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    First Look: April 21

    First Look

    21 Apr 2015

    Are Activist-ceos A Good Thing For Brand And Country?

    Wheter Starbucks' recent attempt to engage customers in discussions about race relations was a success or failure, one thing is clear: CEOs such as the coffee company's Howard Schultz are going public with their personal beliefs and engaging their businesses as well. This trend, according to Aaron Chatterji and Michael Toffel, "is a welcome counterpoint to the largely hidden involvement of corporate leaders in shaping policy through the hundreds of millions of dollars they direct to Super PACs, trade associations, and think tanks to promote liberal and conservative causes." Read their take on the Harvard Business Review blog post, "Starbucks' 'Race Together' Campaign and the Upside of CEO Activism."

    Founders Who Also Serve As Chief Executives Reduce Value Of Their Startups

    In The Throne vs. the Kingdom: Founder Control and Value Creation in Startups, Noam Wasserman investigates the degree to which a founder's control of a startup affects the company value. Studying data from 6,130 American firms, he finds that "startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up control."

    Is Stella Mccartney Losing Competitive Advantage?

    Fashion designer Stella McCartney rose to prominence with clothing lines that used no fur or leather, and with a commitment to environmental sustainability. But now many of her competitors are being forced by the market to adopt similar strategies. The case "Stella McCartney," written by Anat Keinan and Sandrine Crener, asks readers to assess the future of her environmentally friendly positioning. "Is it possible that Stella McCartney's environmentally friendly positioning will not be as differentiating as before...?"

    No News Versus Bad News

    While companies are legally prohibited from lying about their products, they generally have control over which information they disclose. But will customers trust a firm that keeps key facts to itself? The answer is yes, according to the authors of a new paper, Is No News (Perceived as) Bad News? An Experimental Investigation of Information Disclosure. Ginger Jin, Michael Luca, and Daniel Martin explain, "We find that senders disclose less often than equilibrium would predict. Receivers are not sufficiently skeptical about undisclosed information—they underestimate the extent to which no news is bad news."

    —Carmen Nobel and Sean Silverthorne
    LinkedIn
    Email
     

    Publications

    • April 2015
    • John Wiley & Sons

    The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality

    By: Eccles, Robert G., and Michael P. Krzus

    Abstract—The Integrated Reporting Movement explores the meaning of the concept, explains the forces that provide momentum to the associated movement, and examines the motives of the actors involved. The book posits integrated reporting as a key mechanism by which companies can ensure their own long-term sustainability by contributing to a sustainable society. Although integrated reporting has seen substantial development due to the support of companies, investors, and the initiatives of a number of NGOs, widespread regulatory intervention has yet to materialize. Outside of South Africa, adoption remains voluntary, accomplished via social movement abetted, to varying degrees, by market forces. In considering integrated reporting's current state of play, the authors provide guidance to ensure wider adoption of the practice and success of the movement, starting with how companies can improve their own reporting processes. But the support of investors, regulators, and NGOs is also important. All will benefit, as will society as a whole.

    Publisher's link: http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118646983.html

    • April 2015
    • Management Science

    Private Equity and Industry Performance

    By: Bernstein, Shai, Josh Lerner, Morten Sorensen, and Per Strömberg

    Abstract—The growth of the private equity industry has spurred concerns about its potential impact on the economy more generally. This analysis looks across nations and industries to assess the impact of private equity on industry performance. Industries where private equity funds have invested in the past five years have grown more quickly in terms of productivity and employment. There are few significant differences between industries with limited and high private equity activity. It is hard to find support for claims that economic activity in industries with private equity backing is more exposed to aggregate shocks. The results using lagged private equity investments suggest that the results are not driven by reverse causality. These patterns are not driven solely by common law nations such as the United Kingdom and United States, but also hold in Continental Europe.

    • April 2015
    • Harvard Business Review Blogs

    Starbucks' 'Race Together' Campaign and the Upside of CEO Activism

    By: Chatterji, Aaron, and Michael Toffel

    Abstract—When Starbucks CEO Howard Schultz asked his baristas to engage customers in a discussion about race in America, it was a clear case of the growing trend of "CEO activism." Despite the criticism of that particular initiative, CEO activism-from Shultz to Chick-Fil-A's Dan Cathy to Facebook's Sheryl Sandberg to Goldman Sach's Lloyd Blankfein-represents a step forward for corporate involvement in the public square because these efforts are unusually transparent and delimited. As such, CEO activism is a welcome counterpoint to the largely hidden involvement of corporate leaders in shaping policy through the hundreds of millions of dollars they direct to Super PACs, trade associations, and think tanks to promote liberal and conservative causes.

    Publisher's link: https://hbr.org/2015/03/starbucks-race-together-campaign-and-the-upside-of-ceo-activism

    • April 2015
    • Strong Brands, Strong Relationships

    Framing the Game: How Brands' Relationships with Their Competitors Affect Consumer Preference

    By: Paharia, Neeru, Jill Avery, and Anat Keinan

    Abstract—In this chapter, we explore how brands' relationships with their competitors affect consumers' preferences. Through a series of experiments, we show that the competitive context in which a brand operates can affect consumers' purchase interest and purchase frequency. We show that brand positioning statements that communicate that brands are in direct competition with each other elicit size effects: consumers like small brands more when they compete with big brands and like big brands less when they compete with small brands. We further explore the relationships between brand size and competition and show that while large brands are punished for being a competitive aggressor, small brands are rewarded when they compete aggressively. Our findings illuminate how small brands can benefit from the presence of a large competitor and provide a process understanding of how consumers assess and relate to brands not in isolation, but as part of a competitive system.

    • April 2015
    • Strategic Management Journal

    The Throne vs. the Kingdom: Founder Control and Value Creation in Startups

    By: Wasserman, Noam

    Abstract—Does the degree to which founders keep control of their startups affect company value? I argue that founders face a "control dilemma" in which a startup's resource dependence drives a wedge between the startup's value and the founder's ability to retain control of decision making. I develop hypotheses about this tradeoff and test the hypotheses on a unique dataset of 6,130 American startups. I find that startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up control. On average, each additional level of founder control (i.e., controlling the board and/or the CEO position) reduces the pre-money valuation of the startup by 17.1%-22.0%.

    • April 2015
    • Brookings Papers on Economic Activity

    Seesaws and Social Security Benefits Indexing

    By: Weinzierl, Matthew

    Abstract—The price indexation of Social Security benefit payments has emerged in recent years as a flashpoint of debate in the United States. I characterize the direct effects that changes in that price index would have on retirees who differ in their initial wealth at retirement and in their mortality rates after retirement. I propose a simple but flexible theoretical framework that converts benefits reform first into changes to retirees' consumption paths and then into a net effect on social welfare. I calibrate that framework using recently produced data on Social Security beneficiaries by lifetime income decile and both existing and new survey evidence on the normative priorities Americans have regarding their Social Security benefits. The results suggest that the value retirees place on protection against longevity risk is an important caveat to the widespread enthusiasm for a switch to a slower-growing price index such as the chained CPI-U.

    Publisher's link: http://www.brookings.edu/~/media/Projects/BPEA/Fall-2014/Fall2014BPEA_Weinzierl.pdf?la=en

     

    Working Papers

    Selection and Market Reallocation: Productivity Gains from Multinational Production

    By: Alfaro, Laura, and Maggie X. Chen

    Abstract—Assessing the productivity gains from multinational production has been a vital topic of economic research. Positive aggregate productivity gains are often attributed to within-firm productivity improvement; however, an alternative, less emphasized explanation is between-firm selection and market reallocation, whereby competition from multinationals leads to factor reallocation and the survival of only the most productive domestic firms. We investigate the roles of the two different mechanisms in determining the aggregate productivity gains by exploring their distinct predictions on the distributions of domestic firms: within-firm productivity improvement shifts the productivity and the revenue distributions rightward while between-firm selection and market reallocation raise the left truncation of the distributions and shift revenue leftward. Using a rich cross-country firm-level panel dataset, we find significant evidence of both mechanisms, but between-firm selection and market reallocation accounts for the majority of aggregate productivity gains, suggesting that ignoring this channel could lead to substantial bias in understanding the nature of gains from multinational production.

    Download working paper: http://ssrn.com/abstract=2101302

    Implied Materiality and Material Disclosures of Credit Ratings

    By: Eccles, Robert G., and Timothy Youmans

    Abstract—This first of three papers in our series on materiality in credit ratings will examine the materiality of credit ratings from an "implied materiality" and governance disclosure perspective. In the second paper, we will explore the materiality of environmental, social, and governance (ESG) factors in credit ratings' methodologies and introduce the concept of "layered materiality." In the third paper, we will evaluate current and potential credit rating agency (CRA) business models based on our analysis in the previous papers and introduce the concept of "institutionalized materiality." Starting with this paper, and in the rest of the series, we will also recommend how the credit rating model can be enhanced in the coming years to help build more sustainable credit markets. This first paper is focused on the "G" (governance) component of ESG reporting. The governance matters we identify in this paper must be addressed before turning our attention to the broader set of ESG considerations in credit ratings. Failure to put these important governance matters at the top of the credit ratings reform agenda would, in our opinion, undermine the efforts we will recommend in our second and third papers.

    Download working paper: http://ssrn.com/abstract=2592630

    Is No News (Perceived as) Bad News? An Experimental Investigation of Information Disclosure

    By: Jin, Ginger, Michael Luca, and Daniel Martin

    Abstract—A central prediction of information economics is that market forces can lead businesses to voluntarily provide information about the quality of their products, yet little voluntary disclosure is observed in the field. In this paper, we demonstrate that the inconsistency between theory and reality is driven by a fundamental failure in consumer inferences when sellers withhold information. Using a series of laboratory experiments, we implement a simple disclosure game in which senders can verifiably report quality to receivers. We find that senders disclose less often than equilibrium would predict. Receivers are not sufficiently skeptical about undisclosed information-they underestimate the extent to which no news is bad news. Senders generally take advantage of receiver mistakes. We find that providing disclosure rates by quality score helps to improve receiver inferences.

    Download working paper: http://people.hbs.edu/mluca/InformationDisclosure.pdf

     

    Cases & Course Materials

    • Harvard Business School Case 715-412

    Nasty Gals Do It Better

    In 2006, Sophia Amoruso started Nasty Gal, an eBay boutique selling vintage clothes. With a strong sense of style and personality, Amoruso poured herself into building the brand and developing relationships with her customers-typically the slightly edgy 18-24 year old. The company had grown since that time into a multi-category retailer, expanding into third-party clothing, accessories, and its own private label. Its explosive growth was one of the biggest stories in e-commerce, especially when the retailer attracted $50 million in investment from Index Ventures, a top VC firm that funded other successful retailers such as Net-a-Porter and Etsy, in 2013. Yet, with a cash infusion, plans for a brick and mortar store, an ever-growing e-commerce site, and fierce competition, Amoruso wondered what opportunity to tackle next. Should she concentrate on product line expansion into lingerie, swimwear, cosmetics, and fragrances? How would a brick and mortar store impact the focus of the company or its ability to develop customized web sites for overseas markets? How would she maintain the detail and attention she had put into so many aspects of the company as Nasty Gal grew? As Amoruso's time was limited and management resources were already spread thin to sustain the existing site's growth, what was the best way forward?

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/715412-PDF-ENG

    • Harvard Business School Case 515-059

    Rebranding Godiva: The Yildiz Strategy

    This case concerns Yildiz Holding's acquisition of Godiva Chocolatier from its previous owner, Campbell Soup, and its strategy in preserving Godiva's "made in Belgium" brand position. Provenance paradox, a problem faced by companies in emerging countries trying to establish their brands in developed markets, had not become a problem for Yildiz Holding. After patiently waiting five years and seeing the company not performing as desired, Murat Ülker, the chairman of Yildiz, decides to change the management structure and encourage rethinking brand positioning, channels, and communications in the U.S. market. How was the Godiva brand affected by the execution problems of previous management? Why did Godiva succeed in international markets while it declined in the U.S.? What were the implications of the change in marketing strategy to Godiva's brand image?

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/515059-PDF-ENG

    • Harvard Business School Case 515-075

    Stella McCartney

    Stella McCartney launched her own fashion house under her name in a partnership with the luxury conglomerate Kering as a 50/50 joint venture in 2001. A lifelong vegetarian, Stella McCartney does not use any leather or fur in her collections, which include women's ready-to-wear, handbags, shoes, lingerie, eyewear, fragrance, and a kids line. Stella McCartney's achievement in fashion and social awareness has been recognized on many occasions, and her commitment to sustainability is present throughout all her collections and numerous environmental and charitable initiatives. As climate change is becoming a more pressing issue, companies are pressured to embrace a more sustainable approach to their business. With fashion and luxury industries progressively rising to this challenge, what does it mean for Stella McCartney's brand's ethos to be a responsible, honest, and modern company? Is it possible that Stella McCartney's environmentally friendly positioning will not be as differentiating as before as more fashion and luxury brands are becoming environmentally conscious and starting to develop sustainable initiatives? Similarly, how are Stella McCartney's partnerships to develop ethical fashion items impacting the brand luxury positioning and appeal?

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/515075-PDF-ENG

    • Harvard Business School Case 315-051

    Entrepreneurship and Technology Innovations in Education

    No abstract available.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/315051-PDF-ENG

    • Harvard Business School Case 315-050

    Note on Economic Inequality (2015)

    For over half a century, most of the world's economies have enjoyed steady growth and prosperity. However, beginning in the 1980s, and continuing essentially unabated to the present, the gap between the "haves" and the "have nots" in developed countries has widened, with a small proportion of the population reaping an increasingly larger share of a country's economic rewards. This growing economic inequality has been particularly pronounced in the United States, but the phenomenon has also occurred in many nations, among them Germany, Japan, and Sweden. This note provides background on aspects of economic inequality. It begins by describing both income inequality and wealth inequality, providing an explanation of two widely used metrics and data that show increasing inequalities over time. It then moves to the factors that might contribute to this inequality, as well to propositions of economic and social consequences that might result from the widening gap. Finally, it addresses the issue of "equality of opportunity" or social mobility.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/315050-PDF-ENG

    • Harvard Business School Case 115-021

    Omar Selim: Building a Values-Based Asset Management Firm (A)

    At Barclays Capital, Omar Selim had spearheaded the development of Arabesque-a new socially responsible asset management firm designed to appeal to all investors wishing to invest according to broadly held environmental and social values, as well as to investors wishing to align their investments with their faith. Should Selim give up a very successful career to compete in a highly competitive business, in which it could be very hard to build a differentiated offering? Could Arabesque be something different in the world of asset management? And what role, if any, should values and religious faith play in shaping the firm's products and conduct?

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/115021-PDF-ENG

    • Harvard Business School Case 615-046

    Credem: Banking on Cheese

    Credem, an Italian regional bank, grants loans to Parmigiano Reggiano producers and holds the cheese as collateral in its own warehouse during the maturation process, essentially replacing part of the operations for the cheese producers and gaining deep operations expertise.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/615046-PDF-ENG

    • Harvard Business School Case 715-426

    Allstate Corporation, 2007-2013

    After five years of global financial crises and natural catastrophes, Allstate, the U.S.'s number two property and casualty insurer, seemed to be on the mend. It had been a tough ride for Thomas Wilson who had taken over as CEO on January 1, 2007, and vowed to "reinvent protection and retirement for the consumer." Soon after this statement, a combination of exogenous shocks and fierce competition had driven the whole industry into underwriting losses. Meanwhile, Allstate continued to lose market share to GEICO and Progressive as it struggled to build its direct sales business in the face of opposition from its tied-agent distribution system. During the May 2011 Annual General Meeting (AGM), 31% of shareholders voted against Wilson's reappointment, the highest "no" vote for any CEO in the Standard & Poor's 500. Many speculated that he would not last long. To help boost direct sales, in October 2011, Wilson completed the acquisition of Esurance, a direct online specialist with a 2% share of online sales. In the next six months, Allstate's stock price rose 45%, buoyed by Wilson's promise that return on equity would reach 13% by 2014. At the May 2012 AGM, Wilson's support from shareholders surged to 97%. By the end of 2012, revenues were up 2% to $33.3 billion while operating profits surged 168% to $3.6 billion. With renewed support, Wilson pondered on what else he might do to ward off the challenges from GEICO and Progressive.

    Purchase this case:
    https://cb.hbsp.harvard.edu/cbmp/product/715426-PDF-ENG

    • Harvard Business School Case 815-702

    BOLT: Seed Venture Capital Firm

    No abstract available.

    Purchase this case:
    http://courseware.hbs.edu/cases/bolt/1.html

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