Why are people so willfully stupid about how news gets made?

Another shocking expose about the lazy, corrupt “old media” this week from Down Under via Crikey, which “tackles the stories insiders are talking about but other media can’t or won’t cover.” In conjunction with the University of Technology, Syndney, employing 40 students over 6 weeks, Crikey discovered the dark secret of the news media: between 42% and 70% of the news printed originated from PR. Horrors! What has become of the independent media?

Let’s leave aside their methodology, their definitions, and the fact that they say, “PR driven” rather than simply “PR” and accept Crikey’s claim at face value. Let’s grant that much of the news that shows up in a daily newspaper or broadcast news originates from the public relations function of something that’s being covered by the newsroom.

Here’s my question: why are people so stupid about how the news works? I don’t simply mean uninformed. I mean willfully, stubbornly, self-righteously self-deluded and stupid.

Crikey should know better: their brief claims to know what’s “really going on” in media. But it’s not just Crikey. New media guru Jeff Jarvis retweeted the link with a knowing/scolding comment, “Spin Zone.” Reporters and editors at all levels of the media–from the local weekly up through the New York Times–pontificate on panels about how useless PR is to them, and how press releases go into their circular file.

Where do these people think news comes from? I don’t mean the sexy investigative journalism and enterprise reporting most people think of when they walk about “news,” I mean the day in, day out happenings around town. That kind of news originates from the people who make it. When soldiers return from a deployment in Afganistan, how do you think the news media finds out about it? The National Guard tells them. When some local dude gets busted for workers’ comp fraud, how does that get into the newspaper? The Tax Department issues a press release.  When the most awesome moving company in the Northeast opens a big new warehouse in town, it may not be the Pentagon Papers but it sure is interesting to the local community, and they find out when Gentle Giant announces it.

I mean, employees who write stories for newspapers are called reporters, for crying out loud. They report news that’s interesting and useful to their audience. So when they get a press release that’s clearly newsworthy, they can and should report that news to their readers.

This relationship between the news media and its sources is eternal, and frankly it works just fine. What’s surprising (and a little galling) to me is the denial that exists among news mavens about how this all works. Reporters, editors and news pundits treat PR like a regular booty call that they don’t want their friends to know about.

The problem with this shame and denial by the news media is that it’s leading them to make stupid, wasteful decisions about how to run their businesses. And not just the old media: new media suffer from the same assumptions and delusions.

Take Jeff Jarvis. He clearly disdains PR and press releases as “spin” and worse. Yet the core of his link economy philosophy is, “cover what you do best and link to the rest.” Don’t replicate coverage elsewhere, he says to the mainstream media (and its new media heirs): focus on your core expertise and link to what’s already been created if it’s valuable to your audience.  So why not embrace the fact that local news is being made and written about constantly by members of the community and link to their press releases (maybe with some commentary or context) rather than making a fetish of rewriting it for the sake of journalism? The “new news ecosystem” could run much leaner and put its efforts toward enterprise journalism and original reporting if it isn’t rewriting good, relevant press releases.

I think this same fetish for “original reporting” hurt Aol’s Seed.com reporting project at South by Southwest. Rather than get hundreds of freelance reporters to interview and profile 2,000 bands in two weeks–from a standing start–why didn’t Aol simply tell all of the bands that they’d publish a band-written profile, and give them some helpful guidelines (not requirements) for what to write? I’ll bet they didn’t do the latter because it would have been “promotional” or “PR” rather than “reporting,” but who cares? What’s the goal of the project? Presumably it’s to have informative content on Spinner.com for readers to find out about all of the new bands they’d see at SXSW. And who do you think is more motivated to provide the content–a freelancer getting paid 20 bucks/piece or the band itself?

Seed.com’s strategy was also wasteful as a way of doing business in the new news world. Let’s say that some percentage of self-published content from the bands was crap. We should also agree that some percentage from the freelancers is just as bad. Even if the bands produced more junk, at least Aol would have gotten that junk for free, instead of paying $40,000 for it.

It’s time for the news media to be honest with themselves and their readers about how news gets made, and embrace the “professional user generated content” that organizations produce. It’s the right thing to do because it’s transparent, and it makes good business sense.

How to Fix Executive Pay: Get Skin in the Game

Executive pay–particularly at public companies–is broken, and I know how to fix it.

The problems come down to agency theory, the idea that CEOs and managers (as agents) have the incentive and ability to look after themselves at the expense of the principals (you, me and everyone else who owns stock or invests in a mutual fund). Basically, it’s much easier for a CEO to convince the Board of Directors to pay him a bunch of money from the company coffers than it is for shareholders to act together to stop it.

Stock options and restricted stock grants are two solutions that are supposed to align the interests of managers and shareholders. In theory, making the management an equity holder in the business drives them to seek long-term stock appreciation, which is what shareholders want, too. But there are two big flaws in this theory:

  • Managers game the system by focusing on short-term appreciation and cashing in options based on those gains, getting in-the-money option grants, repricing out-of-the-money options (among other shenanigans); and
  • Option and restricted-stock grants are asymmetrical rewards, meaning that the managers have a lot more to gain from the grant they they stand to lose from this equity stake.

The first point is the one that people generally focus on: back-dating option “scandals,” new option grants, CEOs who take bundles of money off the table by selling options are all standard business-section features. I think the second point is the more important one.

CEOs, asset managers, traders and other “agents” don’t have real skin in the game. Option and restricted stock grants are all gravy on top of their base comp and bonuses. If they pay off–kaboom! Massive, often dynastic wealth follows. If they don’t, then in the worst case the options expire un-exercised or the restricted stock declines in value reducing the upside that the manager hoped for, but otherwise not changing the managers’ status quo ante wealth. And let’s face it, these guys get plenty wealthy from pay that is completely decoupled from the performance of their company or fund. (That’s for another post.)

So, how do you get skin in the game? The way company founders, entrepreneurs and old-style banking partnerships do: require a big investment from the manager if they want equity.

In my last post on conservative entrepreneurs, I talked about how risk averse true entrepreneurs are. That’s because they stand a lot to lose if they screw up: most entrepreneurs have almost all of their net work tied up in their companies. That means that they gain a lot if the company does well, but get wiped out–comprehensively, “lose-the-kids-college-money” wiped out. That kind of risk focuses the mind like nothing else, so that entrepreneurs tend to carefully manage their downside while looking for the opportunity to maximize their wealth.

It’s that kind of entrepreneur we want running companies and managing funds: not swashbuckling CEOs who bet the farm and rake in millions in salary and bonuses even when shareholders see their portfolios decimated, or traders who lever up 30-to-1 on a derivatives bet because they get massive gains on the upside and a government bailout if the trade goes to hell.

So here’s my prescription for turning the business and financial leadership of the country into true entrepreneurs, with all of the risk and reward that entails:

  1. Award no stock-based compensation as a grant.
  2. Any equity participation must be in the form of an investment by the manager of his or her personal wealth. No stock purchases funded by company loans, unless they are full-recourse loans with personal guarantees by the manager. (To soften the blow, the personal guarantee can exclude the primary residence and maybe some minimum asset threshold–like $100,000.)
  3. All management equity positions must be disclosed at least quarterly. I’d like to see the stake as a % of the manager’s total net worth as long as I’m asking.
  4. To sweeten the deal, the Board could offer 100% warrant coverage of any investment made by the manager.
  5. There should be a lockup period (6 – 12 months) after the manager leaves the company before he or she can sell the equity stake.

I’d also like to see a requirement that senior management invest a significant (50%+) portion of their personal wealth in whatever company they lead, but I’d settle for very full and rapid disclosure of how much they invest and how big a chunk of their wealth it represents.

This is what old investment banking partnerships looked like: to become a partner (and thereby receive equity participation in the profits) you had to put real skin in the game. When business was good, you made a lot of money. When it was bad, you tightened your belt. And if you let your partners get careless with their trading bets, you got wiped out. There was no agency risk because the managers were as focused on shareholder wealth and profits as any investor.

I’d like to hear what you think.