Sarbox still putting the squeeze on marketing

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It's now three years since the Sarbanes-Oxley Act tightened corporate-governance and reporting requirements and the notorious Section 404 required CEOs and CFOs to sign off on the validity of corporate accounts. Imagine that when visiting the dentist for a checkup, you now have to show up with signed affidavits that you've brushed and flossed your teeth every day since you were last there. That's the effect of Sarbox.

Nothing to do with marketing? Far from it. Sarbox's impact on the marketing function has received scant attention, but it has been and continues to be significant. Unless marketers and boards are vigilant, its knock-on impact can be substantial.

First, the extra auditing fees needed to comply with Sarbox have to come from cost reductions elsewhere if a company is still to achieve its profit and earnings-per-share growth targets. Small- and mid-cap companies have seen auditing fees triple or quadruple to 1.5% of revenues. Where has that money come from? You guessed right, from budget cuts in marketing and R&D-functions that have a tough time proving returns on investment-have been the most common sources.

Second, corporate boards continue to be preoccupied with audit and compliance issues. Most new board appointees these days are finance and audit experts, aggravating the lack of marketing expertise in the boardroom. Though many boards have increased the frequency of meetings to deal with Sarbox issues, they are spending less time than ever discussing marketing strategy even though customers are the source of all organic growth and all cash flow.

With only a handful of chief marketing officers serving as directors on the main boards of public companies, marketing has precious few advocates or apologists in the boardroom. This at a time when marketing expenditures are looming larger as a percent of sales in many corporate-cost structures because outsourcing and productivity gains in recent years have slashed manufacturing and distribution costs.

Third, the aftermath of the Enron and WorldCom scandals has sensitized public-company directors to all sorts of risk. Marketing expenditures appear risky because they are subject to waste and fraud. Several marketing-services suppliers have recently been convicted of overbilling clients. Time Warner has been fined for overstating ad revenue.

Reputation risk is heightened when the corporate name is the brand name. Criticized for overly aggressive advertising, pharmaceutical-industry leader Pfizer has agreed to detail product risks more exclusively in direct-to-consumer advertising and not to advertise new drugs to consumers until six months after launch.

Value of brand names

This makes boards increasingly aware of the importance and value of brand names. At one level, this is good news for marketers because it means boards are interested in protecting brand trademarks, preparing crisis-management plans and in measuring brand health as part of a balanced scorecard. But it also means that boards are nervous about any marketing initiatives that might put strategic brand assets at risk.

Sarbox has spawned a legal-beagling culture in which new-product rollouts are delayed, imaginative promotions curtailed, disclaimers swamp advertising messages and marketers hide behind their channel intermediaries. Low-risk line extensions, tried-and-true promotions and new executions of existing ad campaigns are favored-all because the liability risk is lower and approvals by the legal department can be speedier. All this means that true innovation and creativity are dampened. In short, marketing is less fun.

Relationship marketing has been impeded by tighter restrictions (and requirements for annual employee sign-offs that they've complied) on vendor-buyer interactions, gift-giving, corporate hospitality and unauthorized discounts. Pricing flexibility has been restricted given the fear of booking revenues incorrectly. A recently settled lawsuit with Time Warner highlighted the importance of customer-service representatives not being awarded bonuses for dissuading consumers from canceling service.

Harder fight

As a result of these new trends, marketing must fight harder than ever before for its fair share of airtime in the boardroom. In the all-too-many companies where the CEO has not come up through marketing, a top-quality CMO is vital. By top quality, we mean a CMO with left-brain financial savvy as well as a right-brain feel for creativity, a CMO who can talk the language of ROI, work with the chief finance officer and command board credibility. For this role, the best CMOs are marketers who have already run businesses.

Boards of directors cannot absorb detailed customer-research reports. What they want is a quarterly tracking report of the three or four marketing or customer-related metrics that truly drive and predict the company's business performance. These metrics should be behavioral, not attitudinal, and should be specific to each company's business model, not off-the-shelf measures like customer satisfaction.

For example, the board of Harrah's, the casino operator, focuses on three metrics: share of its customers' gaming dollar (share of wallet); loyalty-program upgrades (an indicator of increased concentration of a customer's gaming at Harrah's); and percent of revenue from customers visiting more than one of Harrah's 30 casinos (an indicator of cross-selling). Tracking depends on a customer information system in which Harrah's invests $50 million a year.

In the new world of Sarbanes-Oxley, marketing requires both good management and good measurement to build credibility and respect in boardrooms that are focused on risk reduction and accurate financial reporting.

Gail McGovern is a marketing professor at Harvard University and was president of Fidelity Personal Investments.

John Quelch is a marketing professor at Harvard University and former dean of London Business School.

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