Monday, January 21, 2008

Murky ethics on the part of the media, and the firms they cover

Bennett Coleman, a very big media house, is onto difficult ethical terrain with a concept of `private treaties'. Here, they get invested in some companies, and then these companies get favourable media treatment. Their media outlets trumpet these stocks, hopefully a good IPO takes place, and Bennett Coleman makes a good return on their portfolio. The expectation of free advertising and glowing editorial treatment probably leads to their purchases of these stocks getting done at bargain basement prices.


Sucheta Dalal says:

MoneyLIFE has in its possession a document to prove that journalists are being designated as champions for PT clients to tailor editorial coverage to enhance the value of these companies and TOIs investment. An e-mail by The Economic Times editor, Rahul Joshi (dated 29 November 2007), says, At ET, we are carving out a separate team to look into the needs of Private Treaty clients. Every large centre will have a senior editorial person to interface with Treaty clients. In turn, the senior edit person will be responsible, along with the existing team, for edit delivery. This team will have regional champions along with one or two reporters for help - but more importantly, they will liaise with REs (Resident Editors) and help in integrating the content into the different sections of the paper. In this way, we will be able to incorporate PT into the editorial mainstream, rather than it looking like a series of press releases appearing in vanilla form in the paper. He then goes on to name the PT champions for each region, who will advise the regional editorial chief to carry stories about PT clients. He also designates trouble shooters in each region, probably to ensure that no PT client is offended with negative coverage.

It reflects poor ethical standards on the part of Bennett Coleman to do such a thing. First, a question of fact: Do good papers in the world, such as New York Times, have private equity portfolios where editorial coverage and advertising are bartered in return for shares? Compare and contrast against the soul-searching that the New York Times has institutionalised on far more subtle kinds of conflicts of interest. I am curious about the role that law can play here. If the New York Times embarked on such a thing, would it be outright illegal? If it was not outright illegal, what else might go wrong for New York Times if they did such a thing?

The only saving grace lies in the fact that Bennett Coleman has put up their hall of shame, of firms who are willing to cooperate with such a scheme, on the web. Some names in there make no sense - e.g. I can't see how they can get a fabulous return on an investment in ISB. But many are recognisable targets of laudatory coverage.

I have often felt that in order to become a well functioning market economy, there has to be a culture of high ethical standards, a sense that certain things are just not done. While ethical standards require legal foundations, there is something about ethics which goes well beyond law. A go-getting atmosphere, where all kinds of behaviour is welcome, is a highway to becoming a banana republic. You may like to see something that I wrote in 1997, about how an atmosphere of low ethical standards induces entry barriers and hampers competition.

While there are signs of progress on the economy as a whole, in recent years, the scale of corruption in India associated with real estate and natural resources appears to be straight out of your worst stereotypes of a banana republic. CEOs have an incentive to do bad things: e.g. the stock market likes electricity generation projects which have locked down coal supplies, which favours entrepreneurs with a gift for manipulating the government. Ministers are rumoured to have become like Bennett Coleman, asking for shares in return for unethical actions. With natural resources and land, we are experiencing the well known pathologies of the `resource curse'. The only saving grace for us is that by now, the real estate and natural resource related sectors are a small part of the economy.

I'm not one of the proponents of the view that blogging fundamentally changes mainstream media. But in this one respect, I can see that it helps. The rise of the Internet in general and blogs in particular has helped to reduce the mindshare of Bennett Coleman. Blogs have helped make such murky practices more visible.


  1. I have seen this during my rookie days as a securities analyst. At IPO analyst conerences, journo-s from financial magazines / periodicals come and begin to grill the promoters/ merchant bankers with unpleasant questions.

    After making the promoters grovel, those journo-s subtly hint that they will favorably review the offering in exchange for a big splash of advertisement(s) in the periodical. This has been happening time immemorial.

    L&T Infotech

  2. 1. What can we do about it?

    The answer to this is competition in the print and other media. If the story does not come in one newspaper, it would come in another paper along with an explanation of why it did not come in the other paper.

    This is exactly what happens in political stories. Some newspapers do not carry negative stories about party X and some other newspapers do not carry positive stories about that party. I remember two decades ago, the editor of one newspaper held a press conference about the story that his own newspaper refused to carry and that was front page news in every other newspaper.

    Fierce defence of freedom of speech and expression is what is needed. Unfortunately, the right of free speech in the Indian constitution is not as strong as in the US constitution and as a nation we seem willing to whittle down even what we have.

    The saving grace is that with the emergence of the internet and the blogosphere, it is impossible to shut down negative stories about any company, party or person except by building a great firewall like the Chinese are doing.

    2. What happens elsewhere in the world?

    My experience is that the global newspapers disclose any financial interest of any kind in any story that they do. For example, if the Economist does a story about the Financial Times, they would disclose their common ownership by Pearson. I have seen stories on Wall Street Journal in another paper disclose the competitive relationship that they or their sister publications may have. Apart from disclosure, bias is rampant. When Murdoch was buying WSJ, the coverage in virtually every newspaper was severely and systematically biased in one direction or the other.

    Bias in political coverage is even worse than in India even in the financial press.

    3. How does securities law deal with it?

    It is necessary to distinguish fraudulent conduct from biased coverage. Any attempt to stop biased coverage will only end up destroying freedom of the press and that would be the end of democracy. This is one respect in which we do not want to emulate East Asia.

    Fraudulent conduct (publishing deliberately wrong or misleading stories for example) is another matter altogether. I am not a lawyer, but my understanding is that any fraudulent or deceptive reporting in any scheme of this kind would be covered by the general anti-fraud provisions of 10b5 in the US and the FUTP regulations in India. After the decision of the US Supreme Court in the Stoneridge case, private law suits against an offending newspaper may be impossible, but the SEC can proceed against them under 10b5 in cases of fraud.

    The hard part is to prove fraud or deception as opposed to bias. Bias however strong and repulsive it may be would be protected in the US and perhaps even in India. You can prove fraud only if you get hold of incriminating emails or other correspondence. There is no alternative to painstaking investigation.

  3. Hi Ajay
    wonderful blog. It is such causes that you should take more often rather those like capital controls and mumbai international financial center, which remain unclear issues on several aspects.
    There is a great amount of deterioration in the ethical standards and issues of integrity, particularly driven by institutions considered as icons for preserving and protecting these things. It is these things that hurtle a nation towards severe setbacks the pains of which would be intensely felt by the common man.
    One of the best pieces and most timely ones that I read in the recent times.

  4. Thanks for the kind words. But capital controls, international finance and macroeconomics is my profession! `Private treaties' was an egregious violation of ethics that caught my attention, even though neither media nor ethics are my front burner issues (e.g. I had to invent new labels just for these blog entries).

  5. Watch Clinton's voice on your channel rather than the real press conference and only on Times Now and CNN. hmmm....

    Give me a break..Its all a farce and all fixed...India meaning Dr singh has capitulated....


Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.