First Look

Working Papers

Equity-Debtholder Conflicts and Capital Structure

Abstract

We use an important legal event as a natural experiment to examine equity-debt conflicts in the vicinity of financial distress. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors' fiduciary duties in that state. This change limited incentives to take actions favoring equity over debt. We show that, as predicted, this increased the likelihood of equity issues, increased investment, and reduced risk taking. The changes are isolated to indebted firms (where the legal change applied). These reductions in agency costs were followed by an increase in average leverage and a reduction in interest costs. Finally, we can estimate the welfare implications of agency costs, because firm values increased when the rules were introduced. We conclude that equity-bondholder conflicts are economically important, determine capital structure choices, and affect welfare.

Download the paper: http://www.hbs.edu/research/pdf/10-070.pdf

The Many Faces of Nonprofit Accountability

Abstract

What does it mean for a nonprofit organization to be accountable? Nonprofit leaders tend to pay attention to accountability once a problem of trust arises-a scandal in the sector or in their own organization, questions from citizens or donors who want to know if their money is being well spent, or pressure from regulators to demonstrate that they are serving a public purpose and thus merit tax-exempt status. Amid this clamor for accountability, it is tempting to accept the popular view that more accountability is better. But is it feasible, or even desirable, for nonprofit organizations to be accountable to everyone for everything? The challenge for leadership and management is to prioritize among competing accountability demands. This involves deciding both to whom and for what they owe accountability. This paper provides an overview of the accountability pressures facing nonprofit leaders and examines several mechanisms available to them: disclosures, performance evaluations, self-regulation, participation, and adaptive learning. Nonprofit leaders must adapt any such mechanisms to suit their organization-be it a membership-based organization, a service-delivery nonprofit, or an advocacy network. More crucially, they need to pay greater attention to strategy-driven forms of accountability that can help them to achieve their missions.

Download the paper: http://www.hbs.edu/research/pdf/10-069.pdf

Integrity: A Positive Model That Incorporates the Normative Phenomena of Morality, Ethics, and Legality-Abridged

Abstract

We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, in whatever way one chooses to define performance (for example, quality of life, or value creation for all entities), and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology. Yet the major role of integrity in productivity and performance has been largely hidden or unnoticed or even ignored by economists and others. The philosophical discourse, and common usage as reflected in dictionary definitions, leave an overlap and confusion among the four phenomena of integrity, morality, ethics, and legality. This overlap and confusion confound the four phenomena so that the efficacy and potential power of each is seriously diminished. We show that defining integrity as honoring one's word, as we have defined "honoring one's word," 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at the individual, organizational, and social levels and 2) empowers the three virtue phenomena of morality, ethics, and legality. We also demonstrate that applying cost-benefit analysis to honoring your word guarantees that you will be untrustworthy.

Download the paper: http://www.hbs.edu/research/facpubs/workingpapers/papers0910.html#wp10-061

Accelerating Innovation in Energy: Insights from Multiple Sectors

Abstract

A combination of concerns about climate change and energy security has recently led to significant increases in public funding for energy R&D. Some commentators are suggesting that these increases need to be sustained and are advocating for increases of as much as 300 or 400 percent, suggesting that the U.S. needs a "Manhattan project" for energy. Other observers have discussed supporting innovation through a range of additional policy interventions, including tax credits, loan guarantees, IP policy, regulatory mandates, codes, and standards. It is critically important that these kinds of interventions be thoughtfully designed since it seems probable that without major advances in energy technology it is unlikely that the world will be able to reduce green-house gas emissions rapidly enough to avoid a substantial increase in the risk of significant climate change. This book hopes to contribute to the public debate in this area by pulling together a group of distinguished economists who have studied the role of public support in generating innovation in other sectors of the economy. Over the last few years relatively few economists have studied energy innovation in any depth, but there has been a substantial investment in understanding the dynamics of innovation in a wide range of other industries, including pharmaceuticals and biotechnology, IT and telecommunications, defense, chemicals, and agriculture. We believe that there are valuable lessons in this research for the energy sector.

Download the paper: http://www.hbs.edu/research/pdf/10-067.pdf

A New Model of Leadership

Abstract

In this paper we provide a new definition of leadership that gives organizations and individuals access to new power, performance, and accomplishment. In our model leadership, consists of four critical elements: 1) the creation of a vision for the future that represents a significant departure from the past, one that requires breakthroughs for its realization; 2) the creation of a system that facilitates enrollment into and elicits voluntary commitment to the vision by the critical mass of people required to discover and implement the breakthroughs required for realization of the vision; 3) the creation of a system that ensures both the timely identification of breakdowns (and the dissemination of information about them) that, if unresolved, would prevent the successful realization of the vision; and 4) the creation of a system for managing breakdowns that causes people to voluntarily recommit to the vision and maintain these commitments through to the implementation of the breakthroughs required for the realization of the vision.

Download the paper: http://www.hbs.edu/research/facpubs/workingpapers/papers0910.html#wp07-107

Beyond Agency Theory: The Hidden and Heretofore Inaccessible Power of Integrity

Abstract

There is far too much concern today about the conflicts of interest between people-for example, conflicts of interest between agents and owners-and not enough attention paid to the damage caused by an individual's conflict of interest with himself or herself. We argue here that a large amount of the damage inflicted on people and organizations is caused by actions of individuals that are not in their own self-interest. That is, people consistently impose costs on their loved ones, friends, associates, partners, employers, and the public by actions that are not in their own self-interest. This paper focuses on the integrity issues that cause huge problems in the lives of most individuals and to everyone we come in contact with. We present a positive model of integrity that, as we distinguish and define integrity, provides powerful access to increased performance for individuals, groups, organizations, and societies. Our model reveals the causal link between integrity and increased performance, quality of life, and value creation for all entities and provides access to that causal link. Integrity is thus a factor of production as important as knowledge and technology, yet its major role in productivity and performance has been largely hidden or unnoticed or even ignored by economists and others. In summary, we show that defining integrity as honoring one's word, as we have defined "honoring one's word," 1) provides an unambiguous and actionable access to the opportunity for superior performance and competitive advantage at both the individual and organizational level and 2) empowers the three virtue phenomena of morality, ethics, and legality.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1552009

Deep Dive: What Leaders Do When Only They Can Drive

Abstract

The actions of top management are seldom the unit of analysis in empirical strategy research on complex organizations. Yet, the behaviors of top executives are frequently featured as an important determinant in historical treatments of strategic change inside large firms. Theories of organizational ecology, ambidexterity, and punctuated change do not provide explanations consistent with these historical accounts. This paper, by examining the resource allocation process closely, identifies a specific set of circumstances in which intervention by top management is critical to a firm's ability to adopt new ways of behaving and thereby to realize a new strategy. In these cases, top management must seize hold of the substantive content of the new strategy as well as its operational implementation—a top-down intervention we call deep dive—in order to overcome barriers to change that are manifest in a wide range of organizational routines and behavioral norms, previously fostered by the established structural context of the firm. We illustrate this model of corporate intervention with a case study in which a high-performing firm seeks to shift its performance trajectory into new dimensions.