Corporate Eye

...compare, compete, excel

Featured

EU continues corporate governance reform

EU slow corporate governance reformLike a slow, inevitable, irresistible piece of origami, the EU’s plans on corporate governance reform in line with general CSR principles continue to unfold.  This latest instalment looks at corporate governance and follows on from a public consultation and green paper in 2011.

Sixteen areas have been identified and put into an action plan.  Some will require regulatory changes, all will be enacted during 2013 unless further investigation is required and all, with the exception of the SPE proposal, will apply to all listed companies across the EU.

Generally they fall into three broad categories: transparency, shareholder power and cross border ownership.

[Read more…] about EU continues corporate governance reform

Five Key Elements of Sustainable Supply Chains

green supply chains : five elementsOne of the hottest topics of debate surrounding business sustainability is how to introduce it in a broad ranging manner across all sectors.  Regulation seems to be one path, as will shortly be seen for greenhouse gas (GHG) emissions, but business’ instinct is always to see if the market is flexible enough to bring about change without a change in the law.

Supply chains are one of the key players in this deregulated approach because they allow engagement with both upstream suppliers and downstream clients and neither of these crucial relationships should be forgotten.

However playing your part in a sustainable supply chain is about more than engaging with your business partners.  There are five key areas of a business which should be addressed to ensure your company’s link is forged with strength and resilience.

[Read more…] about Five Key Elements of Sustainable Supply Chains

The Psychology Behind Viral Marketing: Why People Share

Did you know that a virus doesn’t even have to mate? It just grows exponentially; hitching a ride on its host, taking over the host’s functions in order to replicate itself inside every cell it comes into contact with.[1]

The term ‘virus’ has anything but a good connotation. The term ‘viral marketing’ brings about a very different response, however; one of intrigue, excitement, and curiosity.

But what is it?

According to Dr. Ralph F. Wilson, E-Commerce Consultant for Web Marketing Today Viral Marketing is “…any strategy that encourages individuals to pass on a marketing message to others, creating the potential for exponential growth in the message’s exposure and influence.”

He compares this type of marketing to viruses, stating that “Like viruses, such strategies take advantage of rapid multiplication to explode the message to thousands, to millions.”[2]

While modern medical science knows the reasons why viruses insert their DNA into other cells, isn’t it an interesting question as to why people pass on marketing messages to others?

What is it that makes one press the ‘forward‘ button or the ‘share‘ icon? This is an important question, because without someone making a conscious decision to pass on a marketing message, Viral Marketing simply wouldn’t be possible.

It is important for corporations to know the answer to this question for several reasons. Viral Marketing has several benefits[3]

  1. Increases Visibility
  2. Establishes Consumer Credibility and Trust
  3. Enhances Customer Interaction
  4. Reduces Marketing Costs

The Psychology of Sharing

Schutz (1966) developed a fundamental motivation theory which outlined three reasons why people engage in interpersonal communication[4].

  • Inclusion – The need to be part of a group and attract personal attention
  • Affection – Showing appreciation or concern for others
  • Control – The need to feel in control of one’s social environment

In a study, researchers Jason Ho and Melanie Dempsey applied these concepts to Viral Marketing[5]. They found that Schutz’s theory offered explanation for why people decide to share online content. More specifically, they found the following:

  • Inclusion and affection, (uniqueness in particular), are the leading reasons people share online content.
  • Control was found to not be a reason that people forward online content. They explained that this is because there is no consistent feedback in sharing online material, and feedback is what drives sense of control.

So, how can this information help your corporation as you develop your Viral Marketing campaign? The following are some tips on how to create marketing messages that will go viral:

  • Create a marketing message that a user would want to share in order to make them feel unique. Creating marketing messages that reflect a target audience’s self image has been found to be effective.
  • Create a marketing message that will enable the user to show affection to another user.
  • Design marketing content that creates cohesiveness among social groups. Find an element shared by your target audience, and present it in a way that encourages bonding and sharing

Viral Marketing is an essential component of promoting your brand on the Internet. Many corporations think it is more complex than it really is. When it comes down to it, it really just follows the tenants of basic social rules.

———-

References

1Virus http://www.ucmp.berkeley.edu/alllife/virus.html

2 Dr. Ralph F. Wilson: The six simple principles of viral marketing

3 http://blog.brainhost.com/5-ways-viral-marketing-will-help-your-business/

4 Schutz (1966) A three dimensional theory of interpersonal behavior

5 Ho & Dempsey (2010): Viral Marketing: Motivations to forward online content

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.

The Role of Financial Theory in Investor Relations

During their first year of business school, MBA students are taught that traditional financial theory holds that the value of a firm is equal to the sum of its future cash flows, discounted back to a present value.

While this is fairly simple to express, quite a bit of financial calculation goes into coming up with the final value, including making estimates of future cash flows, figuring a terminal value, risks to be considered in coming up with a discount rate, and other considerations beyond the scope of this essay. Note at this point that the financial theory does not make any mention of a firm’s past performance record. However, except in the case of a brand new venture with no history of operations, estimates of future cash flows and prospects do not occur in a vacuum but rather are examined through the lens of past performance in order to judge the likelihood of achieving the firm’s potential for future profits.

A common framework used to think about how this valuation is achieved is: Past Performance + Perception of Future Performance = Current Stock Price.

In other words, the valuation of future cash streams coming from the company is filtered through an examination of what the company has done in the past. This means that the investor relations officer of a company must be able to express to the equity market not only what a company has done in the past but also needs to be able to cogently frame up the company’s future prospects. And the weighting between the two should be fairly equal.

Yet when you look at the presentations of most companies, the bulk of discussion seems to focus on what has happened in the past. A couple of years ago I looked at a small sampling of presentations posted on the internet by large capitalization U.S. companies to try and determine how much of their presentation concerned forward-looking information. My methodology was simple – I counted the total number of slides in a presentation and then counted the total number of slides that contained information concerning future operations. I tried to be overly generous in what I counted as a slide concerning the future, and any slide that had even a little bit of information about what a company intended to do going forward or the outlook for their products and markets was counted as being about the future.

In examining the presentations, it became obvious that companies were much more concerned with talking about past performance than future opportunity. The percentage of forward looking slides in presentations ranged from a low of 6% to a high of 35%, with the average for all presentations being 20%. If we assume that the information being discussed generally follows in proportion to the slides in the presentation, this means that, on average, four-fifths of all information in the sample was about something other than future profitability.

I am somewhat at a loss to explain this behavior. Usually when you find this type of disconnect between theory and practice, a reason exists for it. I have lots of theories, such as management’s fear of being sued if forward-looking information proves incorrect, corporate conservatism, and an attitude that “we need only tell investors the minimum required by regulation”. Unfortunately, I have no data to back any of it up.

Financial theory is clear however: the more data a company can provide on future prospects, the closer estimates of the firm’s current market value will get to its intrinsic value.

Creative Brand Cross-Promotion – Toyota iQ and Google Street View

toyota iq google street viewGoogle Street View is a handy tool that lets you explore places around the world through 360-degree street-level imagery. But when Google Street View debuted in Belgium last year, there was a problem. Many streets in Belgium are too small for a car to navigate. Therefore, Google Street View had gaping holes of missing content in Belgium. Google needed to fill those gaps.

Toyota iQ is a tiny car as you can see in the above image. The Happiness Brussels agency saw an opportunity to promote the Toyota iQ while solving Google’s problem at the same time. Toyota iQs were fitted with 360-degree cameras and equipment to record the narrow streets that Google’s cars couldn’t.

A special iQ Street View website launched where consumers were asked to add streets that hadn’t been captured by Google Street View yet, and the Toyota iQ would go out and capture them. People could also view tagged streets on the iQ Street View site and sign up to test drive the Toyota iQ. The site also includes a video that shows the Google Street View and Toyota iQ story. You can watch it below.

But that’s not all. People who live on the narrow streets tagged on the iQ Street View website will be mailed special offers for the Toyota iQ. There is no doubt that the people who live on those streets are a perfectly targeted audience for the iQ.

This is a great example of out-of-the-box creative thinking that brings two strong brands together for a cross-promotional opportunity that benefits both of the participating brands and consumers. What do you think? Leave a comment and share your thoughts on the Google Street View and Toyota iQ cross-promotion initiative.

Image: Toyota