First Look

July 7, 2009

In the eyes of many people, potential losses often loom larger than potential gains. The impact of this psychological bias on public policy is that costs and benefits may not be weighed equally when policymakers cast their vote, and therefore otherwise good policies never advance. A working paper by HBS professor Max H. Bazerman and colleagues, "Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes" [PDF], describes a study that uses principles from the psychology of decision-making to increase support for potentially controversial bills.
— Martha Lagace

Working Papers

Consistency and Monotonicity in One-Sided Assignment Problems


One-sided assignment problems combine important features of two well-known matching models. First, as in roommate problems, any two agents can be matched, and second, as in two-sided assignment problems, the payoffs of a matching can be divided between the agents. We take a similar approach to one-sided assignment problems as Sasaki (1995) for two-sided assignment problems, and we analyze various desirable properties of solutions including consistency and weak pairwise-monotonicity. We show that for the class of solvable one-sided assignment problems (i.e., the subset of one-sided assignment problems with a non-empty core), if a subsolution of the core satisfies (indifference with respect to dummy agents, continuity, and consistency) or (Pareto indifference and consistency), then it coincides with the core (Theorems 1 and 2). However, we also prove that on the class of all one-sided assignment problems (solvable or not), no solution satisfies consistency and coincides with the core whenever the core is non-empty (Theorem 3). Finally, we comment on the difficulty in obtaining further positive results for the class of solvable one-sided assignment problems in line with Sasaki's (1995) characterizations of the core for two-sided assignment problems.

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CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts (revised)


We find that missing the quarterly analyst consensus earnings forecast is associated with career penalties in the form of a reduced bonus, smaller equity grants, and a greater chance of forced dismissal for both CEOs and CFOs during the period 1993-2004. These results are obtained after controlling for several proxies for earnings and stock return performance suggesting that boards appear to penalize managers for failing to meet analysts' quarterly earnings forecasts per se. Career penalties for failing to meet the analyst consensus estimate are no different for firms where forecasting earnings is harder. Moreover, such penalties have increased in the post-SOX period. Our evidence suggests that incentives of the CEO and CFO to meeting analysts' consensus forecast might be driven at least partly by career concerns.

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Policy Bundling to Overcome Loss Aversion: A Method for Improving Legislative Outcomes


Policies that would create net benefits for society but would also involve costs frequently lack the necessary support to be enacted because losses loom larger than gains psychologically. To reduce this harmful consequence of loss aversion, we propose a new type of policy bundling technique in which related bills that have both costs and benefits are combined. Using a laboratory study, we confirm across a set of four legislative domains that this bundling technique increases support for bills that have both costs and benefits. We also demonstrate that this effect is due to changes in the psychology of decision making, rather than voters' willingness to compromise and support a bill they weakly oppose when that bill is bundled with one they strongly support.

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A 'Novel' Approach to the Design of an IS Management Course


We report on the design and implementation of an unusual course in Information Systems (IS) management built around an extended case series: a fictitious but reality-based story about the trials and tribulations of a newly appointed but not-technically-trained Chief Information Officer (CIO) in his first year on the job. Together the cases constitute a true-to-life "novel" about IS management (published, in fact, as a novel, as well as individual cases). Four principles guided development of the series and its associated pedagogy: 1) emphasis on integrative, soft-skill, and business-oriented aspects of IS, independent of underlying technologies; 2) student derivation and ongoing refinement of cumulative theoretical frameworks arrived at via in-class discussion; 3) identification of a set of core issues vital to practice that collectively approximate IS management as a business discipline; and 4) design for student engagement, in particular by basing the case "story" on the monomyth, a literary pattern common to important narratives around the world. A supporting website facilitates sharing of teaching materials and experiences by faculty using the case series. We report results from using this curriculum with undergraduate and graduate students in two universities in different countries, and with executives at a multinational corporation and in an executive program at Harvard Business School. Our results suggest that a "novel-based" approach holds considerable promise for use at undergraduate, graduate, and executive levels, and that it might have advantages in addressing the so-called "enrollment crisis" in IS education, especially with the generation of "digital natives" who have come of age in an environment crowded with engaging approaches to communication and entertainment that compete for their attention.

The Role of Resources in Institutional Entrepreneurship: Insights for an Approach to Strategic Management That Combines Agency and Institution

No abstract is available at this time.

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Small and Medium Firm Lending in Mexico: Lessons and Current Issues


Mexico is often cited as one of the world's most entrepreneurial countries in terms of the percentage of its population that has started or is in the process of starting a business venture. Yet Mexico does not seem to be very friendly to entrepreneurs, as confirmed by the fact that a large portion of new businesses is created in the informal sector. The authors identify the main obstacle to this area as the country's insufficient access to credit for small entrepreneurs. The chapter is devoted to assessing recent programs adopted in Mexico to foster SME competitiveness (including programs to increase capital availability) and draws some important conclusions for policymakers in their efforts to improve the micro-components of national competitiveness.

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How Firms Respond to Being Rated


While many rating systems seek to help buyers overcome information asymmetries when making purchasing decisions, we investigate how these ratings also influence the companies being rated. We hypothesize that ratings are particularly likely to spur responses from firms that receive poor ratings, and especially those that face lower-cost opportunities to improve or that anticipate greater benefits from doing do. We test our hypotheses in the context of corporate environmental ratings that guide investors to select "socially responsible," and avoid "socially irresponsible," companies. We examine how several hundred firms respond to corporate environmental ratings issued by a prominent independent social rating agency and take advantage of an exogenous shock that occurred when the agency expanded the scope of its ratings. Our study is among the first to theorize about the impact of ratings on subsequent performance, and we introduce important contingencies that influence firm response. These theoretical advances inform stakeholder theory, institutional theory, and economic theory.

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Biomass Supply for Biofuel Production: Estimates for the United States and Canada


The potential supply of biomass feedstocks in the U.S. and Canada is estimated using a static supply function approach. Estimated total biomass available at a price of $100 per metric ton is 568 million metric tons in the U.S. and 123 million tons in Canada, which together can displace 23-45 billion gallons of gasoline. Sufficient biomass, mainly agricultural and mill residues, will be available at prices of around $50/ton to meet the advanced biofuel mandates of the U.S. Energy Independence and Security Act of 2007. The estimates of agricultural residue supply are very sensitive to the assumed fraction of residues that can be sustainably removed from the field, and the potential of municipal solid waste as a feedstock depends on which components can be economically converted into liquid biofuels.

Becoming the Lamp Bearer: The Emerging Roles of the Chief Risk Officer


Enterprise risk management, under the leadership of chief risk officers (CROs), has the promise to bring enterprise-wide risks, which threaten the achievement of the firm's strategic objectives, into the open and under control. Its organizational significance is that, by providing a process to identify, measure, monitor, and manage uncertainty in strategic decision-making, strategic planning, performance management, and deal-approval processes, it enables top management to maintain or alter patterns in risk-taking. This chapter addresses the question: How may CROs realize that organizational significance? I draw on the existing practitioner and academic literature on the role of CROs and on a number of case studies from my ongoing research program on the evolution of the role of the CRO. I outline and illustrate four major roles that senior risk officers may fulfill: compliance champion, modeling expert, strategic controller, and strategic advisor and discuss the contingencies that shape the mix and effectiveness of these roles in actual organizational settings.

The Return of State-Owned Enterprises: Should We Be Afraid?


The global financial crisis of 2008-2009 has prompted many industrialized states worldwide to increase their stakes in private corporations. This wave of partial nationalizations has come amidst full-scale expropriations in developing countries such as Venezuela, Bolivia, and Ecuador. Does this signal a return of "state capitalism"? If so, what should we expect of the state-owned enterprises (SOEs) that spring back into economic life? Should we be afraid that this return to state capitalism will bring back the practices of the large, inefficient SOEs that countries privatized during the 1980s and 1990s?

From a look at the popular press, one certainly gets the impression that there is a return of "state capitalism," as if state intervention in industrial activity actually went away for a significant period of time. Moreover, many observers of the recent wave of nationalizations and government-backed bank capitalizations are afraid that a return to the wasteful state-owned enterprises of the past is imminent. In this essay we propose two alternative views. First, we stress the resilience of state-owned enterprises, which have been around for more than one hundred years in the world's capitalist economies. In fact, state interventions similar to those of today were seen in the pre-World War I period, an era known by some economic historians as "the first big wave of globalization." Second, we argue that there is no reason to believe that the SOEs of the twenty-first century will be as inefficient as those of the 1970s and 1980s. The world has changed much since former British Prime Minister Margaret Thatcher first began implementing large-scale privatizations. In fact, we document some cases of present-day competitive SOEs and explain some of the conditions that made them efficient, even in comparison to their private counterparts. We do not argue that all SOEs are efficient or that it is optimal to have government ownership of banks and other companies. What we aim to show is that the return of state capitalism is likely to be different this time since, we believe, the environment is different and many SOEs have learned the lessons of the past.

Organizational Design: Balancing Search and Stability in Strategic Decision Making


Managers often must make decisions that depend on decisions in other parts of the organization. These interactions create a network of interdependent choices and make strategizing difficult. In this chapter, the authors explore the intersection between organizing and strategizing. Motivated by real examples that run contrary to conventional wisdom, the authors examine how firms organize themselves to strategize well. In particular, they examine "premature lock-in"—how a firm's strategizing efforts can become stuck in a web of conflicting constraints prematurely, before managers have explored a wide enough range of possibilities. A key role of organizing is to free strategizing efforts and encourage broad search. At the same time, organizing must ensure that strategizing efforts stabilize after the firm discovers an effective set of choices. Balancing search and stability, the authors argue, is a central challenge of organizing. They explore this challenge with an agent-based simulation that shows (1) how a change in organizational structure, for example, a shift from decentralization to integration, may reflect not a reversal of early mistakes but an effective sequence of organizing; and (2) why firms may benefit from unnecessary overlap between departments. They conclude that a period of decentralization and unnecessary overlap can be seen as organizational mechanisms to ensure the broad, early search that a firm needs in order to cope with interactions among strategic decisions.


Cases & Course Materials

Actis: January 2008

Harvard Business School Case 808-130

Paul Feltcher, the CEO of Actis, a leading private equity investor in emerging markets, is preparing for an executive retreat at which the management team will consider how best to position the firm for the future. Actis could move in a number of different directions by expanding into new geographies, asset classes, or deal sizes. Choices made along these dimensions all have different implications for the degree of cohesion between the regions and the headquarters in London, the types of funds the firm will raise, and the skills required of employees. One of the final challenges is whether Actis, which has produced a very good track record, even needs to change its business model at this point.

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Colbun—Powering Chile

Harvard Business School Case 709-060

This case is about Colbun, Chile's second largest electricity generator, which is facing significant uncertainty regarding the cost and availability of alternative energy sources. Problems with the contracted supply of natural gas and the volatility of oil prices, coupled with regulatory changes made by the government, force Colbun to revise its business strategy and its sourcing mix. New legislation will replace historically regulated electricity prices for certain customers with free market prices and therefore change the conditions under which the company must operate. The case also deals with the pros and cons of various energy sources in view of their perceived environmental impact. As the company's CEO, Bernardo Larrain Matte has to take all these different considerations into account when planning Colbun's future, especially in the light of new opportunities and challenges posed by global climate change. The case analyzes the Chilean electricity sector and the operations of Colbun to illustrate the complexities associated with conducting business under the influence of global energy markets, government regulations, and environmental activism.

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Executive Remuneration at Royal Dutch Shell (A)

Harvard Business School Case 409-126

The remuneration committee at Shell decided to exercise their discretionary power to award five top executives a bonus for 2008, even though they had not met the necessary performance measures under the compensation plan. Proxy advisors RiskMetrics and the British Association of Insurers advise their clients to vote against the plan at the upcoming 2009 annual meeting. The Shell remuneration committee wonders how the shareholders will react.

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Executive Remuneration at Royal Dutch Shell (B)

Harvard Business School Supplement 409-127

At the 2009 Shell annual meeting, the majority of shareholders vote against the exclusive pay package. The B case compares the remuneration committee perspective (and their rationale for using discretion to award the bonuses) as well as the shareholder perspective (and their rationale for reacting so strongly against the pay package).

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Sun Hydraulics: Leading in Tough Times (C)

Harvard Business School Supplement 409-714

Video of Tricia Fulton, Sun Hydraulic's CFO, visiting Linda Hill's executive education class in March of 2009.

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Tokyo Electron Ltd.

Harvard Business School Case 609-096

Tokyo Electron Ltd. operates in a constrained innovation environment, defined by modular boundaries that are long standing in the industry that it serves, the global semiconductor manufacturing industry. While the original motivation for these boundaries was division of labor and partitioning of a complex problem into manageable pieces, the company is now faced with a new innovation that crosses these boundaries and offers the opportunity to significantly improve the yield and performance of the manufacturing process. While the technical solution is straightforward, it is not clear that the company's customers are prepared to accept such a change because it would cross organizational lines that manufacturers have established for control purposes. The case frames the technical question and poses the organizational question.

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