Shamed straight

Next time you feel the urge to complain to a journalist about a negative story about your company, take a moment to ponder the potential corporate governance benefit that article might have for your organization.

That’s the upshot of a piece I read recently on the Knowledge@Wharton site of the Wharton School of the University of Pennsylvania. Or, possibly, that’s just what I, as a journalist, took as the upshot.

In all seriousness, the piece, Good News about Bad Press: For Corporate Governance, Humiliation Pays Off, is an interesting read. The piece is largely based on the research of Alexander Dyck, professor of finance and business economics at the University of Toronto, and some of his academic colleagues into the impact negative publicity can have on corporate governance.

The article cites the experience of Bill Browder, manager of The Hermitage Fund, a hedge fund focusing on Russian investments, who shared his findings of evidence of shady dealings at Russian oil company Gazprom with journalists in hopes of drawing attention to the misdeeds of the company’s top managers. His efforts ultimately paid off in the firing of Gazprom’s CEO, business reforms at the company and a 10-times increase in the value of his fund’s Gazprom investment.

Damaging publicity can have an impact on governance by forcing regulators to take action on problems that might have been ignored if they hadn’t been brought to the public’s attention by the press, the article notes. And, while bad publicity can hurt a company in a variety of ways, including distrust by labor and the financial markets, a good reputation can have such benefits as a lower cost of capital.

The news media’s potential impact on corporate governance is likely more limited in developed economies than developing ones, according to the Knowledge@Wharton article, as in developed countries the target companies can often fight back with sophisticated public relations campaigns.

Still, no less a developed economy business figure than Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission, is cited in the article as noting that one of the most important parts of his job at the SEC was working with the agency’s press office. 


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