Confidence: How it helps to keep the marketing budget healthy and long-term

Looking at organisational structures, it is mostly the CEO who has the decision-making ability to determine the marketing budget. Image: Shutterstock

When you were a child, what superpower did you want to have? Flying? Telekineses? Invisibility? And what about now in later life? In fact, one of the most desired superpowers among adults is mind-reading. And it makes sense – not least in a business context. A marketing director, for example, would probably use this superpower to find out their CEO’s future plans for the marketing budget. Do they have to be prepared to defend it? Is the CEO planning a cut in the marketing budget that might harm the company’s long-term performance?

Unfortunately, for many working in firms and organisations, it is unlikely that they will ever gain the ability to read minds. But the good news is that research carried out by Prof. Tuck S. Chung of ESSEC Business School Asia-Pacific points to the conclusion that it is not really necessary either. Using confidence as a marker in CEOs to be more inclined to support erroneous marketing cuts, Prof. Chung and his fellow researchers sought to find out how Chief Marketing Officers (CMOs) can identify such situations and how they can protect their budget with a – this time – real-life superpower: Their own confidence.

A costly gamble on the future

Marketing spending is naturally a high-wire act – if it is too high, it increases costs and decreases current profits. If it is too low, costs are low and profits are higher in the short term. In the long-term however, low marketing spending harms long-term prospects and thus long-term profitability.

Looking at organisational structures, it is mostly the CEO who has the decision-making ability to determine the marketing budget. However, external pressures from the stock market, financial analysts or short-term oriented investors make them highly susceptible to “borrow from the future”. When faced with a potential earnings shortfall under their term of management, CEOs are likely to cut investments in discretionary expenses – i.e. the marketing budget – to show a rosier picture in the P&L statement and to appease stakeholders.  

In the long-term, for the company as a whole, cutting the marketing budget in such a way will however cut earnings as the product is no longer effectively marketed to the consumer. So, how can short-term oriented marketing management be prevented?

Understanding the Big Bosses: Confidence is key

A first step is to understand the motivations and characteristics of CEOs, the board of directors they interact with, and their CMOs whose work is directly affected by the marketing budget.

So what would make a CEO disregard possible long-term consequences of cutting the marketing budget? Prof. Chung and his colleague’s research used confidence as the key characteristic that influences such decision making. Moreover, confidence is often seen as a valuable trait in CEOs.

Paradoxically however, having a confident CEO comes with some shortfalls: the latter tend to believe that the stock market has undervalued their firm. And in order to prove the market wrong, they have a tendency to accumulate internal cash flows. Moreover, they also tend to overestimate the payoff in risky projects, which in turn causes them to adopt riskier strategies. And finally, they are tempted to give more optimistic earnings forecasts, their earnings management is more accrual-based, and they are less responsive to feedback and expert advice.

Using data sets, Prof. Chung et al looked at previously identified traits of confident CEOs and how their confidence could affect market management decisions. They also explored how CMOs could use their position – albeit only with persuasive power – to mitigate such decision making, as well as taking into account the role of the independent board of directors and how it might affect the myopic marketing tendencies of confident CEOs. 

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Pressure from the top

The researchers indeed found that highly confident CEOs are more prone to cutting the marketing budget for short-term profitability. However, it is the board of directors which really exacerbates these tendencies: CEOs have to report their performance – good and bad – to them. And coincidentally, it is the board of directors which also decides on CEO compensation.  

Moreover, while the board of directors is independent, they have to answer to shareholders. Shareholders in turn are interested in maximising their earnings, i.e. the dividend pay-out. As dividends are dependent on profit, shareholders tend to be more interested in short-term, rather than long-term, performance. As mentioned earlier, in turn this means that the board of directors, representing the interests of the shareholders, put a lot of pressure on the CEOs, leading them to be more inclined to engage in myopic marketing management.

Countering confidence with confidence

Under these conditions, who can defend the marketing budget? The most likely answer is the CMO. And while they do not have the power, in the traditional sense, to veto the CEOs decision concerning the marketing budget, they do have a persuasive role. Even more so, a highly confident CMO can act as a checks and balances entity.

While usually confident CEOs are quite unresponsive towards advice, they are more inclined to listen to highly confident CMOs who demonstrate a conviction in their own abilities and knowledge of the market. This confidence therefore gives CMOs the ability to influence the firm’s marketing decisions.

Winning the battle over the marketing budget

So what can CMOs do to win this battle of confidence? First of all, it is important to recognise the signs for a short-sighted marketing budget cut. These turn out to be a highly confident CEO paired together with a potential earnings shortfall. Catching these indicators on time allows the CMO to take action. Moreover, CMOs should use their own confidence to advise their CEOs, as well as use it to persuade the board of directors to not go forward with the marketing budget cuts.

As it is the CEO’s job to guarantee the long-term performance of the firm, they too would be wise to take action to prevent themselves making any short-sighted decision making. Starting on a more personal level, CEOs could take the time and check their own confidence-levels. Additionally, while potentially counter-intuitive, CEOs can opt to strengthen the CMO’s position and seek their advice. For even greater impact, the researchers recommend that CEOs actively recruit CMOs with high confidence levels in order to help them prevent making short-sighted decisions.

Lastly, Prof. Chung and his fellow researchers encourage boards of directors to include marketing metrics in the firm’s reports and evaluate the marketing performance to ensure the firm’s long-term profitability. In general, it would be important to educate board members in the importance of marketing. Moreover, to gain a deeper understanding of the firm and their added value, board members should be encouraged to have regular exchanges with the chief officers of other departments.

Prof. Tuck S. Chung’s research shows us that finally we do not need superpowers in the workplace. However, both CEOs and CMOs need to be confident and have a long-term vision for the future. After all, confidence can prevent mistakes with negative long-term consequences.

Tuck Siong Chung is an Associate Professor of Marketing at ESSEC Business School Asia-Pacific.
This article was first published in CoBS Insights.