First Look

Abstract— The well-known weak empirical relationship between beta risk and the cost of equity—the beta anomaly—generates a simple tradeoff theory: As firms lever up, the overall cost of capital falls as leverage increases equity beta, but as debt becomes riskier the marginal benefit of increasing equity beta declines. As a simple theoretical framework predicts, we find that leverage is inversely related to asset beta, including upside asset beta, which is hard to explain by the traditional leverage tradeoff with financial distress that emphasizes downside risk. The results are robust to a variety of specification choices and control variables.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=55799

Abstract— While in recent decades the social and business sectors have evolved on fairly separate tracks, today companies are increasingly expected to generate social value in addition to profit. As a result, they also increasingly face the distinct challenge of pursuing social and financial goals at the same time. Social enterprises have a great deal of experience dealing with this challenge as hybrid organizations that combine aspects of typical businesses (undertaking commercial activity) and not-for-profit organizations (pursuing a social mission). In this essay, I discuss my research, as well as that of others, on social enterprises with the objective of tracing my perspective on the current state of knowledge regarding social enterprises and their capacity to pursue joint social and financial goals over time. I start by discussing how exposure to diverse organizational contexts and gender affect the founding of social enterprises before presenting the distinct tensions of hybrid organizing and how social enterprises overcome them. In doing so, I suggest that we consider these challenges in terms of internal and external pressures related to both identity and resources. Building on existing research, I then identify four pillars that seem to play a critical role in enabling organizations to pursue joint social and financial goals over time—specifically, how organizations set goals, structure activities, select members, and socialize those members. In my own research, I see that these four pillars both shape and are shaped by the culture of the organization. While they might configure these organizational elements differently, I observed that the organizations able to pursue both social and financial goals over time seem to share a commonality—they maintain a hybrid organizational culture that holds and balances tensions between creating social and economic value. In conclusion, I discuss areas for future research on the joint pursuit of financial and social goals in organizations.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=55763

Abstract— Exploitive working conditions have spurred companies to pressure their suppliers to adopt labor codes of conduct and to conform their labor practices to the standards set forth in those codes. Yet little is known about whether organizational structures such as codes are associated with improvements in supplier labor practices, especially in organizations in which they compete with productivity-driving incentive structures. We investigate under what internal structural conditions suppliers’ labor practices are likely to become more tightly aligned—or coupled—with their formal commitments to labor codes of conduct. Using data on 3,276 suppliers in 55 countries, we find that in suppliers with high-powered efficiency structures (piece-rate pay), labor codes are internally buffered and thus less tightly coupled with labor practices, yet tighter coupling is more likely in suppliers with certain types of managerial structures (certified management system and unions). We also find important interactions between these organizational structures: managerial structures offset efficiency structures, and the presence of multiple managerial structures within a single supplier hastens improvement. Our focus on the internal structural dynamics of suppliers extends the existing decoupling literature and provides the first empirical investigation of internal buffering of multiple organizational structures. Furthermore, our findings suggest important strategic considerations for managers selecting supplier factories and provide key insights for the design of transnational sustainability governance regimes.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=55732

Abstract— We conduct a field experiment at an entrepreneurship bootcamp to investigate whether interaction with proximate peers shapes a nascent startup team's performance. We find that teams whose members lack prior ties to others at the bootcamp experience peer effects that influence the quality of their product prototypes. A one-standard-deviation increase in the performance of proximate teams is related to a two-thirds standard-deviation improvement for a focal team. In contrast, we find that teams whose members have many prior ties interact less frequently with proximate peers, and thus their performance is unaffected by nearby teams. Our findings highlight how prior social connections, which are often a source of knowledge and influence, can limit new interactions and thus the ability of organizations to leverage peer effects to improve the performance of their members.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=55775

Abstract— Many teams face the problem of process loss, or suboptimal functioning, with sometimes serious consequences, such as medical errors. Team reflexivity—a deliberate process of discussing team goals, processes, or outcomes—can aid in optimizing team performance. In the current chapter, we build on a conceptualization of teams as information-processing systems and highlight reflexivity as a critical information processing activity. Specifically, we describe the relationship of team reflexivity to team and organizational learning and emphasize the dynamic, self-regulatory process aspect of team reflexivity as well as the role of goal setting. Furthermore, we describe the antecedents and outcomes of team reflexivity, the role of motivated information processing, the important role of team reflexivity in problem identification and problem solving, and how team reflexivity can be stimulated. Finally, we discuss the implications of our review and identify avenues for future research.

Publisher's link: http://www.hbs.edu/faculty/Pages/item.aspx?num=55662

Abstract— CEO activism refers to corporate leaders speaking out on social and environmental policy issues not directly related to their company’s core business. Distinct from nonmarket strategy and traditional corporate social responsibility, the recent wave of CEO activism focuses on social issues unrelated to their core business, ranging from environmental issues to LGBTQ rights and race relations. In the first study of this phenomenon, we implement two framed field experiments to provide evidence on how CEO activism can influence public opinions about government policies and consumer attitudes about the CEO’s company.

Abstract— Collaborating with Yelp and the city of San Francisco, we revisit a canonical example of quality disclosure by evaluating and helping to redesign the posting of restaurant hygiene scores on Yelp.com. We implement a two-stage intervention that separately identifies consumer response to information disclosure and a disclosure design with improved salience—a consumer alert. We find score posting is effective, but improving salience further increases consumer response. Moreover, the presence of an alert for a low-score restaurant reduces its probability of getting a low score again.

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Abstract— Why do regimes allow some low-income business owners to avoid taxes by operating informally? Electoral incentives are central to prevailing explanations of governments’ forbearance of informal enterprise. Yet many unelected regimes host large informal economies. This article examines forbearance in non-democracies. We argue that unelected regimes forbear their supporters’ informal businesses. We test this argument in Jordan. Using survey data of over 3,800 micro and small enterprises (MSEs), we find that informal businesses are more likely to operate in districts with higher rates of public sector employment, the crown jewel of the Jordanian regime’s patronage. Interviews with over 60 of the surveyed firm owners across four strategically paired districts illustrate that business owners covet forbearance and that kinship ties to public sector employees limit forbearance to regime supporters. Communities that attract higher rates of public sector employment forfeit higher levels of fiscal revenue by permitting informality. This complementarity between public sector employment and forbearance amplifies inequalities between regime supporters and opponents in non-democracies.

Abstract— Managing customers effectively is crucial for firms' long-term profitability. By understanding differences across customers, firms can tailor their activities towards those customers for whom the intervention will pay off, therefore increasing the value of customers while maximizing the return on the marketing efforts. Targeting effectively ultimately depends on the firm's ability to precisely estimate differences across customers—a very difficult task when firms attempt to manage recently acquired customers for whom only the first purchase has been observed. We propose a model that allows marketers to form “first impressions" of customers right after having been acquired. We define a first impression as an inference (based on the observed behaviors at the moment of acquisition) that the firm makes about customers' traits that are relevant for the firm (e.g., whether the customer will purchase again, how s/he will respond to specific marketing actions). The main aspect of the model is that it captures latent dimensions that impact both the variety of behaviors collected at acquisition as well as future propensities to buy and to respond to marketing actions. Using probabilistic machine learning, we combine deep exponential families with the demand model, relating behaviors observed in the first purchase with consequent customer behavior. We first demonstrate that such a model is flexible enough to capture a wide range of heterogeneity structures (both linear and non-linear), thus being applicable to a variety of behaviors and contexts. We also demonstrate the model's ability to handle large amounts of data while overcoming commonly faced challenges such as data redundancy, missing data, and the presence of irrelevant information. We then apply the model to data from a retail context and illustrate how the focal firm could form customers' first impressions by merely using its transactional database. We show that the focal firm would significantly improve the return on their marketing actions if it targeted just-acquired customers based on their first impressions.

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In August 2017, Commonwealth Bank of Australia was looking for ways to differentiate itself from competing banks and was also trying to improve the financial well-being of its customers. One domain where this was particularly relevant was in its bank-issued credit card business, where customers routinely selected cards that although profitable for the bank could be a poor fit for customers’ needs—leading to low satisfaction scores, cancellations, and occasionally, financial distress. To that end, the company’s Behavioral Economics team had developed a provocative experiment dubbed “The Good and the Bad.” Rather than just presenting the strengths of its various credit card offerings, they proposed also promoting each credit card’s less-obvious drawbacks. Being transparent with customers might help them make better choices, but would those choices come at the expense of bank performance? Should a company choose to be in the sales prevention business?

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With a breakthrough cure for Hepatitis C listing in the U.S. at $1,000/pill, Gilead must now solve the issue of making it available to patients across the world, much as it did for its blockbuster HIV/AIDS antiretrovirals. For Erik Musalem, the new general manager of Gilead Mexico, the challenge was complicated by operating in a middle-income country, where Gilead’s terms for more vulnerable nations did not apply. For all practical purposes, Musalem had only one customer for his company’s Hep C medicine: Mexico’s public health system and the National Pricing Commission that set prices annually for the entire sector. With no lack of priorities competing for the finite resources of the public health sector, Musalem’s charge was to devise the strategy that in the long run would maximize access to the cure in Mexico while protecting the financial strength of Gilead Sciences, Inc.

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It is March 2017, and TPG, a global alternative investment firm with $74 billion assets under management, has recently launched its inaugural impact-investing fund—the $2 billion Rise Fund. In an effort to “take the religion out of impact investing,” Bill McGlashan, founder and managing partner of TPG Growth, an arm of TPG focused on growth equity investments and middle-market buyouts and co-founder and CEO of the Rise Fund, has partnered with The Bridgespan Group, a nonprofit consultancy, to develop an evidence-based methodology for quantifying the impact of prospective Rise investments. Together, they have come up with a framework that ultimately generates an impact multiple of money (IMM), a measure of the social value created by a company per equity dollar invested. If a company fails to meet the IMM threshold, Rise will not invest in it. The case finds McGlashan and Maya Chorengel (HBS MBA ’97), Rise’s senior partner for impact, debating whether to make Rise’s first investment in EverFi, an educational technology company that offers a range of online educational programming to its K-12 school, university, and corporate clients.

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Supplement to the (A) case. The case describes the events that took place in the run-up to the 2018 Annual General Meeting, the voting outcome, key perspectives on success factors, and the challenges that The Weir Group faced in the near future.

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In late 2013, Ryan Cohen, cofounder and CEO of online pet products retailer Chewy.com, faces a “bet the company decision”—whether to stay with a third-party logistics provider (3PL) for all of its e-commerce fulfillment or to take the function in house. Cohen worries that the existing 3PL may not be able to scale with Chewy’s projected growth or maintain the company’s performance standards for service quality and fulfillment. While Cohen is convinced that achieving scale is essential to making the business work, he is also keenly aware that neither he nor his cofounders have any experience in managing logistics. In addition, any move they might make to in-source fulfillment would likely destabilize the existing 3PL relationship, on which the viability of the fast-growing business depends. Cohen’s board members are concerned enough about the situation to pressure him to throttle back growth and maintain the 3PL. Cohen sees four possible options: stay with the current 3PL, add another 3PL to handle additional volume, stay with the 3PL and add a company-owned fulfillment center in a new region, or fully insource fulfilment as quickly as possible. In light of Cohen’s goal of reaching $500 million in sales by 2018, the board is divided about what to do, and the CEO is left with what appears to be a choice between two risky options as he attempts to move Chewy forward.

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Cohen and Chewy’s other board members decided to fully insource order fulfilment and commenced building an order fulfilment center near its 3PL partner’s facility. As soon as the 3PL learned that Chewy would be managing its own order fulfillment; however, it decided to triple what it charged Chewy to fulfill each order. What should Chewy do?

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Omar Simmons, managing director of a private equity fund that owns 53 Planet Fitness Health Clubs, has to choose: continue in private equity or shift his career to managing and growing the health clubs. An African-American graduate of Princeton University and Harvard Business School, Simmons has to weigh the financial implications of his choice—as well as the career implications of whatever he chooses to do. Students will learn about private equity investing, Entrepreneurship via franchising, the health club industry, and career decision-making.

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This note explains how several retail and service organizations use a practice described here as “structured empowerment” to balance control and flexibility as they grow. I define structured empowerment as a practice that grants employees both (a) the power to make choices from narrow sets of options on a set of inputs and processes and (b) the responsibility to deliver results according to the company’s value proposition. This lets a company control operations—by standardizing the options frontline employees can choose from to drive results—and adapt to diverse markets—because combining choices from the options makes a large number of service offerings and routine sequences possible.

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On the afternoon of Monday October 13, 2008, Hank Paulson Jr., the Secretary of the Treasury of the United States, walked into the large conference room across the hall from his office in the Treasury Department. Joining him were Federal Reserve Chairman Ben Bernanke, President of the Federal Reserve Bank of New York Timothy Geithner, Chair of the Federal Deposit Insurance Corporate Sheila Bair, and the Chief Executive Officers of nine of the largest banks in the United States. This distinguished group had been brought together by the most serious financial crisis since the Great Depression of the 1930s. Financial panic was pushing the U.S. and European financial systems to the brink of failure. Paulson hoped his meeting with the bank CEOs would be a turning point. U.S. financial markets were closed for Columbus Day, and Paulson was planning to announce the latest government actions to stabilize the financial system before markets reopened on Tuesday.

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In the summer of 2018, San Francisco–based electronic cigarette (e-cigarette) maker JUUL Labs, was experiencing exponential growth. Sales of its JUUL e-cigarette had increased by 783% over the preceding year, projected revenues for 2018 topped $940 million, and the company had captured over 72% of the U.S. e-cigarette market. The company’s success had thrust it into the spotlight, and JUUL Labs found itself at the center of considerable controversy. Whereas the company’s stated goal was to provide tobacco smokers with a less harmful e-cigarette alternative, JUUL Labs’s products had proven widely popular with teenage high school students who had never smoked. Some advocacy groups and public policy makers speculated that the company had purposefully marketed its products to minors—an allegation JUUL Labs’s executives strongly denied. The company now faced an FDA probe and investigations by at least two state attorney generals. It needed a strategy to deal with its mounting regulatory and public relations problems.

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In April 2018, Prime Minister Shinzo Abe was again in Washington to petition Donald Trump. After years of rapid, export-led growth, Japan had slumped into recession in 1991 and never really recovered. For the past 27 years, its economy has grown at 1.1% annually, plagued by deflation. After several attempts at quantitative easing, Abe had commenced a radical program in 2012 called Quantitative and Qualitative Easing—the first of “three arrows” to repair the Japanese economy. But in early 2018, inflation was still far below the 2% goal, growth had turned negative, and Abe faced the highest debt among the OECD. Together with demographic, energy, and security problems, Abe had his hands full, while President Trump roiled the waters in China and North Korea.

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This case describes how Robert Fadel, CEO and chairman of ABC, one of Lebanon’s leading retail and real estate groups, professionalized the family business. Robert was the second son of the company’s founder, Maurice Fadel, who had run it single-handedly. Concerned that the business might be affected by rivalry between his four sons after he died, Maurice set up a trust in 2002 that designated Robert as his successor, and in May of 2009, Maurice revised the trust, granting Robert full control of the board as well. In June 2009, Maurice Fadel passed away, and according to the provisions of the trust, Robert became the chairman and CEO of ABC for a period of five years, with the possibility of extending his term by an additional three years on condition that he had the support of at least one of his brothers. In his new role, Robert set two main goals for the company. First, he wanted to turn ABC into a professionally managed organization at all levels. Second, he wanted to invest in long-term projects that would expand the business. Actualizing his vision was not an easy task given the family conflicts and Lebanon’s economic and political environment. However, Robert achieved both of his goals by the end of his eighth year, in 2017, when he stepped down as ABC’s CEO. The dilemmas at that point were whether he should appoint someone from outside the Fadel family as ABC’s new CEO, and whether he should step down from the board chairmanship.

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JD, China’s second largest e-commerce company by gross merchandise volume (GMV) after Alibaba, had expanded rapidly from 2012 to 2016. When the company celebrated its 13th birthday in 2017, Richard Liu, its founder, deliberated on the company’s growth strategies. The landscape of China’s e-commerce market had changed drastically in recent years. The growth in the e-commerce market had declined significantly. Furthermore, the advancement of AI and big data was turning shopping into a boundaryless experience—consumers could purchase products tailored to their preferences anywhere and anytime. Finally, JD’s rival, Alibaba, had made rapid moves to improve its logistics capabilities and expanded aggressively in the offline market. Liu must decide how JD should compete and how to expand the company’s offline strategy.

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