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How Marketing Hype Hurt Boeing and Apple

by John Quelch

In his latest blog entry, professor John Quelch looks at the examples of Boeing and Apple to investigate why shareholders have little patience for companies that hype high but deliver low. Key concepts include: The penalties for not delivering on marketing promises are fast becoming as significant as not meeting quarterly earnings targets. Do not risk marketing hype unless you are sure of both your supply curve and your demand curve. Hype can hurt stock prices and investor confidence when expectations are not met. Closed for comment; 0 Comments.

Building Sandcastles: The Subprime Adventure

by Nicolas P. Retsinas

The early days of the subprime industry seemed to fulfill a market need—and millions of renters became homeowners as a result. But rapidly escalating home prices masked cracks in the subprime foundation. HBS professor Nicolas P. Retsinas, who is also director of Harvard University's Joint Center for Housing Studies, lays out what went wrong and why. Closed for comment; 0 Comments.

Mattel: Getting a Toy Recall Right

by John Quelch

Mattel has been criticized heavily for having to recall not once but twice in as many weeks 20 million toys manufactured in China. But Mattel also deserves praise for stepping up to its responsibilities as the leading brand in the toy industry. Harvard Business School professor John Quelch examines what Mattel did right. Key concepts include: Mattel's recall of 20 million toys made in China was handled deftly: The CEO took personal charge of the problem. Consumers are being empowered by Mattel's communications. The recall Web site is a model of excellence. Mattel's compensation program to customers may not be sufficient. Closed for comment; 0 Comments.

3 Steps to Reduce Financial System Risk

by Mohamed El-Erian

By using complex derivative products, banks are better able to manage risk. But this "credit risk transfer" technology is transferring risk to a new set of investors inexperienced in this arena and posing exposure problems for the international financial system as a whole, argues Harvard Business School professor Mohamed El-Erian. Here's how to fix the problem. Key concepts include: Regulatory authorities must address 2 challenges to contain a new source of systemic risk in international finance: the increasing migration of complex market activities to unqualified supervisory bodies, and the growing threat of politically motivated changes to regulatory regimes. If left unchecked, systemic risk in the international financial system will increase and much of the initial beneficial impact of credit risk transfer technology may be negated. 3 steps can mitigate this new component of systemic risk: greater cooperation among supervisory bodies; encouragement of rating agencies to improve their modeling of derivative products; and inducement of new investors to evaluate the ratings issued by the agencies against improved internal risk management capabilities. Closed for comment; 0 Comments.

Company Town: Fixing Corrupt Governments

by Eric Werker

Too many democracies are ruled by corrupt leaders, says HBS professor Eric Werker. So how about letting good corporate citizens run for elected office in Third World regions? Key concepts include: Corporations should be allowed to run for office in corrupt Third World governments. Companies and nonprofits have stronger incentives than do individuals to steer clear of bribes and kickbacks. Voters might look favorably on a foreign "mayor" because it might be viewed as the only credible option to escape the corruption rut, and their taxes would fund good government. Closed for comment; 0 Comments.

Leveling the Executive Options Playing Field

by Mihir Desai

Harvard Business School professor Mihir A. Desai recently presented testimony to a U.S. Senate subcommittee looking at the subject of executive stock options. His theme: A "dual-reporting system" makes it difficult for investors and tax authorities to learn the real numbers. Closed for comment; 0 Comments.

Government’s Misguided Probe of Private Equity

by Josh Lerner

The U.S Department of Justice has begun an inquiry into potentially anti-competitive behavior on the part of leading private equity firms. Professor Josh Lerner looks to history to underscore why this move carries the prospect of damaging what is actually an incredibly competitive industry that creates much value. Key concepts include: The Justice Department, which has little understanding of the nuances of the private equity business, could repeat missteps of the past by mistaking competition for collusion. Deal sharing, in the crosshairs of the inquiry, actually helps investors make better investment decisions, helps companies' managements, and helps limit risk. The benefits to society from widespread venture syndication appear to substantially outweigh the costs. Washington must understand that the many benefits private equity provides by facilitating economic growth are unlikely to be sustained if the heavy hand of government intrudes, whether through litigation or regulation. Closed for comment; 0 Comments.

What a U.N. Partnership with Big Business Could Accomplish

by George C. Lodge & Craig Wilson

If the world's large corporations really are the greatest drivers of wealth creation, it only seems reasonable that their capabilities and resources can be focused on global poverty, says professor emeritus George C. Lodge. Here's the case for a partnership between business, the United Nations, and NGOs. Key concepts include: More than a trillion dollars has been spent since WWII to alleviate poverty, with marginal success. But the goal of poverty reduction will not be reached unless the world tries something new. Countries most successful in reducing poverty have focused on creating profitable businesses. They provide the jobs, income, and motivation for education and individual development that raise standards of living. Multinational corporations can play a key role by connecting local businesses to world markets, credit, and technology. A nonprofit World Development Corporation could be formed to identify and design profitable projects in poor countries in which teams of multinationals would collaborate with local partners. Closed for comment; 0 Comments.

Tata-Corus: India’s New Steel Giant

by Tarun Khanna

By acquiring Anglo-Dutch steel firm Corus, India's Tata Steel is now one of the world's top five steel makers. Professor Tarun Khanna says the fact that the deal is the largest out of India and generated by the private sector makes this a notable event. But now comes the hard part—making the merger work. Can Tata avoid mistakes made by Chinese companies? From The Economic Times/India Times. Key concepts include: Tata's acquisition of Corus is notable not only for creating a new steel giant, but also because this deal was a private sector venture far from Indian government influence. Tata should be able to make the merger work by virtue of its position of financial strength as well as previous cross-border experiences. The West should not underestimate this heretofore relatively unknown competitor. Closed for comment; 0 Comments.

Learning from Private-Equity Boards

by Malcolm Salter

Boards of professionally sponsored buyouts are more informed, hands-on, and interventionist than public company boards. HBS professor emeritus Malcolm S. Salter argues that this board model could have helped Enron—and perhaps your company as well. Key concepts include: Boards compiled by professionally sponsored buyout firms are typically more informed and hands-on, and have more investment at risk than boards of public companies. That makes them more likely to spot problems and intervene before the problems become crises. Public companies need to consider a different population of directors to include the large pool of former executives and successful entrepreneurs who have stepped down after decades of accomplishment and have the time, energy, and interest to be truly focused directors. Given increasing time commitments and responsibilities, public companies need to present a better financial reward for directors—a doubling of director compensation may be an absolute minimum. Directors should be required to invest between $250,000 and $1 million in personal holdings depending on revenue size of the company. Closed for comment; 0 Comments.

Investors Hurt by Dual-Track Tax Reporting

by Mihir Desai

What corporations report in profit to the IRS and what they report to shareholders are often two different numbers—sometimes wildly so. That's why the IRS and Securities and Exchange Commission are proposing that companies publicly report taxes paid—and Professor Mihir Desai thinks this is only a first step. Key concepts include: Corporations are allowed to report different profit figures to capital markets and to tax authorities, creating large, unexplained gaps that potentially confuse investors. The IRS and SEC have jointly called for a simple but controversial proposal: Companies would be required to disclose how much they pay in taxes, an amount not now decipherable from public filings. More ambitious alternatives should be considered, including making corporate tax returns public, an end to the dual-book system, and a lower corporate tax rate on profits reported to capital markets. Closed for comment; 0 Comments.

India Needs to Encourage Trade with China

by Tarun Khanna

Although India and China have increased bilateral trade over the last five years, the amount is far less than what would be expected. Harvard Business School professor Tarun Khanna says India has primarily itself to blame. From The Economic Times. Key concepts include: China and India recorded $19 billion in bilateral trade in 2005, much less than would be expected of countries similar in size, within geographic proximity, and with shared cultural ties. Indians' fears about Chinese competition and unease over past border wars result in procedural and other roadblocks to increased trade, at India's disadvantage. China benefits from the trade more than India, both by selling more and better products to India and by welcoming Indian investment in China. Closed for comment; 0 Comments.

Fixing Executive Options: The Veil of Ignorance

by Mihir Desai & Joshua Margolis

Who says you can't rewrite history? Dozens of companies have been caught in the practice of backdating options for top executives. But this is only part of the problem with C-level compensation packages, which often motivate top executives to act in their own best interests rather than those of shareholders. Professors Mihir Desai and Joshua Margolis turn to philosopher John Rawls for a solution: Reward the execs, but don't give them the details. Key concepts include: Too often executive incentive packages are not aligned with the best interests of shareholders. Why create long-term value if your bread is buttered by quarterly performance? Option compensation could be restructured to ensure that managers were aware of the value of their compensation without any knowledge of the details of their compensation—a concept inspired by philosopher John Rawls' work on distributive justice. These options may only be useful for CEOs, senior officers, and directors—not middle management. Closed for comment; 0 Comments.

Rising CEO Pay: What Directors Should Do

by Jay W. Lorsch

Compensation committees are under pressure to keep CEO pay high, even as shareholders and the media agitate for moderation. The solution? Boards of directors need better competitive information and an ear to what shareholders are saying, says Jay Lorsch. Key concepts include: CEO compensation in the U.S. continues to soar—American CEOs make twice what their European counterparts earn. Shareholders want to moderate pay hikes for top execs, but board members often give more weight to internal organizational pressures. Boards must be more critical of consultant reports, listen to shareholders, and align CEO pay with what is earned by other top management in the company. Closed for comment; 0 Comments.

The Compensation Game

by Lucian Bebchuk & Rakesh Khurana

Do CEOs deserve "star" compensation? The idea that CEO pay is driven by the invisible hand of market forces is a myth from which chief executives have long benefited, say Harvard professors Lucian Bebchuk and Rakesh Khurana. Key concepts include: It is wrong to use sports stars' salaries to justify high CEO compensation. When setting CEO pay, board members can be influenced by economic incentives that are reinforced by social and psychological factors. Directors must be given strong incentives to focus on shareholder interests. Closed for comment; 0 Comments.

The Real Wal-Mart Effect

by Pankaj Ghemawat & Ken A. Mark

Critics are lining up to take shots at Wal-Mart's treatment of workers and a host of other alleged knocks against society. But the critics miss one big point, says Pankaj Ghemawat: Wal-Mart's overall impact benefits the economy and lower-income consumers. Key concepts include: While Wal-Mart has many problems, the company's overall economic impact is positive both for the overall economy and for low-income consumers. The real Wal-Mart conflict isn't between capital and labor. It is a battle involving consumers and cost-efficient producers against traditional retailers, organized labor, and community activists. Closed for comment; 0 Comments.

Enron Jury Sent the Right Message

by Malcolm S. Salter

Although the actions of Enron's executives were in many areas neither clearly legal nor illegal, jurors sent an unambiguous message that all executives should heed: Truth telling and ethical discipline are the cornerstone values in corporate governance. Key concepts include: Executives can be convicted in a court of law for a pattern of deception, even when it is not illegal. Firms that focus on exploiting the rules rather than building a sound business often lose their way. Closed for comment; 0 Comments.

The Case for Consumer-Driven Medicaid

by Regina E. Herzlinger

The Medicaid program is a health insurance safety net for 52 million Americans, but the price tag threatens the financial stability of the states. Regina Herzlinger looks to South Carolina for a model in consumer-driven healthcare. Key concepts include: Medicaid costs threaten the financial health of states. Consumer-driven plans dramatically control costs and improve the health of those with chronic disease. Closed for comment; 0 Comments.

Corporate Governance Activists are Headed in the Wrong Direction

by Joseph Hinsey

Corporate governance reformers are pushing the idea of majority voting for directors. But that solution, as Joseph Hinsey sees it, won't produce the desired outcome. The answer? Keep CEOs and board chairs separate. Key concepts include: Majority voting for directors is a flawed concept that neither enhances shareholder democracy nor improves corporate governance. Corporate accountability is best served by separating the CEO and board chair responsibilities. Closed for comment; 0 Comments.

Is Business Management a Profession?

by Rakesh Khurana, Nitin Nohria & Daniel Penrice

If management was a licensed profession on a par with law or medicine, there might be fewer opportunities for corporate bad guys, argue HBS professors Rakesh Khurana and Nitin Nohria, and research associate Daniel Penrice. Closed for comment; 0 Comments.