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Next time a public relations executive I’m talking to for a story starts getting nervous about bad press, I’m going to show them this study. According to a trio of researchers from Penn State, Georgia State, and Arizona State Universities, “negative publicity could be good for stock prices.” Or at least that’s the apparent finding of a study that examined the effect of BusinessWeek’s “Worst Boards” list, which hasn’t been published since 2002.
The study, which will be in a forthcoming issue of the Journal of Financial and Quantitative Analysis, found that “media coverage of the ineffectiveness of corporate boards of directors forces those boards to take corrective actions and increases shareholder profits in the months after the negative publicity.” Of the 50 firms that appeared on the lists in 1996, 1997 and 2000, 34 of them, or 68%, “took observable steps to improve their governance structures.” The authors found that individual investors tended to sell or stop buying the companies’ stocks following publication, putting “downward pressure on the stocks, which is quickly countered by trading activity by institutional investors.”
While it’s nice to think BusinessWeek is that influential, it’s hard to believe the media alone caused those prices to rise. Surely, some of these companies were considering such changes to their boards or chief executives before the publication of our list.
If we were to do the list again today, I’d imagine that it would be somewhat harder (though by no means difficult) to find candidates for a Worst Boards list. No matter what you may think of Sarbanes-Oxley, there are clearly far more independent directors, split Chairman/CEO roles, and much more board oversight in the wake of the changes that resulted from the Enron era. There is much more productive conversation going on between shareholders, boards, and management. Still, things are far from fixed. Whose boards would you put on such a list today?
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