The Corporate Governance role of the Media Alexander dyck Harvard Business school And igi zingales University of Chicago August 2002 Abstract In this paper we discuss the role of the media in pressuring corporate managers and directors to behave in ways that are "socially acceptable. Sometimes this coincides with shareholders' value maximization others not. We provide both anecdotal and systematic evidence that media affect companies' policy toward the environment and the amount of corporate resources that are diverted to the sole advantage of controlling shareholders. Our results have important consequences for the focus of the corporate governance debate and for the feasibility of reforms aimed at improving corporate governance around the 4 We thank Mehmet Beceren for assistance in preparing the data and rakhesh khurana, Jay Lorsch, Forest Reinhardt, Richard Vietor, Andy Zelleke, and seminar participants at the Harvard Business School for helpful comments earlier draft Alexander Dyck gratefully acknowledges financial support from the Division of Research of Harvard Business School and luigi Zingales from the George Stigler Center at the University of Chicago
The Corporate Governance Role of the Media Alexander Dyck* Harvard Business School And Luigi Zingales University of Chicago August 2002 Abstract In this paper we discuss the role of the media in pressuring corporate managers and directors to behave in ways that are “socially acceptable”. Sometimes this coincides with shareholders’ value maximization, others not. We provide both anecdotal and systematic evidence that media affect companies’ policy toward the environment and the amount of corporate resources that are diverted to the sole advantage of controlling shareholders. Our results have important consequences for the focus of the corporate governance debate and for the feasibility of reforms aimed at improving corporate governance around the world. * We thank Mehmet Beceren for assistance in preparing the data and Rakhesh Khurana, Jay Lorsch, Forest Reinhardt, Richard Vietor, Andy Zelleke, and seminar participants at the Harvard Business School for helpful comments on an earlier draft. Alexander Dyck gratefully acknowledges financial support from the Division of Research of Harvard Business School and Luigi Zingales from the George Stigler Center at the University of Chicago. 1
In April 1992 the Wall Street Journal published a strange advertisement. It was a full-page picture of a silhouette of the board of directors of Sears roebuck with the title: " The non-performing assets of Sears. The advertisement, paid for by shareholder activist Robert Monks, exposed all the directors, who were identified by name, as responsible for the poor performance of Sears'stock. The directors, greatly embarrassed by the advertisement, chose to adopt many of the proposals advanced by Robert Monks, even though he had received only 12 percent of the votes in the previous election for board members and had failed to get a seat on the board. The market welcomed this change with a 9.5 percent excess return the day these changes were announced and a 37 percent excess return during the following year(Monks and Minow 1995, pp 399-411) On March 8, 1988, all the major U.S. networks broadcast a tape of a Panamanian tuna boat, the Maria Luisa, killing hundreds of dolphins while fishing for tuna. Building on public outrage, the Earth Island Institute, Greenpeace, and the Humane Society launched a boycott of tuna. Restaurant chains took tuna off the menu and school boards across the country stopped using tuna until it was dolphin safe that is, fished with nets that were not killing tuna. On April 12, 1990, Heinz announced that it would only sell dolphin-safe tuna. Within hours the two other largest tuna producers made a similar commitment (Reinhardt and vietor 1994a, b) These episodes suggest that the media may play a role in shaping corporate policy. Are these isolated incidents or are they representative of the medias influence? If the media do have such an influence, why do they have it? As the media do not vote and do not set managers'compensation, what mechanisms force directors to pay attention to what the media say? How does the medias power relate to and interact with other corporate governance mechanisms, such as the legal and competitive environment? In what direction does media influence lead corporate policy? These two examples alone suggest that an answer to these questions is not straightforward. In both examples the media play the role of a lever, but a lever used by two very different groups disenfranchised shareholders in the first case, environmentalists in the second. The way the media were
In April 1992 the Wall Street Journal published a strange advertisement. It was a full-page picture of a silhouette of the board of directors of Sears Roebuck with the title: “The non-performing assets of Sears.” The advertisement, paid for by shareholder activist Robert Monks, exposed all the directors, who were identified by name, as responsible for the poor performance of Sears’ stock. The directors, greatly embarrassed by the advertisement, chose to adopt many of the proposals advanced by Robert Monks, even though he had received only 12 percent of the votes in the previous election for board members and had failed to get a seat on the board. The market welcomed this change with a 9.5 percent excess return the day these changes were announced and a 37 percent excess return during the following year (Monks and Minow 1995, pp. 399-411). On March 8, 1988, all the major U.S. networks broadcast a tape of a Panamanian tuna boat, the Maria Luisa, killing hundreds of dolphins while fishing for tuna. Building on public outrage, the Earth Island Institute, Greenpeace, and the Humane Society launched a boycott of tuna. Restaurant chains took tuna off the menu and school boards across the country stopped using tuna until it was “dolphin safe,” that is, fished with nets that were not killing tuna. On April 12, 1990, Heinz announced that it would only sell dolphin-safe tuna. Within hours the two other largest tuna producers made a similar commitment (Reinhardt and Vietor 1994a,b). These episodes suggest that the media may play a role in shaping corporate policy. Are these isolated incidents or are they representative of the media’s influence? If the media do have such an influence, why do they have it? As the media do not vote and do not set managers’ compensation, what mechanisms force directors to pay attention to what the media say? How does the media’s power relate to and interact with other corporate governance mechanisms, such as the legal and competitive environment? In what direction does media influence lead corporate policy? These two examples alone suggest that an answer to these questions is not straightforward. In both examples the media play the role of a lever, but a lever used by two very different groups: disenfranchised shareholders in the first case, environmentalists in the second. The way the media were 2
sed is also different. In the first case a dissenting shareholder paid out of his own pocket for an advertisement that communicated his position about the shortcomings of managers and directors. In the second case the television networks included a tape filmed by an environmental group in their regular programming. Finally, the outcome is also different. In the first example the public pressure resulting from the advertisement ended up forcing the directors of Sears to increase shareholders' value, an objective they should have pursued to begin with. In the second case it forced them to bow to environmentalist groups, a constituency to which they have no fiduciary duty. One could argue that Heinz managers responded to their customers' preferences and that the media were simply instrumental in bringing crucial facts to the attention of customers. In this case however, we have evidence that contradicts this hypothesis. As some marketing studies show, a big gap exists between consumer complaints communicated through the press and their willingness to pay. If there is a dolphin-safe can of tuna next to a regular can, people choose the cheaper product even if the difference is just one penny(Reinhardt and Vietor 1994a, p. 3). It is not even clear that the media forced the directors to behave in societys interest. There is no evidence that the societal loss caused by the killed dolphins is compensated for by the additional cost of fishing dolphin safe tuna. In fact, some environmentalists have criticized this decision by claiming that it has reduced biodiversity, because it shifted tuna fishing entirely to the western Pacific, where catching tuna does not kill dolphins, but does kill many other species that, unlike dolphins, are on the endangered species list All these questions regarding the medias role receive limited attention in the academic literature. This is no accident. The process of diffusion of information plays a small role in economic models. Agents are assumed to be informed or not. If not, sometimes they are given the option of acquiring information at a prespecified cost. There is no role for information aggregators, which selectively reduce the cost of acquiring information. In the real world the media play this role. People I In his survey of the state-of-the-art in corporate finance, Zingales(2000)mentions this as one important force that has been neglected. Skeel (2001)analyzed the role of shaming in corporate law. Baron(1996, 2001)investigated the role of the media in lobbying efforts and in private politics more generally. Djankov and others(2001) studied the effects of the ownership of the press
used is also different. In the first case a dissenting shareholder paid out of his own pocket for an advertisement that communicated his position about the shortcomings of managers and directors. In the second case the television networks included a tape filmed by an environmental group in their regular programming. Finally, the outcome is also different. In the first example the public pressure resulting from the advertisement ended up forcing the directors of Sears to increase shareholders’ value, an objective they should have pursued to begin with. In the second case it forced them to bow to environmentalist groups, a constituency to which they have no fiduciary duty. One could argue that Heinz managers responded to their customers’ preferences and that the media were simply instrumental in bringing crucial facts to the attention of customers. In this case, however, we have evidence that contradicts this hypothesis. As some marketing studies show, a big gap exists between consumer complaints communicated through the press and their willingness to pay. “If there is a dolphin-safe can of tuna next to a regular can, people choose the cheaper product even if the difference is just one penny” (Reinhardt and Vietor 1994a, p. 3). It is not even clear that the media forced the directors to behave in society’s interest. There is no evidence that the societal loss caused by the killed dolphins is compensated for by the additional cost of fishing dolphinsafe tuna. In fact, some environmentalists have criticized this decision by claiming that it has reduced biodiversity, because it shifted tuna fishing entirely to the western Pacific, where catching tuna does not kill dolphins, but does kill many other species that, unlike dolphins, are on the endangered species list. All these questions regarding the media’s role receive limited attention in the academic literature.1 This is no accident. The process of diffusion of information plays a small role in economic models. Agents are assumed to be informed or not. If not, sometimes they are given the option of acquiring information at a prespecified cost. There is no role for information aggregators, which selectively reduce the cost of acquiring information. In the real world the media play this role. People 1 In his survey of the state-of-the-art in corporate finance, Zingales (2000) mentions this as one important force that has been neglected. Skeel (2001) analyzed the role of shaming in corporate law. Baron (1996, 2001) investigated the role of the media in lobbying efforts and in private politics more generally. Djankov and others (2001) studied the effects of the ownership of the press. 3
obtain much of their information from the media, which play an important part in selecting which pieces of information to communicate to the public and in adding credibility to information provided through other sources. By selectively reducing agents' cost of collecting and evaluating information, the media play a major role in shaping the creation and accumulation of reputation The media can play a role in corporate governance by affecting reputation in at least three ways First, media attention can drive politicians to introduce corporate law reforms or enforce corporate laws the belief that inaction would hurt their future political careers or shame them in the eyes of public opinion, both at home and abroad Second, media attention could affect reputation through the standard channel that most economic models emphasize In the traditional understanding of reputation(see, for example, Fama 1980; Fama and Jensen 1983), managers' wages in the future depend on shareholders'and future employers' beliefs about whether the managers will attend to their interests in those situations where they cannot be monitored. his concern about a monetary penalty can lead mangers not to take advantage of opportunities for self- dealing so as to create a belief that they are good managers Third, and what we emphasize here, media attention affects not only managers' and board members'reputations in the eyes of shareholders and future employers, but media attention affects their reputation in the eyes of society at large. As Monks describes the Sears advertisement: We were speaking to their friends, their families, their professional associates. Anyone seeing the ad would read it Anyone reading it would understand it. Anyone understanding it would feel free to ask questions of any board member they encountered(Rosenberg 1999, pp. 269-70) Heinz shareholders may have been extremely unhappy about the decision to fish only dolphin-safe tuna, as might any of the managers potential employers. Heinz 's managers and directors acted in part to protect their public image. They did not want to be harassed by their children when they went home or to feel embarrassed when they went to church or to their country club. Nell Minow, Robert Monks' business partner, told us that to this day Sears' directors hate Robert Monks, because at their local country club they are still laughed at as a result of Monks'advertisement No insurance policy for managers or directors can protect them from such
obtain much of their information from the media, which play an important part in selecting which pieces of information to communicate to the public and in adding credibility to information provided through other sources. By selectively reducing agents’ cost of collecting and evaluating information, the media play a major role in shaping the creation and accumulation of reputation. The media can play a role in corporate governance by affecting reputation in at least three ways. First, media attention can drive politicians to introduce corporate law reforms or enforce corporate laws in the belief that inaction would hurt their future political careers or shame them in the eyes of public opinion, both at home and abroad. Second, media attention could affect reputation through the standard channel that most economic models emphasize. In the traditional understanding of reputation (see, for example, Fama 1980; Fama and Jensen 1983), managers’ wages in the future depend on shareholders’ and future employers’ beliefs about whether the managers will attend to their interests in those situations where they cannot be monitored. This concern about a monetary penalty can lead mangers not to take advantage of opportunities for selfdealing so as to create a belief that they are good managers. Third, and what we emphasize here, media attention affects not only managers’ and board members’ reputations in the eyes of shareholders and future employers, but media attention affects their reputation in the eyes of society at large. As Monks describes the Sears advertisement: “We were speaking to their friends, their families, their professional associates. Anyone seeing the ad would read it. Anyone reading it would understand it. Anyone understanding it would feel free to ask questions of any board member they encountered” (Rosenberg 1999, pp. 269-70). Heinz shareholders may have been extremely unhappy about the decision to fish only dolphin-safe tuna, as might any of the managers’ potential employers. Heinz’s managers and directors acted in part to protect their public image. They did not want to be harassed by their children when they went home or to feel embarrassed when they went to church or to their country club. Nell Minow, Robert Monks’ business partner, told us that to this day Sears’ directors hate Robert Monks, because at their local country club they are still laughed at as a result of Monks’ advertisement. No insurance policy for managers or directors can protect them from such 4
putational penalties Thus the media do play a role in shaping the public image of corporate managers and directors and in so doing they pressure them to behave according to societal norms. Depending on the situation this pressure can lead to shareholders value maximization, as in the case of Sears, or to deviations from it, as in the case of heinz Thus far we have only raised the possibility that managers and directors care about their public image, and thus respond to media pressure. Before concluding that the media do indeed play a role orporate governance we have to establish that this is more than a theoretical possibility supported by two anecdotes. This is what we do in the rest of this paper. We start by reviewing a series of examples where the media do affect corporate policy. These examples sharpen intuition that we seek to clarify in a theoretical section on issues that determine the impact of the media on corporate behavior. We then move on to more systematic evidence. In Dyck and Zingales(2001)we showed that the diffusion of the press affects the amount of corporate value that insiders appropriate for themselves, the so-called private benefits of control. In this paper we look at the effects of the press on the private sector's responsiveness to environmental issues. As our main measure of the importance of the press in a country we use the circulation of daily newspapers normalized by population. While the press cannot be important if it is not ead, this is clearly a rough indicator of its importance, but one of the few available in a large cross- section of countries. We then test the robustness of our results using other indicators of press freedom and independence. As a measure of the average corporate environmental standards of firms in a country we use an index produced as a component of the 2001 environmental sustainability index. This private sector responsiveness index is a combination of five firm-based indicators ranging from the number of Iso 14001 certified companies per million dollars of gross domestic product(GDP) to the rating of firms environmental sustainability in the Dow Jones global index We found that countries with a larger newspaper circulation have better environmental responsiveness, on average. This is true even after controlling for the extent of environmental regulation, he availability of information on environmental outcomes, and the level of economic development
reputational penalties. Thus the media do play a role in shaping the public image of corporate managers and directors, and in so doing they pressure them to behave according to societal norms. Depending on the situation this pressure can lead to shareholders’ value maximization, as in the case of Sears, or to deviations from it, as in the case of Heinz. Thus far we have only raised the possibility that managers and directors care about their public image, and thus respond to media pressure. Before concluding that the media do indeed play a role in corporate governance we have to establish that this is more than a theoretical possibility supported by two anecdotes. This is what we do in the rest of this paper. We start by reviewing a series of examples where the media do affect corporate policy. These examples sharpen intuition that we seek to clarify in a theoretical section on issues that determine the impact of the media on corporate behavior. We then move on to more systematic evidence. In Dyck and Zingales (2001) we showed that the diffusion of the press affects the amount of corporate value that insiders appropriate for themselves, the so-called private benefits of control. In this paper we look at the effects of the press on the private sector’s responsiveness to environmental issues. As our main measure of the importance of the press in a country we use the circulation of daily newspapers normalized by population. While the press cannot be important if it is not read, this is clearly a rough indicator of its importance, but one of the few available in a large crosssection of countries. We then test the robustness of our results using other indicators of press freedom and independence. As a measure of the average corporate environmental standards of firms in a country we use an index produced as a component of the 2001 environmental sustainability index. This private sector responsiveness index is a combination of five firm-based indicators ranging from the number of ISO 14001 certified companies per million dollars of gross domestic product (GDP) to the rating of firms’ environmental sustainability in the Dow Jones global index. We found that countries with a larger newspaper circulation have better environmental responsiveness, on average. This is true even after controlling for the extent of environmental regulation, the availability of information on environmental outcomes, and the level of economic development 5
measured as GDP per capita. The effect is also economically significant. One standard deviation increase in the diffusion of the press increases the environmental index by 15 percentage points, equal to 28 percent of its standard deviation As the diffusion of the press may itself be endogenous or spuriously correlated with other institutional factors, we try to explain the press diffusion using exogenous variables. Religion is a major factor affecting the literacy of a country and its propensity to read. Another important factor is the degree of ethnolinguistic fractionalization. These two factors alone can explain 41 percent of the cross-sectional variation in press diffusion. When we use these two factors as instruments in our regressions on the effects of the press on environmental standards and on the size of private benefits, we obtain similar results. This supports the idea that our results are not driven by spurious correlations or reverse causality From a policy perspective, this evidence on the importance of media in corporate governance has two important consequences. First, previous research has mostly focused on the legal and contractual aspects of corporate governance. The evidence provided in this paper and in Dyck and Zingales(2001) suggests that this focus should be broadened, and that the policy debate should undergo a similar shift in ocus econd, the press pressures managers to act not just in shareholders'interest, but in a publicly acceptable way. This finding brings the role of societal norms to the forefront of the corporate governance debate. With a few notable exceptions, for example, Coffee(2001), the role of these norms has been ignored, yet they may present an opportunity for reformers if they can increase communication about behavior that violates norms and those norms support effective corporate governance. However, they might also represent a major obstacle to any attempt to improve a countrys corporate governance system In countries where firing workers to increase profits is viewed negatively, creating the incentives for managers to do so will be extremely difficult, especially in highly visible companies. This should be openly considered in any realistic plan to reform a country's corporate governance system
measured as GDP per capita. The effect is also economically significant. One standard deviation increase in the diffusion of the press increases the environmental index by 15 percentage points, equal to 28 percent of its standard deviation. As the diffusion of the press may itself be endogenous or spuriously correlated with other institutional factors, we try to explain the press diffusion using exogenous variables. Religion is a major factor affecting the literacy of a country and its propensity to read. Another important factor is the degree of ethnolinguistic fractionalization. These two factors alone can explain 41 percent of the cross-sectional variation in press diffusion. When we use these two factors as instruments in our regressions on the effects of the press on environmental standards and on the size of private benefits, we obtain similar results. This supports the idea that our results are not driven by spurious correlations or reverse causality. From a policy perspective, this evidence on the importance of media in corporate governance has two important consequences. First, previous research has mostly focused on the legal and contractual aspects of corporate governance. The evidence provided in this paper and in Dyck and Zingales (2001) suggests that this focus should be broadened, and that the policy debate should undergo a similar shift in focus. Second, the press pressures managers to act not just in shareholders’ interest, but in a publicly acceptable way. This finding brings the role of societal norms to the forefront of the corporate governance debate. With a few notable exceptions, for example, Coffee (2001), the role of these norms has been ignored, yet they may present an opportunity for reformers if they can increase communication about behavior that violates norms and those norms support effective corporate governance. However, they might also represent a major obstacle to any attempt to improve a country’s corporate governance system. In countries where firing workers to increase profits is viewed negatively, creating the incentives for managers to do so will be extremely difficult, especially in highly visible companies. This should be openly considered in any realistic plan to reform a country’s corporate governance system. 6
Some Examples of the effects of the Media on Corporate Policy To illustrate that the two examples provided in the introduction are not isolated anecdotes, but the tip of an iceberg, this section provides additional case studies that link media pressure to changes in corporate behavior. What is remarkable about all the examples is that these changes took place even in the absence of any legal requirement to act or legal liability not to act Corporate Strategy toward the environment Following the passage of the Pollution Prevention Act in 1990, U.S. firms were required to disclose their annual releases of each listed chemical by facility. Unlike accounting information, which constituency could legally make use of this information is unclear. Nevertheless, this information requirement has become an extremely important tool for changing corporate behavior, because it allowed polluters to be identified by firm and by individual facilities. As the Environmental Protection Agency noted: " The information is a lever for action, as citizens exact pledges from local manufacturing facilities to reduce toxic discharges"( Vietor 1993, p. 3) Environmental groups like the Natural Resource Defense Council and the National Wildlife Federation have aggregated the information and communicated it to the press by means of publications with such titles as The who's Who of Toxic Polluters and The Toxic 500, which have then been selectively picked up by the broadcast and print media Given the high appeal of any news about the environment, environmental groups are generally spared the expense that Robert Monks had to face in his Sears battle(the Wall Street Journal advertisement alone cost more than US$100, 000)to communicate their information to the public. This differential appeal of news to the broader public might lead to systematic distortions in the targets of these campaigns, and thus in the medias corporate governance role
Some Examples of the Effects of the Media on Corporate Policy To illustrate that the two examples provided in the introduction are not isolated anecdotes, but the tip of an iceberg, this section provides additional case studies that link media pressure to changes in corporate behavior. What is remarkable about all the examples is that these changes took place even in the absence of any legal requirement to act or legal liability not to act. Corporate Strategy toward the Environment Following the passage of the Pollution Prevention Act in 1990, U.S. firms were required to disclose their annual releases of each listed chemical by facility. Unlike accounting information, which constituency could legally make use of this information is unclear. Nevertheless, this information requirement has become an extremely important tool for changing corporate behavior, because it allowed polluters to be identified by firm and by individual facilities. As the Environmental Protection Agency noted: “The information is a lever for action, as citizens exact pledges from local manufacturing facilities to reduce toxic discharges” (Vietor 1993, p. 3). Environmental groups like the Natural Resource Defense Council and the National Wildlife Federation have aggregated the information and communicated it to the press by means of publications with such titles as The Who’s Who of Toxic Polluters and The Toxic 500, which have then been selectively picked up by the broadcast and print media. Given the high appeal of any news about the environment, environmental groups are generally spared the expense that Robert Monks had to face in his Sears battle (the Wall Street Journal advertisement alone cost more than US$100,000) to communicate their information to the public. This differential appeal of news to the broader public might lead to systematic distortions in the targets of these campaigns, and thus in the media’s corporate governance role. 7
The public opinion pressure created by this information about polluters had an impact. Firms that were high on the list, such as Allied (ranked third in 1990)and dupont (ranked first in 1990), have made getting off that top 10 list a point of corporate strategy, and doing so as fast as possible, even in the absence of any legal requirement. Allied, for example, more than tripled its expenditures on environmental control facilities and voluntary cleanup following the release of this information(Vietor 1993, exhibit 1). The industry has also responded, with the Chemical Manufacturers Association developing a code for responsible manufacturing and handling principles and making these principles mandatory for members, with this"draconian self-policing" viewed as"necessary to reverse the publics overwhelmingly negative opinion of the chemicals industry"(Vietor 1993, p. 3) Corporate Governance and the Press The press also intersects with various corporate governance mechanisms SHAREHOLDER ACTIVISTS AND THE PRESS. While activists such as robert Monks and Nell minnow have found the press useful in their fights with management in the United States, does the press have a similar effect in emerging markets? Recent events in the Republic of Korea indicate that it does Korea has long been known as a place where controlling shareholders in the largest Korean firm (chaebol) take advantage of their position at the expense of small investors. National corporate laws convey few rights to outside investors-they score only 2 out of 5 in La Porta and others'(1998)index that measures the strength of protection for minority shareholdersand expectations in relation to law enforcement are low. according to an index designed to assess countries'law and order tradition Korea has a level half of the average in the industrial countries The beginning of efforts to force change in Korea dates to 1996 and the formation of the People's Solidarity for Participatory Democracy(PSPD)driven by Jang Ha-Sung of Korea University. As in the United States, this investor activist has focused his attention on changing corporate policies in the largest
The public opinion pressure created by this information about polluters had an impact. Firms that were high on the list, such as Allied (ranked third in 1990) and DuPont (ranked first in 1990), have made getting off that top 10 list a point of corporate strategy, and doing so as fast as possible, even in the absence of any legal requirement. Allied, for example, more than tripled its expenditures on environmental control facilities and voluntary cleanup following the release of this information (Vietor 1993, exhibit 1). The industry has also responded, with the Chemical Manufacturers Association developing a code for responsible manufacturing and handling principles and making these principles mandatory for members, with this “draconian self-policing” viewed as “necessary to reverse the public’s overwhelmingly negative opinion of the chemicals industry” (Vietor 1993, p. 3). Corporate Governance and the Press The press also intersects with various corporate governance mechanisms. SHAREHOLDER ACTIVISTS AND THE PRESS. While activists such as Robert Monks and Nell Minnow have found the press useful in their fights with management in the United States, does the press have a similar effect in emerging markets? Recent events in the Republic of Korea indicate that it does. Korea has long been known as a place where controlling shareholders in the largest Korean firms (chaebol) take advantage of their position at the expense of small investors. National corporate laws convey few rights to outside investors—they score only 2 out of 5 in La Porta and others’ (1998) index that measures the strength of protection for minority shareholders—and expectations in relation to law enforcement are low. According to an index designed to assess countries’ law and order tradition, Korea has a level half of the average in the industrial countries. The beginning of efforts to force change in Korea dates to 1996 and the formation of the People’s Solidarity for Participatory Democracy (PSPD) driven by Jang Ha-Sung of Korea University. As in the United States, this investor activist has focused his attention on changing corporate policies in the largest 8
Korean firms, and has relied both on legal pressures, including proxy battles, criminal suits, and derivative suits, and on the use of the press to shame corporate leaders into changing their policies Perhaps to an even greater extent than in the United States, the success stories have resulted more from the creation of public opinion pressure than from legal sanctions The most successful challenge to date has been the battle to stop insider dealings in SK Telecom SK Telecom was an extremely profitable company, but its financial results did not show this because the company used transfer pricing to benefit two companies almost 100 percent owned by the chairman of SK Telecom and his relatives. The PSPd drew attention to these policies. After the London-based Financial Times picked up the story, a media campaign ensued to attract proxy votes. This campaign involved publishing advertisements in newspapers and using television and radio. In March 1998 SK Telecoms directors capitulated and agreed to the PSPD's requests This success stands in sharp contrast with the failure of legal actions. For example, shareholders proposals are severely restricted and cannot involve the removal of directors or auditors. Perhaps the only successful legal challenge has been the one to ensure investors' rights to speak at meetings, though the right to speak can only be used to affect the reputation of the parties involved, not to trigger any legal remedy. For example, the press gave extensive coverage to the fact that the Samsung shareholders meeting lasted 13 hours. The effect of shareholder and public opinion pressure was an increase in the transparency of Samsungs financial statements INSTITUTIONAL INVESTORS. While institutional investors have many legal mechanisms to encourage change in corporate policies, the presence of an active press increases their influence. It provides a According to PSPD(2002, p. 3): It was confirmed that SK Telecom channeled huge profits to Sunkyung Distribution, in which Sunkyung Group Chairman Choi Jong-Hyun holds 94.6% shares, and Daehan Telecom, owned 100% by Choi's son and his son-in-law. It was revealed that SK Telecom transferred profits to Sunkyung Distribution and Daehan Telecom by paying exorbitant service fees or purchasing equipment at high prices. Due to SK Telecoms internal transactions, sK Group affiliate Daehan Telecom's business profits increased from only 64 million won to 13.7 billion won, and Sunkyung Distributions business profits increased from -4. 1 billion won to 6.6 billion won. In contrast, SK Telecom, which as the strongest company in 1996 recorded sales of 2.6 trillion won, began showing sharply increased sales costs and sharply decreased profits since becoming part of the SK Group in
Korean firms, and has relied both on legal pressures, including proxy battles, criminal suits, and derivative suits, and on the use of the press to shame corporate leaders into changing their policies. Perhaps to an even greater extent than in the United States, the success stories have resulted more from the creation of public opinion pressure than from legal sanctions. The most successful challenge to date has been the battle to stop insider dealings in SK Telecom. SK Telecom was an extremely profitable company, but its financial results did not show this because the company used transfer pricing to benefit two companies almost 100 percent owned by the chairman of SK Telecom and his relatives.2 The PSPD drew attention to these policies. After the London-based Financial Times picked up the story, a media campaign ensued to attract proxy votes. This campaign involved publishing advertisements in newspapers and using television and radio. In March 1998 SK Telecom’s directors capitulated and agreed to the PSPD’s requests. This success stands in sharp contrast with the failure of legal actions. For example, shareholders’ proposals are severely restricted and cannot involve the removal of directors or auditors. Perhaps the only successful legal challenge has been the one to ensure investors’ rights to speak at meetings, though the right to speak can only be used to affect the reputation of the parties involved, not to trigger any legal remedy. For example, the press gave extensive coverage to the fact that the Samsung shareholders’ meeting lasted 13 hours. The effect of shareholder and public opinion pressure was an increase in the transparency of Samsung’s financial statements. INSTITUTIONAL INVESTORS. While institutional investors have many legal mechanisms to encourage change in corporate policies, the presence of an active press increases their influence. It provides a 2 According to PSPD (2002, p. 3): “It was confirmed that SK Telecom channeled huge profits to Sunkyung Distribution, in which Sunkyung Group Chairman Choi Jong-Hyun holds 94.6% shares, and Daehan Telecom, owned 100% by Choi's son and his son-in-law. It was revealed that SK Telecom transferred profits to Sunkyung Distribution and Daehan Telecom by paying exorbitant service fees or purchasing equipment at high prices. Due to SK Telecom's internal transactions, SK Group affiliate Daehan Telecom's business profits increased from only 64 million won to 13.7 billion won, and Sunkyung Distribution's business profits increased from -4.1 billion won to 6.6 billion won. In contrast, SK Telecom, which as the strongest company in 1996 recorded sales of 2.6 trillion won, began showing sharply increased sales costs and sharply decreased profits since becoming part of the SK Group in 9
elatively cheap way to impose penalties on companies and to coordinate the response of other investors in availing themselves of potential legal protection The California State Pension Fund for Public Employees(CalPERS), for example, has adopted a policy of identifying underperforming firms and generating widespread media attention as an important tool in its efforts to change corporate policies to increase their returns. CalPERS identifies a long list of poorly performing firms according to criteria such as shareholder returns, economic value added, and orporate governance. Armed with this list CalPERS representatives talk to companies to try to get them to change their policies, with the threat that if they do not, CalPERS may launch a proxy contest and will go ahead and reveal the firms in a"focus list. This threat of public exposure is an important part of CalPERS approach. CalPERS found that when it removed this publicity threat its strategy did not work. In 1991, when several chief executive officers(CEOs)convinced CalPERS that a"kindler, gentler strategy would be less antagonistic and more effective, only 2 of the 12 targeted companies negotiated acceptable agreements with CalPERS and 3 resisted even meeting with CalPERS officials. As CalPERS CEO Dale Hanson commented: "Kindler, gentler'is not working. It has shown us that a number of companies wont move unless they have to deal with the problem because it's in the public eye (Dobrzynski 1992, p. 44). In 1992 CalPERS returned to the policy of publicizing its target lists Another example is the case of investors in Russian firms. William Browder, CEO of Hermitage Capital Management, the largest public equity fund in Russia, reported to us that the single most important corrective mechanism we have against misgovernance is the press(email, May 21, 2002). For example, Browder brought misdeeds at Gazprom in October 2000 to the medias attention, and was thereby able to generate publicity about managements failures, with stories in the international business press, including Business Week, the New York Times, the Financial Times, the Wall Street Journal, and the Washington Post. Such media pressure, reportedly, had the beneficial effect of facilitating coordination by institutional investors and shaming them to take action to vote for a special audit of the 1994. The sales profit, which was as high as 31% in 1994, decreased to only 14% in 1996, and the sales cost/income ratio increased greatly from 58% to 76%
relatively cheap way to impose penalties on companies and to coordinate the response of other investors in availing themselves of potential legal protection. The California State Pension Fund for Public Employees (CalPERS), for example, has adopted a policy of identifying underperforming firms and generating widespread media attention as an important tool in its efforts to change corporate policies to increase their returns. CalPERS identifies a long list of poorly performing firms according to criteria such as shareholder returns, economic value added, and corporate governance. Armed with this list CalPERS representatives talk to companies to try to get them to change their policies, with the threat that if they do not, CalPERS may launch a proxy contest and will go ahead and reveal the firms in a “focus list.” This threat of public exposure is an important part of CalPERS’ approach. CalPERS found that when it removed this publicity threat its strategy did not work. In 1991, when several chief executive officers (CEOs) convinced CalPERS that a “kindler, gentler” strategy would be less antagonistic and more effective, only 2 of the 12 targeted companies negotiated acceptable agreements with CalPERS and 3 resisted even meeting with CalPERS officials. As CalPERS CEO Dale Hanson commented: “‘Kindler, gentler’ is not working. It has shown us that a number of companies won’t move unless they have to deal with the problem because it’s in the public eye” (Dobrzynski 1992, p. 44). In 1992 CalPERS returned to the policy of publicizing its target lists. Another example is the case of investors in Russian firms. William Browder, CEO of Hermitage Capital Management, the largest public equity fund in Russia, reported to us that “the single most important corrective mechanism we have against misgovernance is the press” (email, May 21, 2002). For example, Browder brought misdeeds at Gazprom in October 2000 to the media’s attention, and was thereby able to generate publicity about management’s failures, with stories in the international business press, including Business Week, the New York Times, the Financial Times, the Wall Street Journal, and the Washington Post. Such media pressure, reportedly, had the beneficial effect of facilitating coordination by institutional investors and shaming them to take action to vote for a special audit of the 1994. The sales profit, which was as high as 31% in 1994, decreased to only 14% in 1996, and the sales cost/income ratio increased greatly from 58% to 76%.” 10
