Oil and gas companies face asset expropriations and corruption by foreign governments in many of the countries where they operate. In addition, most of these companies operate in multiple host countries. What determines their disclosure of business activities and hence transparency? Paul Healy, Venkat Kuppuswamy, and George Serafeim examine three forms of disclosure costs that oil and gas managers could potentially consider. Both the US government and the European Union are currently considering laws that would require oil and gas companies to disclose information about operations in host countries.
Robert G. Eccles, Ioannis Ioannou, and George Serafeim compared a matched sample of 180 companies, 90 of which they classify as High Sustainability firms and 90 as Low Sustainability firms, in order to examine issues of governance, culture, and performance. Findings for an 18-year period show that High Sustainability firms dramatically outperformed the Low Sustainability ones in terms of both stock market and accounting measures. However, the results suggest that this outperformance occurs only in the long term. Managers and investors who are hoping to gain a competitive advantage in the short term are unlikely to succeed by embedding sustainability in their organization's strategy. Overall, the authors argue that High Sustainability company policies reflect the underlying culture of the organization, where environmental and social performance, in addition to financial performance, are important, but these policies also forge a strong culture by making explicit the values and beliefs that underlie the mission of the organization.
Insurance "reinsurers" underwrite much of the catastrophic risk insurance taken out to protect against huge disasters natural and man-made. Problem is, says Professor Kenneth A. Froot, reinsurers themselves are in danger of failing from a major catastrophic event.
Between 2005 and 2008, the world saw a dramatic increase in corporate environmental reporting. Yet this transition toward greater transparency and accountability has occurred unevenly across countries and industries. Findings by professors Christopher Marquis and Michael W. Toffel provide the first systematic evidence of how the global environmental movement affects corporations' environmental management practices. Firms' use of symbolic compliance strategies, for instance, is affected by specific corporate characteristics and by institutional context. This study contributes to a larger body of research on the effects of global social movements and environmental reporting.
What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80.
Contrary to its staid image in popular culture, accounting has reigned at the forefront of globalization over the last decade. As of 2010, about 100 countries, including all of the world's major economies, either have adopted a common set of accounting principles known as International Financial Reporting Standards, have initiated an IFRS harmonization program, or have in place a national strategy to respond to IFRS. In fact, the proliferation of IFRS worldwide is one of the most important developments in corporate governance today. Through a series of case studies on Canada, China, and India, Assistant Professor Karthik Ramanna analyzes key similarities and differences in the international political dynamics that contribute to countries' responses to IFRS. His framework helps explain and predict countries' decisions on IFRS harmonization, as well as the potential structure and impact of IFRS in the future.
When engaging in international trade, exporters must decide which financing terms to use in their transactions. Should they ask the importers to pay for goods before they are loaded for shipment, ask them to pay after the goods have arrived at their destination, or should they use some form of bank intermediation like a letter of credit? In this paper, Pol Antrās and C. Fritz Foley investigate this question by analyzing detailed data on the activities of a single US-based firm that exports frozen and refrigerated food products, primarily poultry. The data cover roughly $7 billion in sales to more than 140 countries over the 1996-2009 period and contain comprehensive information on the financing terms used in each transaction.
A key endeavor of modern economic theory is to understand the causes of panics. This paper shows empirically that currency investors are more likely to get spooked unnecessarily when they have too much information. This finding accords well with global games models, which argue that self-fulfilling panics—i.e., panics unrelated to fundamentals—are more likely to occur when the quality of public information available to investors is very high. Research was conducted by Venky Nagar (University of Michigan) and Gwen Yu (Harvard).
To determine the extent to which corporate and investor behavior is changing to contribute to a more sustainable society, researchers Robert Eccles and George Serafeim analyzed data involving over 2,000 companies in 23 countries. One result: a ranking of countries based on the degree to which their companies integrate environmental and social discussions and metrics in their financial disclosures.
In the past decade, many countries have adopted International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board, which has impelled economists to examine the benefits of the standards. This paper discusses how IFRS adoption affects financial reporting comparability—that is, the properties of financial statements that allow users to identify similarities or differences between the economics of different reporting entities over any given period of time. Research was conducted by Francois Brochet and Edward J. Riedl of Harvard Business School, and Alan Jagolinzer of the University of Colorado at Boulder.
While corporate board members take their jobs more seriously than ever, they are not necessarily as helpful or effective as they could be, says HBS senior lecturer Stephen Kaufman. He recently sat down with HBS Working Knowledge to discuss what he considers to be the biggest practical issues facing boards today.
In the management literature, some theories hold that corporate actions and strategic choices can be partially predicted by knowing the functional background of executives. The authors provide evidence on how CEOs and CFOs who were former investment bankers, auditors, and private equity/venture capital executives managed decisions around goodwill impairments (essentially goodwill charge-offs)—a complex accounting choice involving a high degree of managerial discretion. Research by HBS professor Francois Brochet and doctoral candidate Kyle Welch.
Accounting scholars generally do a fine job of analyzing how we process accounting data, but they ought to spend more time looking at how that data is produced, says Harvard Business School professor Robert S. Kaplan. In this paper—in response to a newly minted professor who sought his advice—Kaplan reminds young scholars that accounting is more of a professional discipline than an academic subject. To that end, he advises them not just to teach their students the common body of accounting knowledge, but also to advance that body of knowledge by bridging the gap between scholarship and practice.
In the business world, "gaming" refers to the act of subverting the intent of rules or laws without technically breaking them--a skillful if unsavory way to achieve private gain. Harvard Business School professor emeritus Malcolm S. Salter explores how gaming the system can lead to institutional corruption, citing examples from Enron and early efforts by some banks to game the implementation of the Dodd-Frank financial reform act.
Published in 2010
Three Harvard Business School professors—former Medtronic chairman and CEO Bill George, economist and entrepreneurship expert William Sahlman, and innovation and strategy authority Rosabeth Moss Kanter—offer their thoughts on the most significant business and economic developments of 2010.
With traditional monetary and fiscal policy instruments to stimulate the economy seemingly exhausted, professor Mihir Desai offers a radical proposal: Use taxes to motivate corporations to spend a trillion dollars in cash.
Accounting standards promulgated by the Financial Accounting Standards Board (FASB) play an important role in the development and maintenance of capital markets worldwide, so it is important to understand how these standards come to be. Prior research has focused on the effect of corporate lobbying on the development of FASB standards, but has largely overlooked the role of the FASB members themselves. Looking at these individuals between 1973 and 2007, Harvard Business School doctoral candidate Abigail M. Allen and professor Karthik Ramanna examine how board members' professional experience, length of service on the board, and political leanings influenced accounting standards.
An e-book written by participants of a recent HBS workshop on integrated reporting is now available. HBS Dean Nitin Nohria offers a forward.
Between 2003 and 2008, 75 countries adopted, to various degrees, International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board. More countries, including the United States and China, are currently engaged in convergence projects. Researchers Karthik Ramanna (Harvard Business School) and Ewa Sletten (MIT Sloan School of Management) report on the role that perceived network benefits play in convincing some countries to shift from local accounting standards to IFRS.
What a company externally reports shapes how it behaves
internally. The key question is, "What should companies report?"
