Great Brands Don’t Chase Shareholders
I recently wrote an article for OPENfor.business entitled, “Are You Making Excuses for Not Building Your Brand or Are You Embracing Its Potential?” In it, I explained that some CEOs try to explain why brand-building isn’t relevant or possible for them by claiming “Our situation is different.” But the unique challenges they think face are, more often than not, really just excuses for not having the commitment, discipline, and focus to build a great brand.
In today’s post, I want to explore another “excuse” I often hear — the pressure to produce short term results in order to meet shareholders’ expectations. Some CEOs report that investing expenses and implementing strategies to build their brands — which generally yield longer-term, less measurable returns — are not conducive to the consistently-positive and growing sales and profits that shareholders demand. They are wistfully jealous of the leaders of privately-held companies who seem to have more freedom to decide to lose money in the short-term, take significant risks, and turn down growth opportunities and justify their decisions because they’re doing what’s right for the brand.
But I’m not convinced this excuse is valid.
the perils of being public
To be sure, being a public company does add increased scrutiny and pressure. Writing about Kip Tindell, CEO of The Container Store, Businessweek’s Susan Berfield recounted how he came down with pneumonia a few months after his company’s IPO because “the demands of leading a public company were so intense.” Tindell himself lamented, “It’s been wonderful and terrible and good and bad…If we were private, it would be fun to work on getting sales up. It’s less fun because investors want you to do it in one quarter.”
And, in a “How I Did It” piece for the Harvard Business Review, Tommy Hilfiger Chairman Fred Gehring explained how he rescued the over-exposed brand by getting a private equity firm to take over the company. “As a private company, we were relieved of pressure to achieve artificial short-term objectives,” he observed. “We could focus on finding the right structure and long-term strategy instead of worrying about the next quarter’s sales report.”
Some companies have avoided, or at least mitigated, shareholder short-termism by instituting alternate investment approaches. Patagonia signed up to become a B Corp (benefit corporation) because, according to company founder Yvon Chouinard:
Patagonia is trying to build a company that could last 100 years. Benefit corporation legislation creates the legal framework to enable…Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs. (Source: Patagonia)
And Toyota recently won approval to sell a new class of stock to long-term shareholders. Model AA shares, named after Toyota’s first car, will be restricted from trading for five years. In exchange, the company pays a fixed dividend and will offer to buy it back at the issue price. The move to lock in capital for the long term is aimed at helping the company finance “the next generation of innovations that will support the industry’s future,” Toyota said in a statement.
brand-building vs. shareholder interests?
But going and being public does not preclude brand-building. Some leaders of publicly-held companies manage to prioritize what’s right for their brand.
Howard Schultz, CEO of Starbucks, recently shared his perspective on the topic. The Motley Fool recapped the company’s December 2014 investor day reporting:
Schultz believes his management team must make its employees proud of what the brand stands for, and that requires ongoing ‘deposits in the reservoir of goodwill of Starbucks coffee company.’ He also acknowledged that this philosophy does not always jibe perfectly with the quarterly reporting and the need to grow on a period-by period-basis required of a public company.
‘In order to be a great and enduring company, we have to play the long game,’ Schultz said. ‘We have to make long term-investments in the strategies of the company while consistently developing the kind of short-term victories quarter to quarter that demonstrate we’re meeting our responsibilities.’
Other CEOs share a similar philosophy. According to the Businessweek article, Jim Sinegal, the co-founder of publicly-held Costco, told The Container Store’s Tindell that brand-building and shareholder interests are not diametrically opposed — but reconciling them requires patience and performance. He advises:
Don’t run your business for [short-term investors]. He believes companies eventually get the shareholders they deserve. ‘We value our long-term shareholders. But we didn’t have them right away,’ says Sinegal. ‘We had to prove ourselves, and rightfully so. You have to produce.’
natural shareholder selection
In my book What Great Brands Do, I explain that Great Brands Don’t Chase Customers. Great brands embrace and celebrate what they stand for — even if it means turning off some people. In doing so, they naturally attract those customers who are likely to be their most profitable and loyal ones. It seems this principle can be applied to shareholders as well.
Amazon CEO Jeff Bezos demonstrates this best. When Amazon first went public in 1997, Bezos described his long-term management philosophy and investment approach writing:
We believe that a fundamental measure of our success will be the shareholder value we create over the long term…Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies…We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
Today, Bezos stays committed to making decisions that will pay out for the Amazon brand in the long run. Even when his company’s stock recently dropped and was off 25% from its peak, Bezos dismissed concerns somewhat flippantly. Fortune magazine reported that “Investors that aren’t in it for the long haul simply aren’t worth his time.” In fact, he dedicates just six hours per year to investor relations and prefers to meet with the investors with the lowest churn — the ones who have held Amazon’s stock the longest.
So, a corollary to Great Brands Don’t Chase Customers may very well be: Great Brands Don’t Chase Shareholders.