Reexamining dual-class stock

Snapchat’s initial public offering, which provided shares with no voting rights, is a culmination of the growing trend of dual-class shares. It contradicts the precept of one-share, one-vote that is essential for corporate democracy. Snapchat’s action caused an uproar among influential investors. In January 2017, a coalition of the world’s biggest money managers, which together control more than $17 trillion in assets, demanded a total ban on dual-class shares. We reason that the increasing prominence of dual-class stock is explained by the confluence of three economic trends: the growing importance of intangible investments, the rise of activist investors, and the decline of staggered boards and poison pills. A dual-class structure offers immunity against proxy contests initiated by short-term investors. It enables managers to ignore capital market pressures and to avoid myopic actions such as cutting research and development, which hurt companies in the long term. Thus, a dual-class structure is optimal in certain scenarios. We put forth alternatives to dual-class structure that enable managers to maintain control while retaining focus on sustainable value creation.     

The CEO's role in business model reinvention

Fending off new competitors is a perennial struggle for established companies. Govindarajan and Trimble, of Dartmouth's Tuck School of Business, explain why: Many corporations become too comfortable with their existing business models and neglect the necessary work of radically reinventing them. The authors map out an alternative in their "three boxes" framework. They argue that while a CEO manages the present (box 1), he or she must also selectively forget the past (box 2) in order to create the future (box 3). Infosys chairman N.R. Narayana Murthy mastered the three boxes to reinvigorate his company and greatly increased its changes of enduring for generations.     

Profit center manager compensation: An examination of market,political and human capital factors

A model of the determinants of profit center manager (PCM) compensation is presented and tested. Market, political and human capital factors are included in the model development and testing. Based on a sample from several industries, this study found a complex set of variables affecting PCM compensation.     

Let's hear it for B players

In the much-heralded war for talent, it's hardly surprising that companies have invested a lot of time, money, and energy in hiring and retaining star performers. For most CEOs, recruiting stars is simply more fun; for one thing, the young A players they interview often remind them of themselves at the same age. For another, A players' brilliance and drive is infectious; you simply want to be in their company. Besides, in these troubled times, when businesses are so vulnerable, people who seem to have what it takes to turn around a company's performance are almost irresistible. But our understandable fascination with star performers can lure us into the dangerous trap of underestimating the vital importance of the supporting actors. It's true that A players can make enormous contributions to performance. Yet, as the authors have found, companies' long-term performance--even survival--depends far more on the unsung commitment and contributions of their B players. These capable, steady performers are the best supporting actors of the corporate world. Companies are routinely blinded to the important role B players serve in saving organizations from themselves. They counter-balance the ambitions of the company's high-performing visionaries, whose much-esteemed strengths, when carried to an extreme, can lead to reckless or volatile behavior. In this sense, B players act as a stabilizing force for charismatic A players who might otherwise destabilize the organization. Unfortunately, organizations rarely learn to value their B players in ways that are gratifying for either the company or these employees. As a result, they see their profits sinking without understanding why. This article will help you to rethink the role of your organization's B players. The authors show how you can mentor and nurture B players to ensure their continued participation in the company.     

The Effects of Mainstream and Emerging Customer Orientations on Radical and Disruptive Innovations

The merits of being customer‐oriented for firm innovation have long been debated. Firms focused on their existing customers have been argued to be less innovative. This paper distinguishes between mainstream and emerging customer orientations and examines their effects on the introduction of disruptive and radical product innovations. Radical product innovations draw on a substantially new technology and could initially be targeted at a mainstream or an emerging market. In contrast, disruptive innovations are initially targeted at an emerging market, and may not involve the newest technology. This paper hypothesizes that mainstream customer orientation is negatively related to disruptive innovation and positively related to radical innovation, and that emerging customer orientation is positively related to disruptive innovation. To test these hypotheses, longitudinal and multiple informant data from senior executives in 128 SBUs of 19 Fortune 200 corporations are analyzed, with technology scanning and willingness to cannibalize as key control variables. The results support the hypotheses, providing evidence for contrasting effects of being oriented to mainstream customers and/or emerging customers on radical and disruptive innovations. Mainstream customer orientation has a positive impact on the introduction of radical innovations but a negative impact on disruptive innovation, while emerging customer orientation has a positive effect on disruptive innovation and is unrelated to radical innovations. Technology scanning is positively related to radical innovation but not to disruptive innovation, supporting the idea that disruptive innovation may not require new technology. In contrast, willingness to cannibalize is positively related to disruptive innovation but not to radical innovation, supporting the idea that radical innovation does not require cannibalization of existing investments. Additionally, mainstream customer orientation is found to have a near‐zero correlation with emerging customer orientation, indicating that the two can coexist and can be pursued simultaneously.     

Building breakthrough businesses within established organizations

Many companies assume that once they've launched a major innovation, growth will soon follow. It's not that simple. High-potential new businesses within established companies face stiff headwinds well after their inception. That's why a company's emphasis must shift: from ideas to execution and from leadership excellence to organizational excellence. The authors spent five years chronicling new businesses at the New York Times Company, Analog Devices, Corning, Hasbro, and other organizations. They found that a breakthrough new business (referred to as NewCo) rarely coexists gracefully with the established business in the company (called CoreCo). The unnatural combination creates three specific challenges--forgetting, borrowing, and learning--that NewCo must meet in order to survive and grow. NewCo must first forget some of what made CoreCo successful. NewCo and CoreCo have elemental differences, so NewCo must leave behind CoreCo's notions about what skills and competencies are most valuable. NewCo must also borrow some of CoreCo's assets--usually in one or two key areas that will give NewCo a crucial competitive advantage. Incremental cost reductions, for example, are never a sufficient justification for borrowing. Finally, NewCo must be prepared to learn some things from scratch. Because strategic experiments are highly uncertain endeavors, NewCo will face several critical unknowns. The more rapidly it can resolve those unknowns--that is, the faster it can learn--the sooner it will zero in on a winning business model or exit a hopeless situation. Managers can accelerate this learning by planning more simply and more often and by comparing predicted and actual trends.     

The contingent relationship between the controller and internal audit functions in large organizations

The research literature on organizational control in large business firms does not address the inter-relationship between the controller and internal audit functions. Yet these functions are commonly used to effect control within large, diversified corporations having hierarchical management. This research uses principal-agent theory to hypothesize the need for complementary control systems for monitoring and verifying inter-manager relationships in large U.S. firms. The research findings suggest that the primary duties and responsibilities assigned to the internal audit function are related to the organization, centralization vs decentralization, of the controller function so that effective organizational control can be achieved.     

Linking control systems to business unit strategy: impact on performance

Rooted in continguency theory, this paper examines linkages between strategy, incentive bonus system and effectiveness at the strategic business unit (SBU) level within diversified firms. Data from 58 SBUs reveal (1) that greater reliance on long-run criteria as well as subjective (non-formula) approaches for determining the SBU general managers' bonus contributes to effectiveness in the case of “build” SBUs but hampers it in the case of “harvest” SBUs, and (2) that the relationship between extent of reliance on short-run criteria and effectiveness is virtually independent of SBU strategy.     

The objectives of financial statements: An empirical study of the use of cash flow and earnings by security analysts

The Financial Accounting Standards Board (FASB) has tentatively accepted that cash flows to the enterprise are the major focus of financial statements. This article highlights the importance with which security analysts view earnings information and cash flow information in compiling their professional reports.