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editorial

No such thing as bad publicity?

June 2015

I’ve always wondered the validity of that oft quoted phrase, “There’s no such thing as bad publicity.” Surely, particularly in these social media savvy days (should that be anti social media?), a bad tweet can, and does, have huge ramificiations. Even in the pre-internet days, Gerald Ratner’s comments about the jewellery his company sold are now infamous and who can forget during the BP oil crisis of 2010, the ceo’s comment that he’d like his life back…

Interestingly, more news about a company’s chief executive – positive and not – is good news when it comes to the firm’s valuation, according to a study at University of Cambridge Judge Business School. More media coverage of a CEO is a “channel of investor recognition” that also helps the chief executive extract higher compensation, says the study.

“The study shows that, in the long term, if a firm’s CEO attracts more media coverage the firm will do better in terms of valuation,” says Bang Dang Nguyen, University Lecturer in Finance and Director of the MPhil in Finance Programme at Cambridge Judge. “We live in a world of incomplete information, and the study shows that additional coverage of a company’s CEO helps fill that information gap for investors, and this contributes to additional valuation.”

The study deliberately focused on coverage of CEOs rather than their companies, because often a CEO is better known than his or her company, and investors tend to listen to the CEO seriously; in fact, in many cases the CEO becomes not only the company’s public face but also its embodiment in the eyes of investors and the broader public.

The study found that companies with the highest level of CEO media coverage outperformed in value those with the lowest level by 8%, while firms with the highest level of positive CEO coverage outperformed those with the lowest level by 7% – suggesting it was the greater aggregate CEO coverage itself, not its relative positivity, that was the key factor to greater value.

Previous studies have mostly focused on the effect of media coverage on specific events or announcements by firms, while Nguyen’s research uses a long-term approach based on aggregate coverage of CEOs, including both good and bad news.

“Because of incomplete information, investors rely at least partially on public information to make decisions,” the study says. “Media coverage may help in removing some uncertainty, bringing in more transparency, adding credibility, and highlighting the viability of future projects.”

Bad news can also help culture change, according to Mark Taylor, dean of Warwick Business School. Commenting on yet another banking scandal where banks have been fined nearly $6bn for rigging foreign exchange markets, he said: “The fact these fines are so big and this has been investigated so thoroughly, demonstrates just how serious the collusion and price fixing was, and how low confidence in the banks has sunk. A shift in culture is necessary in order to ensure that something similar doesn’t happen in another guise. Imposing heavy penalties - together with the accompanying adverse publicity - is one way of shifting that culture.

I suppose with all these corporate scandals what’s important is to acknowledge the sin and then focus on the solution. Like Alan Philips said: “It is bad news. But we just have to get on and deal with it.”

 




Europe | corporate reputation

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