Reputation-Building, Corporate Governance, and the Media
Research by Luigi Zingales
The media plays a crucial role in shaping the public image of corporate managers, and in doing so can pressure them to behave according to social norms.
In April 1992, the Wall Street Journal published a full-page
ad featuring 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 Monk. The market rewarded these changes
with a 9.5 percent excess return the day the changes were
announced, and a 37 percent excess return the following year,
increasing shareholder value.
On March 8, 1988, all major U.S. television networks broadcast
a tape of a Panamanian tuna boat, the Maria Luisa, killing
hundreds of dolphins while fishing for tuna. Building on public
outrage, many environmental agencies launched a boycott of
tuna. On April 12, 1990, H.J. Heinz Company announced that
it would only sell dolphin-safe tuna, and within hours, the
two other largest tuna producers made a similar announcement.
Managers were forced to bow to environmental groups.
Both examples demonstrate the wide-ranging influence of the
media on corporate policy. In these examples, the media acts
as a lever, but for two different groups-disenfranchised shareholders
In the study, "The Corporate Governance Role of the
Media," University of Chicago Graduate School of Business
professor Luigi Zingales and Alexander Dyck of Harvard Business
School find that the media can pressure corporate managers
and directors to act not just in shareholders' interest but
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 labor market, and will behave in ways that
maximize shareholder value in order to receive better compensation
in the future. From the authors' analysis emerges 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.
Using international data, Zingales and Dyck analyze the effects
of a country's press on private sector responsiveness to environmental
issues. They chose to focus on the environment because it
is a popular issue in the press, and because creating environmentally-friendly
policies is not necessarily related to maximizing shareholder
The results indicate that in countries where the media is
more influential, companies exhibit greater environmental
"Only concerns about their public image would explain
the responsiveness of corporate managers to environmental
issues," says Zingales. "These policies have little
or no impact on the wealth of their ultimate employers, the
shareholders, and may actually be very expensive."
In regards to the tuna example, Zingales points out that
some studies indicated that customers were not willing to
pay a higher price for environmentally-friendly tuna. In fact,
not even the environment benefited from dolphin-safe tuna
fishing, because the fishing was moved to the South Pacific
where it threatened other endangered species (dolphins not
being an endangered species). The decision therefore was only
made to please the public.
"A manager's relationship with the media is extremely
important," says Zingales. "For example, Richard
Grasso, head of the NYSE, was forced to resign mainly because
of public opinion. You have to carefully manage your relationship
with the press, because it might cost you dearly if you don't."
Channels of Media Influence
A person's reputation within a certain group encompasses
all of the historical information about that person's behavior
available to that group. Governments, firms, and interest
groups generate an enormous amount of information that the
media then process and selectively communicate. Hence, public
reputation is very much affected by the media.
The broader the media coverage, the more likely the public
will acquire the information. The more attention the country's
media commands, the more likely this information will spread.
The Importance of the Press
Zingales and Dyck note that it is difficult to measure the
influence of a country's press in exact terms. To address
this issue, they use official statistics on a country's circulation
of daily newspapers divided by the population, a measure referred
to as "diffusion." A higher level of diffusion indicates
a higher readership level, and thus a broader reach of the
press. A more diffuse press is often also a more reliable
If higher diffusion of the press leads to a higher probability
of exposing socially unacceptable corporate policies, the
authors argue that it is more likely that managers will behave
in an environmentally conscious way in countries where the
press is more diffuse.
To determine private sector responsiveness to environmental
concerns, the authors used an index developed in collaboration
with the World Economic Forum and researchers from Columbia
University and Yale University. In this measure, the five
highest ranking countries were Switzerland, Japan, Germany,
the United Kingdom, and New Zealand. The five lowest ranking
countries were Venezuela, Indonesia, Greece, Columbia, and
The authors find a strong link between diffusion of the press
and a country's private sector responsiveness to environmental
Countries where the press is very diffuse also tend to be
countries with higher GDP per capita and better law enforcement.
The five economies with the highest readership were Hong Kong,
Norway, Japan, Finland, and Sweden. The five countries with
the lowest press diffusion were Kenya, Zimbabwe, Pakistan,
South Africa, and Egypt. To disentangle the impact of the
press from the effect of higher income per capita, however,
the authors control for GDP per capita in their analysis,
and still find a strong effect of the press.
Having established the importance of diffusion of the press,
what factors determine the level of diffusion? Zingales and
Dyck find that the ultimate determinants of press diffusion
lie in the education level of the country's population, and
its cultural and ethnic traditions.
An important factor impacting the level of diffusion of the
press is the number of languages spoken in a country, which
has a negative impact on the level of diffusion. If more languages
are spoken in a country, the newspaper market will be more
fragmented, making it more difficult for newspapers to acquire
On the subject of language, the authors point out that the
power of U.S. and British newspapers to pressure managers
transcends domestic borders.
"The importance of the Anglo-American press in the overall
international corporate governance debate should not be understated,"
says Zingales. "People read the Financial Times and the
Wall Street Journal not only because they are very good papers,
but because they are written in English. This has the effect
of promoting the Anglo-American model of corporate governance."
The authors find that a country's dominant religion has a
significant impact on the diffusion of the press, mainly through
its effect on education. Protestant countries, for example,
have a higher diffusion of the press than Catholic countries.
Shifting the Debate
Previous research has focused on the legal and contractual
aspects of corporate governance. Zingales and Dyck argue that
the media also plays an important role in shaping corporate
policy-a role that should not be ignored in any analysis of
a country's corporate governance system. The media's role,
however, also brings to the forefront the importance of social
"The media plays a role as social enforcers, so they
are going to push managers in the direction where public opinion
wants them to go," says Zingales.
From a policy point of view, this is a mixed blessing. On
the one hand, even countries with inadequate laws and malfunctioning
justice systems can experience some of the benefits of better
corporate governance if media pressure is sufficiently strong,
and social norms support good governance. On the other hand,
social values cannot be easily changed by legislators or by
international policymakers. Hence, the extent of press influence
may be largely outside policymakers' control.