strategy+business is published by PwC Strategy& LLC.
 
or, sign in with:
strategy and business
(originally published by Booz & Company)

 
 

A Helpful Prod from the Press Gallery

Title: Burr Under the Saddle: How Media Coverage Influences Strategic Change (Fee or subscription required)

Authors: Michael K. Bednar (University of Illinois at Urbana–Champaign), Steven Boivie (University of Arizona), and Nicholas R. Prince (University of Illinois at Urbana–Champaign)

Publisher: Organization Science

Date Published: September 2012 online, forthcoming in print

The corporate world has a complicated relationship with the media. When times are good, firms often want news outlets to act as bullhorns for positive publicity. But when fortune fades, those same companies are only too happy to shrink from the spotlight. However, this paper finds a bright side to the bad news: Negative coverage can spur companies to embrace wide-ranging strategic changes. The media is neither an enemy nor an ally to upper management, according to the authors, but one of a number of key stakeholders that can significantly shift a firm’s direction, often for the better.

Previous research has focused on a number of effects that the media can have on business. For example, news reports can elevate a company and its leaders to celebrity status, subsequently broadening the firm’s range of options. The media can also act as a watchdog on management, encouraging decisions in line with shareholders’ interests. But despite growing interest in the relationship between media and the businesses media organizations cover, little is understood about the ways news outlets can provoke firms to shift their fundamental strategies.

To gain more perspective, the authors of this paper randomly selected 250 firms from the 2001 S&P 500 and tracked them for five years. Using the Factiva database, they analyzed about 40,000 articles in leading business publications, looking for negative keywords and phrases to gauge the tone of the coverage. Combining several other data sources, the researchers obtained information on the firms’ CEO characteristics, stock returns, profitability, strategic changes, and governance structures.

The authors controlled for an extensive list of variables that could potentially affect media coverage or strategic initiatives, including the number of earnings restatements, lawsuits, and analyst downgrades for each of the firms, as well as their size, their level of executive turnover, and the total media attention they received. To ensure they were analyzing only meaningful articles about the firms, the researchers eliminated stories that didn’t reference any of the sample companies in the headline or lead paragraph, that were less than 50 words long, or that mentioned more than four other organizations.

The negative language cropped up in multiple ways. Most came directly from the writers of the articles, discussing a disappointing aspect of the company. But the quoted words of CEOs or spokespeople also often contributed to a downbeat tone.

In their analysis, the authors found a link between the volume of negative media attention that a firm experienced and the likelihood that the company would subsequently undergo a strategic shift that was responsive to at least some of the problems that the press had cited. “Negative media coverage about a firm,” they concluded, “is a salient trigger that suggests to top managers that the current strategy needs to be changed.” That trigger is all the more persuasive, they found, for companies with higher numbers of independent directors on their boards, including members with fewer prior ties to the company. In those cases, board members may rely more heavily on external evaluations to inform their decisions—and they may be more forceful in prodding senior executives to address problems that the press is pointing out.

“When there are board members with familial or business ties on the board, they are less likely to be influenced by…outside perspectives, including the media,” said one of the researchers in a press release. “So that relationship between negative media coverage and strategic change gets stronger when you have outsiders on the board.”

The media’s impact can be felt by boards and senior executives in three main ways, say the authors, any one of which can cause management to chart a new strategic course if the sting of the news is forceful enough. The first way the press can affect companies is when it shines a light on a firm’s tangible actions (such as laying off employees or launching a new initiative that is proving unsuccessful). The second way is by serving as a platform for stakeholders, even small groups, and amplifying their messages. As an example, the authors cite the Occupy Wall Street movement’s influence on the decision of several major banks in October 2011 to reconsider charging consumers a fee for using debit cards. Finally, the third way that the press can have an impact is by uncovering damning evidence of a company’s failures, such as managers’ making bribes to gain footholds in new markets or allowing unsafe working conditions in foreign plants. However, the researchers did find that the power of negative coverage to act as a catalyst for strategic change was lessened, to some extent, by the overall level of success the firm was enjoying—particularly when its stock price was flying high.

Although prior research has tended to focus on internal variables as portents of change, this study shows that external stakeholders, such as the media, can play a crucial role in prodding companies out of their inertia. CEOs and directors should pay close heed (yet not overreact) to media coverage, the authors write, because scrutiny from the press is often the wake-up call for needed change. Although positive performance in the stock market can soften the impact of bad news, executives should not use that cushion as an excuse to dismiss downbeat signals from the media.

“That can make us so focused on, ‘Hey, we’re doing fine, we don’t need to listen to outside voices,’” one of the authors said in the press release. “Well, that’s a situation that could pose a risk to firms as well.” Just being aware of the influence that the media can have on a board, and particularly on independent directors, can make senior managers more willing to assess problems cited by the media, the author added, and to respond when necessary. 

Bottom Line:
Negative media coverage can lead to strategic shifts for companies—especially those with more independent-minded directors on their boards. Positive stock performance can paper over bad news to an extent, but ignoring the warning signs is a missed opportunity to correct problems that could become even more damaging down the line. 

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

 
Close
Sign up to receive s+b newsletters and get a FREE Strategy eBook

You will initially receive up to two newsletters/week. You can unsubscribe from any newsletter by using the link found in each newsletter.

Close