The Impact of Negative Media on the CEO and Board of Directors

Abstract

A few recent empirical studies examine the effect of the media on a firm’s corporate governance and allude to the positive influence of media on firm-level governance. This paper extends that work by presenting a novel exploration of the theoretical relationships between the media and the corporate board. The analysis shows how the threat of media exposure can affect the decision-making of a CEO considering diverting project resources for personal consumption, and that of the inside board members who must approve his proposed project implementation. Prior studies in social network modeling and psychological game theory are used to derive the cost of a negative media report to both the corporate insiders on the board and the CEO who is the focus of the media attention. The analysis shows that the threat of public exposure will discourage most CEOs from attempting diversion, and for the CEO who is unfazed by the threat of public exposure, it is highly probable that he will be abandoned by formerly supportive corporate insiders’ even if the private benefits of supporting the ‘tainted’ CEO are substantial.