First Look

October 12, 2006

How accurately do firms that offer social responsibility ratings predict companies' environmental performance? Some better than others, according to the new working paper by Michael W. Toffel and colleagues, "Do Corporate Social Responsibility Ratings Predict Corporate Social Performance?" The analysis carries broad implications for socially-aware investors as well as CSR advocates and opponents. In other new publications this week from HBS faculty, several case studies look into a number of high-profile companies. One case examines Las Vegas-based MGM Grand Hotel's effort to gather better information on nongaming customers. Another explores Bang & Olufsen's ability to sustain innovative design and profit over time in the very volatile audio equipment industry. A third case looks at the development of corporate culture by shadowing Tom Pedersen, newly-appointed chief learning officer of Shinsei Bank in Japan, as he considers how to create an integrated culture in an institution lacking strong tradition.
— Sean Silverthorne

Working Papers

Do Corporate Social Responsibility Ratings Predict Corporate Social Performance?


Ratings of corporations' environmental activities and capabilities influence billions of dollars of "socially responsible" investments as well as some consumers, activists, and potential employees. Unfortunately, there is little evidence about the validity of these ratings. We examine how well two of the most widely used ratings—those of Kinder, Lydenberg, Domini Research & Analytics (KLD) and Innovest Strategic Value Advisors—predict environmental performance. We find that firms that have more KLD Environmental Concerns have slightly, but statistically significantly, more pollution and regulatory violations in later years than firms that raise fewer "concerns." Innovest scores and KLD Environmental Strengths, in contrast, do not accurately predict the outcomes. We discuss the implications of our findings for advocates and opponents of corporate social responsibility, as well as for studies relating social responsibility ratings with financial performance.

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Coerced Confessions: Self-Policing in the Shadow of the Regulator


As part of a recent trend toward more cooperative relations between regulators and industry, novel government programs are encouraging firms to monitor their own regulatory compliance and voluntarily report their own violations. In this study, we examine how regulatory enforcement activities influence organizations' decisions to self-police. We created a comprehensive dataset for the "Audit Policy," a United States Environmental Protection Agency (US EPA) program that encourages companies to self-disclose violations of environmental laws and regulations in exchange for reduced sanctions. We find that facilities are more likely to self-disclose if they were recently subjected to one of several different enforcement measures and if they were provided with immunity from prosecution for self-disclosed violations.

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Cases & Course Materials

Bang & Olufsen: Design Driven Innovation

Harvard Business School Case 607-016

A successful company, recognized worldwide for exquisite design of consumer electronics products, strives to better integrate software design into its traditional physical product design processes to meet the demands of a post-iPod world. Details the Bang & Olufsen "design driven innovation" process, that works very differently than many companies' product development processes, but allows this company to produce very high profit margin products that retain their margins for a very long time in an industry in which products come and go very quickly. The case helps students understand processes and practices that support the creation of highly differentiated products. It also deals with issues of change in an already successful context, and of managing highly creative staff who are vital to a company's business model.

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Boeing's e-Enabled Advantage

Harvard Business School Case 807-011

Examines Boeing's new strategy of offering services to regain market dominance and help its struggling airline customers improve efficiency and profitability.

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Business, Law, and Society: The Systems Approach to Law and Management

Harvard Business School Note 806-086

Presents the systems approach to law and management, a construct for understanding how public law affects the competitive environment and a firm's resources. Describes how the legally astute manager can use legal tools to assess opportunities, develop the firm's value proposition, and select and perform the activities in the value chain. Also, explains the social context in which business operates.

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Comergent Technologies Inc.: Enterprise E-Commerce

Harvard Business School Case 505-016

BP's IR director has begun a program to use information regarding external views of BP and the industry as part of the firm's planning and operational activities. This information is generated as a portion of their award winning investor relations program, and had previously been used only to enhance communications. The case allows a discussion of the relative merit of more formally including this information in BP's planning and operations. It also provides "best practices" insights into IR.

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IR at BP: Investor Relations and Information Reconnaissance

Harvard Business School Case 107-026

BP's IR director has begun a program to use information regarding external views of BP and the industry as part of the firm's planning and operational activities. This information is generated as a portion of their award winning investor relations program, and had previously been used only to enhance communications. The case allows a discussion of the relative merit of more formally including this information in BP's planning and operations. It also provides "best practices" insights into IR.

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Legal Aspects of Management: Anticipating and Managing Risk, Module Note

Harvard Business School Note 806-148

Describes the sixth and final module of the Harvard Business School MBA second-year elective course Legal Aspects of Management. This module deals with the way firms should approach business risks in order to avoid legal liability and how firms can use contracts to allocate risk.

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Legal Aspects of Management: Increasing and Capturing the Value of Knowledge Assets, Module Note

Harvard Business School Note 806-137

Describes the third module of the Harvard Business School MBA second-year elective course Legal Aspects of Management. This module deals with the way in which intellectual property rights—as protected by patents, copyrights, trademarks, and trade secrets—enable firms to achieve competitive advantage.

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Note on Human Behavior: Character and Situation

Harvard Business School Note 404-091

When we think of human behavior, especially from a moral perspective, we are often drawn to explanations that rest on character. In simple terms, we conclude that virtuous behavior stems from a person of integrity with strong character and immoral behavior from a person of little integrity with weak character. Discussions of character typically hinge on the extent to which an individual believes in and adheres to the basic moral tenets of honesty, fairness, fidelity to commitments, respect for others and their property, no unjustified harm to others, no theft, and no violation of accepted legal codes. The ability to identify empathetically with others is sometimes seen as a necessary component to understanding and complying with such moral precepts. Character is presumed to influence predictably any individual's behavior across different situations and over time (in the language of rational choice, character can be thought of as a stable system of preferences that informs the tradeoffs and choices an individual is likely to make in different circumstances). Teaching Purpose: To provide background on human behavior.

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Note on Human Behavior: Reason and Emotion

Harvard Business School Note 404-104

Human beings are driven by reasons and emotions. On the one hand, as rational choice theorists assert, human beings are resourceful and evaluative as they strive to maximize their own interests. An individual's interests can converge or diverge from the interests of the organization. Thus, to bring the resourcefulness of individuals to benefit the organization, control systems must be designed to align the interests of the organization and the individual. On the other hand, it has long been recognized (and reinforced by contemporary research on the human brain) that human beings are also driven by emotions. Emotions can be in accord with rational behavior (e.g., when fear evokes caution in the face of danger, or pride motivates greater effort). But emotions can also be at odds with rational behavior (e.g., when pain avoidance leads to an unwillingness to confront difficult decisions, or shame leads to cover-ups, or hubris leads to excessive optimism). Understanding the importance of both reason and emotion is, thus, critical to designing organizations, control systems, and governance structures that promote desired behaviors. Teaching Purpose: Some model of human nature, implicitly if not explicitly, guides any manager's actions. It is useful for students to be aware of these underlying assumptions and attentive to ways reason and emotion shape their own behavior and those of others around them.

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The Rise of Wal-Mart Stores Inc. 1962-1987

Harvard Business School Case 707-439

It is 1988 and David Glass has just taken over as CEO from the legendary Sam Walton at Wal-Mart. Meanwhile, Joe Antonini has just taken the CEO position at Wal-Mart's arch rival, Kmart. Although Wal-Mart is still well behind Kmart, it appears to be in great shape and is catching up fast. Glass seems committed to continuing with "business as usual." Is this enough? What might Kmart do to stop him?

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Shinsei Bank: Developing an Integrated Firm

Harvard Business School Case 407-006

Tom Pedersen, newly appointed chief learning officer (CLO) of Shinsei Bank in Japan, pondered how he could facilitate development of an integrated culture and transformation of the organization. Shinsei Bank had not developed longstanding tradition or a strong corporate culture. The bank, which was made up of professionals with extremely diverse backgrounds, had to develop an integrated organizational culture. Pedersen had just administered a new performance evaluation program for seventeen senior executives. This was the first time that they had been measured against competencies aligned with the corporate vision and values revised in late 2005. He thought the evaluation program was critical for permeating the vision and values throughout the bank and was eager to roll out the program to a larger number of employees next year. Pedersen wondered how he should improve the performance evaluation, and if this was the right process to influence the culture of the bank? He also wondered what other measures might be effective to get employees with diverse backgrounds to work together. How could he create a learning organization at Shinsei Bank?

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Slots, Tables, and All that Jazz: Managing Customer Profitability at the MGM Grand Hotel

Harvard Business School Case 106-029

The MGM Grand Hotel in Las Vegas had detailed information on loyal gaming customers, but could its information systems also be tailored to nongaming customers? As the nongaming business sectors became increasingly profitable both at the MGM Grand and in Las Vegas generally, understanding the nongaming customers appeared to be of critical importance to the continuing growth of the resort.

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Strategic Compliance Management

Harvard Business School Note 806-173

Explains the construct of strategic compliance management (SCM) and asserts that managers and their firms can perform more effectively, that is, create or capture more value or better manage risk, when they comply with applicable laws, search for innovation opportunities created by regulation and deregulation, and proactively anticipate future regulation. A rewritten version of an earlier note.

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Wild Oats Markets, Inc.

Harvard Business School Case 707-438

Ever since ex-Ben and Jerry's CEO Perry Odak took over as CEO of Wild Oats in 2001, he has been trying to turn the company around. After some apparent false starts, profits now seem to be on the rise in 2005 and 2006. Has he finally done it?

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Science Business: Promise, Performance and the Future of Biotech


Why has the biotechnology industry failed to perform up to expectations despite all its promise? In Science Business, Gary P. Pisano answers this question by providing an incisive critique of the industry. Pisano not only reveals the underlying causes of biotech's problems; he offers the most sophisticated analysis yet on how the industry works. And he provides clear prescriptions for companies, investors, and policymakers seeking ways to improve the industry's performance. According to Pisano, the biotech industry's problems stem from its special character as a science-based business. This character poses three unique business challenges: how to finance highly risky investments under profound uncertainty and long time horizons for R&D; how to learn rapidly enough to keep pace with advances in drug science knowledge; and how to integrate capabilities across a broad spectrum of scientific and technological knowledge bases. The key to fixing the industry? Business models, organizational structures, and financing arrangements that place greater emphasis on integration and long-term learning over shorter-term "monetization" of intellectual property. Pisano maintains that all industry players—biotech firms, investors, universities, pharmaceutical companies, government regulators—can play a role in righting the industry. The payoff? Valuable improvements in health care and a shinier future for human well-being.

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Capital Flows and Capital Goods


Studying the relation between equity market liberalization and imports of capital goods, we examine one channel through which international financial integration can promote growth. For the period 1980-1997, we find that after controlling for other policies and fundamentals, stock market liberalizations are associated with a significant increase in the share of imports of machinery and equipment. We hypothesize this can be attributed to the consequences of financial integration, which allows access to foreign capital, and provide evidence consistent with this channel. Our results suggest that increased access to international capital allows countries to enjoy the benefits embodied in capital goods.

Strategies for Two-Sided Markets


"Two-sided markets" are platform-mediated markets that exhibit network effects between two distinct groups of users, for example, card holders and merchants in credit card markets; home buyers and sellers in real estate markets. In this context, "platforms" provide infrastructure and rules that facilitate users' transactions. The article provides an introduction to strategic challenges that confront platform providers serving two-sided markets. The first challenge is designing optimal business models, which typically involves subsidizing one user group and profiting from the other. The second challenge is coping with winner-take-all dynamics that often prevail in markets with network effects. The third challenge is "platform envelopment," which occurs when a platform provider enters an adjacent platform-mediated market, stealing share by bundling the target platform's functionality with its own.

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