First Look

July 3, 2018

Of special interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Corporate sustainability needs bigger political punch

Many companies are committed to corporate sustainability and have taken big steps to improve the environment, yet certain corporate political actions like lobbying can have a greater overall impact. In an article to be published in a summer issue of California Management Review, Michael W. Toffel and colleagues argue that it’s time for firms to become as transparent about their corporate political responsibility as their corporate social responsibility. Plus, new metrics need to be developed to critically evaluate just how much these companies are fighting for the environment, the researchers say. CSR Needs CPR: Corporate Sustainability and Politics.

How AT&T answered the call for a new switchboard

Starting in the mid-1910s, AT&T began evolving from manually operated switchboards to mechanical switching systems that were faster, more cost-effective, and did not require human operators. The rollout of this new technology, which was well underway by the 1930s, caused quite a stir, not just because it involved a new dialing process that customers were struggling to learn, but it also spelled massive layoffs for many of the 100,000 switchboard operators employed by the company. In a new case study, Daniel P. Gross and William R. Kerr take a look at how AT&T handled both the reaction to its new system as well as deep cuts to the company’s staff. AT&T: Managing Technological Change and the Future of Telephone Operators in the 20th Century.

India's rapid approach to developing medical devices

In the United States, developers of innovative medical devices follow a conservative step-by-step process with an intense focus on patient safety, strict regulatory guidelines, and legal risks. A paper written by Stefan Thomke and Budhaditya Gupta, which was published in a recent issue of R&D Management, says that development teams in India take a completely different approach, conducting frequent testing of their prototypes in clinical settings. The development teams then use what they learned from these tests to develop their products. This test-and-learn process is more feasible there than in a developed country like the United States partly because of the emerging country’s more flexible regularly system. An Exploratory Study of Product Development in Emerging Economies: Evidence from Medical Device Testing in India.

A complete list of new research and publications from Harvard Business School faculty follows.

— Dina Gerdeman
 
  • forthcoming
  • IMF Economic Review

Debt Redemption and Reserve Accumulation

By: Alfaro, Laura, and Fabio Kanczuk

Abstract—In the past decade, foreign participation in local-currency bond markets in emerging countries increased dramatically. We revisit sovereign debt sustainability under the assumptions that countries can accumulate reserves and borrow internationally using their own currency. As opposed to traditional sovereign-debt models, asset-valuation effects occasioned by currency fluctuations act to absorb global shocks and render consumption smoother. Countries do not accumulate reserves to be depleted in “bad” times. Instead, issuing domestic debt while accumulating reserves acts as a hedge against external shocks. A quantitative exercise of the Brazilian economy suggests this strategy to be effective for smoothing consumption and reducing the occurrence of default.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54665

Abstract—Recent research has studied innovation in emerging economies. However, microlevel product development processes in these economies are relatively unexplored, and the mechanisms by which the emerging economy context might affect such processes are still unclear. In this paper, we explore the testing routines fundamental to product development in one emerging economy. Based on an exploratory field study of medical device development projects in India, we observe the frequent, iterative testing of prototypes in clinical settings and investigate the related learning process. The observed testing approach is distinctly different from the comparatively linear and sequential approach adopted by medical device development teams in developed countries like the United States. Further, we suggest that such testing is feasible in India because of the prevailing regulatory flexibility, the cognitive orientation of device development practitioners, and the normative orientation of medical professionals.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54600

  • Summer 2018
  • California Management Review

CSR Needs CPR: Corporate Sustainability and Politics

By: Lyon, Thomas, Magali A. Delmas, John W. Maxwell, Pratima Bansal, Mireille Chiroleu-Assouline, Patricia Crifo, Rodolphe Durand, Jean-Pascal Gond, Andrew King, Michael Lenox, Michael W. Toffel, David Vogel, and Frank Wijen

Abstract—Corporate sustainability has gone mainstream, and many companies have taken meaningful steps to improve their own environmental performance. But while corporate political actions such as lobbying can have a greater impact on environmental quality, they are ignored in most current sustainability metrics. It is time for these metrics to be expanded to critically assess firms based on the sustainability impacts of their public policy positions. To enable such assessments, firms must become as transparent about their corporate political responsibility (CPR) as their corporate social responsibility (CSR). For their part, rating systems must demand such information from firms and include evaluations of corporate political activity in their assessments of corporate environmental responsibility.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54635

  • Summer 2018
  • MIT Sloan Management Review

Why High-Tech Commoditization Is Accelerating

By: Shih, Willy C.

Abstract—Knowledge embedded within state-of-the-art production and design tools is a powerful force that is leveling the global technology playing field. It democratizes innovation and makes future competition more challenging. This paper describes the knowledge flows through production and design tools, and it suggests that the increasing level of abstraction is enabling new players to innovate without understanding how the technology building blocks they are using actually work inside. This suggests that there are new rules of competition, where firms should move beyond commoditized parts and focus their differentiation strategies.

Publisher's link: https://www.hbs.edu/faculty/Pages/item.aspx?num=54596

Abstract— We examine whether and to what extent managers are evaluated, in their relative-performance contracts, on the basis of systematic performance. Focusing on relative total shareholder returns (rTSR), the predominant metric specified in these contracts and used by market participants to evaluate managers, we document that 60% of firms—those that choose specific peers—do a remarkable job of capturing the systematic component of returns. However, 40% of firms—those that choose index-based benchmarks—retain substantial systematic noise in their rTSR metrics, which they could have substantially corrected by using their self-chosen compensation-benchmarking peers. We show that selection of noisy benchmarks is economically important, is driven by compensation consultants' tendencies and by firms' governance-related frictions, and is associated with lower ROA.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=51919

Abstract—Worker rights advocates seeking to improve labor conditions in global supply chains have engaged in private politics that led transnational corporations (TNCs) to adopt codes of conduct and to monitor their suppliers for compliance, but it is not clear whether or when these organizational structures can actually raise labor standards. We extend the literature on private politics and decoupling by identifying structural contingencies in the institutional environment and in program design under which codes and monitoring are more likely to go beyond mere symbolism and to be associated with improvements in supply chain working conditions. At the institutional level, we find that suppliers improve working conditions more when they face greater exposure risk from their domestic civil society and when their buyers are more sensitive to such exposure. At the program design level, we find that suppliers improve more when the monitoring regime signals a cooperative approach and when auditors are highly trained. We also identify several structural contingencies among and between institutional and program design features. These findings advance theory and provide new empirical insights on the outcomes of private political activism and suggest key considerations to inform monitoring strategies aimed at improving working conditions in global supply chains.

Download working paper: https://www.hbs.edu/faculty/Pages/item.aspx?num=51347

  • Harvard Business School Case 118-061

The Whistleblower at International Game Technology

Robert Mayhem, a senior manager at International Game Technology, had filed a whistleblower report with the U.S. Securities and Exchange Commission alleging that the company had misstatements in its financial reports. Mayhem’s report involved IGT’s practice of refurbishing used parts in one of its reporting segments and then transferring those parts to another reporting segment. Mayhem indicated that IGT’s method of determining the costs of the refurbished parts was inaccurate and resulted in profits being shifted from one segment to another. Prior to his report to the SEC, Mayhem had reported his concerns to his managers and to the company’s internal compliance hotline. At about the same time, IGT announced that it had accepted an offer to be acquired by another large player in the industry, which would soon move its incorporation out of the U.S. and into the UK. What should IGT do regarding the whistleblower and his report?

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This note provides an overview of U.S. federal legislation relating to whistleblowing, Sarbanes-Oxley, Dodd-Frank (including the Office of the Whistleblower), and the False Claims Act.

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https://hbsp.harvard.edu/product/118090-PDF-ENG

By the 1930s, AT&T dominated the American phone industry, serving 10 million telephones and employing over 100,000 switchboard operators. But beginning in the mid-1910s, the company began changing from manually operated switchboards to mechanical switching systems that were faster and more cost-effective and did not require human operators. By the 1930s, the changeover has been completed or is underway in most American cities with over 50,000 people. The rollout of the new technology is garnering a good deal of public attention, not just for the unfamiliar new “dialing” process that customers are required to learn, but also because of the mass layoffs of the women who served as operators. The job cuts have even resulted in reports from the Department of Labor and Congressional hearings. As the rollouts continue across the country, AT&T questions how to handle the layoffs and the reaction to the new system.

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https://hbsp.harvard.edu/product/718486-PDF-ENG

  • Harvard Business School Case 218-028

Berkshire Partners: Party City

In 2005, Berkshire Partners, a Boston-based private equity firm specializing in growth equity, was one year into their ownership of Amscan, the market leader of designed, manufactured, and distributed decorated party goods and accessories. However, Amscan's primary customer, retail store Party City, was making aggressive moves to backwards integrate and cut into Amscan's profit pool. Even if Party City failed at its attempt, it could cause significant damage to the business and subsequently hurt Amscan’s top line. The Berkshire team needed to figure out a path forward. Should they try to invest in or buy Party City to thwart efforts that would potentially erode both businesses? If they did, should Party City remain a standalone company, or should it be merged with Amscan? Would Party City even come to the negotiating table? These questions, plus additional complications with investments from overlapping funds, left the Berkshire team in a difficult situation.

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https://hbsp.harvard.edu/product/218028-PDF-ENG

  • Harvard Business School Case 118-034

Fair Value Accounting Controversy at Noble Group (A)

Noble Group was a large commodities trader based in Hong Kong and listed on the Singapore Stock Exchange. In 2012, Noble shifted its business strategy towards an asset-light model. Under this model, Noble did not own mines or farms to produce commodities but built commodity sourcing capacity by working with and investing in producers in exchange for purchase and marketing contracts. Noble also worked with customers to secure supply contracts. Noble had a portfolio of 12,000 commodity contracts by the end of 2014. The contracts were measured at fair value. Iceberg Research, an anonymous blog, released a series of reports starting in February 2015 alleging that Noble was too aggressive in its fair value accounting for contracts and investments in producers. Iceberg did not accuse Noble of fraud but suggested that Noble’s profits and balance sheet were highly inflated and Noble was headed for disaster. The case explores Noble’s business and the valuation of its contracts.

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https://hbsp.harvard.edu/product/118034-PDF-ENG

  • Harvard Business School Case 118-062

Fair Value Accounting Controversy at Noble Group (B)

Following a series of reports by Iceberg Research alleging that Noble Group was too aggressive in its fair value accounting for contracts and investments in producers, Noble’s stock price continued to fall and stakeholders began to call for improved transparency in financial reporting. This case contains two actions that the company took in an attempt to signal confidence in and credibility of its financials. This case supplements the (A) case HBS No. 118-034.

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https://hbsp.harvard.edu/product/118062-PDF-ENG