What is the role of the media and can it substitute for explicit legislation in some cases? In our paper, we present evidence that media pressure can propel corporate governance improvements. Specifically, media hostility does encourage unifications of dual class shares into a single ‘one share one vote’ class.
Dual class structures evolve when controlling shareholders issue to the public inferior-vote shares (where, for example, each share is entitled to a 1/10 vote) while keeping for themselves most of the superior-vote shares (with one-share one vote). Many such companies exist all over Europe and the USA (Facebook, Alphabet and more).
Dual class firms draw harsh public criticism on the ground that they take public investors' money without giving them (or us) adequate voice. Moreover, the dual class structure generates a wedge between the control group percentage in vote and percentage in equity, and Professor Bebchuck claims that this wedge aggravates agency problems by encouraging private benefits consumption by controlling shareholders.
We study voluntary dual class share unifications, ie, decisions by firms to abolish their dual class structure and convert all shares to one-share one-vote. Our first proposed hypothesis is that when media sentiment towards dual class shares becomes more negative, the reputation toll levied upon dual class firms increases (dual class firms' valuation-discount deepens), and the trend of unifications intensifies.
Our sample comprises 286 dual class firms in seven European countries in 1994-2009, of which 72 decided to unify their dual class shares. We monitor press hostility by counting the yearly number of hostile press articles on these firms in the Financial Times and the Wall Street Europe. Consistent with our first hypothesis, we identify positive correlations between the media anti-dual-class-shares sentiment, dual class firms' valuation discount (as measured by the lower Tobin Qs of dual class firms), and the propensity of dual class firms to unify. This evidence leads us to conclude that media pressure helps convincing controlling shareholders to abandon the dual-class structure. Controlling shareholders rationally give up the extra private benefits afforded by the dual class structure in return for the extra market valuation of their holdings (elimination of the dual class discount) afforded by the unification.
Our second testable hypothesis is cross-sectional. We propose that firms that are more sensitive to their public image and reputation are more likely to unify their dual-class shares. The empirical tests support this hypothesis. We find that on the eve of a Seasoned Equity Offering (a period of high reputational concerns) firms are more likely to unify their dual class shares. We also suggest approximating the public image sensitivity of an industry by its Corporate Social Responsibility (‘CSR’) score, and present evidence that firms in industries with higher CSR scores exhibit a higher unification propensity.
Our main conclusion is that media plays an important role in corporate governance promotion. Firms care for their reputation, which is a valuable asset for them; thus firms pay special attention to public opinion and media criticism. Some real firm decisions are influenced by firm image and reputation concerns, and the weight of these concerns probably only grow with the current ‘explosive’ advance of social media and its power.
Another interesting possible conclusion is that media is a powerful and flexible tool that in some cases can substitute for regulation in effectively restraining firms and their controlling shareholders.
Beni Lauterbach is the Raymond Ackerman Family Chair in Israeli Corporate Governance at the School of Business Administration of Bar Ilan University.
Anete Pajuste is an Associate Professor at the Stockholm School of Economics in Riga, Latvia.