Investor Pressure and Myopic Management

Prof. Tuck Siong Chung, ESSEC Business School Asia-Pacific, Council on Business & Society

Prof. Tuck Siong Chung

Delivering excellent results is one way to impress your investors or your boss – but what do you do when you cannot deliver? Prof. Tuck Siong Chung of ESSEC Asia-Pacific and Prof. Angie Low, Nanyang Business School, follow up on the tendency of managers to ‘manage the bottom-line’.

By CoBS Editor Kunal Ganorkar, based on the paper ‘The impact of investor impatience and environmental turbulence on myopic marketing management and stock performance’ by Tuck Siong Chung and Angie Low.

Picture this: you are in your office on a Friday evening, working on your division’s budget for the year. You need to present it to your CEO, who is already under a lot of pressure from the shareholders, first thing Monday morning. What’s more, your marketing team has just informed you that sales are going to be significantly lower this year. You are aware that if you do not deliver encouraging numbers this time around, you may not get another chance to. So how would you present your budget?

It’s all about the money

Investor pressure creates myopic management by the Council on Business & SocietyThe capitalistic economy today is driven primarily by the interests of investors. These shareholders provide capital for the company’s operations in exchange for growing returns on their investment. However, these investments only grow if the company is prospering. Upon its failure to do so, a dismayed investor might just walk out. This negatively affects not only the value of the company, but also the salaries of the managers which are usually dependent on the company’s performance. In some cases, it may also entail a loss of employment for them. Blackberry, for instance, a smartphone company based in Canada, saw a drop in the share value by over from $58 to $6, along with Billions of dollars in losses and restructuring costs, and global job cuts, all in a span of 6 years (2010-2016).

In light of such consequences, managers of companies feel pressurized by the investors to portray a healthy balance sheet and an upwards pointing arrow on the stock markets. For a company that is performing favourably, this obviously proves less of an issue. However, the managers of companies on the other end of the spectrum feel the heat. To portray a positive bottom-line, they show a tendency to cut budget spending, primarily in Marketing and Research & Development.

Managing like there’s no tomorrow

short-term management in a turbulent investor context by the Council on Business & SocietyBudget cuts for Marketing and R&D are usually the first activities that managers engage in if they suspect that they cannot meet the earnings target. Such myopic management involves cutting spending in long term investments like new product development, customer relationships and branding. The irony is that these activities are expected to deliver generous results in the long run and are crucial for creating long term value for the company but ironically only show up as profit reducing expenses in the income statement of the company. What’s more, there is a chance that these investments may not even yield these ‘generous’ results after all. Google Glass, for example, a heavily researched and much anticipated product, was unable to capitalize and had to be discontinued in 2015. As such, managers have ample incentive to cut marketing and R&D spending and give in to investor pressure.

Changing with the times

The business environment is witnessing major transformations today, with consumers constantly changing their tastes in products and not afraid to experiment with newer ones. Businesses are also rapidly turning digital and letting go of traditional technologies for more unconventional ones in order to stay relevant. How do these factors affect the way business is conducted? How should managers react under such circumstances? Professor Tuck Siong Chung and associate Angie Low, on the basis of an extensive research comprising over 5,000 firms, paint the following picture.

Managing in turbulent waters

Short and long-term management strategy by the Council on Business & SocietyChanging customer preferences and expectations are what create market turbulence. Customers in such market turbulence are seen to be less loyal to one particular brand and are likely to make their purchases elsewhere the second time around. To complicate matters further, rival firms are prone to take advantage of this instability and try to poach customers through various tactics. As a result, companies need to go the extra mile in order to retain their client base.

Likewise, an environment where there is rapid advancement in technology – or technological turbulence – can alter the way business is conducted. Data storage technology, for example, has seen 23 stages of evolution within the past 50 years, from cassettes back in the 70s to Cloud storage that we use today. Unable to adapt to this fast-paced transformation, several big companies have bitten the dust. Moreover, in such an environment the advantage of being an experienced company is lost and it needs to be compensated by additional efforts. Essentially, states prof. Chung, companies should increase marketing and R&D spending in order to keep their customer from drifting away and stay ahead of the technological demands of the industry.

Penny wise, Pound foolish

Fundamentally, the objective of myopic management is to keep investors satisfied by creating an illusion of superior company performance which leads to a higher valuation on the stock market. Profs. Chung and Low have observed this phenomenon and noted that although managers are able to trick the exchanges, it is only partially successful.

The study shows that the stock markets react more favourably in the short-term to the myopic company that posts a positive bottom-line as compared to a company that invests in long term activities. However, reality sets in eventually, the short-term gain in valuation is compensated by the company’s gradual decline on the financial markets. To make things worse, the decline intensifies proportionally to the degree of turbulence in the business environment.

Turbulence or not, Prof. Chung and Prof. Low assert that managers consider the pros and cons of myopic management and are keeping track of the environmental implications, before deciding whether to yield to investor pressures or not.

Word to the wise

Long-term management strategy helps create better returns for investors, Council on Business & SocietyThese findings should serve as caution to executives everywhere who wish to engage in short-term management practices. The researchers highlight the importance of adopting a long-term perspective when operating in market and technological turbulence and, as such, avoid conceding to investors.

Chung and Low also recommend that companies should invest in shareholder relationship building programmes in order to attract long-term investors. Firms must also communicate effectively to the shareholders the importance of marketing assets, capabilities, in determining a firm’s market value and for building a loyal shareholder base. According to Profs. Tuck Siong Chung and Angie Low, these actions would as such reduce investor pressure on the companies’ managers, enabling them to focus on creating long-term value for the enterprise instead of their own corporate survival. So, how will your budget look on Monday?

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