First Look

First Look summarizes new working papers, case studies, and publications produced by Harvard Business School faculty. Readers receive early knowledge of cutting-edge ideas before they enter the mainstream of business practice. For complete details on faculty research, see our Working Papers section.

March 16

Avoiding conflicts of interest should be easy when you vow to stay objective. But even incentives for objectivity can't content with outside influences, according to new research by HBS professor Max Bazerman and colleagues. Writing in "Conflict of Interest and the Intrusion of Bias," they emphasize how remarkably typical it is for individuals to fall prey to outside influences yet continue to believe in their own biased assessments—with implications for professional conduct and public policy. "Our results suggest that the psychology of conflict of interest is at odds with the way economists and policy makers routinely think about the problem."

In Capitalism: Its Origins and Evolution as a System of Governance (forthcoming), Professor Bruce R. Scott provides analysis of capitalism's roots and transformation, highlighting the role of political authority. As he explains, "Capitalism is not a natural system, and it did not emerge or spread as an unguided process like biological evolution; it has only existed since the liberation of the markets for land, labor, and capital, i.e., the end of feudalism. Its spread is a story of the politics of hostile takeovers and/or liberation."

Among other cases this week, "Ben Bernanke: Person of the Year?" looks at recent criticism of the Federal Reserve and its chairman.



Renewing Unilever: Transformation and Tradition


Unilever's brands can now be found in one out of every two households in the world. This arresting and impressive fact shows the scope and scale of this unique global corporation. Geoffrey Jones, a leading business historian from the Harvard Business School, takes us inside this corporation, which from its origins in Britain and the Netherlands has become a worldwide manufacturer of fast-moving consumer products. Unilever's operations cover food and home and personal care, and its brands include Lipton Tea, Hellmann's, Bird's Eye, Wall's, Ben and Jerry's, Surf, Domestos, Comfort, Dove, Sunsilk, Pond's, Signal, Axe, and Calvin Klein. In particular the book focuses on the evolution of the company over the last half century. Managing such a firm in the era of globalization posed enormous challenges. The book covers the company's strategies and provides compelling evidence of its decision making, marketing, brand management, innovation, acquisition strategies, corporate culture, and human resource management. The author has had full access to corporate archives and executives and provides us with a unique insight into the workings and strategies of one of the world's oldest and largest multinationals.

Capitalism: Its Origins and Evolution As a System of Governance


Capitalism, as defined in this book, is an indirect, three-level system of governance for economic relationships (i.e., economic, administrative, and political). Whereas economic markets can coordinate supply and demand within an existing system thanks to the invisible hand of the pricing mechanism, capitalism must have the administrative capability to regulate the behavior of economic actors within those markets and the political capability to redesign their institutions; regulation and the design of market frameworks require the visible hand and coercive powers of a political authority. This three-level structure closely parallels that of all organized team sports. The play on the field is like the markets of capitalism, and the actions of the players are regulated by referees who enforce a set of rules created and promulgated by a political authority that enjoys an anti-trust immunity. Capitalism is not a natural system and it did not emerge or spread by an unguided process like biological evolution; it has only existed since the liberation of the markets for land, labor, and capital, i.e., the end of feudalism. Its spread is a story of the politics of hostile takeovers and/or liberation. Capitalist evolution requires the continuing transformation of its three levels of governance.

Denial: Why Business Leaders Fail to Look Facts in the Face—and What to Do About It


This book deals with two of the biggest problems in business: Why do sane, smart leaders often refuse to accept the facts that threaten their companies? And how do they find the courage to resist denial when facing new trends, changing markets, and tough new competitors?

The Effect of Financial Development on the Investment Cash Flow Relationship: Cross-Country Evidence from Europe


We investigate financing constraints in a large cross-country data set covering most of the European economy. Firm-level investment sensitivity to cash flow is used to identify financing constraints. We find that the sensitivities are significantly positive, on average, controlling for country and industry fixed effects, as well as firm-level controls. Most importantly, the cash flow sensitivity of investment is lower in countries with better-developed financial markets. This suggests that financial development may mitigate financial constraints. This effect is weaker in conglomerate subsidiaries, which are likely to have access to internal capital markets and depend less on the outside financial environment, and possibly for firms in industries with highly liquid assets as well. This result sheds light on the link between financial and economic development.

Estimating the Effects of Large Shareholders Using a Geographic Instrument


Large shareholders may play an important role for firm performance and policies, but identifying this empirically presents a challenge due to the endogeneity of ownership structures. We develop and test an empirical framework, which allows us to separate selection from treatment effects of large shareholders. Individual blockholders tend to hold blocks in public firms located close to where they reside. Using this empirical observation, we develop an instrument—the density of wealthy individuals near a firm's headquarters—for the presence of large, non-managerial individual shareholders in firms. These shareholders have a large impact on firms, controlling for selection effects.

Course Research: Using the Case Method to Build and Teach Management Theory


Some in the Academy have questioned the usefulness of case studies in teaching sound management theory (Shugan 2006). Our research and experience suggests exactly the opposite—that case studies can unite the development of theory with the teaching of it in a single enterprise we'll call course research. Conclusions such as those that Shugan and others have reached stem from misconceptions about the relationship of research, theory, case studies, and teaching. In fact, the proper use of case studies in teaching can help faculty resolve a basic dilemma of academia: promotion is often based upon our published research, and we find that responsibilities to teach detract from the mandate to publish. When approached properly, case studies can transform teaching into research and enroll students as "course researchers," whose class participation can be exceptionally valuable in the theory-building process.

Buy Local? The Geography of Successful Venture Captial Expansion


We document geographic concentration by both venture capital firms and venture capital-financed companies in three metropolitan areas: San Francisco, Boston, and New York. We find that venture capital firms locate in regions with high success rates of venture capital-backed investments. Geography is also significantly related to outcomes. Venture capital firms based in locales that are venture capital centers outperform, regardless of the stage of the investment. This outperformance arises from outsized performance outside of the venture capital firms' office locations, including in peripheral locations. If the goal of state and local policy makers is to encourage venture capital investment, outperformance of non-local investments suggests that policy makers might want to mitigate costs associated with established venture capitalists investing in their geographies rather than encouraging the establishment of new venture capital firms.

Performance Persistence in Entrepreneurship and Venture Capital


This paper presents evidence of performance persistence in entrepreneurship. We show that entrepreneurs with a track record of success are much more likely to succeed than first-time entrepreneurs and those who have previously failed. In particular, they exhibit persistence in selecting the right industry and time to start new ventures. Entrepreneurs with demonstrated market-timing skill are also more likely to outperform industry peers in their subsequent ventures. This is consistent with the view that if suppliers and customers perceive the entrepreneur to have market-timing skill, and is therefore more likely to succeed, they will be more willing to commit resources to the firm. In this way, success breeds success and strengthens performance persistence.

Conflict of Interest and the Intrusion of Bias


This paper explores the psychology of conflict of interest by investigating how conflicting interests affect both public statements and private judgments. The results suggest that judgments are easily influenced by affiliation with interested partisans, and that this influence extends to judgments made with clear incentives for objectivity. The consistency we observe between public and private judgments indicates that participants believed their biased assessments. Our results suggest that the psychology of conflict of interest is at odds with the way economists and policy makers routinely think about the problem. We conclude by exploring implications of this finding for professional conduct and public policy.


Working Papers

Implications for GAAP from an Analysis of Positive Research in Accounting


Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP's principal focus is on control (performance measurement and stewardship) and that verifiability and conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

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The Great Leap Forward: The Political Economy of Education in Brazil, 1889-1930


Brazil at the turn of the twentieth century offers an interesting puzzle. Among the large economies in the Americas, it had the lowest level of literacy in 1890, but by 1940 the country had surpassed most of its peers in terms of literacy and had made a significant improvement in its education system. All of this happened in spite of the fact that the Constitution of 1891 included a literacy requirement to vote and gave states the responsibility to spend on education. That is to say, Brazilian states had a significant improvement in education levels and a significant increase in expenditures on education per capita despite having institutions that limited political participation for the masses (Lindert, 2004; Engerman, Mariscal, and Sokoloff, 2009) and having one of the worst colonial institutional legacies of the Americas (Acemoglu, Johnson, and Robison, 2001; Easterly and Levine, 2003; and Engerman and Sokoloff, 1997, 2002). This paper explains how state governments got the funds to pay for education and examines the incentives that politicians had to spend on education between 1889 and 1930. Our findings are threefold. First, we show that the Constitution of 1891, which decentralized education and allowed states to collect export taxes to finance expenditures, rendered states with higher windfall tax revenues from the export of commodities to spend more on education per capita. Second, we prove that colonial institutions constrained the financing of education, but that nonetheless the net effect of the increase in commodity exports always led to a net increase in education expenditures. Finally, we argue that political competition after 1891 led politicians to spend on education. Since only literate adults could vote, we show that increases in expenditures (and increases in revenues from export taxes) led to increases in the number of voters at the state level.

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Cases & Course Materials

TD Canada Trust (Abridged)

Dennis Campbell and Brent Kazan
Harvard Business School Case 110-049

The case illustrates the role of performance measurement and analytics in translating TD-Canada Trust's service model of "comfortable banking" into operational terms. In 2000, in a banking market where consumers and regulators were typically hostile to mergers and acquisitions, Canada's fifth largest commercial bank, Toronto-Dominion Bank (TD Bank), undertook a merger with a relatively small trust company, Canada Trust, which was known for exceptional customer service. To assuage the concerns of regulators, consumer groups, and newly acquired customers, TD Bank made several public pronouncements promising to maintain Canada Trust's high customer service standards and to deliver a "comfortable banking" experience. Chris Armstrong, executive vice president and chief marketing officer, was now faced with the task of defining the comfortable banking model and consistently delivering on these promises. Armstrong and his team undertake a systematic analysis of the drivers of customer satisfaction and branch network profitability and, based on the results, must decide how to change TD-Canada Trust's branch compensation and performance reporting systems to consistently, and profitably, deliver a "comfortable banking" experience.

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Ben Bernanke: Person of the Year?

Lakshmi Iyer and Matthew C. Weinzierl
Harvard Business School Case 710-051

In response to the economic and financial crisis of 2008-2009, the Federal Reserve greatly expanded the scale and scope of its activities. Though lauded by many experts for its actions, the Fed and its chairman, Ben Bernanke, faced harsh criticism from some public commentators and members of Congress. This document summarizes that criticism and Chairman Bernanke's responses to it, highlighting the tension between congressional oversight of the Fed and the Fed's independence from political influence.

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Elkay Plumbing Products Division

Robert S. Kaplan
Harvard Business School Case 110-007

The vice president of sales learns that the most profitable 1% of the division's customers generate 100% of profits, and that two of the division's largest customers lose 50% of profits. The division has just finished a project to install a time-driven activity-based cost system that traces costs directly to the processes used to produce, sell, and deliver a wide variety of stainless steel sinks to a diverse customer base. Given the division's high variety of products and customers (which includes wholesalers, retailers, contractors, and distributors), the VP of sales wanted a much more accurate cost system so that he could conduct difficult but fact-based negotiations with customers. The case describes the design and implementation of the new cost and profit measurement system. It documents acceptance and decisions made by managers after seeing the enormous dispersion of profits among their products and customers.

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1366 Technologies

Joseph B. Lassiter, Ramana Nanda, and David Kiron
Harvard Business School Case 810-005

Just months after declaring their intent to become a solar cell equipment supplier, van Mierlo and Sachs were again revisiting the issue of what the company should be. Becoming a successful solar cell manufacturer would potentially be much more lucrative than becoming a successful equipment supplier. But, the latter was much less capital intensive and perhaps a less operationally risky approach. For van Mierlo and Sachs, the question—"What kind of company should 1366 become?"—was back on the table.

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