Equity-Debtholder Conflicts and Capital Structure
|Authors:||Bo Becker and Per Strömberg|
We use an important legal event as a natural experiment to examine equity-debt conflicts in the vicinity of financial distress. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors' fiduciary duties in that state. This change limited incentives to take actions favoring equity over debt. We show that, as predicted, this increased the likelihood of equity issues, increased investment, and reduced risk taking. The changes are isolated to indebted firms (where the legal change applied). These reductions in agency costs were followed by an increase in average leverage and a reduction in interest costs. Finally, we can estimate the welfare implications of agency costs, because firm values increased when the rules were introduced. We conclude that equity-bondholder conflicts are economically important, determine capital structure choices, and affect welfare.
Download the paper: http://www.hbs.edu/research/pdf/10-070.pdf
The Many Faces of Nonprofit Accountability
What does it mean for a nonprofit organization to be accountable? Nonprofit leaders tend to pay attention to accountability once a problem of trust arises-a scandal in the sector or in their own organization, questions from citizens or donors who want to know if their money is being well spent, or pressure from regulators to demonstrate that they are serving a public purpose and thus merit tax-exempt status. Amid this clamor for accountability, it is tempting to accept the popular view that more accountability is better. But is it feasible, or even desirable, for nonprofit organizations to be accountable to everyone for everything? The challenge for leadership and management is to prioritize among competing accountability demands. This involves deciding both to whom and for what they owe accountability. This paper provides an overview of the accountability pressures facing nonprofit leaders and examines several mechanisms available to them: disclosures, performance evaluations, self-regulation, participation, and adaptive learning. Nonprofit leaders must adapt any such mechanisms to suit their organization-be it a membership-based organization, a service-delivery nonprofit, or an advocacy network. More crucially, they need to pay greater attention to strategy-driven forms of accountability that can help them to achieve their missions.
Download the paper: http://www.hbs.edu/research/pdf/10-069.pdf
Integrity: A Positive Model That Incorporates the Normative Phenomena of Morality, Ethics, and Legality-Abridged
|Authors:||Werner H. Erhard, Michael C. Jensen, and Steve Zaffron|
We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value creation for all entities), and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology. Yet the major role of integrity in productivity and performance has been largely hidden or unnoticed or even ignored by economists and others. The philosophical discourse, and common usage as reflected in dictionary definitions, leave an overlap and confusion among the four phenomena of integrity, morality, ethics, and legality. This overlap and confusion confound the four phenomena so that the efficacy and potential power of each is seriously diminished. We show that defining integrity as honoring one's word, as we have defined "honoring one's word," 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at the individual, organizational, and social levels and 2) empowers the three virtue phenomena of morality, ethics, and legality. We also demonstrate that applying cost-benefit analysis to honoring your word guarantees that you will be untrustworthy.
Download the paper: http://www.hbs.edu/research/facpubs/workingpapers/papers0910.html#wp10-061
Accelerating Innovation in Energy: Insights from Multiple Sectors
|Authors:||Rebecca Henderson and Richard G. Newell|
A combination of concerns about climate change and energy security has recently led to significant increases in public funding for energy R&D. Some commentators are suggesting that these increases need to be sustained and are advocating for increases of as much as 300 or 400 percent, suggesting that the U.S. needs a "Manhattan project" for energy. Other observers have discussed supporting innovation through a range of additional policy interventions, including tax credits, loan guarantees, IP policy, regulatory mandates, codes, and standards. It is critically important that these kinds of interventions be thoughtfully designed since it seems probable that without major advances in energy technology it is unlikely that the world will be able to reduce green-house gas emissions rapidly enough to avoid a substantial increase in the risk of significant climate change. This book hopes to contribute to the public debate in this area by pulling together a group of distinguished economists who have studied the role of public support in generating innovation in other sectors of the economy. Over the last few years relatively few economists have studied energy innovation in any depth, but there has been a substantial investment in understanding the dynamics of innovation in a wide range of other industries, including pharmaceuticals and biotechnology, IT and telecommunications, defense, chemicals, and agriculture. We believe that there are valuable lessons in this research for the energy sector.
Download the paper: http://www.hbs.edu/research/pdf/10-067.pdf
A New Model of Leadership
|Authors:||Michael C. Jensen and Allan L. Scherr|
In this paper we provide a new definition of leadership that gives organizations and individuals access to new power, performance, and accomplishment. In our model leadership, consists of four critical elements: 1) the creation of a vision for the future that represents a significant departure from the past, one that requires breakthroughs for its realization; 2) the creation of a system that facilitates enrollment into and elicits voluntary commitment to the vision by the critical mass of people required to discover and implement the breakthroughs required for realization of the vision; 3) the creation of a system that ensures both the timely identification of breakdowns (and the dissemination of information about them) that, if unresolved, would prevent the successful realization of the vision; and 4) the creation of a system for managing breakdowns that causes people to voluntarily recommit to the vision and maintain these commitments through to the implementation of the breakthroughs required for the realization of the vision.
Download the paper: http://www.hbs.edu/research/facpubs/workingpapers/papers0910.html#wp07-107
Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity
|Authors:||Michael C. Jensen and Werner Erhard|
There is far too much concern today about the conflicts of interest between people-for example, conflicts of interest between agents and owners-and not enough attention paid to the damage caused by an individual's conflict of interest with himself or herself. We argue here that a large amount of the damage inflicted on people and organizations is caused by actions of individuals that are not in their own self-interest. That is, people consistently impose costs on their loved ones, friends, associates, partners, employers, and the public by actions that are not in their own self-interest. This paper focuses on the integrity issues that cause huge problems in the lives of most individuals and to everyone we come in contact with. We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, quality of life, and value creation for all entities and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology, yet its major role in productivity and performance has been largely hidden or unnoticed or even ignored by economists and others. In summary, we show that defining integrity as honoring one's word, as we have defined "honoring one's word," 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at both the individual and organizational level and 2) empowers the three virtue phenomena of morality, ethics, and legality.
Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552009
Deep Dive: What Leaders Do When Only They Can Drive
|Authors:||Howard H. Yu and Joseph L. Bower|
The actions of top management are seldom the unit of analysis in empirical strategy research on complex organizations. Yet, the behaviors of top executives are frequently featured as an important determinant in historical treatments of strategic change inside large firms. Theories of organizational ecology, ambidexterity, and punctuated change do not provide explanations consistent with these historical accounts. This paper, by examining the resource allocation process closely, identifies a specific set of circumstances in which intervention by top management is critical to a firm's ability to adopt new ways of behaving and thereby to realize a new strategy. In these cases, top management must seize hold of the substantive content of the new strategy as well as its operational implementation—a top-down intervention we call deep dive—in order to overcome barriers to change that are manifest in a wide range of organizational routines and behavioral norms, previously fostered by the established structural context of the firm. We illustrate this model of corporate intervention with a case study in which a high-performing firm seeks to shift its performance trajectory into new dimensions.
Learning by Design: Developing an Engine for Transforming Your Company
|Authors:||Michael Beer and Magnus Finnstrom|
|Publication:||Leadership in Action, November-December 2009|
Traditional leadership development programs often fail to achieve the desired results because they don't focus on learning linked to the company's business strategy and the real day-to-day challenges facing managers. The experience of Sweden-based industrial group Cardo, which built its executive management program from scratch, shows how organizations can unleash the leadership capabilities required to drive transformation and strengthen business results.
Leadership with a Small "l"
|Publication:||British Medical Journal, January 27, 2010|
What exactly do we mean by leadership in health care? Does it mean to take formal positions in senior leadership teams in hospitals, trusts, health boards, ministries of health, and professional societies—what might be termed leadership with a big "L?" Or does it mean something fine grained and local—leadership with a small "l"?
Taxes, Dividends and International Portfolio Choice
|Authors:||Mihir Desai and D. Dharmapala|
|Publication:||The Review of Economics and Statistics (forthcoming)|
This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by U.S. investors towards equities in tax-favored countries. A difference-in-difference analysis that compares U.S. equity holdings in affected and unaffected countries finds a substantial portfolio reallocation towards the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA.
Consistent Constructs in Individuals' Risk Taking in Decisions from Experience
|Authors:||Eyal Ert and Eldad Yechiam|
|Publication:||Acta Psychologica (forthcoming)|
The current research evaluates the consistency of different constructs affecting risk taking in individuals' experiential decisions across different levels of risk. Specifically, we contrast three major views concerning the psychological constructs that underlie risk-taking behavior. The first is the classical economic approach, which views risk as the sensitivity to differences in variance. The second is the latent components approach suggesting the importance of sensitivity to losses and diminishing sensitivity to marginal increases in payoffs. The third approach, risk acceptance, relates to the willingness to accept probable outcomes over certainty. The results of three studies indicate that 1) individuals do not exhibit consistency in their sensitivity to variance; 2) consistent diminishing sensitivity is found within the gain and loss domain, but across these domains individuals seem to be consistent only when deciding between constant versus probable outcomes, suggesting that they reliably differ in their risk acceptance; and 3) risk acceptance appears to entail different psychological constructs when the decision problem involves co-occurring gains and losses.
The New Governance Paradigm
|Authors:||Nathaniel Foote and Michael Beer|
|Publication:||Directorship (September 8, 2009)|
Boards members of failed banks in 2008 or of the many companies like Enron who were caught up in scandals are by and large honorable, well intentioned, and competent people. So what went wrong and what can be done about it. This article argues that the problem lies in boards' almost sole focus on business results and their fiduciary responsibilities. Boards and CEOs must create a common vision of the effective, values based, high commitment, high performance organization they intend to build together and institutionalize a process by which the CEO and board of directors can learn the truth about gaps between vision and reality. Without a commitment to a vision and an institutionalized learning and governance system, well intentioned boards will continue to be surprised ethical, human, and performance failures.
Download the paper: http://www.directorship.com/new-governance-paradigm/
One Strategy: Organization, Planning, and Decision Making
|Authors:||Steven Sinofsky and Marco Iansiti|
|Publication:||John Wiley, 2010|
An abstract is unavailable at this time.
Cases & Course Materials
MINTing Innovation at NewYork-Presbyterian
Richard G. Hamermesh and David Kiron
Harvard Business School Case 810-004
Several top surgeons at NewYork-Presbyterian hospital (NYP) are receiving financial and administrative support to advance their surgical device inventions through the earliest stages of commercialization.
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SEWA Trade Facilitation Center: Changing the Spool
Mukti Khaire and Kathleen L. McGinn
Harvard Business School Case 810-004
The case is about the decision to convert a not-for-profit organization into a for-profit company. SEWA Trade Facilitation Center (STFC), which is part of a larger non-profit organization—the Self-Employed Women's Association (SEWA)—works to improve the livelihoods of very poor rural and urban women in India. It does so by translating traditional Indian embroidery skills into contemporary apparel and home furnishings that STFC then helps to market and sell around the world. Organized as a producers' cooperative, STFC is owned by its artisan members. STFC is thinking of changing to for-profit status because it would enable faster and more sustainable growth by providing access to outside funds and also allow the payment of dividends, which would further improve the women's livelihoods. The legal and financial implications of such a move aside, it is not clear that STFC would be able to withstand the changes such a transformation would entail. Most importantly, would an organization accustomed to taking decisions based solely on social benefit criteria be able to adjust to a for-profit mentality? And, would customers accept the change?
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Messer Griesheim (A)
Josh Lerner, Ann-Kristin Achleitner, Eva Lutz, and Kerry Herman
Harvard Business School Case 809-056
In 2001, Allianz Capital Partners and Goldman Sachs acquired a majority stake in Messer Griesheim, a European industrial gas concern held by Hoechst. The dealmakers faced several challenges, including delicate corporate governance issues due to partial family ownership and a consolidating market for industrial gases. Aiming to make Messer Griesheim a more attractive potential acquisition, Messer Griesheim management had drawn up a restructuring plan as early as 2000. By late 2003 the private equity players were ready to exit and the Messer family agitated for further control. Several factors were in play: the family had a buy-back option, the window of which was quickly closing; there were few possible strategic buyers, given the anti-trust issues facing a European player interested in buying the firm; and the family made no secret of its desire to retain a piece of the firm, at the very least, and some measure of control. The case explores the steps taken by the private equity investors to restructure the firm, and the relationship the partners forged with the family owners, to bring about a favorable exit for the private equity partners and ownership for the Messer family.
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Mikołaj Jan Piskorski, David Chen, and Bill Heil
Harvard Business School Case 710-455
Twitter is a micro-blogging company that allows users to send short text updates to others. The site is used by people, including celebrities, government officials, and businesses. It helps to raise money for non-profit organizations and provides first-responders with information during a natural disaster. Even though almost 10 million people visited the site in early 2009, the site had no strategy for monetizing the traffic. The case allows students to examine potential monetization strategies for Twitter.
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Koo Foundation Sun Yat-Sen Cancer Center: Breast Cancer Care in Taiwan
Michael E. Porter, Jennifer F. Baron, and C. Jason Wang
Harvard Business School Case 710-425
Taiwan's Koo Foundation Sun Yat-Sen Cancer Center has developed an integrated, team-based care delivery model for breast cancer care that is being expanded to other cancer types in 2009. A decade earlier, President and CEO Dr. Andrew Huang and the Center had worked with the Taiwan National Health Insurance system to create a pay-for-performance reimbursement program for breast cancer care that has since been adopted by five other providers. The program issues capitated, per patient base payments for breast cancer care, with bonus payments based upon provider reporting and performance on a set of quality measures. This case allows readers to examine health care provider strategy, development and implementation of bundled reimbursement, integrated care delivery, quality measurement, and Taiwan's universal health care system.
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Gilead Sciences Inc.: Access Program
V. Kasturi Rangan and Katharine Lee
Harvard Business School Case 510-029
Gilead Sciences, the U.S. leader in HIV/AIDS medicines, with global sales of $5.4 billion in 2009, had undertaken several innovative actions to make its anti-viral products available to over 100 low- and middle-income countries. Having reached nearly 680,000 patients by the middle of 2009, the company's senior managers contemplated how to reach 2 million patients by 2012.
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