Equity and Loyalty in the Evolving Business Landscape
Equity and Loyalty in the Evolving Business Landscape
🔬 A closer look at the longstanding relationship between stock ownership and brand loyalty
Since launching The Roundtable Roundup almost a year ago, we've put a spotlight on the opportunities retail shareholders present to companies in building a vibrant community of supporters capable of influencing the wider market. We’ve highlighted numerous examples where online communities, self-organizing with a common belief in a company, have pushed stock prices to surprising levels, defying market expectations. But beyond acting as an unanticipated player in a company's capital market strategy, decades of both academic and corporate research affirm that stakeholders — notably customers and employees — who hold equity in a business exhibit increased loyalty over time. So, in this week’s Roundtable Roundup, we delve into the tangible evidence that connects equity ownership to brand loyalty and investigate brand and reputation strategies companies are using to democratize access to their stock.
🔬 (2021) The Effect of Stock Ownership on Individual Spending and Loyalty (National Bureau of Economic Research)
In this study, Professors Vrinda Mittal and Michaela Pagel from the Columbia Business School and Paolina C. Medina of Texas A&M University quantify the effects of receiving stocks from certain brands on spending in the brand's stores.
Impact of Stock Rewards on Customer Spending:
Customers increase their weekly spending at selected brands (Red Robin, Taco Bell, McDonald’s, Exxon Mobile, Chevron) by 40% and maintain this elevated level for 3 to 6 months after receiving stock rewards.
A specific increase of approximately $23 in weekly spending is observed, and customers exhibit a notable and persistent spending response (100% weekly increase) at brands from which they received stock grants.
Loyalty as a Key Driver:
The spending increases are not merely tied to financial gains (as rewards range from 1% to 2%) but are significantly driven by psychological mechanisms of loyalty.
Mechanisms potentially include gift exchange perceptions, positive gestures from companies, familiarity, an illusion of control, and cognitive dissonance reduction.
Feedback Loop Between Stock Ownership and Brand Loyalty:
Stock ownership not only engenders spending loyalty but also feeds into a cycle of additional investments, stabilized cash flows, and enhanced firm value, creating a mutually beneficial relationship between consumer and company.
🔬(2009) Stock Ownership as a Motivation of Brand-Loyal and Brand-Supportive Behaviors (Journal of Consumer Marketing)
In this study, Professor Jaakko Aspara, Acting Professor of Marketing at the Department of Marketing and Management, Helsinki School of Economics HSE and Visiting Professor at NYU, Stern School of Business, examines the psychological motivations and empirical evidence associating stock ownership with brand loyalty.
Link Between Stock Ownership and Brand Loyalty:
Individuals often exhibit increased brand loyalty and engagement in brand-supportive behaviors (like positive word-of-mouth) when they own stock in a company.
Researchers are beginning to explore the interplay between consumption and investment behaviors, noting patterns where consumers invest in companies whose products they buy.
Psychological Motivations and Empirical Evidence:
Psychological motivations, such as feeling a personal stake in the company's success, drive the link between stock ownership and increased brand loyalty.
A survey study of 293 individuals showed that stock ownership in a company does increase motivation to exhibit loyalty towards the company through personal purchases and other supportive behaviors.
Managerial Implications:
Managers can leverage the tendency of stock-owning individuals to be more loyal and supportive customers to boost company sales and build stronger brand relationships.
There’s an underexplored potential in recognizing stockowners not merely as investors but also as potentially loyal customers, thereby bridging a gap between marketing and finance strategies.
🔬 (2004) Building Brand Loyalty Through Individual Stock Ownership (Journal of Product & Brand Management)
This research, led by Professors Denise D. Schoenbachler, Geoffrey L. Gordon and Timothy W. Aurand of Northern Illinois University, investigates a possible avenue for building brand loyalty that is not directly related to the marketing of the product – attracting individual investors in the brand’s corporate parent.
Distinguishing Brand and Stock Loyalty:
Consumers and stockholders exhibit different types of loyalty: while a consumer might consistently buy a brand, their loyalty is not necessarily psychologically driven. Similarly, stockholders might purchase shares, not out of attachment to the company but for potential financial gain.
Stock Buying Behavior Variances:
Individual stock buyers, in contrast to institutional ones, exhibit less rational behavior, holding onto stocks longer and considering public image and marketing alongside financial reports. Their decisions, although motivated primarily by profit, can also be influenced by a company's public perception and promotions.
Offers and Incentives for Shareholders:
Companies often provide special offers, discounts, or access to events for their shareholders. For instance, discounted rates in hotels for shareholders can drive investment not necessarily due to share performance but because the investment can be offset by the offered advantages.
Pivoting Loyalty Programs Towards Shareholders:
Even if shareholders are not "loyal" in the conventional sense, they can act as essential advocates for the business, especially if they stand to gain from promoting and utilizing the firm’s brands. Efforts to attract business by targeting individual shareholders through specialized loyalty programs might prove beneficial despite the inherent differences in motivations behind choosing a brand and purchasing stock.
🔬 (2011) The “Risky” Side of Brand Equity - How Brands Reduce Capital Costs (New Theory)
In this study the association between brand equity and firm risk is investigated by Indiana University - Kelly School of Business Professors Lopo L. Rego, Matthew T. Billett and Neil A. Morgan.
Brand Equity's Impact on Firm Risk: Strong consumer-based brand equity (CBBE) notably decreases both debtholder and shareholder risk, reducing a company's capital costs and offering a buffer during economic downturns, highlighting brand equity as a pivotal tool in managing firm risk.
Dual Role in Reducing Different Types of Risks: High levels of brand equity reduce systematic risk by buffering firms from market fluctuations through enhanced customer loyalty, while also lowering unsystematic risk (firm-specific) due to the uniqueness and perceived value of established brands.
Financial Implications and Cost of Capital: A tangible link is established between CBBE and reduced costs of capital, with noted variations in firm credit ratings and associated cost savings in debt service, affirming the financial relevance of investing in brand equity.
Inclusion in Management and Reporting Strategies: Considering its significant impact, brand equity should be integrated into risk management strategies, and its measures should possibly be disclosed in financial reporting, underscoring the necessity for a standardized measurement system for intangible assets like brand value in financial assessments.
📰 (2021) Robert F. Smith and Goalsetter Launch “One Stock. One Future.” – A Movement to Create One Million Black and Latinx Youth Shareholders and Investors Nationwide (The Executive Leadership Council)
This initiative combines direct stock gifting with an overarching objective of enabling financial literacy and ownership among young Black and Latinx Americans, facilitated through corporate involvement and multi-organizational partnerships.
Inceptive Gift and Larger Movement:
Philanthropist Robert F. Smith and Goalsetter launch "One Stock. One Future." by initially gifting nearly 15,000 shares in total to 2,900 individuals at Eagle Academies for Young Men.
The broader movement aims to turn one million Black and Latinx children into shareholders to bridge the racial wealth gap.
Corporate Involvement:
Prominent companies like Comcast, Delta Air Lines, and HP have committed to the initiative by donating 1,000 shares each, alongside several other technology and Fortune 1000 companies.
Goalsetter and The Executive Leadership Council (ELC) challenge members and corporations to contribute shares and have also committed directly (ELC: $100,000).
Program Mechanism and Partnerships:
Corporations and individuals can contribute through Goalsetter’s non-profit arm, which also manages stock donations and identifies youth groups in need.
Partner organizations, including Black Girls Code and the NAACP, will help distribute corporate shares to youth.
Recipients gain access to Goalsetter's financial education tools, emphasizing early investment and financial literacy education.
Impact and Aim:
Aiming to rectify projected zero net worth for Black and Latinx communities by 2053, the initiative seeks generational wealth impact through introducing young individuals to investing and ownership.
📰 (2023) Amazon's stock isn't enough to keep workers loyal, high forfeiture rates show (Business Insider)
This article ties Amazon’s high attrition rates to its less worker-friendly equity packages relative to their Big Tech competitors.
Significant RSU Forfeiture:
Amazon experiences a high 27% forfeiture rate of Restricted Stock Units (RSUs), indicating prevalent early employee departure before stock fully vests.
For context, tech giants like Meta and Apple have much lower rates, typically under 8% and some below 3%.
Employee Dissatisfaction:
Employees, under anonymity, express discontent with Amazon’s benefit structures and RSU vesting schedules, favoring other tech companies' offerings.
Amazon’s back-weighted stock vesting (5% first year, 15% second, 80% thereafter) is particularly criticized.
Attrition Concerns:
Experts underscore that high RSU forfeiture rates signal potential issues with employee retention and satisfaction levels.
Amazon's substantial unclaimed stock value ($10 billion/45 million units last year) underscores these concerns.
Summary
This week's Roundtable Roundup underscores the longstanding relationship between stock ownership and brand loyalty, a topic extensively researched by academia over the years. From notable increases in spending following stock rewards to the psychological ties that bind equity ownership to brand loyalty, it's clear that stocks are more than mere financial tools. Initiatives like "One Stock. One Future" highlight equity's broader societal role, not just its financial significance, emphasizing its potential for societal change and addressing wealth disparities. Amazon's case illustrates the need for equity offerings to adopt a comprehensive approach, addressing both fiscal and personal considerations, to genuinely boost loyalty and retention. Given such insights, we're compelled to question:
Why aren't more corporations highly focused on closing the gap between brand loyalty and equity participation?
Past Roundtable Roundups have indicated that historically corporations grappled with considerable administrative and cost hurdles when implementing equity loyalty programs. Many shareholder rewards programs were phased out over time, especially as institutional investors began to dominate the capital markets during the early part of the 21st century. However, the landscape is shifting. The surge of individual investors, including everyday customers, combined with innovative technology like Stakeholder Labs’ Roundtable, are revitalizing shareholder loyalty programs. It's worth noting that research on this topic spans marketing, economics, and business disciplines, underscoring the need for cross-departmental collaboration to tackle this challenge effectively. Stakeholder Labs will continue bring you insights on the convergence of brand loyalty and share ownership, so stay tuned for further research and case studies from our colleagues and partners.