by: Issues: March / April 2007. Categories: Leadership.

Marketing is too important to the future of every company to avoid prime-time review by the Board of Directors. While few firms would say that marketing does not share time in the spotlight at board meetings, the focus of marketing consideration could generally be elevated. This author has critical suggestions for how to bring the right questions to the board table and for making a discussion of marketing as sophisticated as a discussion of strategy.

It is not uncommon for marketing to receive little attention at board meetings and for board committees to concern themselves about matters other than marketing. A review of the Management Information Circulars issued by publicly traded companies suggests few directors have had hands-on marketing roles and fewer participate in board committees focused on marketing. Given this lack of experience and attention, boards have difficulty providing effective governance of the marketing function. Where boards do focus on marketing, they often ask the wrong questions, receive too much or misguided information in response, and may engage in discussions of an anecdotal nature that are unaligned with the board’s mandate. Screening of the latest advertising or presentation of marketing initiatives confirm to board members what they suspected all along, that marketing is a right brain activity unsuited for much time and attention of the board.

Marketing has built fortunes and depleted others, so it does behoove directors to provide close scrutiny of and governance to the firm’s marketing function and initiatives. It is striking that in the collapse of companies, mention is often made of shortcomings in financial governance. But what about marketing governance? While weak or absent marketing governance may not cripple a company immediately, over time the effect may be no less damaging. And even if marketing is benign or ineffective, shareholder value is still depressed. Gaps in marketing performance that can be highlighted by marketing governance are leading indicators of financial problems. Simply put, most boards should pay more attention to marketing governance to accomplish two main benefits for the company: shareholder value enhancement and the effective management of those emerging and future risks which marketing might affect. This article discusses the linkage of marketing to shareholder value and risk, and notes important areas for boards of directors to consider if they are to achieve clearer insight and better oversight of a firm’s marketing function and its performance.

How marketing affects shareholder value

The primary mandate of directors is to protect and increase shareholder value. Before directors question the specifics of the firm’s marketing, they should therefore ask how marketing may put shareholder value at risk, create new shareholder value and, more generally, what linkages exist between marketing and shareholder value.
This last-mentioned linkage is important to recognize and address if the Board is to focus on marketing for its strategic potential and avoid the trappings of details, of which marketing has many. There are several approaches for assessing marketing’s contribution to shareholder value, including:

  • EVA (Economic Value Added), which employs financial performance and capital attribution models popularized by firms such as Stern Stewart & Co., and McKinsey & Company;
  • VBM (Value Based Management) principles are becoming more frequently used to focus management on managing the factors that are the main determinants of shareholder value;
  • The DuPont method1 can be employed to link marketing drivers to return on investment.

Building on the DuPont method as suggested by Chart 1, marketing has a primary affect on ROI by impacting business growth in two main ways: organic growth and discontinuous or step-wise growth, as discussed below. Directors should pay special attention to the measurements of marketing effectiveness in the context of both sources of growth. Secondary focus should be on operating impacts of marketing, such as marketing margin drivers and how marketing affects capital investment, as these are obviously also important in creating or damaging shareholder value. Merger and acquisition activity also links to marketing, as suggested in the following chart, but this activity is usually outside the control of the marketing department until the acquisition is completed and is not discussed further here.

Organic vs. discontinuous revenue growth

Marketing contributes to business growth from two main sources: organic growth and discontinuous or step-wise growth.

Organic growth occurs when marketers achieve better revenue results with what they already have – their current product, market and customer portfolios. Organic growth can come from changes to, for example, market segmentation and target market definition, strategies for pricing, positioning, advertising and promotion, line extensions, packaging, merchandising, sales effectiveness, distribution channels and e-marketing. Detailed consideration of issues such as these would take up too much time to be considered at every board meeting but could be covered once a year or at a special board meeting convened for the purpose. The main objectives of this meeting would be for the board to confirm the anticipated timing and level of results from organic growth, receive reassurance of the methods by which results are to be accomplished, and understand what the impact of marketing will be on working capital, capital investments, cost-to-serve and margins.

Directors also need to understand how revenues will grow from discontinuous or step-wise changes where the main affect is felt just once as a result of a specific marketing initiative. Chart 3 describes some of the metrics companies measure when considering discontinuous growth that arises from sources other than merger and acquisition activity, which this article previously noted as initially outside the control of marketing.

How marketing can destroy shareholder value

Marketing can detract from shareholder value in at least as many ways that it can create such value and directors seeking to manage risk should be alert for the signs. For example, shareholder value can be erased when marketing fails to achieve results that are better than industry averages or below analysts’ expectations. Some of the major culprits of shareholder value destruction include pursuit of quarterly revenue targets by poorly conceived pricing and margin sacrifice, an approach one Director called “mortgaging the future” to ensure the optics of good results now. In the intermediate term, Directors might observe marketers who diminish shareholder value by undertaking actions such as the following:

  • Product and company positioning that departs materially from historical investments in consumers’ minds without extensive research and a “gut-check” for reasonableness;
  • Brand equity extension that depreciates brands by over-leveraging them, such as by new entries in far-flung product categories,
  • Market segment or customer targeting that does not effectively balance size, growth rates, profitability and competitive intensity;
  • Knee-jerk competitive reactions such as to product launches and price cuts, instead of proactive competitor targeting or planned competitive response;
  • Slow re-alignment of product, customer and market, and channel portfolios;
  • Ineffective structuring of the marketing function;
  • Inadequate control of all aspects of marketplace demand and its management, such as customer and channel service, pricing and product innovation to pick three areas where marketing controls are sometimes weak.

In the longer term, marketing can destroy shareholder value by failing to think and act broadly and strategically in areas such as changing business models, disruptive technologies, value chains, converging industries/products/technologies and changing customer value drivers. The absence of deep thinking should be a warning sign to Directors that the future might not be as good as is the present. This leads to a discussion of marketing leadership.

Marketing leadership

When marketing abdicates strategic responsibilities it naturally becomes the simultaneous serf of sales and finance departments, pulled one way to increase sales and another to build profits. There is little more dangerous to the future of a company than marketing enmeshed completely in day-to-day challenges. Marketing needs to build creative and strategic tension into the usual tug-of-war between sales and finance departments. Where there is peace with marketing today, there is often strategic trouble brewing so the comfort of sales and finance executives with marketing and their initiatives is not a sufficient benchmark for marketing’s effectiveness. A demonstration of marketing leadership is to be found by considering, for example:

  • The extent to which marketing has identified and focused on core customers – those on whom the future of the firm will depend most, and competitor targets – those competitors that core customers say represent the greatest threat and opportunity in the intermediate term;
  • Whether marketing has deployed marketplace metrics to secure organizational alignment in support of achieving competitively superior customer value;
  • Evidence of improved positioning in respect of key value drivers;
  • Development of insightful and comprehensive plans to accelerate profitable revenue growth; and
  • Leadership in identifying, describing and deploying strategic capabilities for the firm that affect marketplace performance, such as customer relationship management technologies, processes and competencies.

Another indication of marketing’s leadership is to be found in the nature of personnel hired and the extent to which new hires address knowledge and capability gaps. One clue that marketing is driving forward by looking in the rear-view mirror is when all new marketing personnel match the unchanged profiles of past hires.

Board representation

As mentioned at the outset of this article, one of the reasons that oversight of marketing is often overlooked is that directors usually lack experience in the marketing function so they pay more attention to the areas with which some have more familiarity, such as finance and acquisitions. Directors seem to take comfort that financial measures or selected balanced scorecard measures will eventually account for whatever marketing says they do or will do. In some cases, the density or drift of presentations from marketing executives can re-enforce directors’ inclination to limit their time investment in marketing examination. Unfortunately, when weak marketing performance does show up in poor financial results, it may be hard to reverse direction and irreparable damage may have been done. What can be done if marketing has already focused on the wrong customers with the wrong value proposition and the wrong message, for example? By the time errors in marketing are uncovered, it may be too late for the company and very expensive to remedy. Many boards would benefit from the representation of an experienced and independent marketing director from outside the company asking thoughtful questions and make reasoned assessments of the answers provided and marketing performance, more generally.

In addition to inclusion of an external marketing director, the board could consider the appropriateness of the following:

  • An annual marketing meeting of the board with marketing executives, delivered by marketing and comprising two elements: a situation analysis of the company’s products and markets in the present and near future, and a review of plans to achieve a desired future position;
  • The establishment of a marketing sub-committee, led by a Director, whether or not the annual marketing meeting suggests a more intensive marketing review by the Board is required;
  • Development of a marketing dashboard comprising high level indicators to be reviewed at each Board meeting.

It may be appropriate for the board to use a consultant to assess the effectiveness of the board’s engagement with, and assessment of, marketing, and oversight of concomitant risks.


What not to discuss at board meetings

Marketing by its very nature is interesting, and it is easy for directors to engage with elements of marketing that may or may not affect shareholder value, such as communications, visuals, analytics or various applications of discretionary spending. This engagement might cause some directors to think that they have explored the essence of marketing at the firm. Usually, this has not happened, and directors seizing only upon content presented to them without focusing on those issues that link marketing to shareholder value – creating it and mitigating downside risks – and challenging marketing accordingly, may not yet be representing shareholders adequately.

1.  The DuPont method was developed by F. Donaldson Brown, Treasurer of  E.I. DuPont de Nemours & Co. during World War I.