CEOs, Shareholder Value and the Decline of Marketing Risk-Taking
Has the pursuit of growing share prices and high C-Suite compensation turned Marketing into a cost-reduction target?
Credit: Lee Lorenz, The New Yorker, The Cartoon Bank
You’d have to be older than a Millennial to remember a time when corporate CEOs were heavily involved in marketing decisions, like increased spend on media, the development of new Big Idea ads, the launching of new consumer products (rather than the spitting out of line extensions), and the formulation of strategies designed to outsmart competitors. That was a time before “shareholder value” became the universal corporate objective -- the value to be delivered to shareholders because of management’s ability to grow earnings, dividends and share price (www.investopedia.com).
Accompanying the “shareholder value” concept in the 1990s and 2000s was an explosion of C-Suite salaries and compensation levels. By 2021, average pay for the top 350 US CEOs was $27.8 million. CEO pay has skyrocketed 1,322% since 1978, according to the Economic Policy Institute,
The “shareholder value” compensation levels have not done much for company growth in recent years. The number of advertisers reporting difficulties in achieving growth targets now include P&G (CEO compensation = $17.7 m), American Express ($28.5 m), Bank of America ($30 m), McDonald’s ($20 m), General Mills ($12.3 m), Mondelez ($17.9 m), Coca-Cola ($22.3 m), PepsiCo ($21.1 m), Walmart ($24.1 m) … a long list of legacy branded companies that goes beyond those listed here.
Bob Liodice, President and CEO of ANA, notes that Fortune 500 revenue growth rates were 4.0% per year from 2000-2010 but fell to 1.8% per year from 2010-2015. “Despite all of the creative and media transformation that has happened, advertisers are not growing,” Liodice wrote to me in early 2023. “This is why the ANA is so focused on [helping its members] achieve growth.”
Despite the high CEO compensation levels, legacy brand companies are not growing much or have much marketing strength to brag about. There are many reasons: online disruption, the demographic shift from the super-consuming Baby Boomer generation to the more conservative and broke Millennial generation, the availability of high quality private label products, the over-supply of high quality consumer durables in the US economy, consumer uncertainty about the future – a long list of causes.
Shareholder-value priorities have put marketing in the back seat. Marketing appears to have become a risky and speculative area for investment, with great uncertainty about its potential returns. The increased complexity of media choices has not helped. Marketing is increasingly viewed as a cost to be “optimized” through marketing and procurement-led cost reduction programs that have seen a decline in agency fees, reductions in out-of-pocket production costs and shifts from high-cost media mixes to lower cost, more targeted social and digital media mixes. Advertisers invented a term — “non-working costs” to cover all marketing costs other than media costs (“working costs”) and pretended that reducing the ratio of non-working to working costs was a good thing. This meant cutting agency costs and turning agency partners into commodity suppliers of low-cost marketing executions.
Call it what you will, hopes for improved corporate stock price growth are being generated by lower costs, however achieved, rather than marketing muscle.
Kraft Heinz touted its post-merger “economies of scale” to announce a “shift of US marketing dollars away from "non-working" media expenditure (agency and production costs) to brand messaging costs.” Since then, Kraft Heinz took a run at acquiring Unilever in an effort to further increase economies of scale, but the effort was quickly abandoned. Still, Kraft Heinz was thinking “M&A” rather than “marketing” to improve shareholder value.
P&G’s Marketing Chief Marc Pritchard has been vocal about the need for more focused digital and social marketing spends, particularly at Meta (Facebook), and the need for the industry to clean up its “crappy supply chain.” “We’re not growing enough,” Pritchard told the press. “Despite spending an astounding $200 billion in advertising in the US, the growth rate of our collective industries is pretty anemic.” He called on his agencies, ad tech partners and publishers to enable viewability and third-party measurement, to root out fraud and to provide transparent contracts. This noble talk did not keep P&G from cutting its agency fees, though, and raise the prices of its major products in an effort to improve margins and show some revenue growth.
A lot of marketing talk is tactical and logistical stuff, and it’s probably important – but it has not improved marketing of the type that led P&G to have such historically strong brands in the marketplace — the brand strength that has allowed it to rely on price increases to support revenue growth.
In a recent Accenture survey, more than a third of CEOs surveyed said that the CMO would be the first to go should growth targets not be met (Accenture: “The C-level disruptive growth opportunity.” by Kevin Quiring, Rachel E. Barton, Joanna Levesque). CMOs are clearly in the hot seat.
Can advertiser growth targets be achieved through the optimization of marketing costs, or will CMOs have to find solutions for their fundamental brand problems and then make new arguments for marketing as an investment to achieve results?
Perhaps they should enlist the services of Huge, the former digital creative agency that transformed itself with a mission to help clients “accelerate their growth rates.” Huge, in my experience, is the only holding company agency to begin focusing on helping clients perform better. Most other agencies continue to tout “creativity” as their main product, but this certainly needs to change.
In the meantime, marketing cost reductions and “optimizations” rule the day, and enfeebled agencies and insecure CMOs are only two of the many outcomes
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