First Look

April 17, 2012

The Importance Of A Csr Strategy

The question for firms is not whether to engage in corporate social responsibility, but how to do it effectively, according to a new working paper by Kash Rangan, Lisa A. Chase, and Sohel Karim. In "Why Every Company Needs a CSR Strategy and How to Build It," the authors provide a pragmatic framework for business practitioners looking to develop an effective CSR strategy.

Converting Free Readers To Paid Subscribers

Last year, The New York Times decided to start charging for much of its online content, after more than a decade of offering it for free. A new business case discusses how the newspaper company dealt with the controversial transition. In "The New York Times Paywall," authors Vineet Kumar, Bharat Anand, Sunil Gupta, and Felix Oberholzer-Gee address the issues inherent in adopting a paywall system, including how to avoid turning off readers and advertisers.

Buying Gifts Makes Us Happy

An oft-doctored adage tells us that when the going gets tough, the tough go shopping. Experimental research suggests that they'll be most contented if shopping for gifts. A new article in The Journal of Happiness Studies reports that participants felt happier when recalling recent purchases made for other people than when recalling a purchase made for themselves. Furthermore, this feeling of happiness induced the desire to buy things for other people in the future. Read "Happiness Runs in a Circular Motion: Evidence for a Positive Feedback Loop between Prosocial Spending and Happiness" by Lara B. Aknin, Elizabeth W. Dunn, and Michael I. Norton

— Carmen Nobel


Happiness Runs in a Circular Motion: Evidence for a Positive Feedback Loop between Prosocial Spending and Happiness


We examine whether a positive feedback loop exists between spending money on others (i.e., prosocial spending) and happiness. Participants recalled a previous purchase made for either themselves or someone else and then reported their happiness. Afterward, participants chose whether to spend a monetary windfall on themselves or someone else. Participants assigned to recall a purchase made for someone else reported feeling significantly happier immediately after this recollection; most importantly, the happier participants felt, the more likely they were to choose to spend a windfall on someone else in the near future. Thus, by providing initial evidence for a positive feedback loop between prosocial spending and well-being, these data offer one potential path to sustainable happiness: prosocial spending increases happiness, which in turn encourages prosocial spending.

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Correlation in the Multiplayer Electronic Mail Game


In variants of the Electronic Mail Game (Rubinstein, 1989) where two or more players communicate via multiple channels, the multiple channels can facilitate collective action via redundancy, the sending of the same message along multiple paths or else repeatedly along the same path (Chwe, 1995 and De Jaegher, 2011). This paper offers another explanation for how multiple channels may permit collective action: parties may be able to coordinate their actions when messages' arrivals at their destinations are sufficiently correlated events. Correlation serves to fill in information gaps that arise when players are uncertain of the source of message failure, effectively strengthening messages from one player. This asymmetry in message strength in turn permits cutoff equilibria, where players take action after receiving a minimum number of confirmations.

Good Morning Creativity: Task Reactivation During Sleep Enhances Beneficial Effect of Sleep on Creative Performance


Both scientists and artists have suggested that sleep facilitates creativity, and this idea has received substantial empirical support. In the current study, we investigate whether one can actively enhance the beneficial effect of sleep on creativity by covertly reactivating the creativity task during sleep. Individuals' creative performance was compared after three different conditions: sleep-with-conditioned-odor; sleep-with-control-odor; or sleep-with-no-odor. In the evening prior to sleep, all participants were presented with a problem that required a creative solution. In the two-odor conditions, a hidden scent diffuser spread an odor while the problem was presented. In the sleep-with-conditioned-odor condition, task reactivation during sleep was induced by means of the odor that was also presented while participants were informed about the problem. In the sleep-with-control-odor condition, participants were exposed to a different odor during sleep than the one diffused during problem presentation. In the no-odor condition, no odor was presented. After a night of sleep with the conditioned odor, participants were found to be (i) more creative and (ii) better able to select their most creative idea than participants who had been exposed to a control odor or no odor while sleeping. These findings suggest that we do not have to passively wait until we are hit by our creative muse while sleeping. Task reactivation during sleep can actively trigger creativity-related processes during sleep and thereby boost the beneficial effect of sleep on creativity.

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Sweeping Dishonesty under the Rug: How Unethical Actions Lead to Forgetting of Moral Rules


Dishonest behavior can have various psychological outcomes. We examine whether one consequence could be the forgetting of moral rules. In four experiments, participants were given the opportunity to behave dishonestly, and thus earn undeserved money, by over-reporting their performance on an ability-based task. Before the task, they were exposed to moral rules (i.e., an honor code). Those who cheated were more likely to forget the moral rules after behaving dishonestly, even though they were equally likely to remember morally irrelevant information (Experiment 1). Furthermore, people showed moral forgetting only after cheating could be enacted but not before cheating (Experiment 2), despite monetary incentives to recall the rules accurately (Experiment 3). Finally, moral forgetting appears to result from decreased access to moral rules after cheating (Experiment 4).

Designed for Workarounds: A Qualitative Study of Hospitals' Internal Supply Chains


We examine the internal supply chains at two service organizations to discover the source of disruptions that erode employees' efficiency. Through in-depth qualitative research, including observations and interviews of over 80 individuals from 6 service delivery units and 8 support departments that provide them with equipment and supplies, we find that a lack of interconnectedness among interdependent departments-rather than errors or execution issues-leads to disruptions in the internal supply chains. We develop the concept of interconnectedness as four conditions of an internal supply chain: a focus on system-rather than individual department-performance; routines within departments that are connected to current customers' needs; deliberate knowledge translation across departmental boundaries to enable efficient response; and an infrastructure for daily management and continuous improvement of the chain's performance. Furthermore, we find that employees on the service delivery unit spent 12% of their day compensating for internal supply chain problems, which is a disproportionate amount of time compared to the support departments. We suggest that the burden of compensating for the disconnected internal supply chains fell to the service providers because they were the only department that had both the ability to translate customer orders into requirements for materials and the responsibility for securing these materials.


Working Papers

Payout Taxes and the Allocation of Investment


When corporate payout is taxed, internal equity (retained earnings) is cheaper than external equity (share issues). If there are no perfect substitutes for equity finance, payout taxes may therefore have an effect on the investment of firms. High taxes will favor investment by firms that can finance internally. Using an international panel with many changes in payout taxes, we show that this prediction holds well. Payout taxes have a large impact on the dynamics of corporate investment and growth. Investment is "locked in" in profitable firms when payout is heavily taxed. Thus, apart from any level effects, payout taxes change the allocation of capital.

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Mandatory IFRS Adoption and Financial Statement Comparability


This study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability. UK domestic standards are considered very similar to IFRS (Bae et al., 2008), suggesting any capital market benefits observed for UK-domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across-firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders' ability to benefit from private information. Consistent with these expectations, we find that abnormal returns to insider purchases―used to proxy for private information―are reduced following IFRS adoption. Similar results are derived across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders' ability to exploit private information.

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Putting Integrity into Finance: A Purely Positive Approach


We summarize our new positive theory of integrity that has no normative content and argue that there are large gains from putting integrity into finance-into both the theory and practice of finance. We define integrity as being whole and complete and unbroken. We argue that if finance scholars, teachers, and practitioners take this approach to applications in finance, there are huge gains to be achieved. We caution the reader that since our intention in this piece is to call attention to aspects of life and aspects of finance that are not commonly discussed, or certainly not discussed in the way we will do so here, you are likely to find it strange and even wrong or irrelevant. It is unlikely to fit your view of what a finance paper should be. And that will be encouraged by the fact that it is impossible to be complete on such a huge topic in one paper. As a young scholar, Michael lived through the days of the revolution in finance in the 1960s and 1970s when the modern approaches to finance were coming into vogue. Consistent with Kuhn's (1996) Structure of Scientific Revolutions, the established profession and the established journals systematically rejected such new thinking. But change did occur, and we are committed to see such change continue to happen in the finance of today.

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Is India's Manufacturing Sector Moving Away from Cities?


This paper investigates the urbanization of the Indian manufacturing sector by combining enterprise data from formal and informal sectors. We find that plants in the formal sector are moving away from urban and into rural locations, while the informal sector is moving from rural to urban locations. While the secular trend for India's manufacturing urbanization has slowed down, the localized importance of education and infrastructure have not. Our results suggest that districts with better education and infrastructure have experienced a faster pace of urbanization, although higher urban-rural cost ratios cause movement out of urban areas. This process is associated with improvements in the spatial allocation of plants across urban and rural locations. Spatial location of plants has implications for policy on investments in education, infrastructure, and the livability of cities. The high share of urbanization occurring in the informal sector suggests that urbanization policies that contain inclusionary approaches may be more successful in promoting local development and managing its strains than those focused only on the formal sector.

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Why Every Company Needs a CSR Strategy and How to Build It


The authors argue for a strategic and pragmatic, rather than ideological, approach to Corporate Social Responsibility (CSR) that contrasts sharply with the prevailing Shared Value framework offered by Porter and Kramer (HBR, January-February 2011). We assert that, despite criticisms of and debate about the value of CSR initiatives to society and to corporate profitability, every company needs a CSR strategy that reflects both its desire to address social, humanitarian, and environmental needs and its core competencies and institutional capacity. Using a "three theatre" CSR framework, the paper demonstrates why the question for corporations is not whether to engage in CSR, but why they need to develop CSR strategies that both enhance CSR practice within each theatre and coordinate the independent efforts from across the three theatres. Our perspective is a marked departure from the Shared Value framework, in that we embrace the inherent value of corporate philanthropy (theatre 1) on one end as well as transformational business models with potentially limited short-term financial returns at the other (theatre 3). Furthermore, the paper seeks a moratorium on the fruitless debate about CSR definition and societal value, instead providing pragmatic guidance for corporations to significantly improve the social and environmental impact of their CSR initiatives through a holistic and strategic process of continuous CSR auditing, editing, and development.

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Cases & Course Materials

Affinity Plus: Priorities and Performance Pressures

Dennis Campbell and Rui Lu
Harvard Business School Case 112-095

The CEO of a financial services organization must decide how to maintain the company's "customer-first" values in the face of significant performance pressures after the economic crisis of 2008.

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Introduction to Short Selling

Lauren H. Cohen and Christopher Malloy
Harvard Business School Note 212-079

We provide a primer on the market for securities' lending of equities in the United States. We describe the basic market structure, along with descriptions of the relevant market participants. We build intuition for the basic economic forces in this decentralized market through a series of examples that sequentially build on each other layering on the particular fees and collateral requirements commonly levied in short-selling transactions. We also provide a survey of the academic literature to date on the relationship between short selling and securities' prices.

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Dimensional Fund Advisors (DFA)'s Entry into the Retirement Market

Lauren H. Cohen and Christopher Malloy
Harvard Business School Case 212-068

This case examines Dimensional Fund Advisors (DFA)'s decision to enter the retirement market with their new "Dimensional Managed DC" product, a complete retirement solution that aimed to provide investors with what they really wanted: the same standard of living in retirement that they had while working. The case considers the challenges of entering the fiercely competitive retirement market, introduces students to the large literature on the behavioral biases of individual investors, and asks students to evaluate an innovative new financial product designed to automate the process of retirement investing.

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Intel: Exploring Market Opportunities in Water

Robert G. Eccles, Amy C. Edmondson, George Serafeim, and Sarah E. Farrell
Harvard Business School Case 412-100

Seeking to move beyond chip-making to offer sophisticated IT solutions in the form of software and hardware platforms, Intel Corporation, a leading semiconductor manufacturer in the United States, introduces a pilot project in India for testing a new platform that allows monitoring and demand management along water distribution networks. The case describes, in detail, internal events that led to the creation of this pilot. It examines details of the water market relevant in Intel's decision to move the pilot forward.

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Tough Decisions at Marks and Spencer

Robert G. Eccles, George Serafeim, and Kyle Armbrester
Harvard Business School Case 112-062

In 2007, under the leadership of CEO Stuart Rose, the iconic British retailer Marks and Spencer (M&S), with great fanfare, announced its "Plan A" initiative. Based on the five essential pillars of climate change, waste, sustainable materials, fair partnership, and health, the plan sought to transform the company's practices. By 2012, the program's aim was to ensure that M&S was carbon neutral and sent no waste to landfill. It also aimed to help customers and employees achieve a healthier lifestyle and improve the lives of all involved in the company's supply chain with fair wages as well as improved working hours and conditions. Called Plan A "because there is no Plan B," the company identified 180 projects to improve the sustainability of its operations and business practices in anticipation of the need for a very different business model in the future. Key aspects of Plan A included more sustainable sourcing and influencing the business practices of the company's supply chain; communication to employees, customers, and investors; and employee engagement. The case concludes with the tradeoffs involved in the decision of whether or not to install refrigerator doors in the grocery section of its stores. While the energy savings and reduced carbon emissions are relatively clear and easy to measure, the impact on customers and revenues is harder to assess.

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Scaling a Startup: Pacing Issues

Thomas R. Eisenmann
Harvard Business School Note 812-099

To build students' understanding of business model attributes, competitive dynamics, and capital market conditions that encourage entrepreneurs to pursue accelerated growth.

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Greater Minneapolis—St. Paul: Building on a Diversified Base

William W. George
Harvard Business School Case 412-074

Since the 1970s, the Minneapolis-St. Paul metropolitan region (MSP) had outpaced the nation in job creation and income per capita. MSP's diversified base of industry clusters had enabled the region to adapt to economic downturns and an exodus of major corporate headquarters, earning it the accolade "Minnesota Miracle." Starting in 2003, however, MSP lagged the rest of the United States in job creation. Alarmed business and civic leaders coalesced around a loose-knit group that congregated annually as the Itasca Project. In 2009, these leaders launched the Itasca Jobs Task Force, and its 2010 report set in motion a series of actions by groups of CEOs and politicians aimed at reversing these trends by creating jobs in all sectors of the economy. In the fall of 2011, however, it was unclear whether these efforts would achieve their intended results or whether longer-term corrective actions in education and skills training would need to take hold first.

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The New York Times Paywall

Vineet Kumar, Bharat Anand, Sunil Gupta, and Felix Oberholzer-Gee
Harvard Business School Case 512-077

On March 28, 2011, The New York Times website became a restricted site where most of the content was protected behind a "paywall." Users who exceeded the limit of 20 free articles per month were required to pay for either a digital or print subscription. The newspaper industry had been suffering from revenue declines over the past decade, and the transition to digital media was difficult to navigate. Revenues from online advertising were not sufficient to replace the loss of print revenue, and many publishers had explored charging readers for content, with mixed success, where specialized sources like The Wall Street Journal successfully using the model, but several other general news sites had failed. Newspapers and content creators in general were very interested in understanding whether transitioning to the paywall at the most popular news website would succeed, and whether it could become a blueprint for future success as a sustainable business model. There were several difficult issues to examine in determining the digital strategy for The Times. Would consumers remain as engaged with a site protected by a paywall? Would advertisers react positively to such a move that walled off readers? Would readers value both the print and digital versions of the content, or would it become necessary to create new content? The Times had several choices in designing the paywall, including determining the digital content, pricing, as well as how to interface with readers of secondary news websites like blogs that posted links to news articles. Should they design a "leaky" paywall where determined users could easily slip through, or a "bulletproof" paywall like the Financial Times had done, where users had to pay before they could access any content? What choices would provide the foundation for a successful business model?

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Aubrey McClendon's Special Incentive Compensation at Chesapeake Energy (A)

Paul M. Healy, Clayton Rose, and Aldo Sesia
Harvard Business School Case 110-047

Aubrey McClendon, founder and CEO of Chesapeake Energy, was, according to Fortune Magazine, the highest paid U.S. CEO in 2008 receiving over $100 million in total compensation. McClendon received this compensation despite a significant drop in the company's stock price and financial performance during the year. The (A) case addresses the specifics of the compensation and the rationale for the compensation from the perspective of Chesapeake's board and its compensation committee, including McClendon's role in consummating several joint ventures, which the board and committee believed positioned the company for future growth in the relatively young industry of unconventional natural gas exploration and extraction. In addition, the (A) case describes the role of the compensation committee and the company's executive performance measurement factors.

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Aubrey McClendon's Special Incentive Compensation at Chesapeake Energy (B)

Paul M. Healy, Clayton Rose, and Aldo Sesia
Harvard Business School Supplement 110-050

The (B) case describes shareholder and investor reactions to the 2008 compensation awarded Aubrey McClendon, founder and CEO of Chesapeake Energy, which according to Fortune Magazine made him the highest paid CEO of a U.S.-based company.

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India 2012: The Challenges of Governance

Lakshmi Iyer and Richard H.K. Vietor
Harvard Business School Case ###-###

In January 2012, the government of India faced significant challenges to achieving three key objectives of high growth, inclusive development, and improved governance. The economy was experiencing a growth slowdown, persistently high inflation, and infrastructure and energy deficits. Policy reforms were hampered by several recent corruption scandals, widespread citizen protests against corruption, and disagreements with coalition partners. Could India make the right decisions needed to lift hundreds of millions of citizens out of poverty?

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1366 Technologies: Scaling the Venture (Abridged)

Joseph B. Lassiter, Ramana Nanda, Evan Richardson, and Alison Berkley Wagonfeld
Harvard Business School Case 812-133

For some time, 1366's co-founders, Frank van Mierlo and Ely Sachs, had faced a choice, which was now made all the more stark: 1366 could expand to produce silicon wafers itself, raising the required capital from "friendly" investors and building shipment volume slowly, or 1366 could accelerate its market entry dramatically by partnering with the Asian manufacturers that had begun to dominate the worldwide solar industry. While accelerated growth was attractive to 1366 and its current investors, the company believed it would face considerable risks if it were to expose its intellectual property to the "wrong" partners. 1366 had no intention of losing control of its technology, but given the pace of innovation and the active role of governments in the solar industry, van Mierlo and Sachs feared this might not be a race that could be won by the cautious.

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Ultimate Fighting Championship: License to Operate (B)

George Serafeim and Kyle Welch
Harvard Business School Supplement 112-081

The case describes the financial performance and business development of UFC after the change in ownership that happened in 2000, until 2004, when the owners are considering exiting the business.

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