Using CAFRs to estimate the costs of corporate misconduct on society a framework for civic action.

Author:Hunter, Shirley A.
 
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INTRODUCTION

What is the cost to society when corporations misbehave? At what level of the corporate hierarchy is management deemed accountable for third parties' agreements which violate the public trust? This study provides a framework which government officials and accounting and legal professionals could use to estimate the costs of corporate or any misconduct on society. Public records, such as the Comprehensive Annual Financial Reports (CAFRs), provide detailed financial and statistical information on local, state, and federal governments operations which are publish annually on their websites. This is the first study to empirically use statistical data disclosed in the CAFRs to measure the effects from a guerilla marketing campaign on society. Guerilla marketing (Levinson, 1984) is defined as the art of being able to execute marketing activities, using unconventional tactics to elicit consumer interest at minimum costs to the advertisers. The majority of guerilla marketing is stage in public places (Cova and Saucet, 2014); hence, if sites are not properly researched (Zuo and Veil, 2007) before execution, pandemonium could result.

On January 31, 2007, a guerilla marketing campaign financed by the Turner Broadcasting Company, a subsidiary of Time Warner Company, created mayhem in Boston and its surrounding communities when an advertising hoax was classified as a suspected terrorist threat. Following immense media coverage and finger pointing, a deal was announced in which Turner Broadcasting agreed to pay $2 million to reimburse state, federal, and local law enforcement agencies for the cost of responding to the threat (Zuo and Veil, 2007). As part of the settlement, the Turner Broadcasting Company was resolved of all criminal and civil claims.

The ordeal surrounding the Turner Broadcasting Company's advertising hoax is the object of this study. This research uses the event study methodology to demonstrate how citizens access to public and emergency services in the affected areas were severely compromised. It shows that Turner Broadcasting Company paid a reasonable settlement of $2 million in retribution to Massachusetts to offset remediation expenses incurred of $1,999,341. Thus, this study has practical application for policymakers and the general public; it presents a framework which can be used to estimate the social costs for corporate as well as individual acts which are detrimental to society.

Corporate governance is increasingly becoming a topic of interest by scholars and practitioners in public administration (Becht, Bolton, and Roell, 2005). The term corporate governance is derived from an analogy between the governments of cities, nations or states and the governance of corporations (Becht et al., 2005). Corporate governance refers to a framework of rules, processes, or laws controlling an entity's operations (Becht et al., 2005). Governance policies are designed by internal and external stakeholders and senior management is responsible for their enforcement. Corporations should ensure that their employees and third parties doing business with them adhere to a code of professional conduct which supports their governing philosophy. This study, involving Turner Broadcasting Company's guerilla marketing campaign, demonstrates that a corporation deemed to have a high standard of corporate social responsibility may knowingly agree to a deceptive practice to promote a brand.

Levinson (1984, 1999) coined the term guerilla marketing and defines it as designing unconventional systems of extreme advertising that rely more on time, energy, and imagination to target consumers at minimal costs to the promoters. He further states that the innovative approaches to guerrilla marketing utilize cutting edge technologies to create a memorable brand experience. Typically, guerilla marketing campaigns are interactive and consumers are targeted in unexpected places. Guerilla marketing tactics have become vogue due to the advent of the social media networks. A variety of Fortune's 500 are using guerilla marketing tactics, including Unilever, Microsoft, Sony, and Ford, to enhance their brand image (Van der Lans, Van Bruggen, Eliashberg, and Wierenga, 2009).

The guerilla advertising campaign financed by Turner Broadcasting System involved hiring a third party, the Interference Company, to place electronically wired devices under bridges and other obscure public locations throughout the three municipalities of Boston, Cambridge, and Somerville (Boston Globe, 2007; Driscoll, 2007). The campaign went awry because many of the citizenry reported the presence of the foreign objects to local fire and police departments. These departments responded by initiating high alert safety procedures which were constantly broadcast by the local media. For six intense hours on January 31st, 2007, travel between and within the three municipalities was halted as investigations were conducted. In the end, after sheer pandemonium, the local news announced that they had received a communication from Time Warner, stating that what had ensued was in fact a hoax designed to introduce a television show.

The late admittance of responsibility for the advertising event was not in the public interest. Boston is the originating site of two of the hijacked 9/11 flights, so citizens may have a heighten sense of awareness about public security (Zuo and Veil, 2007). Throughout the event day, the story of the suspected terrorist threat was one of the wired headlines carried by Reuters, CBS, and ABC, which are news dispatchers to CNN1. As shown in Figure 1, CNN is the cable news network owned by the Time Warner Company. From a public interest perspective, this study argues that news of the advertising debacle should have been more timely communicated through the corporate hierarchy resulting in an immediate decision by management to suspend the promotion.

[FIGURE 1 OMITTED]

The remainder of this study is organized as follows. Section II presents prior literature on corporate ethics, background information on the laws in Massachusetts which protect public and private property, and a demographic profile of the citizens in the affected communities. Section III discusses the research methodology and develops the set of suppositions about the timely provisions of public services. In Section IV, the Comprehensive Annual Financial Reports provide the data and contains a discussion of the results. Section V provides the concluding remarks.

LITERATURE REVIEW AND PUBLIC INFORMATION

Literature Review

Past ethics-related research includes studies such as Blazovich and Smith (2011), which examine the relationship between ethical corporate citizenship and financial performance and the existence of a market premium for ethical corporate conduct over a four year period (2000 to 2003). Their sample data consist of the top 100 ethical firms identified by the Business Ethics magazine. The sample was matched to a control group of firms based on a number of accounting-based performance measures. Time Warner was one of the media and communication firms recognized by Business Ethics; its two-digit SIC code 48, represented 1.89% of the sample. Blazovich and Smith (2011) concluded that firms deemed ethical by independent assessors are perceived as been less risky by investors; thus, they enjoy a lower cost of capital than their counterparts.

A firm specific ethics-related study by Mobus (2012) scrutinized corporate social responsibility (CSR) reporting by British Petroleum (BP) in the aftermath of an environmental disaster that occurred on April 20, 2010. An explosion on the BP Deepwater Horizon rig resulted in the spillage of over 4.9 million barrels of crude oil into the Gulf of Mexico and the death of a number of rig employees. Drawing on prior literature examining financial transparency in capital markets, Mobus (2012) questioned whether voluntary CSR reporting satisfies the tenets of full disclosure for public investors. In the eight day event window following the disaster, Mobus (2012) performed a comparative analysis of 45 media articles published by seven newspapers to information voluntary disclosed by BP to test for transparency. The analysis was organized around the three themes which normally guide CSR reporting of economics, environmental, and social performance. The intent was to determine the accuracy of BP's theme base CSR reporting. Mobus (2012) conclusions suggest that voluntary CSR disclosure by BP provided them with too much leeway for self-promotion rather than self-reflection or accountability for their actions. A subsequent investigation by an independent commission revealed that refinery exploration accidents have plagued BP for decades, thus not consistent with BP's professed commitment to safety and risk management in its CSR reports (Mobus, 2012).

Prior ethics related literature shows that corporations strategically manage their public image. Reputational capital in contrast to earned capital can be easily swayed by public investors. Most likely, the subscribers to the Business Ethics magazine constitute a distinguish group of investors who limit their investment decision to socially responsible firms (Mobus, 2012). The oil and gas industry is under constant pressure by public interest groups, so BP was managing its corporate image by voluntary disclosing selected CSR information to public investors (Blazovich and Smith, 2011). Time Warner, the company of interest to this study, took swift action to mitigate a public outcry against its advertising hoax. As social media evolves, public awareness of corporate-ethics could increase and possibly influence the investment decision.

Massachusetts General Laws, Chapter 266, Crimes against Property

Prior literature states that the most common pitfalls of guerilla marketing are trespassing on private property, defacing private or public property and not getting the proper permits or forewarning local authorities of...

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