Changing Corporate Governance in Response to Negative Media Reports
| Published date | 01 January 2019 |
| Date | 01 January 2019 |
| Author | Ilya Okhmatovskiy,Donghoon Shin |
| DOI | http://doi.org/10.1111/1467-8551.12308 |
British Journal of Management, Vol. 30, 169–187 (2019)
DOI: 10.1111/1467-8551.12308
Changing Corporate Governance in
Response to Negative Media Reports
Ilya Okhmatovskiy and Donghoon Shin1
NOVA School of Business and Economics, Universidade Nova de Lisboa, Campus de Campolide, 1099-032
Lisbon, Portugal, and 1College of Business and Economics, University of Wisconsin Whitewater, 800 West
Main Street, Whitewater, WI 53190, USA
Corresponding author email: ilya.okhmatovskiy@novasbe.pt
We study how organizations change their corporate governance in response to negative
publicity in the media. We build on insights from the literature on interpersonal trust to
theorize how organizations respond to dierent types of trust-damaging information. We
suggest that organizations are likely to replace key individuals involved in the corporate
governance process when trust-damaging information providesevidence of low integrity.
In contrast, organizations are likelyto make changes in how the governance process is or-
ganized when trust-damaging information provides evidence of low benevolence.We test
our hypotheses by using data on publicly traded Korean firms from 2006 to 2013. Our
results provide general support for our argument about corporate governance changes
that organizations initiate in response to dierent types of trust-damaging information.
We also explorehow foreign ownership and state ownership moderate organizational re-
sponses to trust-damaging information.
Introduction
How organizations respond to scandals that dam-
age their reputation and undermine the trust of
stakeholders is an important topic attracting more
and more research (Desai, 2011; Pfarrer et al.,
2008; Zavyalova et al., 2012). Organizational re-
sponses to scandals often involve changes in cor-
porate governance, such as replacement of CEOs
or board members (Arthaud-Day et al., 2006;
Marcel and Cowen, 2014). Organizational mis-
conduct that triggers scandals is often attributed
to corporate governance failures, and making
changes in corporate governance is a natural re-
sponse to such scandals. While empirical evidence
about dierent types of organizational miscon-
duct has been accumulated, and dierent types
of organizational responses have been explored
(Gomulya and Boeker, 2014; Greve, Palmer and
Pozner, 2010; Wiersema and Zhang, 2013), each of
these studies is usually focused on a particular type
of misconduct and a particular type of response.
Given that scandals are triggered by dierent
types of misconduct, and that dierent types of
corporate governance changes can potentially be
implemented as corrective responses,an important
research question is: What kind of corporate gov-
ernance changes are initiated after scandals pro-
voked by dierent types of organizational miscon-
duct? Corporate governance is about relationships
among managers, shareholders and other stake-
holders (Aoki, 2001; Hitt, Ireland and Hoskisson,
2013). Trust plays an important role in these re-
lationships, and thus we choose to answer our re-
search question by drawing on theories developed
in research on trust repair (Bachmann, Gillespie
and Priem, 2015; Gillespie and Dietz, 2009).
While some prior studies describe responses to
media reports about organizational misconduct in
terms of impression management (e.g. McDonnell
and King, 2013; Zavyalova et al., 2012), we con-
sider these responses from the trust-repair per-
spective, acknowledging that attempts to repair
trust haveimportant symbolic components but can
also involve substantive changes in how organiza-
tions operate (Eberl, Geiger and Ablander, 2015;
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2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
170 I. Okhmatovskiy and D. Shin
Gillespie, Dietz and Lockey, 2014). Webelieve that
some insights generated in research on interper-
sonal trust can be fruitfully applied in the anal-
ysis of corporate governance changes that orga-
nizations initiate in response to dierent types of
negative publicity.
In this paper, we shed light on two notable
changes in a firm’s corporate governance: the re-
placement of individuals involved in the gover-
nance process and the adoption of new governance
structures. We relate these corporate governance
changes to two distinct trust-repair approaches
described in the literature on interpersonal trust.
One trust-repair approach is focused on disposi-
tional factors contributing to trust-damaging be-
haviour, while the other approach is focused on
situational factors. We theorize what corporate
governance changes organizationsare likely to ini-
tiate depending on the nature of trust-damaging
information (indicating the lack of integrity or the
lack of benevolence) and how these choices are
aected by the preferences of dierent types of
shareholders.
In our empirical analysis, we trace trust-
damaging information reported by Korean news-
papers and corporate governance changes in pub-
licly traded Korean firms from 2006 to 2013. We
use conceptual models developed in research on
trust to understand which corporate governance
changes organizations choose to initiate in re-
sponse to dierent types of negative publicity.
Literature review
Trust in organizations is susceptible to damages
(Bachmann and Inkpen, 2011; Gillespie and Dietz,
2009; Kramer and Lewicki, 2010; Mayer, Davis
and Schoorman, 1995; Searle et al., 2011). Trust
can be breached when an organization behaves in
a way that contradicts the stakeholders’ expecta-
tions, and these breaches will eliminate the ben-
efits of trusting relationships with stakeholders
(Dirks,Lewicki and Zaheer, 2009; Kim et al., 2004;
Tomlinsonand Mayer, 2009). Various events could
lead to diminished trust, including scandals, ir-
regularities in financial reporting, mistreatment
of employees, and so on. If the reputation and
trustworthiness of an organization are damaged,
it will face diculties in obtaining the necessary
resources or support from its stakeholders (Rhee
and Valdez, 2009). A number of prior studies have
considered how companies are trying to repair
trust after their misconduct has been exposed.
For example, researchers have studied how or-
ganizations are trying to restore the confidence
of investors after financial restatements (Gomulya
and Boeker, 2014, 2016) or after being accused
of some other types of organizational misconduct
(Connelly et al., 2016).
Dirks, Lewicki and Zaheer (2009) point out
that the challenges of repairing relationships have
been described using dierent conceptual frame-
works. Researchers have described organizational
responses to scandals in terms of repairing trust,
reputation and legitimacy (Gillespie, Dietz and
Lockey, 2014; Gomulya and Boeker, 2014; Pfarrer
et al., 2008). Several studies describe actions taken
by organizationsafter the disclosure of reputation-
damaging information as impression management
(e.g. McDonnell and King, 2013; Westphal and
Graebner, 2010; Zavyalova et al., 2012). Impres-
sion management is often associated with super-
ficial organizational changes, while trust repair is
often associated with substantive organizational
changes. However, this simplified distinction leads
to one-sided interpretations of both impression
management and trust repair. There is no reason
why impression management cannot include sub-
stantive actions as long as they are suciently visi-
ble and thus can impress the audience (e.g.Durand
and Vergne, 2015). Similarly, there is no reason
why trust repair cannot involve symbolic actions
that have limited practical implications but send
a strong signal to stakeholders (e.g. Eberl, Geiger
and Ablander, 2015). If the audience does not per-
ceive these signals as misleading, then such sig-
nalling can help organizations to engender trust.
Correspondingly,instead of presenting trust repair
as an alternative to impression management, we
consider impression management as an important
part of the trust-repair process. For eective trust
repair,it is important for organizations not only to
make some changes in how they operate, but also
to communicate these changes or to make them
visible for the audience whose trust needs to be
repaired.
Researchers have pointed out that trust plays an
important role in corporate governance and that
corporate governance aects the trust of share-
holders and other stakeholders (Child and Ro-
drigues, 2004; Farber, 2005; Gillespie et al., 2012;
Puranam and Vanneste, 2009; Schnackenberg and
Tomlinson, 2016). If corporate governance can
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