Appointing a CEO with marketing expertise increases the company’s profitability and market value

Boards of Directors at large companies ponder more and more often, whether to hire a CEO with marketing background. Companies’ owners and Nomination Committees, in turn, are considering whether to appoint more Board Members with marketing expertise.

A recently published study on U.S. stock exchange listed companies (S&P 500) provides interesting answers and insights to both questions. The study was conducted by Kimberly Whitler, Ryan Krause, and Donald Lehmann (WKL), from University of Virginia, Texas Christian University, and Columbia University, respectively.

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Question by company Boards: Does it pay off to hire a CEO with marketing background?

Somewhat against the conventional wisdom that CEOs with marketing background would help the company grow, WKL’s study finds that appointing such a CEO does not necessarily accelerate the company’s topline revenue growth.

However, WKL’s results indicate an even more crucial reason for companies’ Boards to consider hiring a CEO with marketing background. Namely: such a hire enhances the company’s Return on Assets (ROA) as well as its market value, relative to book value (Tobin’s q).

Statistically, WKL find that appointing a CEO with marketing background increases the company’s market value relative to book value by 15 percentage points as well as ROA by 1.6 percentage points.

As an explanation to this finding, appointing a CEO with marketing background helps the company utilize and leverage its existing resources and assets (e.g., brands, customer knowledge, technological competence). In practice, this may occur by, e.g., developing products and services of higher margins and strengthening the brands’ pricing power.

Although appointing a CEO with marketing background does not seem to accelerate topline revenue growth, its positive effect on ROA and market value give a good reason for Boards to consider hiring CEOs with marketing background more often than today.

 

Question by Shareholders and Nomination Committees: Does it pay off to appoint Board Members with marketing background? 

In contrast to appointing CEOs with marketing background, appointing Board Members with marketing background enhances, according to WKL’s results, first and foremost the company’s topline revenue growth.

Statistically, adding one Board Member with marketing background was found to enhance the company’s topline revenue growth by 8 percentage points – from an average of 5% to 13%.

Why does adding Board Members with marketing background then enhance revenue growth, in particular? WKL’s explanation is that the education and career of persons who have a background in marketing, has prepared them for identifying growth opportunities for the company, as well as for prioritizing growth objectives to other objectives.

On the contrary, Board Members representing so called throughput functions – like production, accounting, finance, law, or administration – typically prioritize and primarily strive for enhancing the organization’s efficiency, and cost cutting, instead of growth.

Yet, the influence that Board Members with marketing background have on topline revenue growth naturally depends on the degree to which they can affect the decisions of the Board, along with other Board Members, as well as on the degree to which the Board can influence the growth targets of the company’s executive top management team.

Correspondingly, WKL’s results show that Board Members with marketing background are especially beneficial for the company’s growth when the industry’s growth rate is low and when the company’s own market share development has been weak. The reason is that in conditions of low industry growth rate as well as weak market share development, the added value of marketing expertise on the Board is greater – because the industry growth or market share development trend do not help or support the company’s revenue growth “automatically”.

Appointing Board Members with marketing background also benefits the company’s revenue growth to a greater extent when the Board has fewer members with finance background – as well as when the CEO and the Chairman are the same person. The latter solution can, however, be questioned with regard to good governance practices.

 

As a summary, it is worthwhile for Boards of Directors at stock exchange listed companies to consider appointing CEOs with marketing background more often, since this improves, according to WKL’s results, the company’s Return on Assets as well as market value relative to book value. For companies’ owners and Nomination Committees, in turn, it is worthwhile to consider appointing more Board Members with marketing background, in particular when the company has a topline growth problem – and even more particularly, if the industry’s growth rate is low or the company’s previous market share development weak.

To conclude, still, it must be emphasized that in WKL’s study, marketing background and expertise do not primarily refer to the persons’ expertise in advertising, marketing communication, and PR. Instead of mere marketing communications and PR, marketing compentence is considered to refer primarily to the person’s general ability to understand customer behaviors, and to help companies therefore create such products, services, and customer experiences that have the ability to favorably change customer behavior.

 

Jaakko Aspara and Anne Korkiakoski

 

Reference: Whitler, Kimberly A., Ryan Krause, & Donald R. Lehmann (2018), “When and How Board Members with Marketing Experience Facilitate Firm Growth”. Journal of Marketing, 82 (September) 86-105.

Photo by rawpixel.com from Pexels

 

About the authors

Jaakko Aspara is Vice-Rector, Dean of Research, at Hanken School of Economics, as well as C. Grönroos Professor and Head of Department at the Department of Marketing.

Anne Korkiakoski is a Board Member of several large companies as well as SMEs; she was formerly the CMO of the world’s top 4 elevator and escalator company, Kone Corporation.