How Powerful Marketing Departments Can Help Prevent Myopic Management

Investors, analysts, and members of the media await Wall Street earnings reports with bated breath. CEOs and their functional teams know that missing projected revenues and profitability targets can lead to precipitous stock price drops and create a lack of investor confidence in the company’s strategy. Thus, it’s no surprise that firms sometimes engage in myopic management, such as cutting marketing spending, offering price promotions, and providing lenient credit to high-risk customers. Marketing activities are frequently at the center of these myopic actions, which can cause longer-term business harm by sacrificing future revenues for short-term advantage. However, there has been little research on what marketing departments can do to prevent these actions.

A new study in the Journal of Marketing hypothesizes the role of powerful marketing departments and how they can prevent myopic marketing spending and revenue management. Our research team hypothesizes that that there are internal and external enablers of marketing department power—a CEO with marketing experience, a firm with power over its customers, favorable analyst coverage, and institutional stock ownership—that help a marketing department prevent myopic management. Our team tested the hypotheses using a panel of 781 publicly listed U.S. firms between 2000 and 2015.

Key findings include:

• 15% of firm-years in the sample engaged in myopic marketing spending, consistent with past academic research that has found that 20.7% of firm-years engaged in myopic marketing spending.
• More firms in the sample engaged in myopic revenue management (34%) than in myopic marketing spending.
• If the firm had a CEO with a marketing background, there was a -7.13% less probability that the firm would engage in myopic marketing spending and a -8.64% probability that it would engage in myopic revenue management.
• If the firm had power over customers, there was a -5.50% probability that it would engage in myopic marketing spending and a -6.03% probability that it would engage in myopic revenue management.
• If the firm received favorable analyst coverage, there was a -3.94% probability it would engage in myopic marketing spending.

These findings highlight powerful marketing leadership as a hitherto overlooked way to prevent myopic management and improve firm performance. They can be useful to senior marketing executives in strengthening the case for providing marketing managers a seat at the C-suite table. In addition, they demonstrate how senior marketing executives, whom some analysts view as profligate spenders, can actually prevent myopic management.

In addition, these findings provide guidance for making top management team (TMT) appointments. Although TMT appointments are driven by corporate governance conditions and not just by the need to prevent myopic management, boards of directors can consider the benefits of appointing powerful marketing executives to firms’ TMTs to help prevent myopic management (under the contingencies in the supported interactions).

Finally, myopic revenue management is in violation of GAAP rules aimed at preventing managers from engaging in behaviors that distort their firms’ fiscal health and mislead investors. The SEC’s detection of trade stuffing by a firm results in significant financial and legal penalties for the firm and its managers. Increasing the power of the marketing department when there is a CEO with marketing experience, the firm has power of customers, and there is high analyst coverage will prevent myopic management, thus reducing the firm’s risk exposure.

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From: Raji Srinivasan and Nandini Ramani,  “With Power Comes Responsibility: How Powerful Marketing Departments Can Help Prevent Myopic Management,” Journal of Marketing, 83 (July).

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