Seven years ago, Bill Browder sifted through reams of obscure Russian securities registration data to piece together an elaborate 41-page PowerPoint presentation outlining how managers of the Russian oil company Gazprom were shifting corporate assets to entities controlled by friends and relatives.

Browder, manager of The Hermitage Fund, a hedge fund focused on Russian investments, shared his findings with journalists at The Wall Street Journal, The Financial Times and BusinessWeek. In late 2000, the journalists began to write stories about corporate governance problems at Gazprom, and eventually the company’s chief executive officer was fired and corporate reforms were enacted. Meanwhile, Browder’s investment in Gazprom grew 10 times, from $150 million to $1.5 billion.

Hermitage’s role in the Gazprom shake-up is the basis of new research exploring the role of public shame in corporate governance. At a recent Wharton Impact Conference on International Corporate Governance, sponsored by the Weiss Center for International Financial Research, Alexander Dyck, professor of finance and business economics at the University of Toronto, said that Browder’s publicly announced strategy to use the media to curb corporate abuse in Russia provided a unique opportunity to measure the impact of media coverage on corporate governance.

“If you look at governance, it is hard to find a place where there was more high-profile abuse than Russia, and a lot of the abuse was evident and quantifiable,” Dyck said. The absence of strong regulatory mechanisms to protect investors makes the role of the media easier to tease out in Russia, and the presence of The Hermitage Fund provides data to test what happened to companies that were the focus of media coverage and those that were not, he added. “The traditional view is that the media is a mirror of reality. The new idea is that the media is involved in the aggregation of information, and it can have” real impact.

In a paper titled, “The Corporate Governance Role of the Media: Evidence from Russia,” Dyck and his coauthors (Natalya Volchkova from the New Economic School in Moscow and Luigi Zingales from the University of Chicago) note that the media serves an important role in absorbing the cost of gathering information that can benefit shareholders. “The problem with governance stories is that they are convoluted and complicated. If they weren’t so convoluted, shareholders would do something about them. There’s an incentive for the parties engaged in the company to hide and confuse what is going on,” Dyck said.

Of course, Browder had a compelling financial incentive to drum up news, too. “In both views, there’s a question about the extent to which the media is biased or not, and the extent to which economically invested actors can influence coverage in a certain way,” Dyck noted.

To influence coverage, Browder took steps to build his own credibility with journalists, including working with the International Monetary Fund. “[Journalists] saw Browder as someone with money in the game — as a person who had an agenda — [and] they tried to manage him as such. He had potentially useful information, but they … knew what it was being used for, so they had a balancing act.”

In a telephone interview from his office in London, Browder said it took time to earn the trust of Western journalists working in Russia. “They were extremely rigorous, and it was a big challenge to get stories published. We were very upfront that our interest was in exposing wrong-doing but that we would also benefit. Most journalists don’t have the time or resources to do the level of investigation that we did.”

Dyck noted that Hermitage was able to improve its odds of coverage by giving journalists only a day or two to review the information. If the story didn’t appear by then, Browder told them he would give the information to a competing news outlet. “That created pressure on journalists who would want to do more complete fact checking. He was quite sophisticated in using the press to get the story out.”

Browder acknowledged that he did apply pressure at times. “There’s competition among journalists, and they’re all trying to get the scoop…. We [had] something interesting from a factual perspective, and facts speak for themselves.” He noted that his most important role was in distilling the complexities of Gazprom’s internal structures to show how shareholders were losing out.

Dyck said the critical question is whether Browder’s own bias, reflected in the media’s portrayal of the company, had an impact on governance. In this case, it led to better governance because Browder was more media savvy than the company he was attempting to reform. “He’s getting his story out, and it’s a biased view of what’s going on. If he’s not trying to do the right thing, it can create problems.”

The $40 Million Article

In developed economies, companies typically have more power in dealing with the media, and good governance can lose out to the self-interest of management or a small group of shareholders. “All too often it’s the firm that has the resources … even more so as the media cuts back on resources,” Dyck noted.

To explore the impact of news stories on Russian corporate governance, the researchers examined a leading Russian investment bank’s weekly bulletin on governance issues between December 1998 and June 2002 and tallied the number of articles about governance problems. They also counted stories about companies in which Hermitage was an investor.

Dyck and the research team built a model that put a price-tag on bad press. According to the paper, one additional article in the Anglo-American press buys a five percentage-point increase in the probability of reversing a corporate governance flaw. The average corporate governance violation had the potential to dilute the value of equity by 57% — meaning, on average, the value of an extra article published in The Wall Street Journal or The Financial Times would be worth $40.4 million.

Bad publicity about governance problems can hurt a company in a number of ways, Dyck pointed out, citing distrust by labor and financial markets as examples. In addition, there are two different “reputational channels” at play when it comes to managers’ motivation to adopt good governance, he noted. One is that a good reputation lowers the cost of capital, benefiting the business and all shareholders; the other channel is more personal.

In Russia, for example, oligarchs have become interested in attending the World Economic Summit at Davos, sitting on Western charity boards or getting their children into exclusive boarding schools. “They care about their own personal reputation, and in the social circles in which they are involved — or would like to get involved — having a reputation of not treating shareholders well might be something they care about,” said Dyck. “The oligarchs have more money than they know what to do with, but the threat of being ostracized from a community they might benefit from is important to them.”

Dyck and his coauthors have not put a value on the degree to which personal reputation matters more than business reputation and the ability to raise capital. “But there’s enough anecdotal evidence that this is an issue they care about,” he said.

Stirring Regulators into Action

Damaging publicity can have an impact on governance because it can prompt regulators to take action against managers for problems that might have been ignored if those issues were not brought to the public’s attention. “The extent to which media attention would stop someone from [violating corporate governance rules] depends on the reputational cost and expected punishment,” Dyck said. “Not only do [individuals] care about their own reputation, but regulators also care about their own reputational impact, too.”

As an example, he cited the case of Richard Grasso, former chairman of the New York Stock Exchange. Grasso was ousted from his position in 2003 following reports about his outsized compensation package. All of the members of the exchange’s board of directors approved the pay package initially. Only after details of Grasso’s salary and benefits were made public — stirring controversy — did board members change their minds.

Arthur Levitt, the former U.S. Securities and Exchange Commission chairman who had worked in journalism, told Dyck that one of the most important parts of his job at the SEC was working with the agency’s press office. Dyck said there are regulators in Russia who act on behalf of political bosses through an authority similar to the SEC. “I think they are quite important in the subtext of all this. There are often rules in place that are — or are not — exercised. Media is an important channel to raise the stakes of not acting.”

In the case of Gazprom, a story in BusinessWeek calling the company “Russia’s Enron” stirred regulators into action, he noted. “Apparently, in a board meeting someone pulled it out and said, ‘We just can’t have this.’ That’s an illustration of the type of political pressure … that forces [regulators] to act in ways they were not willing to act.”

The impact of media coverage is stronger in emerging markets, the authors suggest, because in more developed countries, the influence of activist investors like The Hermitage Fund would be reduced by the target company’s ability to fight back with sophisticated public relations tactics. Although it may be less obvious, Dyck added that the impact of media on governance in countries with advanced financial markets is still important. “We just may not see as much of an impact here because the playing field is leveled off,” he said.

As for Browder, Russian authorities have determined he is a threat to national security and he is not permitted to enter the country. He manages his firm’s stake in Russian equity markets from abroad and is now eyeing other emerging markets: Hermitage has raised $625 million to invest in other parts of the world, including the Middle East and Latin America. In countries like Brazil, where there is a free press, he will be able to use some of his media strategies — but in other countries, such as Saudi Arabia, he will have to come up with another approach, he says.

“Our main objective is to buy things that will go up in price, and often assets are undervalued because people are doing things that are wrong. The way in which we fix that depends on the country. You have to test out different ways of doing things until you find something that works.”

And Gazprom is now playing its own media game: It owns Russia’s biggest private television station, NTV, and the daily paper Izvestia. In November, it acquired Komsomolskaya Pravda, the country’s best-read newspaper.