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 / Summer 2008 / Issue 51(originally published by Booz & Company)


Recent Research

Transparency Is Overrated

Title: Unconventional Insights for Managing Stakeholder Trust
Authors: Michael Pirson and Deepak Malhotra
Harvard Business School Negotiation, Organizations, and Markets (NOM) Unit, Working Paper No. 08-057
Date Published: January 2008

Many executives find it difficult to establish and maintain trust with skeptical stakeholders, whether employees, investors, or suppliers. Managing stakeholder trust often requires a nuanced view and intuitive understanding of the specific needs of particular interest groups. Firms that have figured out how to do that are better able to reap monetary rewards and maximize the value of their relationships with employees and other stakeholders.

The authors highlight several unconventional insights executives should consider. For instance, they found that transparency may have a negative effect on trust, and that building trust with one group of stakeholders can erode it with another group. Using a wealth of examples, including the unintended effects of the Sarbanes-Oxley Act and the various attempts by Coca-Cola Company and Mattel Inc. to recall hazardous products, the authors show how nuanced leaders must be in their approach to dealing with stakeholders. One interesting insight concerns honesty and openness in corporate financial reporting. The authors postulate that Sarbanes-Oxley and Regulation Fair Disclosure (a 2000 SEC rule that requires public companies to disclose important information to all investors simultaneously), instead of building trust with investors by requiring transparency, may actually diminish the quality of the information companies distribute. The researchers suggest that in being forced to regularly publish information about executive compensation and financial controls, some firms may focus more on reporting the short-term visible numbers — stock price and market share, among others — than on exposing information about the long-term health of the company.

Another interesting finding concerns integrity. The authors argue that although it is important for executives to own up to mistakes, corporations must do more than that to build consumer trust. They point to two separate Coca-Cola product recalls. In Europe, Coke’s sales increased after one large-scale recall, which the authors conclude was a result of the company’s concerted efforts to convey to consumers the message that it cared about their well-being. In India, where it failed to communicate similar caring, sales decreased.

Bottom Line: Leaders must understand that stakeholders trust different people for different reasons, not all of which are obvious. To effectively manage a range of stakeholders, executives must exhibit empathy with key people, be honest about any failures or shortcomings, and work hard to make the best interests of stakeholders a priority.

Perceived Savings at Warehouse Clubs

Title: The "Fees —> Savings" Link, or Purchasing Fifty Pounds of Pasta 
Authors: Michael I. Norton and Leonard Lee
Harvard Business School, Working Paper No. 08-029
Date Published: November 2007

Discount membership warehouse shopping clubs, such as Costco and Sam’s Club, are a $120 billion industry in the United States. The authors of this study set out to understand why shoppers at these clubs so often purchase an enormous amount of goods. So they created a mock membership club and drafted 80 individuals to join. Some members were told that club membership required a small fee, whereas the others were allowed to buy what they wanted without paying dues. The two groups were equally likely to make a purchase. However, those that had paid a fee spent significantly more than those who had not. The research suggests that consumers believe that if they pay for membership, the retail club must be offering significant discounts; hence, they tend to buy more than they normally would in order to maximize the perceived savings. The researchers calculated that the value per customer was three times higher among those who paid a membership fee.

Bottom Line: Rather than scaring cost-conscious consumers away, warehouse clubs’ membership fees accomplish the opposite — that is, they convince consumers to buy more to take advantage of expected savings. Membership dues also communicate a sense of community between club and consumer. Understanding this, managers can create value, increase sales, and improve customer retention.

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