Based on research by Brian Rountree, Richard Price and Francisco J. Román. 

• Because fair markets are central to a vibrant economy, in 1999 the Mexican government enacted regulations to bring more transparency to financial reporting. 
• Despite the new regulations, companies remained largely inefficient. 
• To revamp its capital markets, Mexico needs a slew of changes including commitment to enforcing financial regulations that protect minority shareholders.

Theoretically, at least, capital markets allow millions of investors to allocate resources in a way that maximizes competitiveness and efficiency. When these markets are fair, they play a central role in a vibrant economy and society. Transparent financial markets lure capital, allowing economies to pick up steam and grow more quickly. Without transparency, on the other hand, investors are more easily defrauded. Inequality spreads. A country’s economy can quickly decline. 

In 1999, Mexico initiated a Code of Best Corporate Practices in order to ensure greater market efficiency and better corporate performance. The following year, roughly 28 percent of publicly traded firms complied with three-quarters or more of the criteria. By 2004, compliance jumped to 79 percent. One would think that this compliance with the new regulations would mean that corporate performance generally would increase. 

But good intentions are one thing and reality another. After studying market behavior, Rice Business professor Brian Rountree, professor Richard Price at the University of Oklahoma and professor Francisco Roman at George Mason University found that compliance with the code had little, if any, effect on Mexican firms’ overall corporate performance. In fact, the regulations also showed little if any effect on overall earnings management or return on equity.

To reach these conclusions, the professors analyzed a sample that included all nonfinancial firms listed on the Mexican stock exchange as well as stock returns, financial statement data, and governance data over the period of 2000 to 2004. Governance data was collected from each company’s annual Code of ‘Best’ Corporate Practices questionnaire filed with Mexico’s regulator. 

As a proxy for governance strength, the researchers devised a “governance score” based on the level of compliance with the code’s recommended provisions.

So what went wrong with the code? On paper, its mandates were exemplary. Company boards were supposed to include at least 25 percent independent directors, and firms were to limit their size to 20 directors and use audit committees led by independent directors. But while many provisions of this code are mandatory, there was little in the way of oversight by regulators. Company reports were simply not questioned. 

The same held for investor protections. Firms from Mexico that were cross-listed in the United States often escaped enforcement of insider trading laws by the Securities and Exchange Commission. And as late as 2010, the Mexican judicial system’s commitment to minority shareholder protection was still untested, prompting significant questions about the perceived improvements in minority shareholder protection by stock market participants.

Regulations, in sum, are only as good as efforts to enforcement. And while insider trading laws have existed in Mexico since 1975, the first enforcement attempt didn’t occur until 2005. Even then, the action was spurred by the United States, without firm commitment from Mexican authorities.

And those companies that complied with the letter of the law still had to adopt costly measures to signal their investment worthiness to the market. These firms, the scholars found, had a higher propensity to pay dividends and give marginally greater dividend yields than did the lower-compliance firms that also paid dividends. In other words, to reduce agency concerns, the Mexican firms with higher governance scores resorted to the costly mechanism of paying dividends, because the market simply did not value compliance with the code.

The researchers theorize that the weak links they found between company performance and compliance could be related to the limited competition among Mexico’s public firms. Together, the concentrated ownership environment and weak legal system muffled the impact of the new regulatory code on Mexican capital markets. Market monitoring alone was just not enough to create fundamental economic changes.

The results suggest that Mexico’s efforts to boost transparency must be supplemented with stronger enforcement. It’s unclear, however, whether the conflict between insiders and minority outside shareholders can be overcome without major changes in the company ownership structures. While the groundbreaking 1999 code showed the will to improve market efficiency, the scholars warned, only enforcement and perhaps restructuring can pave the way. 

Brian Rountree is an associate professor of accounting at the Jesse Jones Graduate School of Business at Rice University. 

For further reading please see: Price, R., Román, F. J., & Rountree, B. (2011). The impact of governance reform on performance and transparency. Journal of Financial Economics 99(1), 76–96.

By Wagner Kamakura 

• Rice Business Professor Wagner Kamakura created a tool called WordMap, which he used to analyze tweets in the 2018 midterm elections.
• These images produced by WordMap are word clouds formed from the 500 longest tweets from U.S. Senate candidates Beto O’Rourke and Ted Cruz.
• WordMap can also be used to understand what consumers are saying about brands on social media. 

Wagner Kamakura: The images above show word clouds formed from the 500 longest (more than 100 characters) tweets from competing U.S. Senate candidates Beto O’Rourke and Ted Cruz. I created the word clouds by some text-mining using my WordMap tool (you can view a YouTube tutorial video). 

The tool produces a word cloud that reflects not only the frequency of the words used by the two candidates (as other word clouds do), but also how often they are used in the same tweet. In these images, frequency is represented by the font size, while affinity is represented by proximity of the words in the WordMap.
 
WordMap is one of the tools of KATE (Kamakura’s Analytic Tools for Excel), which I use in my Advanced Business Analytics course in the Rice Business EMBA program. WordMap can be used to understand what consumers are saying about your brand on social media, or to understand customer reviews. You can see a description of KATE here. I should note that WordMap tool is most useful for advanced users who are familiar with Excel add-ins. Its product, these candidate word clouds, like the candidates, speak for themselves.

Wagner Kamakura was the Jesse H. Jones Professor of Marketing at the Jones Graduate School of Business at Rice University. 

By Tracy L. Barnett

Austin event planner Natalie George has a talent for transformation. A pop-up clothing boutique she designed turned an abandoned strip mall into a hip showroom; a furniture store became a cozy dance venue for a cabaret series she concocted. Creating the buzzworthy is her business. Now, to her own surprise, she’s turned that talent toward getting out the vote.

“I never looked out and saw someone who looked like me — so I saw no reason to connect to politics,” George says. But as she watched the stakes rise on the political landscape, something shifted. When two of her friends, haunted by the family separation crisis on the border, approached George about doing a fundraiser, she said yes. Their idea evolved into The Show Up: a pop-up event that became an ongoing platform for energizing artistic types to vote.

George isn’t the only innovator urging more people to vote. From New York to San Diego, and from Memphis to Minnesota, activists are launching everything from flash mobs to food trucks to mobilize voters. Sites for get-out-the vote schemes range from beaches to music festivals, and in the case of a troupe of costumed superheroes, the annual San Diego Comic-Con.

Most famously, the formerly apolitical pop star Taylor Swift caused a furor — and a 370,000-person spike in voter registrations in 72 hours — with a single Instagram post urging her fans to register and vote.

But will these efforts make a difference? Earlier efforts to increase the vote have had only paltry success. Voter turnout in the U.S. trails that of most developed countries, even in presidential elections.

On the bright side, the turnout for early midterm voting this month has been astronomical: On the first day of early voting in Texas, turnout was up 325 percent in Dallas County and 213 percent in Harris County compared to 2014. Historically, however, turnout at midterms is up to 20 percent lower than in presidential years. The reasons are many, experts say: from the complexity of our country’s voting system to widespread disillusionment.

For one thing, the U.S. system is not really designed to facilitate participation, said Wagner Kamakura, a marketing professor at Rice Business. A two-round voting system such as the one used in his native Brazil, and on which he has done extensive research, can yield much higher voter participation, he noted.

“This two-round election system, the most common in the world for electing heads of state, is quite different from the crazy system we have in the U.S., where people are discouraged — or even blocked — from voting, and the actual winner is not the one with the most votes. I wouldn’t call it real ‘democracy,’” Kamakura said. “In Brazil, close to 73 percent of eligible voters cast their votes in the first round, which is a far cry from what we see in the U.S.”

Compare that to the 2012 and 2016 U.S. presidential elections, when voter participation was just a little over 61 percent. In the 2014 midterm election, voter turnout was a dismal 36.6 percent, the lowest since World War II.

Boosting those numbers has motivated a whole host of data geeks, designers, event planners, artists and others who have focused their creative energy on the challenge. Houston computer programmer Nile Dixon, for example, developed a chat bot to help people find the closest shelter during Hurricane Harvey; now he’s adapted it to help up to 20,000 Texas voters find their polling place.

Boston attorney and environmentalist Nathaniel Stinnett, wondering why the environment didn’t show up in more political discourse, discovered that environmentalists as a group have an extremely poor voting record. So he left his position to found the Environmental Voter Project, bringing on an army of interns to mobilize the environmental vote.

In St. Louis, picking up on the excitement generated in the African-American community by the blockbuster film “Black Panther,” activist Kayla Reed helped launch #WakandaTheVote. The project allowed people to set up voter registration events at local movie theaters or register to vote via text message. The success of that drive was followed with #WrinkleTheVote, aimed at parents, young adults, babysitters and teachers who took their children to see “A Wrinkle in Time.”

Sacramento journalist and poet Raquel Ruiz, meanwhile, was moved to tears and then to action by the immigration issue. Her arts group MAP California teamed up with Nagual Theater Inc. to produce “Letters from the Wall,” a work of street theater compiled from letters written by the families of immigrants who have lost loved ones. The idea is to raise awareness about immigration policy and motivate people to go to the polls. Ruiz, herself a Colombian immigrant, will be reading the letter of a mother who lost her son at the border while seeking asylum.

While much of the current activity is designed to increase voter turnout in this year’s election, there are also initiatives designed to improve turnout in the years to come.

Adam Eichen, co-author of the book Daring Democracy: Igniting Power, Meaning, and Connection for the America We Want, points to a number of ways to build voter turnout, beginning with how we register voters. “Our voter registration system is antiquated and deters voting,” Eichen said. “We’re in the 21^st century; election officials don’t need multiple weeks to process a registration form. Voters, many of whom have busy lives, should be able to register to vote on Election Day.”

One reform that could bring on an estimated 50 million new potential voters in one fell swoop: automatic voter registration. Under this system, eligible citizens who interact with government agencies — for example, when they get their driver’s license – are automatically registered to vote unless they choose to decline. Since Oregon adopted this approach in 2016, its voter registration has quadrupled; 12 other states and the District of Columbia have followed suit.

Making Election Day a national holiday is another idea we could import from other countries. In the last midterms, some 35 percent of those who didn’t vote said scheduling conflicts with work or school kept them from the polls. Vote.org has launched ElectionDay.org to encourage companies to give their employees Election Day off, and more than 250 have signed on. One of those, New York-based Blue Point Brewery, has launched a Voters’ Day Off beer, complete with petition on the side of the can that consumers can sign and mail to the Senate, advocating a national holiday.

Allowing voters to participate through innovative “Democracy Voucher” public financing programs like the one in Seattle could foster engagement, as well, said Eichen. There every voter is given four $25 vouchers to donate to the candidate of their choice. “Beyond democratizing political financing, the program encourages residents to research candidates and decide whom they want to financially support,” he said. “This should lead to more of an affinity for the political process, while also expanding who has a voice. In Seattle, one candidate even reportedly collected donations from the homeless population.”

What impact all of this might have, of course, won’t be clear until after Nov. 6. But there are already indications that for this year, at least, the push to get people to the polls is working. A surge in voter turnout for the spring midterm primary was one indicator. And a poll from Tufts University showed high levels of young people, usually the least likely to vote, paying attention and planning to vote.

By the second day of Texas’ early midterm voting this month, the in-person vote and mail-in ballots in six counties had already exceeded the total early voting in 2016’s presidential election. Nearly 20 percent of those first day ballots were cast by non-primary voters, while between 5 and 9 percent appeared to be first-time voters. It may not yet be the crashing wave that get-out-the-vote innovators hope for. But it’s clearly a rising swell.

Tracy L. Barnett is an independent writer based in Guadalajara.  

Based on research by Vikas Mittal, Yinlong Zhang and Karen Page Winterich

• “Power distance belief” is the degree of power disparity that people expect and accept in their culture.
• Power distance belief and compulsive spending are inversely related.
• The less people accept that there is inequality in power, the more likely they are to buy vice products such as junk food.

Power imbalance in our society is a fact of life. Get over it. 

If you disagree with this statement, you may also prefer Ben and Jerry’s ice cream over a handful of almonds after dinner. You may even be more likely to be an impulsive shopper.

Improbable as this may sound, a study by Rice Business professor Vikas Mittal and colleagues Yinlong Zhang of the University of Texas at San Antonio and Karen Page Winterich of Pennsylvania State University shows there is a link between our beliefs about social equality and our buying habits. In six different studies that included surveys and experiments with more than 15,000 urban households in in the U.S. and 14 different Asian and Asia-Pacific countries including China, New Zealand, Japan and India, Mittal and his colleagues examined the link between a country’s level of “power distance belief” and shopping habits. 

Power distance belief is the extent to which an person sees social inequality as inevitable. It’s a subtle mindset, not predictable by factors such as political ideology, country GDP or nationality. 

Instead, it’s revealed by “yes” answers to survey questions like these: “As citizens we should put high value on conformity.” “I would like to work with a manager who expects subordinates
to carry out decisions loyally and without raising questions.” “In work-related matters, managers have a right to expect obedience from their subordinates.” While power distance belief is an individual trait, past researchers have also measured its levels in various countries.

People who tend to accept power disparity, Mittal and his fellow researchers found, work harder to control their impulses during shopping. Those who don’t believe inequality is the rule tend to fill their carts with junk food.

To be sure, Mittal and his team write, there’s a big difference between impulsive buying and shopping that is simply unplanned. Impulsive buying tends to be haphazard, a behavior of consumers who just can’t seem to control themselves. 

What’s the connection? In countries where people refuse to accept power imbalance as a norm, Mittal says, people speak out much more. Students from such cultures are encouraged to express their differences publicly and disagree with their teachers if necessary. In other words, they’re encouraged to exhibit less restraint. Over time, people in such countries tend to place a higher emphasis on immediate gratification as opposed to restraint, the researchers found. 

But does it follow that choosing donuts over egg whites for breakfast reflects one’s beliefs about power? Mittal and his fellow researchers demonstrate that it does. 

One study, involving 170 undergraduates from a large U.S. university, illustrated such choices in action. First, the students were screened to judge their beliefs about power imbalance. Next, each was given a task assessing their willingness to spend money on junk food. 

Imagine you had $10 in cash, each student was told. Now, choose from a list of items that includes both “vice products” — a Snickers bar, potato chips and cola — and “virtue products” — a granola bar, an apple and orange juice. Students who rejected power disparity were more likely to crave the Snickers and Coke. 

The ability to act with self-restraint, Mittal and his team theorize, is linked to how we understand inequality. Individuals who accept power imbalance as a fact of life are more conditioned to show self-control. In turn, this helps develop a kind of mental muscle memory to control different urges — including the urge to spend whimsically. 

Critically, the researchers found, these choices have little to do with an individual’s innate character. Instead, acceptance of power disparities could actually be prompted in labs, where messages designed to prompt acceptance of power inequality actually led to less consumption of vice products.

From a business perspective, the research could be groundbreaking for firms in multicultural markets. Studying cultural beliefs about inequality could yield key advertising strategies, based on whether members of a particular market see their product as a virtue or a vice. 

Mittal’s research also presents implications for more than selling ice cream and chips. Whether we reach for a Snickers bar or a handful of almonds, it’s worth examining how these traits correlate to our internal views of power. Do we live in an equitable society? Can it ever be made so? How would we eat, buy, and spend if the world looked like it could change?

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at Jones Graduate School of Business at Rice University. 

To learn more, please see: Zhang, Y., Winterich, K. P. & Mittal, V. (2010). Power distance belief and impulsive buying. Journal of Marketing Research, 47(5), 945-954.

By William M. Arnold and Jim Krane

This article originally appeared in POLITICO Magazine as "Is Saudi Arabia Helping Trump in the Midterms?"

The three-way test of wills over Saudi Arabia’s murder of an exiled journalist has started to play out in oil markets.

Each day, Turkish President Recep Tayyip Erdogan maintains his drip feed of grisly details of Jamal Khashoggi’s killing in the Saudi Consulate in Istanbul. Each day, a reluctant President Donald Trump is forced to respond to a new revelation. The affair has betrayed a yet unseen presidential aptitude for restraint.

Meanwhile, the Saudis’ initially combative tone has been quietly replaced with a more deferential stance. They have opened the valves on their idled oil production, exactly as Trump has demanded in his tweets. Saudi oil minister Khalid al-Falih has talked down oil prices with unusually forthright public statements, saying the kingdom will make sure global demand is met, no matter what.

For Trump and his embattled Republican allies in the U.S. midterm elections, the change in Saudi behavior is welcome. And as long as Trump soft-pedals the Khashoggi affair, it seems the Saudis are willing to cooperate with the American president’s oil market wishes.

A few weeks ago, there were rumors that Trump was pondering an election-timed release from the U.S. Strategic Petroleum Reserve. Now, with the Saudis on board, U.S. gasoline prices — the third rail of domestic politics — should remain low at election time.

If Trump’s measured responses are incentivizing Saudi production increases, the president’s policies are working. The international oil price is down about $9, from $85 just after Khashoggi’s murder to $76 on Tuesday.

Prior to the Khashoggi murder, Saudi Arabia had been slow-walking promised production increases despite strong evidence that Trump’s sanctions on Iran were strangling oil markets. Saudi oil output rose by just 300,000 barrels per day between June and October, while Iran’s oil exports fell by about triple that amount, around 1 million barrels per day.

Had the Saudis continued to drag their feet, prices might have neared the iconic $100 mark just in time for the U.S. election — handing Democrats a convenient talking point. Trump’s unilateral removal from world markets of 1.5 million barrels per day of Iranian oil would have looked masochistic, given that his sanctions deadline is just two days ahead of the Nov. 6 elections.

But global outrage over the Saudi critic’s murder has put the kingdom on the back foot. Allies and detractors alike, including normally friendly Republicans in the U.S. Senate, are baying for sanctions and an arms embargo.

While Saudi political leaders produced fumbling explanations for the murder, the oil minister stepped forward to change the narrative. Al-Falih promised another 300,000 barrel-per-day increase “soon” and said the kingdom still had another 1 million barrels of spare capacity it could call upon. If that weren’t enough, Saudi Arabia would consider investing in further capacity increases, he said. “We will meet any demand that materializes,” Al-Falih said Tuesday.

The comments calmed skittish markets, revealing that the oil minister, at least, is one Saudi official who retains credibility.

Is the kingdom rewarding Trump’s softly-softly approach? It’s hard to be sure. But the timing makes it look like the Saudis are banking that the president needs low gasoline prices more than he needs Riyadh in the penalty box.

The wild card is Erdogan. What depredations will emerge in the Turkish president’s next release? Will he finally release the alleged recordings of the gory murder and dismemberment in Istanbul?

Should that happen, Trump’s resolve could crumble. A forceful presidential response could revive Saudi threats to take “bigger measures” (read: oil) if the kingdom’s leadership were censured.

Although Al-Falih has stated that the kingdom has no intention of revisiting the the hardball tactics that brought us the Arab oil embargo of 1973, other Saudi policymakers have broached the possibility.

“If President Trump was angered by $80 oil, nobody should rule out the price jumping to $100 and $200 a barrel or maybe double that figure,” wrote Turki al-Dakhil, an ally of the Saudi royal court and director of the Saudi-owned Al Arabiya news network.

These were undoubtedly scare tactics. But coming from Saudi Arabia, scare tactics can put a scare into oil markets. Prices get notoriously jumpy when Saudi Arabia sheds predictability.

And if prices get jumpy, Trump’s Iran embargo would quickly be undermined by a sheaf of sanctions waivers, starting with Turkey and India, and then extending to others.

Pretty soon, the embargo starts to look like Obama’s, where import waivers were handed out because OPEC didn’t have the spare capacity to cover the loss of Iran’s exports.

Trump has a weak hand. He knows that the Saudis’ influence over U.S. gasoline prices gives them leverage in U.S. elections. Until the voting is done, bet on this: The president will find it hard to get tough on his Saudi friends.

Jim Krane is a fellow for energy and geopolitics at Rice University’s Baker Institute for Public Policy.

Bill Arnold was a professor in the practice of energy management at the Jones Graduate School of Business at Rice University.

Illustrated by Nick Anderson. Based on research by K. Ramesh, Edward Xuejun Li, Min Shen and Joanna Shuang Wu

To learn more, please read: After Hours 

K. Ramesh is the Herbert S. Autrey Professor of Accounting and Head of Accounting Programs at the Jones Graduate School of Business at Rice University

Nick Anderson is a Pultizer Prize-winning editorial cartoonist.

Based on research by Wagner Kamakura, Jesús Cambra-Fierro, Iguacel Melero-Polo and F. Javier Sese

• Multi-channel customers are good for business, according to conventional wisdom.
• But when customers use every channel, the spiraling costs to accommodate them can slash profitability.
• The solution: Concentrate on high-margin channels or on certain channel combinations. 

It’s never been so easy to spend. Or borrow. Or invest.

From an ATM on every street corner to downloadable apps to handshakes at the local branch, banks today are consumed with meeting customer needs through whatever channel is most convenient. All of which is good news for consumers.

What about the banks?

Conventional wisdom has it that multi-channel customers drive profitability. The theory is that varied sales channels increase the frequency of customer touchpoints, which in turn increase the number of opportunities to make a purchase. Then there’s the added value of increased convenience and comfort for the customer. This, together with the opportunity to combine multi-channel benefits, makes it more likely that customers will derive greater value — and therefore spend more.  

But in practice, this doesn’t really work, says Rice Business Professor Wagner A. Kamakura.

Analyzing data from a leading European bank, Kamakura and colleagues from the universities of Pablo de Olavide and Zaragoza found that customers who make use of all the channels available to them are not, in fact, the most profitable in terms of margin. The reason: costs and efficiencies.

Kamakura and his co-authors parsed two years’ worth of transactions made by 1,000 customers across four major channels: online banking, point of sale transactions in retail outlets, ATM use and face-to-face interaction in branches. They analyzed three primary service areas: asset management, credit, and everyday banking services such as debit cards and insurance.

Recent research about purchasing had already challenged the assumption that multi-channel marketing is always a boon to business. While customers shopping for luxury goods typically generated higher profit by using multiple channels, that wasn’t true for people purchasing less expensive day-to-day products.

Kamakura and his team decided to test the same assumptions about banking services.

“We suspected that with goods, multi-channel use did expose customers to opportunities to purchase and spend more. But with services, the outcome would be different because of the costs associated with serving the customer across different channels,” Kamakura wrote. “We wanted to test the theory that overall profitability was tied to two things: the nature of the channel itself, and the quality of the customer-bank interactions each channel promoted.”

What they found was that when customers used all four channels offered by the bank, profits actually decreased.

“We call this the augmentation effect, where customers use a convenient channel leading to an increase in demand for services,” Kamakura explained. “This in turn leads to more costs but doesn’t create a corollary upsurge in the quality of customer relationships.”

On the other hand, when customers used a three-way combination of channels — point of sale transactions, branch banking and online services — profitability was markedly enhanced. Other permutations — branch and point of sale or branch and ATM, for instance — were also relatively good for business.

“There’s an interesting interplay and a complex dynamic when you combine certain platforms and set this in turn against cost implications to the business,” Kamakura said. “Where you see customers using a dual-channel combination of ATM and the branch, for instance, the net outcome is greater profitability to the bank. This is because it’s easy for customers to migrate routine operations to the ATM, reducing costs to the branch without impairing the human relationships with the bank.”

This human dimension offered by branch banking, he said, means that high-value transactions tend to happen here. And when high-value customers arrive at the branch, there’s an opportunity to cross-sell. This makes branch banking a high-margin channel.

Conversely, internet banking, while still relatively cheap to the bank, yields little in terms of relationship-building and makes it easier for customers to manage their own accounts — and switch service providers if they choose to.

In the age of AI and the seamless user experience, the implications of these findings for service firms are significant.

“It’s important to look at the big picture,” Kamakura said. “You need to be thinking about how technology and automation, self-service mechanisms might trim your overheads, but might also reduce your customer satisfaction. It’s about balancing and monitoring the tradeoffs between speed, efficiency, ubiquity and things like loyalty, behavior and emotions.”

Wagner A. Kamakura is the Jesse H. Jones Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Cambra-Fierro, J., Kamakura, W.A., Melero-Polo, I., and Sese, F.J. (2016). Are Multichannel Customers Really More Valuable? An Analysis of Banking Services. International Journal of Research and Marketing, 33(1), 208-212.

Based on research by Shiva Sivaramakrishnan and George Drymiotes

• Boards of directors need both long-term and short-term incentives to motivate them to perform in a company’s best interest.
• Short-term incentives can prove particularly important to encourage board members to perform well at multiple roles.
• Board members who don’t receive short-term rewards may be more likely to overlook misconduct on the part of management.

If you’re a stockholder, you may envision your investment helmed by a benevolent, all-knowing board of directors, sitting around a long finely-grained wooden table, drinking coffee, their heads buried in PowerPoint charts as they labor to plot the best course for the company. Too often, however, you can’t take for granted that a company’s board will steer it wisely. 

Companies choose directors because they offer rich and varied experience in the business world. Many who serve on boards, moreover, are CEOs of other corporations, or have headed big companies in the past. As of October 2018, for example, six of the 11 directors on Walmart’s board and eight of 13 on AT&T’s board hold CEO or CFO positions in other firms. So it’s easy to assume that board members will act in the best interests of stockholders.

But in a recent study, Rice Business professor Shiva Sivaramakrishnan found that board members actually need incentives — both short- and long-term — to act in stakeholders’ best interests.

Corporations usually compensate board members with stock options, grants, equity stakes, meeting fees, and cash retainers. How important is such compensation, and what sort of incentives do board members need to perform in the very best interests of a company? Sivaramakrishnan joined co-author George Drymiotes to trace how compensation impacts various aspects of board performance.

Recent literature in corporate governance has already stressed the need to give boards of directors explicit incentives in order to safeguard shareholder welfare. Some observers have even proposed requiring outside board members to hold substantial equity interests. The National Association of Corporate Directors, for example, recommended that boards pay their directors solely with cash or stock, with equity representing a substantial portion of the total, up to 100 percent.

To the extent that directors hold stock in a company, their actions are likely influenced by a variety of long-and short-term incentives. And while the literature has focused mainly on the useful long-term impact of equity awards, the consequences of short-term incentives haven’t been as clear. Moreover, according to surveys, most directors view advising as their primary role. But this role also has received little attention.  

To scrutinize these issues, the scholars used a simple model, which assumes the board of directors perform three roles: contracting, monitoring and consulting. The board contracts with management to provide productive input that improves a firm’s performance. By monitoring management, the board improves the quality of the information conveyed to managers. By serving in a consulting role, the board makes managers more productive, which, in turn, means higher expected firm output.

This model allowed the scholars to better understand the relationship between the board of directors and the company’s managers, as well as with shareholders. The former was particularly important to take into account, because conflict between a board and managers is typically unobservable and can be costly.

The results were surprising. Without short-term incentives, the researchers found, boards did not effectively fulfill their multiple roles. Long-term inducements could make a difference, they found, but only in some aspects of board performance.

While board members were better advisors when given long-term motivations, short-term incentives were better motivators for performing well in their other corporate governance roles, according to the research, which tied specific aspects of board compensation to particular board functions.

Restricted equity awards provided the necessary long-term incentives to improve the efficacy of the board’s advisory role, the scholars found, but only the short-term incentives, awarding an unrestricted share or a bonus based on short-term performance, motivated conscientious monitoring.

The scholars also examined managerial misconduct. Board monitoring, they concluded, lowered the cost of preventing such wrongdoing — but only if the board had strong short-term incentives in place.

Even in the highest echelons of the corporate world, having skin in the game is what drives action. Maybe that’s no surprise. In business, personal stakes often dictate decisions — so stockholders need to scrutinize those at the top. Like everyone else, board directors perform best when they have something tangible on the line, not just distant rewards on the horizon.

Shiva Sivaramakrishnan is the Henry Gardiner Symonds Professor in Accounting at the Jesse H. Jones Graduate School of Business at Rice University. 

To read more, please see: Drymiotes, G. & Sivaramakrishnan, K. (2012). Board Monitoring, Consulting, and Reward Structures. Contemporary Accounting Research, 29(2), 453-486.

By Vikas Mittal

A version of this article was originally published by the American Marketing Association.

Senior executives at business-to-business companies strive to satisfy their customers to improve sales and margins. Yet very few systematic frameworks exist to guide their customer focus.

Last year, I was discussing the content of a B-to-B strategy course with the dean of a top-10 business school in Asia who lamented, “Most of what B-to-B companies do relies on recycled concepts from consumer companies. Consumer goods and services are focused on customer experience, customer delight and hedonic consumption, and rightly so. But B-to-B is different. It has so many utilitarian value drivers like sales, bidding, billing and project management that go beyond experiential aspects of value.” Simply put, B-to-B customers are different than traditional consumers of goods and services.

B-to-B companies have important differences from B-to-C companies. B-to-B companies typically sell complex products and services that are purchased by clients through a systematic purchase process involving multiple stakeholders, such as end users, evaluators and purchase managers. In terms of consumption, B-to-B cycles are long and complex — sometimes taking several decades and involving hundreds of employees.

B-to-B companies, therefore, must keep this glacial time scale in mind — and the unique customer needs such a scale entails. Research by scholars at Rice, Iowa State, and Texas A&M universities, on behalf of the Collaborative for Customer-Based Execution & Strategy, identified eight competencies specific to B-to-B customers.

Unlike functional competencies based on silos — such as manufacturing, finance, technology or innovation — these are based on perceived customer value. Functional competencies are still necessary to deliver this perceived value to the customer, but superiority on functional competencies alone is not enough.

The eight customer-based competencies are based on in-depth interviews and surveys of more than 600 managers and executives from the supplier and client sides in B-to-B firms. They include:

1. Bidding and Sales Process

While retail customers make quick decisions based on price tags, B-to-B customers typically go through an elaborate bidding and sales process. Throughout the process, they evaluate the sales team’s competency and the suppliers’ ability to provide accurate proposals. In interviews, customers described the process in one of two ways: either “We get a lot of work from relationships that our sales force develops,” or “Salespeople need to do a better job understanding our needs so that the proposals are streamlined to our needs.”

2. Quality of Product and Service

Products and services in B-to-B can range from multiyear service contracts to complete power plants. For B-to-B companies, quality is based on customers’ perceptions of how well the supplier’s core offerings perform. Customers describe this competency as “meet(ing) performance specifications for the equipment and the service employees.”

3. Billing and Pricing

Customer perception of whether a firm’s pricing and billing processes are fair and competitive goes beyond low prices. Respondents report that they “don’t like companies that low bid and then issue change orders to jack up the price.” They also express frustration when “accounts payable has to go back over the billing because it is wrong about half of the time.”

4. Communication

In B-to-B relationships, communication is a core component that can lower perceived customer value when derailed. We define communication as the extent to which a supplier shares appropriate and accurate information in a clear and timely manner. Customers describe companies that excel at this competency as “providing the attention required to keep accounts happy, especially the large ones.” In contrast, firms with poor communication are described thus: “Everything is email. I get zero in-person contact with them.”

5. Safety

Assuring the safety of products, customers and employees is a critical competency, especially in B-to-B contexts involving the oil and gas industry, manufacturing, transportation, nuclear energy and waste management. For example, the Deepwater Horizon disaster ensnared BP for several years. Customers describe safety as one of the major issues in complex jobs, saying “TRIR (Total Recordable Incident Rate) is very important.”

6. Project Management

Suppliers must be able to adequately help plan, execute, and support the initiatives and projects they are involved with. One of our interviewees mentioned that project management is an essential part of the business, explaining that “thousands of policies and procedures need to be followed to execute a project.”

7. Sustainability and Social Responsibility

Sustainability and social responsibility represent customer perception of the extent to which a supplier voluntarily incorporates societal and stakeholder concerns in its value proposition. In describing the benefits of these competencies, customers say: “I know they are not doing anything dirty — they help us stay on the right side of [the Environmental Protection Agency],” and “It is important to be a community partner by creating local jobs. We always emphasize local content and training.”

8. Ongoing Service and Support

Just because you’ve already sold a product or service doesn’t mean you’re done; service and support must continue into the consumption phase of a B-to-B relationship. In marketing, this has been described as after-sales service, as well as ongoing relationship management. It’s different from the customer’s initial assessment of the product or service quality. In interviews, managers stressed the importance of ongoing service support. One said, “For many contracts, we will need to have a guarantee that no issues will be happening after delivery.”

Our research shows that these eight attributes make up a whopping 70 percent of customer value, as measured by overall customer satisfaction. Across a wide swath of industries, these are integral predictors of sales and gross margins — even after statistically accounting for a variety of customer factors, such as purchase amount and involvement; company factors, such as size and firm risk; and industry factors such as the competitiveness of the field. Meeting customer needs through these eight competencies, therefore, also satisfies shareholder goals.

For B-to-B companies, competitive advantage lies in these eight unique competencies, which are specific to business contexts. Delivering each competency will require a cross-functional approach that cannot be achieved by excelling in only marketing, finance, innovation, service or sales. For example, excellence in departments such as project management requires engineering, manufacturing, customer service, accounting, and even sales. To get these departments to work together, companies will need to accurately measure their role in each of these competencies and link them to sales and margins. Done well, this can provide a roadmap for achieving meaningful improvements in both customer value and shareholder performance.

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice University.

By Vikas Mittal

This article was originally published by the American Marketing Association. 

Many executives believe that delighting customers will improve their satisfaction and increase sales, but few can say how exactly to meet (and exceed) their expectations. Often, they think satisfying customers is a subjective exercise that cannot be precisely defined or measured. But both are possible by examining what satisfies and dissatisfies customers. 

For the last two decades, I’ve developed statistical algorithms to measure “satisfier” and “dissatisfier” attributes. My colleagues and I have analyzed hundreds of attributes in dozens of industries to reveal how satisfiers and dissatisfiers can be used to understand customer satisfaction. 

Satisfier attributes — also called “delight attributes” — tend to be hedonic, sensory, “nice to have” amenities that are not considered critical to the functionality of a product or service. At a hotel, a chocolate on your pillow would be a satisfier attribute. Dissatisfier attributes are fundamental must-haves that deliver the basic utility customers expect from the product or service. At a hotel, a clean bathroom would be a dissatisfier attribute. At a doctor’s office, an accurate diagnosis is a dissatisfier attribute, while a polite receptionist may be a satisfier attribute.

When it comes to satisfier attributes, a strong performance improves customer satisfaction a lot more than poor performance hurts it. That is to say: Above-average performance has a disproportionately higher positive effect on satisfaction than the negative impact of below-average performance. 

In the oil and gas sector, sustainability and social responsibility are satisfier attributes, for example. Going above and beyond expectations on these attributes can have a disproportionately greater impact on customer satisfaction than would the negative impact of doing too little. 

Below-average performance on dissatisfier attributes, however, hurts customer satisfaction much more than above-average performance would improve it. In other words, below-average performance on a dissatisfier attribute is more harmful for overall customer satisfaction than the benefit from above-average performance. 

Communication is a dissatisfier attribute among oil and gas customers; the negative impact of below-average communication on satisfaction is disproportionately larger than the positive impact of above-average communication. 

Companies that want to maximize customer satisfaction, therefore, should focus on reducing below-average performance on dissatisfier attributes. In general, the negative impact of dissatisfier attributes is twice as large as the positive impact of satisfiers. Companies that want to avoid steep declines in overall customer satisfaction should start by minimizing below-average performance on dissatisfiers. Simply put, delighting customers with satisfiers does not compensate for dissatisfying customers with subpar performance on the fundamentals. 

Customer experience management is especially prominent in the services sector, with brands such as Ritz-Carlton in hospitality, Sears in retail, JPMorgan Chase in financial services, Ford and Toyota in automotive dealerships and Disney in entertainment. These brands emphasize the sensorial and hedonic aspects of the interaction between brand and customer; the goal is to endlessly please and delight customers by continuously exceeding their expectations. Bloomberg reported on employees at a Ritz-Carlton in Bali who demonstrated this concept when a child with food allergies arrived as a guest. The child required special eggs and milk that could only be obtained in Singapore. The staff called in personal favors and brought in the specialty food from more than 1,000 miles away. This increased the overall customer satisfaction disproportionately higher than if the staff had made a subpar effort to accommodate the child. 

Based on this anecdote, should all companies strive to maximize positive performance on all attributes to delight customers? No.

In most cases, trying to continually exceed customer expectations is going to be unrealistic and unprofitable. As customers come to expect more of you, delighting them becomes progressively more difficult and costly. It will require an astronomical investment to maintain these efforts — investments that will squeeze margins and dramatically raise the cost of doing business. Despite the increased cost of delighting customers, competitive pressures will preclude most firms from raising prices to offset these increased costs. Eliminating dissatisfiers, on the other hand, is less costly to implement, easier to sustain, and provides a durable cost advantage. 

A B-to-B company we worked with found that customers expected their order to be fulfilled within two weeks. Previously, this company had attempted to delight some customers with rush orders that were fulfilled in less than two days — but others were taking more than three weeks. The average fulfilment time was a week and a half, yet many customers were still dissatisfied when their order took more than two weeks. 

Based on our recommendation, the company implemented a strategy to minimize below-average performance by fulfilling every order in fewer than 12 days. It eliminated its policy of rushing orders to delight customers and replaced it with a goal to ensure all orders were met within the 12-day limit. By eliminating rush orders, the company not only saved resources but also improved overall customer satisfaction, leading to an 8.3 percent increase in sales and a 14.6 percent increase in margins.

My colleagues and I also counseled executives from an oilfield-services company that treated communication as a satisfier attribute. Its sales team and customer service representatives were communicating with customers as often as possible in as many ways as possible. Customers received an average of five communications per week, including customer surveys, service representative calls and messages and requests from salespeople to arrange demo meetings for new products. Rather than delighting customers, the communication fatigued and dissatisfied them. Executives were surprised to learn that communication was a dissatisfier, not a satisfier, for its customers. 

Further research showed that the optimal communication frequency was one touch point every two weeks, or two communications per month. By going from 20 touch points per month to two, this company decreased its cost of doing business by 20 percent and simultaneously increased sales and maximized customer satisfaction.

The takeaway? Because losses loom larger than gains, most customers are looking for value that comes from consistently meeting expectations, with few, if any, major letdowns. A strategy of minimizing disappointments runs counter to the oft-touted principle of customer delight, which can inflate customer expectations, erode margins, and cost more than it’s worth. 

To identify dissatisfier attributes, a company must have a clear and consistent measurement strategy that links attribute performance to overall customer satisfaction. This requires a deep understanding of the attributes that drive customer satisfaction, competency in developing customer surveys​ and fluency with advanced statistical analysis. But the payoff is huge: Customers are more satisfied and companies can increase sales and margins while using fewer resources overall. 

Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice University.