Media coverage may be what holds companies to account

MEDIA COVERAGE MAY BE WHAT HOLDS COMPANIES TO ACCOUNT
[SOURCE: MarketWatch, AUTHOR: Thomas Kostigen]
[Commentary] New research shows media coverage, more than policies or shareholder activism, forces companies to behave. "The media seems to exert pressure on corporate managers and regulators, forcing companies to behave more in the interest of shareholders," says Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Graduate School of Business. In a research paper entitled "Candid Camera," he says press coverage of corporate violations even increases the probability such actions will be reversed. Zingales points to the case of Richard Grasso, the former chairman of the New York Stock Exchange who in 2003 lost his job when his lavish pay was exposed. "Although all directors of the NYSE had voted in favor of his compensation, once the information became public -- and even the most pro-business newspapers characterized Grasso's compensation in a very negative light -- many directors changed their position," he says. When the media reports a story, reputations are at stake. And this is what people respond to: the threat of being associated with something negative. Other research has shown that corporate managers are constrained in their behavior by the impact that their actions have on their reputation vis-Ã -vis their future employers or the capital market in general. But Zingales, in research conducted in conjunction with professors at the University of Toronto and Russia's Center for Economic and Financial Research, shows that reputation is an effective constraint only if the future employers or partners can learn about actions.
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