The Correlation Between Public Scrutiny And Corporate Performance

In today’s world, there are so many corporations that major media houses can’t keep track of them all. Public opinion is increasingly getting strong on the norms for the degree of transparency a company must maintain with what information it should disclose to the public. Increased public eye on the company keeps them on their toes, making them reconsider before they take any major decisions, but is it always a good thing? For the public to have too much say in what a for-profit organization does, the ramifications of too much interference by individuals who have zero stakes but too much say in the operations of a company are questionable.

 The Consequential Eye of The Public

Public attention varies among public firms with the prominence they possess, listed companies according to NBRE reports have more google searches performed on them, more quarterly downloaded reports, and salaries of executives tracked, the setbacks of a company being too much in the public eye occasionally makes them take decisions which might not be for the betterment of the company at times. Indexed companies like the one in the S&P 500 have a lot of public scrutinies, this has a lot of issues, majorly these companies divulge a lot of time and capital to maintain public-friendly operations compared to the resources they receive for innovation or any other division which will yield long term returns for the company, the companies have been observed to be very formulaic in their approach and are willing to experiment less and less with the greater attention they receive.

As per the NBRE report, along with stifled innovation, it can make managers implement policies which are detrimental to the company in order to stay in the good books of the public, the intricacies of running a corporation is not straightforward, the ways a company operates and takes decisions in some situations is not understood by the public, at prima facie some of these decisions cause outrage among the public, but they do not see the necessity of the decision or the process they underwent to come to the said decision. For example, when Elon Musk took the decision to make Twitter verification a paid feature, it caused outrage among the users, what they failed to see was Twitter was generating too many losses and he wanted to make it profitable, despite the mode of income being rather strange, the newly appointed CEO took the decision with profitability in mind, and the rest is history.

Increased Renown Correlating to Increased Attention                                                                       

Firms which are subject to more scrutiny are increasingly penalized thanks to their renown, every mistake of theirs is met with increasingly greater attention, and they are at risk of being targeted by well-known political figures, the CEO’s made to testify in front of their judicial bodies. They are exposed to greater legal and regulatory body actions, all these factors force the corporations to take actions that would rather not draw too much attention, and this impacts the growth of a company in an unconstructive manner.

Evidence has been found that when a company is adjoined in an index such as S&P 500, the companies try to monitor the actions of their peer companies and try to implement similar policies and decisions which make them to not stand out much, as there is a presupposition that experienced companies are good at navigating eyes on them. The board of a company after being added to an index also changes, it is observed that prior to being indexed 16% of the board members have S&P 500 experience and after getting indexed, the board has 23% of members who are S&P 500 experienced. It is also seen the wages of key executives are structured in such a way they do not attract attention.

The Investment behaviours of non-private companies vary greatly compared to the investment actions of a public company, large companies have to face a lot of challenges with acquisitions as they may be subject to anti-trust lawsuits and other regulatory actions which make them leery.

The conundrum associated with measuring the net positive impact of public attention is their performance. Firms receive a lot of attention when they change their fundamentals, as a consequence, the increase in performance can be a proxy for change in fundamentals impacting performance. This may or may not be the case, for example, firms with unusually high performances draw more attention, it is difficult to discern how much of the performance increase can be attributed to the change in fundamentals, or if anything can be credited to the change in fundamentals

Conclusion

With this we observe that companies when subjected to public attention can lead to increased monitoring and this can prevent the firms from taking decisions which are adverse to stakeholder interests and can punish the management from taking the said decisions, however, this also has a dark side, this can make distract the management as they have to address the concerns expressed by various segments of the public, this leads to increase in constraints and less freedom to experiment effectively hindering novelty. It is subject to questioning if they stray from the path of their peer companies, this can make management avoid such paths even if it’s optimal for shareholders.