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Archives for 2012

Corporate Governance Essentials

Corporate Governance is in the news–again. Despite recent laws such as Dodd-Frank in the US, Corporate Governance continues to be a problem. Recent events such as the bankruptcy of MF Global, the $5.8 billion trading loss at JP Morgan and the trial of Rajat Gupta all indicate that good Corporate Governance is still wanting. An article  in The European Financial Review states–

The systemic failure of corporate governance is particularly associated with the Anglo-American corporate governance model that has enabled, permitted or tolerated excess power and wealth at the hands of CEOs and cultivated a ‘greed-is-good’ culture in banks.

Then there is an excellent article Corporate Apocalypse that traces the foundations of the recent Economic Crisis back to the 1950s — and states

The financial crisis is both a failure of the invisible hand of market and a failure of the visible hand of management

Seems that it may be time to revisit the fundamentals of what is Corporate Governance.

This post will be the first of a series that will look at the fundamentals of Corporate Governance and posit examples of best practices.  Let’s look at the purpose of Corporate Governance. It starts with stakeholders.

Key to the success of a business are the returns for the owners: the shareholders. However, business is increasingly becoming aware that its goal must be balanced with the interests of other stakeholders.

A company has a number of stakeholder groups. Primary groups include –

  • Owners and shareholders (public companies)
  • Employees
  • Customers
  • Communities
  • Government

There are other subgroup stakeholders as indicated in this visual:

Source: Carol Buchholtx, Business and Society

Anglo American, a large resources company, provides a good example of a corporate statement on managing the interests of stakeholders in a balanced manner.

Our responsibilities to our stakeholders

Our primary responsibility is to our investors. We seek to maximize shareholder value over time. We believe that this is best achieved through an intelligent regard for the interests of other stakeholders, including our employees, the communities affected by our operations, our customers, and business partners. A reputation for integrity and responsible behaviour underpins our commercial performance, gained by motivating employees and building trust and goodwill.

Corporate Governance is the combination of procedures, polices, systems, laws and regulations through which a company is organized and controlled. In doing so, it guides the relationships between internal and external stakeholders. Much has been written about shareholder vs. stakeholder Corporate Governance models. These are typically defined as–

Corporate Governance Model

Geography

Key Items

Anglo-SaxonUnited States, United Kingdom, Canada and Australia
  • Shareowner Focus
  • Extensive disclosure
  • Anglo-Saxon law based
German-ScandinavianGermany, Austria, West Europe, Japan
  • Stakeholder Balance
  • Moderate disclosure
  • Roman-Germanic law based
Emerging MarketsChina, Russia, South America, India
  • Stakeholder Balance
  • Low disclosure
  • Emerging legal systems
Based on  “Challenges of Governing GLOBALLY”, by Marc J. Epstein, Strategic Finance, July 2012 (PDF)

The trend is toward the stakeholder balance model. More about this in future posts.

Key Takeaways

  • The definition of Corporate Governance is rather simple. Its execution is not.
  • Corporate Governance involves different stakeholders both internal and external to the organization.
  • There are different models of Corporate Governance and they vary by geography.

Using A Theoretical Model to Think About the Value of Investor Relations

Academics are big on constructing hypothetical models to prove their financial theories. They blithely disregard such things as taxes, transaction costs and the fact that emotional, sometimes illogical humans are part of the market process. In short, they don’t allow messy reality to interfere with their elegant equations. Many an academic prize (and even some Nobel Prizes) have been won by building explanatory models that make such huge assumptions. In fact, my favorite quote about finance makes a nod to this as it relates to the Efficient Market Hypothesis. Fischer Black, a former Professor at the Massachusetts Institute of Technology (MIT), which sits next to the Charles River in Cambridge, Massachusetts, took a job with Goldman Sachs in New York, situated next to the Hudson River. After working there for a while, he was heard to remark, “Markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles”[1]

As I consider myself only a quasi-academic – that is I teach but I don’t engage in any of the pedantic research that clogs the academic financial journals (plus, I have not yet sewn patches on the elbows of my tweed jacket, nor have I taken up smoking a pipe), I thought I would serve up for the benefit of our readers a theoretical quasi-model to help them think about the value of investor relations. Recognizing that investor relations is a discipline that involves real people and information, I will keep it quasi-simple.

Start by thinking of two hypothetical firms, both in the same industry and each performing exactly the same in financial terms. That is to say, according to their past performances, their growth rates are similar, their rates of return do not differ in any material way and they serve the same customer base. Firm A discloses exactly what is required by the regulations, and nothing more. It makes no effort to explain its more complicated accounting treatments and it does not reveal anything about its strategy or future plans. It does not respond to investor inquiries, does not make management available to investors and analysts, and does not present at any industry conferences. In short, beyond the regulatory filings it makes, it remains silent.

Firm B on the other hand, tries to be as open and transparent as possible, going beyond the regulatory disclosure requirements to explain its business and strategy, meeting with investors and keeping up a steady stream of information that keep investors informed on a timely basis, not just on a regulatory filing basis. Management meets with investors and regularly presents at industry conferences.

The question to be asked then, is under that hypothetical situation, should Firm B get a higher valuation than Firm A? I submit that under these conditions, it is highly likely that a premium will be attached to the valuation of Firm B, compared to Firm A. There are several reasons for this, chief of which is that investors will view the greater transparency into operations and management thinking about the future as enabling them to make better estimates about future cash flows. Secondly, the cost of acquiring information has been lowered by Firm B, and this should show up in their valuation. Finally, the amount of information asymmetry between the company and the investors has been lowered by Firm B, which should also be reflected in a higher valuation.

Now, if you want to nominate me for an academic prize, be my guest. Of course, with my luck it will turn out to be a quasi-prize…

[1] As quoted in Against the Gods by Peter L. Bernstein.

Extending the J.K. Rowling and Harry Potter Brands

harry potter reading clubThe Harry Potter brand is one of the most powerful brands in the world and represents one of the best examples of relationship branding in history. Furthermore, J.K. Rowling is one of the best examples of a brand champion.

The last book in the Harry Potter series was published in 2009, but that hasn’t stopped the brand from strategically extending. With the launch of Pottermore earlier this year, the brand entered the digital world and fans followed. Now, not only is new content coming to Pottermore, but the Harry Potter brand is set to expand a bit further.

On July 31st, Scholastic (the U.S. publisher of the Harry Potter book series) announced the new online Harry Potter Reading Club where children, teachers, librarians, and more can experience the world of Harry Potter together. The site is filled with educational tools, dictionaries, teaching guides, activities, and more. To kick off the official launch of the Harry Potter Reading Club, J.K. Rowling will host a virtual visit on October 11, 2012. In keeping with the tease marketing that has been at work behind the Harry Potter brand for the past decade, this marks the first time that Rowling has taken questions from children in years.

At the same time, J.K. Rowling is quietly teasing audiences about her next project — a book for adults called The Casual Vacancy that she promises will be quite different from Harry Potter. The book won’t be released until September, but it has been in the top 100 books on Amazon since it appeared on the site for pre-order.

Both the J.K. Rowling and Harry Potter brands are perfect examples of the three core steps of brand building in action: consistency, persistence, and restraint. Fans are left wanting more and small teases of what’s to come keep them on the edge of their seats.

I pre-ordered my copy of The Casual Vacancy. Have you?

How Well Do Consumers Know the Olympics Brand?

As a follow up to my previous posts about branding and the Olympic Games (Consumers Cannot Identify Olympics Brand Sponsors and Brands Sponsor Athletes from Great Britain at 2012 Olympics), I thought it’s a good time to talk about the Olympics brand. How well do people really know the Olympics brand? Market research company Lab42 surveyed 500 social media users from the United States to get some answers.

Not only did Lab42 share the survey results in a great infographic (shown below), but the company also re-purposed the content and turned it into a London Games 2012 pinboard on Pinterest with each fact pinned to the pinboard. It’s a great example of repurposing content to extend its reach as part of your brand content marketing plan!

Now, back to the Olympics brand. According to the survey, the Olympics has no trouble with brand awareness, but some of the specifics about the brand are fuzzy to Americans. Here are some findings from the study:

  • 95% have watched the Olympics.
  • 93% plan to watch the 2012 Olympic Games in London.
  • 87% are more likely to watch the 2012 Olympic Games than the U.S. Presidential Debates.
  • 84% knew before the Olympics began that they would be held in London this year.
  • 56% know that orange is not a color used in the Olympic Rings logo.
  • 30% know that Olympiad means 4 year time period.
  • 64% know that the Olympics have been canceled in the past (5 times during World War I and World War II).

Another interesting finding shows the power of celebrity brands. 97% of respondents to the Lab42 survey know that Michael Phelps competes on the United States swimming team, and 77% know that he is a spokesperson for the Subway restaurant brand. Given how few people know which brands sponsor the 2012 Olympics, the fact that more than 3 out of 4 know Michael Phelps is associated with the Subway brand is impressive.

You can see all the data on the infographic below. Did you know there are 302 events at the 2012 Olympic Games in London?

Summer-Games-2012 infographic

Brands Sponsor Athletes from Great Britain at 2012 Olympics [Infographic]

While it’s already been determined that consumers can’t name Olympics brand sponsors correctly, that’s not stopping companies from investing hundreds of millions of dollars into sponsoring the London 2012 Games. Some brands have chosen a different strategy to align their brands with the Olympics. They sponsor athletes from the Olympics teams.

Synergy Consulting put together an infographic that explains the landscape of brand sponsorship of athletes from Great Britain at London 2012. The infographic shows 404 sponsorships overall with 267 unique athletes sponsored (215 Olympians and 52 Paralympians). Over half of those athletes qualified for the London 2012 Games. Thirty-four different sports are represented by these sponsored athletes.

The top athlete sponsors of athletes from Great Britain at the 2012 Olympics are:

  • Lloyds TSB
  • BMW
  • Adidas
  • IHG (InterContinental Hotels Group)
  • BT
  • Jaguar
  • P&G
  • British Airways
  • Maximuscle
  • Sky

Finally, the most endorsed athletes overall at London 2012 are Victoria Pendleton, Jessica Ennis, Louis Smith, and Chris Hoy.

You can see the complete infographic below. Also, be sure to check out the interactive 2012 Olympics Brand Tracker for more information about brand sponsorships of the 2012 Olympic Games.

Sponsorship of GB Athletes at London 2012

Click the infographic to view it at full size.