CoreBrand featured in The Internationalist Magazine

15 April 2011

The Changing World of Marketing Accountability

Do you ever feel your marketing budget is underfunded – welcome to the club.
Original article at: The Internationalist Magazine

Believe it or not 7 of 10 corporate marketing budgets are underfunded. Only 1 in 10 are properly funded and 2 in 10 are overfunded. CoreBrand’s twenty-year proprietary research project called the Corporate Branding Index® has consistently found that those responsible for signing off on marketing budgets are short-changing their own companies of proper accounting for marketing budgets – or at best no real understanding of the potential return on investment. This appalling fact has deep roots that go back to the fundamentals of accounting that will scare the bejesus out of most marketing and communications professionals but will simply get a shrug from the CFOs and accountants reading this article.

This complete disconnect between marketing and finance begins with the accounting profession, which has completely ignores the undeniable growth of brand value in most corporations. GAAP (Generally Accepted Accounting Principles) standards don’t account for the value of brands until a company (or product brand) is bought or sold. This method of accounting for brands doesn’t accurately reflect the true value of the living brand. Brand value changes over time based on the decisions of management (e.g. marketing budgets) and the impact on key constituencies such as customers or other key stakeholders. Corporate and product brand equity can be readily measured, easily identified and valued on an ongoing basis in comparison to its industry, or specific competitors. Unfortunately, the accounting industry has found it better to use brand equity as a “fudge factor” in accounting for the value of the company rather than to provide shareholders with the true brand value of the company.

The Brand is a Business Asset

Getting accountants to recognize that the brand is a business asset is complicated, so let’s start with the fundamentals. Most CEOs and CMOs would agree: Marketing is crucial to corporate success. So why then do CEOs and CFOs tend to also look at corporate marketing and branding budgets as an expense rather than as an investment?

The missing ingredient has been reliable measures and financial metrics that tie marketing performance to growth and ROI. Setting aside the lack of accounting standards for the moment this lack of metrics has created a chasm between CMOs and the CFOs. It is a “Catch-22” – no accounting standard exist therefore proving the value of brand does not exist. The absurdity of the circular argument is what is keeping companies from functioning at optimum levels. Unlocking the significant financial value relating to the management of corporate and product brands, as well as a systematic method to evaluate improvements in perception, will result in an improved financial performance.

Bringing Financial Accountability to Brands

The first challenge facing any valuation model is how to define and capture the measures that ultimately provide the brand's ROI. These measures must be:

• Robust: Examine the meaningful attributes that drive category and company performance.
• Objective: Provide an unbiased report on reputation and financial performance.
• Predictive: Identify the opportunities and brand leverage available.
• Repeatable: Track progress and provide accountability.

Any metric must meet the above criteria in order to be included in brand measurement models. Having a model that meets these criteria is essential, since understanding a corporate or product brand involves measuring and managing a very complex organization. As it is virtually impossible to control every communication a corporation sends out, understanding the major building blocks of what branding can do for an organization are critical to being able to manage a corporate brand.

Certain companies, even certain industries, are more sensitive to brand building efforts than others. A holding company with a corporate name that does not resonate with any audience other than investors will have a more difficult job building familiarity and favorability (which, of course, is not the goal of a holding company), than a company marketing consumer-facing products every day.

The Coca-Cola Company enjoys the highest brand equity in the Corporate Branding Index, with nearly 21% of their market capitalization relating to the corporate brand. A company like this has the most to gain from a more active management of their brand. However, the financial impact of the brand, even in low-sensitivity companies, can increase dramatically if managed through consistent communications over time.

Accountability for brand is everybody’s business

Many departments within a corporation will argue for the need of accountability in marketing, but none will step forward to take ownership of how to account for brand equity.

Theoretically, the CEO is responsible for the value of the corporate brand. Unfortunately, it is a rare CEO who will invest the time to understand how brand equity value is created. CEOs would love to see their company prosper but few seem willing to take command of the very weapons that are available to help them win this battle.

The CFO properly challenges the high costs of marketing as it stands today since there is no standard for accounting for the profitable return on investment for brand building activities. The CFO should be the biggest advocate of marketing in the company, but until GAAP standards exist that account for brands that is unlikely to happen. The enlightened CFO will work closely with marketing to embrace measures and metrics that prove the value being created by branding even if it isn’t currently reflected on the balance sheet.

CMOs would be wise to step forward to take command of brand marketing accountability. Many would argue that they have done so, but attempts to date to create a unified set of standards have been anemic. Most attempts to build accountable ROI bridges to the CFO or CEO have been misunderstood or at the least unrequited.

Procurement departments where the mandate is to dissect every transaction and to shave off another percentage point from already impossibly tight margins of advertising agencies, and marketing communications firms, are reluctant to open their view of the total value of a transaction to include the impact of growth (or potential loss) of brand value. We believe purchasing officers should acknowledge that brand building is a two-way street that creates or destroys value with every communication. This would open an entirely new avenue for the procurement department to evaluate the performance of vendors.

Investor relations, is at the side of the CEO with billions in market capitalization at stake with every communication and every earnings release. I believe the IR professional should step forward to let the CEO know when the corporate brand might need tweaking, or that corporate clarity is a bit softer than it was last year? The investor relations department should have its finger on the pulse of the corporate brand.

And, why aren’t advertising agencies and public relations firms demanding accountability? They have the most to gain by understanding consistent accountability measures for valuing product and corporate branding. Yet, the agency industry is too frail due to decades-long cost containment pressures or too afraid of the result to demand accountability. So, most seem happy just to survive another year.

Corporate brand as a consistent dashboard measure and on the balance sheet

Corporate brand equity value is a stable, predictable, and identifiable value. Even if corporate brand equity value isn’t part of GAAP standards we believe that it has a place and a role on the balance sheet. Think of corporate brand equity in the same context as other industries that have a significant value residing with intangible assets. For the petroleum industry these assets are reported in the footnotes of the annual report as, “untapped oil reserves.” In pharmaceuticals these assets are reported as, “drugs in the pipeline.” These are undeniable intangible assets that can be identified and estimated to a high degree of certainty.

The corporate brand is also an intangible asset that:

• Represents the reputation portion of goodwill.
• Can be accurately and consistently measured.
• Can be accurately and consistently valued.
• Can be compared to competitive companies and industries.
• Can be managed like other assets—including budgeting.
• Can grow or lose value over time.
• Can be evaluated on a ROI basis.
• Can be used as a companywide management tool.

CoreBrand’s twenty-year quantitative research study and regression models (collectively called the Corporate Branding Index), provide continuous data, insights, and value for over 800 companies, across 49 industries.

This massive longitudinal research study found that the corporate brand accounts for 5% to 7% of market capitalization, on average. But, it can also vary significantly by type of industry and general economic conditions. For some industries, like building materials, the brand has relatively low impact, with only a 2% on average impact on market capitalization. However, in the beverage industry for example, the corporate brand plays a major role, showing an 11% on average impact on market capitalization.

The first step towards successfully understanding this data is to examine a company in the context of its industry peer group. Comparing a firm’s quarterly value against its peer group is a perfect dashboard measure of the health, vitality, and value of the corporate brand. In the following example, the client company already had an advantage over their peer group, but wanted to expand that competitive advantage. A $24 million communications campaign was budgeted to build the corporate brand. Over the period of one year, there was a brand equity improvement of 2.1% of the market capitalization over the competition.

We have an opportunity to change our destiny

It is extremely rare to have an opportunity to change the destiny of the world of accounting, but we are presently in a window where the planets are aligned for marketers to demand some respect from this group. More importantly we are in a position to change the way marketing budgets are developed and measured.

The International Accounting Standards Board (IASB) is changing its accounting standards. They are working closely with National Standard Setters (NSS) around the world to create consistent standards for accounting. In the US that group is the Financial Accounting Standards Board (FASB). We have been working with FASB on the issue of valuing intangible assets, but as crazy as this seems FASB was too busy with other more important issues to deal with intangible assets so they punted to the Australian Accounting Standards Board (AASB), who now report directly to the IASB.

There is one organization that represents the marketer. It is called, the Marketing Accountability Standards Board (MASB), it is a group of academics (both accounting and marketing) and practitioners (both corporate and consultants) who have also been in hot pursuit of brand accountability standards. The Marketing Accountability Standards Board is under the leadership of Meg Blair. I highly encourage every corporation, consultant, marketer, who cares about this important issue to join MASB.

So far, one association has come forth ready to take on the issue of marketing accountability and have been supporting the efforts of MASB. The Association of National Advertisers, under the leadership of Bob Liodice, has been pursuing the concept of generally accepted brand valuation principles. The ANA represent the largest advertisers, so it is logical and commendable that such an organization is leading the discussion.