Tuesday, July 7, 2020

Media and Management: Are Firms Easy to Control?

Who do firms answer to? Among researchers and the press, there has been much talk about how firms are willing to ignore a wide range of environmental and social concerns. This discussion is often coupled with the observation that firm pay inequality drives economic inequality. On the other hand, many firms were pioneers in the Black Lives Matter movement, and before that they put pressure on states seeking to enact discriminatory laws. So, which is it?

In research published in Strategic Management Journal, Andrew Shipilov, Tim Rowley, and I looked at whether firms respond to one particularly influential actor – mass media. We examined a very controversial firm action – changing the governance structure to give the board of directors greater control over the CEO and top management team. This type of change is a good indicator of whether the firm is responsive or not, because it goes against top management interests but had significant press coverage for a while.

The key observation we made is that media not only talks positively about what are good governance structures; newspaper articles also describes individual firms. Articles can contain praise or critique. Articles can even contain emotional words, which can be either positive or negative. A person reading a newspaper article describing the governance of a firm can easily find out whether the firm is viewed positively. If that person is the CEO of Chair of the Board, a negative article could be a reason to reconsider the current governance.

Did this happen? Fortunately, newspaper articles can also be read and interpreted by laptop computers, so we asked ours to look at them. We found that firms were indeed responsive to press reports, and they responded in more ways than we imagined when we started the research. First, does a firm improve governance when it gets negative press coverage? Yes. Critique from the press is a problem to solve, and the solution was to act – not to ignore it.

Second, what did firms do when it received positive press coverage of the governance? They improved it further! The press discussing governance set the agenda, which pushed the firms to make subsequent improvements, especially because many firms received press coverage with praise exactly because they had improved their governance. So, they made further changes in response to this praise.

Third, firms also learnt from each other. Many boards of directors are interconnected because the same person serves two firms. These connected board members were like bees spreading the pollen of good governance: when one of their firms had been criticized for poor governance, they advised other firms to avoid this fate.

Firms are not unresponsive: they answer to society. The reason they are often thought to be unresponsive is that they are selective about when to respond, and who to respond to. Any issue that becomes important in mass media and a source of praise and criticism will get their attention. As suggested by their recent responsiveness to social issues, and as we showed in our research, they can respond quite powerfully.

 

Shipilov, A. V., H. R. Greve, and T. J. Rowley

2019 "Is all publicity good publicity? The impact of direct and indirect media pressure on the adoption of governance practices." Strategic Management Journal, 40: 1368-1393.


32 comments:

  1. This is a rather interesting research. And it is important. Because if the classic model of agency theory is fully correct, then the managers (agents) should only be responsible for shareholders (principals) not newspaper reporters or mass civilians. However, that is the opposite of this research's findings. So it comes naturally to me, if organizations are not only responsive and responsible for the shareholders but also to mass media, to citizens, then the classic agency model should be adjusted to accommodate these facts to some degree. It is an interesting paper with important discoveries, thank you for sharing Prof. Henrich.

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