Listen to the authors present their findings (source: February 2018 JM Webinar)
“Improve the customer experience” is the rallying call of companies everywhere. Leaders know that a better customer experience drives sales, increases retention, and decreases price sensitivity.
Companies go to great lengths to gain insight into their customers’ needs, using data analytics, surveys, focus groups, and interviews. One way to achieve this objective is to have a customer on the board of directors (COB), something only one in three B2B companies in the U.S. currently do.
A new article in the Journal of Marketing examines this little-studied practice to determine whether having a COB positively or negatively impacts firm performance.
Our research team hypothesized that having a COB—that is, an executive or director from a buyer firm in a buyer-supplier dyad also serving on the board of the supplier firm—can provide rare and valuable insights to the board, such as a customer orientation or deep market knowledge. Since boards often spend most of their time discussing internal issues, such as finance, accounting, and compliance, gaining external, strategic insights about dynamics of the customer industry can be valuable indeed.
However, having a COB could also render the supplier company vulnerable to accusations of preferential treatment to the one buyer. Other buyers might feel disenfranchised because they were not invited to participate on the board or be concerned that the customer board member is able to negotiate favorable trade terms.
Despite these potential drawbacks, compared with firms with no COB, we expected to see firms with COBs improve firm performance due to their ability to gain strategic insights into buyers’ needs, trends, and decision making. We studied 329 B2B firms from 2007 to 2015 to test this hypothesis.
Key findings include:
- Having a COB on the board increases firm performance by 11.7%.
- It is more effective when demand uncertainty is high than low, increasing firm performance by 13.2% versus 10.3% respectively.
- However, it is more effective when diversification is low than high, increasing firm performance by 18.5% versus 7.6%.
- A board member who is an independent director of the customer firm is less effective than a board member who is an executive at the customer firm, increasing firm performance by 4.4% versus 12.2% respectively.
- 92% of the COBs were independent directors at the supplier firm, reducing conflict of interest concerns.
To be an independent director, a COB at a buyer firm must contribute less than 5% of supplier firm revenues. Indeed, in the majority of the firms we studied, COBs contributed less than 1% of supplier firm revenues, thus alleviating conflict of interest concerns.
Based on our findings, we recommend that board-nominating committees should consider appointing customers as directors. However, these committees should be cognizant of differences among COBs. For example, a COB who is an executive at the customer firm is more valuable than a COB who is an independent director at the customer firm.
We also encourage regulators to distinguish between informed and uninformed independent directors. Typically, independent directors have limited firm-specific knowledge and thus depend heavily on the CEO for information about the firm. This lack of information may impede not only the ability of independent directors to monitor CEOs, but also their ability to provide adequate strategic advice to the management. We suggest that informed independent directors such as COBs can fill this informational deficit, empowering the board with highly relevant customer insights.
From: Raghu Bommaraju, Michael Ahearne, Ryan Krause, and Seshadri Tirunillai “Does a Customer on the Board of Directors Affect Business-to-Business Firm Performance?” Journal of Marketing, 85 (January).