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Monday, February 15, 2016

Strategic CSR - Stakeholder vigilance

The article in the url below highlights the importance of stakeholder vigilance in shaping corporate behavior. The article summarizes research that is published in an accounting journal identifying how earnings misstatements spread via contagion within an industry:
"One bad corporate apple, it seems, can spoil a whole bunch. That's the conclusion of a fascinating academic study that examined accounting restatements by thousands of corporations over a 12-year period. After one company was found to have misstated its earnings, the study determined, others in its industry often followed suit and began massaging their own numbers, ultimately resulting in their own restatements."
What is more important, however, is the effect of public naming and shaming on that contagion process:
"When companies playing accounting charades faced regulatory action, shareholder litigation or prominent news reports about their practices, the researchers found that their corporate peers declined to mimic their conduct. This shows the importance of highlighting and punishing bad behavior."
In other words, when stakeholders stood up and held firms to account, the practices were less likely to spread. For example:
"For the three years after Sarbanes-Oxley went into effect, contagion in earnings misstatements disappeared, the academics found. But memories are short. The study provided evidence that the copycat behavior resumed in 2005 and continued through 2008, when the research concluded."
There is also plenty of evidence to suggest, therefore, that as the vigilance abated, misbehavior returned:
"Class-action lawsuits and news reports critical of manipulative conduct reduce the likelihood that other companies will mimic the behavior, the study found. By contrast, restatements disclosed in a news release that receives little attention tend to encourage others to follow suit."
In other words, the important aspect of this research is not that contagion is real (we know that from social networks research), but that the contagion stops when stakeholders intervene and remains stymied when that vigilance is sustained over time.
Take care
David Chandler & Bill Werther
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Cooking The Books In Bunches
By Gretchen Morgenson
October 25, 2015
The New York Times
Late Edition – Final