would only sell dolphin-safe tuna. Within hours the two other largest tuna producers made a similar commitment (Reinhardt and vietor 1994a, b) These episodes suggest that the media may play a role in shaping corporate policy. Are these isolated incidents or are they representative of the medias influence? If the media do have such an influence, why do they have it? As the media do not vote and do not set managers'compensation, what mechanisms force directors to pay attention to what the media say? How does the medias power relate to and interact with other corporate governance mechanisms, such as the legal and competitive environment? In what direction does media influence lead corporate policy? These two examples alone suggest that an answer to these questions is not straightforward. In both examples the media play the role of a lever, but a lever used by two very different groups disenfranchised shareholders in the first case, environmentalists in the second. The way the media were
In April 1992 the Wall Street Journal published a strange advertisement. It was a full-page picture of a silhouette of the board of directors of Sears Roebuck with the title: “The non-performing assets of Sears.” The advertisement, paid for by shareholder activist Robert Monks, exposed all the directors, who were identified by name, as responsible for the poor performance of Sears’ stock. The directors, greatly embarrassed by the advertisement, chose to adopt many of the proposals advanced by Robert Monks, even though he had received only 12 percent of the votes in the previous election for board members and had failed to get a seat on the board. The market welcomed this change with a 9.5 percent excess return the day these changes were announced and a 37 percent excess return during the following year (Monks and Minow 1995, pp. 399-411). On March 8, 1988, all the major U.S. networks broadcast a tape of a Panamanian tuna boat, the Maria Luisa, killing hundreds of dolphins while fishing for tuna. Building on public outrage, the Earth Island Institute, Greenpeace, and the Humane Society launched a boycott of tuna. Restaurant chains took tuna off the menu and school boards across the country stopped using tuna until it was “dolphin safe,” that is, fished with nets that were not killing tuna. On April 12, 1990, Heinz announced that it would only sell dolphin-safe tuna. Within hours the two other largest tuna producers made a similar commitment (Reinhardt and Vietor 1994a,b). These episodes suggest that the media may play a role in shaping corporate policy. Are these isolated incidents or are they representative of the media’s influence? If the media do have such an influence, why do they have it? As the media do not vote and do not set managers’ compensation, what mechanisms force directors to pay attention to what the media say? How does the media’s power relate to and interact with other corporate governance mechanisms, such as the legal and competitive environment? In what direction does media influence lead corporate policy? These two examples alone suggest that an answer to these questions is not straightforward. In both examples the media play the role of a lever, but a lever used by two very different groups: disenfranchised shareholders in the first case, environmentalists in the second. The way the media were 2
sed is also different. In the first case a dissenting shareholder paid out of his own pocket for an advertisement that communicated his position about the shortcomings of managers and directors. In the second case the television networks included a tape filmed by an environmental group in their regular programming. Finally, the outcome is also different. In the first example the public pressure resulting from the advertisement ended up forcing the directors of Sears to increase shareholders' value, an objective they should have pursued to begin with. In the second case it forced them to bow to environmentalist groups, a constituency to which they have no fiduciary duty. One could argue that Heinz managers responded to their customers' preferences and that the media were simply instrumental in bringing crucial facts to the attention of customers. In this case however, we have evidence that contradicts this hypothesis. As some marketing studies show, a big gap exists between consumer complaints communicated through the press and their willingness to pay. If there is a dolphin-safe can of tuna next to a regular can, people choose the cheaper product even if the difference is just one penny(Reinhardt and Vietor 1994a, p. 3). It is not even clear that the media forced the directors to behave in societys interest. There is no evidence that the societal loss caused by the killed dolphins is compensated for by the additional cost of fishing dolphin safe tuna. In fact, some environmentalists have criticized this decision by claiming that it has reduced biodiversity, because it shifted tuna fishing entirely to the western Pacific, where catching tuna does not kill dolphins, but does kill many other species that, unlike dolphins, are on the endangered species list All these questions regarding the medias role receive limited attention in the academic literature. This is no accident. The process of diffusion of information plays a small role in economic models. Agents are assumed to be informed or not. If not, sometimes they are given the option of acquiring information at a prespecified cost. There is no role for information aggregators, which selectively reduce the cost of acquiring information. In the real world the media play this role. People I In his survey of the state-of-the-art in corporate finance, Zingales(2000)mentions this as one important force that has been neglected. Skeel (2001)analyzed the role of shaming in corporate law. Baron(1996, 2001)investigated the role of the media in lobbying efforts and in private politics more generally. Djankov and others(2001) studied the effects of the ownership of the press
used is also different. In the first case a dissenting shareholder paid out of his own pocket for an advertisement that communicated his position about the shortcomings of managers and directors. In the second case the television networks included a tape filmed by an environmental group in their regular programming. Finally, the outcome is also different. In the first example the public pressure resulting from the advertisement ended up forcing the directors of Sears to increase shareholders’ value, an objective they should have pursued to begin with. In the second case it forced them to bow to environmentalist groups, a constituency to which they have no fiduciary duty. One could argue that Heinz managers responded to their customers’ preferences and that the media were simply instrumental in bringing crucial facts to the attention of customers. In this case, however, we have evidence that contradicts this hypothesis. As some marketing studies show, a big gap exists between consumer complaints communicated through the press and their willingness to pay. “If there is a dolphin-safe can of tuna next to a regular can, people choose the cheaper product even if the difference is just one penny” (Reinhardt and Vietor 1994a, p. 3). It is not even clear that the media forced the directors to behave in society’s interest. There is no evidence that the societal loss caused by the killed dolphins is compensated for by the additional cost of fishing dolphinsafe tuna. In fact, some environmentalists have criticized this decision by claiming that it has reduced biodiversity, because it shifted tuna fishing entirely to the western Pacific, where catching tuna does not kill dolphins, but does kill many other species that, unlike dolphins, are on the endangered species list. All these questions regarding the media’s role receive limited attention in the academic literature.1 This is no accident. The process of diffusion of information plays a small role in economic models. Agents are assumed to be informed or not. If not, sometimes they are given the option of acquiring information at a prespecified cost. There is no role for information aggregators, which selectively reduce the cost of acquiring information. In the real world the media play this role. People 1 In his survey of the state-of-the-art in corporate finance, Zingales (2000) mentions this as one important force that has been neglected. Skeel (2001) analyzed the role of shaming in corporate law. Baron (1996, 2001) investigated the role of the media in lobbying efforts and in private politics more generally. Djankov and others (2001) studied the effects of the ownership of the press. 3
obtain much of their information from the media, which play an important part in selecting which pieces of information to communicate to the public and in adding credibility to information provided through other sources. By selectively reducing agents' cost of collecting and evaluating information, the media play a major role in shaping the creation and accumulation of reputation The media can play a role in corporate governance by affecting reputation in at least three ways First, media attention can drive politicians to introduce corporate law reforms or enforce corporate laws 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 reputation through the standard channel that most economic models emphasize In the traditional understanding of reputation(see, for example, Fama 1980; Fama and Jensen 1983), managers' wages in the future depend on shareholders'and future employers' beliefs about whether the managers will attend to their interests in those situations where they cannot be monitored. his concern about a monetary penalty can lead mangers not to take advantage of opportunities for self- dealing so as to create a belief that they are good managers Third, and what we emphasize here, media attention affects not only managers' and board members'reputations in the eyes of shareholders and future employers, but media attention affects their reputation 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(Rosenberg 1999, pp. 269-70) Heinz shareholders may have been extremely unhappy about the decision to fish only dolphin-safe tuna, as might any of the managers potential employers. Heinz 's managers and 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 church or to their country club. Nell Minow, Robert Monks' business partner, told us that to this day Sears' directors hate Robert Monks, because at their local country club they are still laughed at as a result of Monks'advertisement No insurance policy for managers or directors can protect them from such
obtain much of their information from the media, which play an important part in selecting which pieces of information to communicate to the public and in adding credibility to information provided through other sources. By selectively reducing agents’ cost of collecting and evaluating information, the media play a major role in shaping the creation and accumulation of reputation. The media can play a role in corporate governance by affecting reputation 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 reputation through the standard channel that most economic models emphasize. In the traditional understanding of reputation (see, for example, Fama 1980; Fama and Jensen 1983), managers’ wages in the future depend on shareholders’ and future employers’ beliefs about whether the managers will attend to their interests in those situations where they cannot be monitored. This concern about a monetary penalty can lead mangers not to take advantage of opportunities for selfdealing so as to create a belief that they are good managers. Third, and what we emphasize here, media attention affects not only managers’ and board members’ reputations in the eyes of shareholders and future employers, but media attention affects their reputation 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” (Rosenberg 1999, pp. 269-70). Heinz shareholders may have been extremely unhappy about the decision to fish only dolphin-safe tuna, as might any of the managers’ potential employers. Heinz’s managers and 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 church or to their country club. Nell Minow, Robert Monks’ business partner, told us that to this day Sears’ directors hate Robert Monks, because at their local country club they are still laughed at as a result of Monks’ advertisement. No insurance policy for managers or directors can protect them from such 4
putational penalties Thus the media do play a role in shaping the public image of corporate managers and directors and in so doing they pressure them to behave according to societal norms. Depending on the situation this pressure can lead to shareholders value maximization, as in the case of Sears, or to deviations from it, as in the case of heinz Thus far we have only raised the possibility that managers and directors care about their public image, and thus respond to media pressure. Before concluding that the media do indeed play a role orporate governance we have to establish that this is more than a theoretical possibility supported by two anecdotes. This is what we do in the rest of this paper. We start by reviewing a series of examples where the media do affect corporate policy. These examples sharpen intuition that we seek to clarify in a theoretical section on issues that determine the impact of the media on corporate behavior. We then move on to more systematic evidence. In Dyck and Zingales(2001)we showed that the diffusion of the press affects the amount of corporate value that insiders appropriate for themselves, the so-called private benefits of control. In this paper we look at the effects of the press on the private sector's responsiveness to environmental issues. As our main measure of the importance of the press in a country we use the circulation of daily newspapers normalized by population. While the press cannot be important if it is not ead, this is clearly a rough indicator of its importance, but one of the few available in a large cross- section of countries. We then test the robustness of our results using other indicators of press freedom and independence. As a measure of the average corporate environmental standards of firms in a country we use an index produced as a component of the 2001 environmental sustainability index. This private sector responsiveness index is a combination of five firm-based indicators ranging from the number of Iso 14001 certified companies per million dollars of gross domestic product(GDP) to the rating of firms environmental sustainability in the Dow Jones global index We found that countries with a larger newspaper circulation have better environmental responsiveness, on average. This is true even after controlling for the extent of environmental regulation, he availability of information on environmental outcomes, and the level of economic development
reputational penalties. Thus the media do play a role in shaping the public image of corporate managers and directors, and in so doing they pressure them to behave according to societal norms. Depending on the situation this pressure can lead to shareholders’ value maximization, as in the case of Sears, or to deviations from it, as in the case of Heinz. Thus far we have only raised the possibility that managers and directors care about their public image, and thus respond to media pressure. Before concluding that the media do indeed play a role in corporate governance we have to establish that this is more than a theoretical possibility supported by two anecdotes. This is what we do in the rest of this paper. We start by reviewing a series of examples where the media do affect corporate policy. These examples sharpen intuition that we seek to clarify in a theoretical section on issues that determine the impact of the media on corporate behavior. We then move on to more systematic evidence. In Dyck and Zingales (2001) we showed that the diffusion of the press affects the amount of corporate value that insiders appropriate for themselves, the so-called private benefits of control. In this paper we look at the effects of the press on the private sector’s responsiveness to environmental issues. As our main measure of the importance of the press in a country we use the circulation of daily newspapers normalized by population. While the press cannot be important if it is not read, this is clearly a rough indicator of its importance, but one of the few available in a large crosssection of countries. We then test the robustness of our results using other indicators of press freedom and independence. As a measure of the average corporate environmental standards of firms in a country we use an index produced as a component of the 2001 environmental sustainability index. This private sector responsiveness index is a combination of five firm-based indicators ranging from the number of ISO 14001 certified companies per million dollars of gross domestic product (GDP) to the rating of firms’ environmental sustainability in the Dow Jones global index. We found that countries with a larger newspaper circulation have better environmental responsiveness, on average. This is true even after controlling for the extent of environmental regulation, the availability of information on environmental outcomes, and the level of economic development 5