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Is bad news good for business?

Bad press could be good for business, according to research from Professor Michael K. Bednar at the College of Business at Illinois.

While common business perceptions may suggest the media is a vehicle for promotion, Professor Bednar’s project demonstrated that even negative press attention can lead to positive strategic moves made by company executives.

He commented: “As the news media reports negatively about firms, that registers with executives, and that, in turn, prompts executives to engage in larger scale strategic change.”

Along with two co-authors of the study, Steven Boivie, Professor of management at the University of Arizona, and Nicholas R. Prince, a doctoral student in administration at Illinois, Professor Bednar examined approximately 40,000 articles to assess the effect of both positive and negative press.

“We […] were able to quantify how positive or negative the coverage of the firm was. After we controlled for performance and several other variables that could affect media coverage, we found evidence for the main effect, that negative media coverage may act as a trigger for strategic change.”

Recent high profile media exposés of American firms like Starbucks, Google and Amazon avoiding corporation tax in the UK may be good for the companies’ public profiles if they pay up to HMRC, however the businesses themselves may suffer financially from paying out more than they hoped.

“The fact that companies like Starbucks and Amazon are responding to negative press coverage, would be consistent with our general findings.

“We also point out in our paper that media coverage gives various constituencies a huge platform for voicing their concerns.

“You see this with the protestors outside of Starbucks. Without the media coverage they received, their protest was likely to have very minimal impact.

“But the fact that various protests received significant attention in the media made them much more likely to get the attention of top decision makers at these firms.”

Professor Bednar investigated media coverage for 250 firms over a period of five years, and looked further into how different business models can feel varying effects from press attention.

The study found that independent directors (i.e. those without strong ties to the company, such as family relations) are more likely to be significantly influenced by negative media coverage.

Findings suggested that if directors are less attached to the company, they are more likely to be mindful of public opinion and the attention generated by the press.

Professor Bednar explained: “When you have a board that consists of independent directors, negative media coverage influences their decision-making more than when you have board members who have lots of insiders or directors with family or business ties to the company.

“When there are board members with familial or business ties on the board, they are less likely to be influenced by these outside perspectives, including the media.

“So that relationship between negative media coverage and strategic change gets stronger when you have outsiders on the board.”

Three main influences on the way media can impact businesses were highlighted by Professor Bednar’s study.

The first of these points was general reporting on business activity, which the Professor said has an influence simply by “shining a light on certain issues.”

He added: “So if you have two firms who do essentially the same thing, the one that captures the media’s eye is going to be amplified.”

Stakeholder groups can also make themselves heard by using the press as a vehicle for their views.

“That means that even smaller groups can enact change or have outsize influence because now the media has given them a platform to voice their views.”

The third way companies can be influenced by media coverage is through investigative journalism.

Professor Bednar said: “A good example is the work of Bethany McLean, who helped to expose Enron, which at the time was performing pretty well.

“Through investigative reporting, she discovered that their financial statements didn’t make much sense.”

He added: “A few years ago, Jet Blue fired its founder after the big fiasco when their passengers were stuck on the runway for hours and hours.

“The same thing happened to other airlines, but Jet Blue was the one that got the bulk of the negative media attention.

“You could make the argument that it was that negative media coverage that made the board feel like it had to do something in response to counter all the bad publicity.”

The study also found evidence that some companies can survive bad press by maintaining a strong performance.

Professor Bednar said: “Having a successful company papers over negative publicity. If the firm is doing well financially, that certainly makes it easier to tune out the negative chatter from the outside.

“The flip side, of course, is that when things are going poorly, the negative media coverage becomes that much louder, and makes that negative performance stand out that much more, which then acts as a strong trigger for strategic change.”

The study suggested that chief executives and board members should view the press, as not only a tool for promotion, but as a way to change and influence public perceptions of their companies.

Professor Bednar concluded: “For executives, that’s certainly something to be aware of, but there’s also the potential to make biased decisions if you’re overly influenced by negative coverage.

“So just being aware of that potential influence can help you make better decisions, because there will probably come a time when it will be a good thing to respond to the media scrutiny.

“But there also may be other times when it makes sense to ignore the chatter and continue with a strategy that could pay dividends down the road.”

The professor also warned against ignoring negative media coverage if company performance is strong.

“That can make us so focused on, ‘Hey, we’re doing fine, we don’t need to listen to outside voices.’

“Well, that’s a situation that could pose a risk to firms as well. So just being aware of the influence that the media can have and the circumstances when it’s most likely to have that effect can be a helpful thing for an executive.”

Professor Bednar’s study, “Burr under the saddle: How media coverage influences strategic change”, will be published in the journal, Organization Science.

This was posted in Bdaily's Members' News section by Miranda Dobson .