First Look

September 2, 2008

Independent directors may not bring very much independence to their board duties after all, a new HBS working paper available for download suggests. By studying sell-side analysts who end up serving on the boards of companies they previously covered, the research results "challenge the widely held view that appointments of independent directors necessarily add objectivity to the board," report authors Lauren Cohen, Andrea Frazzini, and Christopher Malloy. Also new this week, a working paper looks at the influence exerted by regulators and activists to pressure companies into releasing information on their emissions levels, risks, and reduction opportunities. And in a new case available for purchase, the authors explorebrand differentiation at Hilton Hotels.
— Sean Silverthorne

Working Papers

Hiring Cheerleaders: Board Appointments of 'Independent' Directors


We test the hypothesis that firms appoint independent directors who are overly sympathetic to management, while still technically independent according to regulatory definitions. We explore a subset of independent directors for whom we have detailed, micro-level data on their views regarding the firm prior to being appointed to the board: sell-side analysts who end up serving on the board of companies they previously covered. We find striking evidence that boards appoint overly optimistic analysts who exhibit little skill in evaluating the firm itself, other firms within the firm's industry, or even other firms in general. The magnitude of the optimistic bias is large: 82.0% of appointed recommendations are strong-buy/buy recommendations, compared to 56.9% for all other analyst recommendations. We find that appointed analysts' optimism is stronger at precisely those times when firms' benefits are larger and that appointed analysts appear to be more closely tied to appointing firms than the title "independent" director would suggest. Our results challenge the widely held view that appointments of independent directors necessarily add objectivity to the board of a firm.

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The Ontological Foundations of Leadership and Performance: Being a Leader, and the Effective Exercise of Leadership, a New Model


This paper is the (pre-course) introduction document to an experimental course developed by the authors and taught at the University of Rochester Simon School of Business. The intention of the course is to leave the participants actually being leaders and being able to exercise leadership effectively and for the course to contribute to creating a new science of leadership. The course is founded on an ontological model of human nature ...

Nameless + Harmless = Blameless: When Seemingly Irrelevant Factors Influence Judgment of (Un)ethical Behavior


People often make judgments about the ethicality of others' behaviors and then decide how harshly to punish such behaviors. When they make these judgments and decisions, sometimes the victims of the unethical behavior are identifiable, and sometimes they are not. In addition, in our uncertain world, sometimes an unethical action causes harm, and sometimes it does not. We argue that a rational assessment of ethicality should not depend on the identifiability of the victim of wrongdoing or the actual harm caused. Yet in four laboratory studies, we show that these factors have a systematic effect on how people judge the ethicality of the perpetrator of an unethical action. Specifically, we find that identifiability of the victim of wrongdoing and information about the outcome of wrongdoing influence both ethical judgments and decisions to punish wrongdoers. Our studies show that people judge behavior as more unethical when (1) identifiable versus statistical victims are involved and (2) the behavior leads to a negative rather than a positive outcome. We also find that people's willingness to punish wrongdoers is consistent with their judgments, and we offer preliminary evidence on how to reduce these biases.

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The Cost of Property Rights: Establishing Institutions on the Philippine Frontier Under American Rule, 1898-1918


Abstract We examine three reforms to property rights introduced by the United States in the Philippines in the early 20th century: the redistribution of large estates to their tenants, the creation of a system of secure land titles, and a homestead program to encourage cultivation of public lands. During the first phase of American occupation (1898–1918), we find that the progress of implementing these reforms was very slow. As a consequence, tenure insecurity increased over this period, and the distribution of farm sizes remained extremely unequal. We identify two primary causes for the slow progress of reform: first, the high cost of implementing these programs was a major factor in reducing take-up. On the other hand, the government was reluctant to evict delinquent or informal cultivators, especially on public lands. This reduced the costs of tenure insecurity. Political constraints prevented the government from subsidizing land reforms to a greater degree.

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Quality Management and Job Quality: How the ISO 9001 Standard for Quality Management Systems Affects Employees and Employers


Several studies have examined how the ISO 9001 Quality Management System standard affects organizational outcomes such as profits. This is the first large-scale study to examine its effects on employee outcomes such as employment, earnings, and health and safety. We analyzed a matched sample of nearly 1,000 companies in California. ISO 9001 adopters subsequently had far lower organizational death rates than a matched control group of non-adopters. Among surviving employers, ISO adopters realized higher rates of growth of sales, employment, payroll, and average annual earnings. Injury rates also declined slightly at ISO 9001 adopters, although total injury costs did not. These results have implications for organizational theory, managers, and public policy.

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Responding to Public and Private Politics: Corporate Disclosure of Climate Change Strategies


The challenges associated with climate change will require governments, citizens, and corporations to work collaboratively to reduce greenhouse gas emissions, a task that requires information on companies' emissions levels, risks, and reduction opportunities. This paper explores the conditions under which firms respond to shareholders' requests for this information. Building on previous theories of how social activists inspire field-level change, we hypothesize that shareholder actions and regulatory threats are likely to prime firms to cooperate with shareholder requests for information disclosure. Using a unique dataset, we find evidence of both direct and spillover effects. In the domain of private politics, shareholder resolutions filed against a firm, and against others in its industry, increase its propensity to acquiesce to these shareholder requests. Similarly, in the realm of public politics, the threat of state regulations that target a firm's industry—as well as those that target other industries—increases the likelihood that the firm will acquiesce to shareholder requests to disclose related information. These findings extend existing theory by showing how organizational change can be sparked by both activist groups and government policymakers and that challenges mounted against a single firm (and industry) can inspire field-level (and state-level) changes.

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Liquidity Needs in Economies with Interconnected Financial Obligations


A model is developed where firms in a financial system have to settle their debts to each other by using a liquid asset. The question that is studied is how many firms must obtain how much of this asset from outside the financial system to make sure that all debts within the system are settled. The main result is that these liquidity needs are larger when these firms are more interconnected through their debts, i.e., when they borrow from and lend to more firms. Two pecuniary externalities are discussed. One involves the choice of paying one creditor first rather than another. The second involves the extent to which firms borrow and acquire claims on other firms with the proceeds. When a group of firms raises their involvement in this activity, firms outside the group may face more difficulties in settling their debts.

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Cases & Course Materials

Cognizant Technology Solutions

Harvard Business School Case 408-099

In the highly competitive information technology outsourcing industry, Cognizant Technology Solutions has developed a strategy to differentiate itself by emphasizing building very close client relationships through its "Two-in-a-box" (TIB) model. This model is based on having two people share complete responsibility for the client. In the U.S. or Europe, the "on site" person, along with his or her relationship management team, is responsible for understanding the client's needs, obtaining projects and properly scoping out the work. The "offshore" person in India or elsewhere, along with his or her delivery team, is responsible for completing the project in a high-quality and timely way. The same top- and bottom-line metrics are used to evaluate the performance of both the on-site and offshore managers. This strategy (as opposed to ones based on things like low cost and innovation used by Cognizant's competitors) is intended to build deep and strong client relationships that will maximize Cognizant's "share of wallet." One interesting aspect of TIB is Cognizant Business Consulting, a 1,700-person group which advises clients in the context of helping them develop IT solutions for their business challenges. More recently, and as the next evolution of the TIB model, Cognizant is developing what it calls "Cognizant 2.0" or C2. C2 is a delivery platform based on Web 2.0 technology that enables Cognizant to subdivide work into tasks that can be allocated wherever in the world the best resources within Cognizant exist based on cost, expertise and availability while at the same time maintaining collaboration and integration to ensure timely and high-quality delivery.

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Corruption in Germany

Harvard Business School Case 709-006

Why do managers become corrupt? Does corruption ever pay? When do friendly relations cross into bribery? How can CEOs manage and prevent outbreaks of corruption? These and other questions are raised by three short case studies of corruption in Germany: at the global engineering firm Siemens, the automaker VW, and the chemical giant BASF. While German law not only permitted overseas bribery but even made it tax deductible until 1999, it was not welcomed in some nations where Siemens did business such as the United States—or in Germany after 2000—but old practices continued. Cooperative management-labor relations, often seen as key to the post-World War II German industrial powerhouse, went sour at VW, as a top manager secured key concessions by paying for union leaders' lavish foreign travel and visits to prostitutes. After vitamin prices sagged in the late 1980s, BASF and the Swiss chemical firm Hoffmann-La Roche plotted a global cartel that lasted a decade and raised the prices of many vitamins 50 percent or more. In the end, even after record criminal fines and jail time for some executives, some observers argued, such practices were likely to recur.

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Hilton Hotels: Brand Differentiation through Customer Relationship Management

Harvard Business School Case 809-029

This case analyzes the Hilton Hotels Corporation's CRM strategy at a key juncture in its history, immediately after the firm has been taken private by Blackstone. The case provides students with a comprehensive history of the evolution and IT enablers of Hilton's CRM Initiative, as well as the proprietary OnQ enterprise system. The case thus offers a rare opportunity to engage in a longitudinal evaluation of the firm's CRM initiative and to enable students to propose the future evolution of the initiative based on their analysis.

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Nephila: Innovation in Catastrophe Risk Insurance

Harvard Business School Case 206-130

At the cross-section of capital markets and the catastrophe insurance space stands the hedge fund Nephila. Nephila must decide how best to take advantage of the newly presented market opportunities post hurricanes Katrina, Wilma, and Rita. Nephila has a plethora of options as it brings capital markets understanding to the insurance space. Nephila can easily trade in and out of insurance products and is not subject to regulatory restrictions. Yet, Nephila only capitalizes 1% of the entire catastrophe reinsurance market. What is the best way to grow?

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Note on Generic Drugs in the European Union

Harvard Business School Note 309-019

Rules governing the introduction of generic drugs in U.S. and EU have some similarities but significant differences because of the Hatch-Waxman Act in the U.S.

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Philip McCrea: Once an Entrepreneur... (B)

Harvard Business School Supplement 409-025

Philip McCrea is dealing with the aftermath of the move of his company and family from San Francisco to New Jersey (from the (A) case). Although the move goes well from a family perspective, his business runs into challenges when he merges it into a Canadian company and winds up with 30% ownership. McCrea eventually resigns and has to deal with his role in the failure of the company and the transition to the next step in his career.

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U.S. and EU Trademark Protection

Harvard Business School Note 309-021

Rules governing trademark protection in the U.S. and EU differ substantially. This note describes the primary differences and their implications.

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Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns


According to recent studies in neuroscience, the way we learn doesn't always match up with the way we are taught. If we hope to stay competitive—academically, economically, and technologically—we need to rethink our understanding of intelligence, reevaluate our educational system, and reinvigorate our commitment to learning. In other words, we need "disruptive innovation."

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When Virtue Is a Vice


Choosing duty over pleasure today can cause regret down the road—whereas regret over the reverse is fleeting. Marketers of luxury products and services should consider prompting customers to predict their future feelings about choices made now.

The Gastroenterology Fellowship Match—The First Two Years


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Making Diverse Teams Click


The article reports on a study concerning team building and the fit or interpersonal congruence among team members. The study found that the performance of diverse teams improves when there is a high level of interpersonal congruence. Performance appraisals with 360-degree feedback improves congruence and collaboration, opens communication when feedback is discussed by the team, and provides an opportunity for more accurate self-assessments. An example of how 360-degree feedback was used by a cross-functional management team at National Semiconductor is discussed.