Research Brief: Product-Harm Management, Before the Harm
What did the study look at?
Whenever new product-harm crises come roaring into the news – from recalls on toxic infant formula to explosive car tires – researchers put their heads together to study the incidents’ consequences and how companies can mitigate market aftershocks. But in this study, researchers Kashmiri and Brower looked at corporate governance and management teams prior to product-harm crises, to see what sorts of firms are better protected against these publicity and product scandals.
The researchers base their study on agency theory, which looks at the problems that arise when the goals of company executives and shareholders are misaligned. Product-harm crises are so common, they say, because self-serving managers tend to under-invest in product-quality systems and processes, with shareholder value taking the hit. By contrast, when the incentives of managers are aligned with those of shareholders, firms would be expected to place a higher emphasis on product quality. Kashmiri and Brower set out to show that in firms with higher managerial ownership, higher family ownership, and higher influence of marketing in the C-suite, the interests of managers and shareholders are better aligned, resulting in a greater investment in product quality and fewer product-harm crises.
How was the study designed?
Researchers tracked 116 S&P firms for six years, using data on companies’ quality assurance, managerial ownership, and degree of marketing involvement in management. The study analyzed several variables over a number of years: the presence of a chief marketing officer in management, ownership by founding families, company ownership by management, and investment in product-quality measures, such as certification and external audits. These different variables were mapped against firms’ number of product-harm crises over the years to detect correlations.
What did the study find?
- Companies that are family-owned or have high levels of managerial ownership, as well as those with more marketing involvement in management, tend to place more value on product quality. Basically, those who were personally invested in their businesses were less likely to let product quality slip. In cases where individuals’ success was highly linked to company success, there were fewer incidents of product-harm crises.
- When it comes to family firms, researchers found that founding families were more invested in protecting their products when they occupied at least one of the positions of chairman and/or CEO – linking their motivation to upkeep their legacy with a position that actually allowed them enough influence to do so.
- A number of other variables were linked to lower levels of product-harm incidents. Younger firms, those with a corporate branding strategy (think Apple), smaller firms, and those with a strong record of quality in the past, all experienced fewer product-harm crises.
What do I need to know?
Higher levels of managerial ownership were tied to a stronger emphasis on product quality, which suggests that companies that include equity-based compensation for managers may see a lower likelihood of product-harm incidents. This type of managerial involvement may help align the views of shareholders and managers on expenditures, and increase investments in product quality.
For firms that are not willing to boost managerial ownership, there are still several important takeaways, researchers note. Companies that do not make product-quality programs an investment priority are much more likely to see product-harm incidents in the future, making it important to preemptively ensure product safety and quality through well-designed programs and processes.
Finally, there has been a noted decline over the years in the influence of marketing team in overall management, which presents an extra hazard to product quality. Those in marketing tend to have positions that are more directly tied to product success, aligning their goals with those of shareholders regardless of personal investments in the firm. Chief marketing officers play a key role in lowering risk of crises that could damage a firm’s public image, making them a critical part of management teams.
Title: Oops! I did it again: Effect of corporate governance and top management team characteristics on the likelihood of product-harm crises
Authors: Saim Kashmiri (University of Mississippi), Jacob Brower (Smith School of Business, Queen’s University)
Published: Journal of Business Research (in press, 2015)
— Kenza Moller