Capital disadvantage: America's failing capital investment system

The U.S. system of allocating investment capital is failing, putting American companies at a serious disadvantage and threatening the long-term growth of the nation's economy. The problem, says Michael Porter, goes beyond the usual formulation of the issue: accusations of "short-termism" by U.S. managers, ineffective corporate governance by directors, or a high cost of capital. The problem involves the external capital allocation system by which capital is provided to companies, as well as the system by which companies allocate capital internally. America's system is marked by fluid capital and a financial focus. Other countries--notably Japan and Germany--have systems with dedicated capital and a focus on corporate position. In global competition, where investment increasingly determines a company's capacity to upgrade and innovate, the U.S. system does not measure up. These conclusions come out of a two-year research project sponsored by the Harvard Business School and the Council on Competitiveness. Porter recommends five far-reaching reforms to make the U.S. system superior to Japan's and Germany's: 1. Improve the present macroeconomic environment. 2. Expand true ownership throughout the system so that directors, managers, employees, and even customers and suppliers hold positions as owners. 3. Align the goals of capital providers, corporations, directors, managers, employees, customers, suppliers, and society. 4. Improve the information used in decision making. 5. Foster more productive modes of interaction and influence among capital providers, corporations, and business units.     

Optimal portfolio allocation under the probabilistic VaR constraint and incentives for financial innovation

We characterize the investor’s optimal portfolio allocation subject to a budget constraint and a probabilistic VaR constraint in complete markets environments with a finite number of states. The set of feasible portfolios might no longer be connected or convex, while the number of local optima increases exponentially with the number of states, implying computational complexity. The optimal constrained portfolio allocation may therefore not be monotonic in the state–price density. We propose a type of financial innovation, which splits states of nature, that is shown to weakly enhance welfare, restore monotonicity of the optimal portfolio allocation in the state-price density, and reduce computational complexity. We are grateful to Ken Kavajecz and seminar participants at Harvard Business School, London School of Economics, Maastrict University, ZEI Bonn, and Danske Bank Symposium on Asset allocation and Value-at-Risk: Where Theory Meets Practice for comments on an earlier version of this paper. We also benefitted from the suggestions of two anonymous referees. Our papers can be downloaded from www.RiskResearch.org.     

Tribute to Professor Michael Gibbins

On May 2‐3, 2008, the Alberta School of Business and the Institute of Chartered Accountants of Alberta (ICAA) sponsored a dinner and a one‐day research workshop in Professor Michael Gibbins's honor. At the dinner on May 2, three presentations were made on the contribution of Professor Gibbins to accounting education, research, and the profession. At the research workshop on May 3, three research papers were presented, a panel discussed professional judgment issues in accounting and auditing, and a CFO gave a luncheon speech on the new financial presentation project of the Financial Accounting Standards Board. The dinner and symposium attracted participants from across Canada, the United States, Australia, and Singapore, which is not surprising given Professor Gibbins's global reputation. This paper summarizes the presentations and discussion that took place during the May 2 dinner and May 3 research workshop.     

Book Reviews

Book reviewed in this article: Asymmetric Information, Corporate Finance, and Investment. By R. GLENN HUBBARD. Chicago: The University of Chicago Press, 1990. Pp. ix + 343. Japanese Takeovers: The Global Contest for Corporate Control. By W. CARL KESTER. Boston: Harvard Business School Press, 1991. Pp. xxii + 298. Breaking Financial Boundaries: Global Capital, National Deregulation, and Financial Services Firms. By DAVID M. MEERSCHWAM. Boston, MA: Harvard Business School Press, 1991. Pp. ix + 306. The S&L Debacle: Public Policy Lessons for Bank and Thrift Regulation. by LAWRENCE J. WHITE. New York, Oxford: Oxford University Press, 1991. Pp. xiv + 308.     

Who Is Publishing? An Analysis of Finance Research Productivity in the European Region

This study ranks the research productivity in finance across European universities and researchers using a set of 15 finance journals during the decade of the 1990s. A total of 219 universities are ranked. During the sample period from 1990 to 1999, UK universities dominate the top-20 ranking. However, the UK 's dominance is significantly reduced when the Journal of Business Finance & Accounting, a UKbased journal, is excluded from the analysis. Other non-UK European universities gain further ground when only the top-4 journals are used to measure ranking. Our analysis also shows that a majority of the top 20 European universities have made significant progress in research productivity over the period 1990–99. Additionally, we compare the top European universities to those in North America. The top European university, London Business School, compares to the 24th and 25th ranked North American universities for the period from 1990 to 1999; it compares to the 15th and 16th ranked North American universities for the more recent sub-period from 1995 to 1999. The top researcher is Henri Servaes from London Business School.     

Morgan Stanley's Risk‐Reward Views: Unlocking the Full Potential of Fundamental Analysis

Since 2008, Risk‐Reward Views have been the basis for the recommendations on all the stocks covered by Morgan Stanley's equity research analysts globally. The firm's analysts use this systematic approach to communicate a broader range of fundamental insights about expected returns and risks, and to articulate more clearly the logic underlying their price targets and calls, and the level of conviction associated with them. The rationale for this approach is to align the firm's research product with its clients' thinking and investment discipline while also creating a link between traditional equity analysis and widely accepted principles of modern portfolio management. Too many sell‐side analysts still try to manifest expertise and conviction with one‐sided investment theses backed by single‐point estimates and “table pounding.” That does a disservice to investors who are looking to sell‐side analysts for an ongoing dialogue about the future with experts on company fundamentals. Risk‐Reward Views are designed to produce a more complete view of the risk‐reward trade‐off in a given stock. They are meant to supplement the use of quant‐only risk models that, while offering at least the illusion of precision, are also often opaque and backward looking. The approach aims to increase transparency while avoiding unnecessary complexity by focusing on a handful of critical uncertainties and modeling a manageable number of coherent scenarios that are relevant to investor debates and cover a full range of plausible outcomes. This article focuses on the theoretical underpinnings of the department's Risk‐Reward initiative. For a more detailed discussion of the institutional setting and the processes followed to implement these ideas, readers are referred to the recently published Harvard Business School case study, “The Risk‐Reward Framework at Morgan Stanley Research” (Harvard Business School Case N9–111–011).     

The Roles of Some Key Stakeholders in the Future of Accounting Education in Australia

This article explores the role of institutional and systemic leadership in changing higher education in accounting in Australia. In particular, it discusses the roles of the Australian Learning and Teaching Council, the Australian Business Deans' Council Teaching and Learning Network, and the professional accounting bodies in meeting the challenges confronting accounting education in the tertiary sector today and in the coming years. The intersection of these leadership roles is exemplified in an accounting discipline research project that explores the critical non-technical skills stakeholders require in graduate students and discusses stakeholders' roles and responsibilities in their development .     

Financial Research in the European Region: a Long‐Term Assessment (1990–2008)

We provide a long‐term comprehensive assessment of financial research in the European region. As with earlier findings in Chan et al. (2004) , the European academic institutions, as a group, perform very well during the 1990–2008 period. Specifically, European institutions exhibit a steady increase in the share of global financial research. During the sample period, the top five institutions were London Business School, INSEAD, Sir John Cass Business School, London School of Economics, and Erasmus University Rotterdam. Subperiod analysis shows that some universities, such as Oxford University, increased their research output substantially. Many of the leading European scholars received their training and had prior experience in North American institutions. We find that a high ranking of the scholars’ affiliated and doctoral granting institutions is correlated with finance research productivity.     

Management control systems and strategy change in buyouts

The impact of management buy-outs (MBO) on strategy and management control systems (MCS) is little understood. Previous research by [Ace. Org. Soc. 17 (1992) 151] focused on efficiency-enhancing buy-outs that were a feature of the early development of the market. However, MBOs are heterogeneous and more recent developments have involved ownership changes that stimulate entrepreneurial practices. The novel contribution of this paper is to use Simons’ [Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal, Harvard Business School, Cambridge, MA, USA] classification of beliefs systems, boundary systems, diagnostic and interactive control systems to explore management control in these newer forms of MBO. Within-case analysis and cross-case comparisons from two buyout firms are used to capture the interaction between management control systems and competitive strategy formulation, implementation and modification. This evidence supports arguments that buy-out managers undertake efforts in balancing the traditional systems with the newer systems that stimulate opportunity-seeking and learning.     

The boundaries of business: commentaries from the experts

The World Leadership Survey, which began a worldwide dialogue on a set of important issues facing managers in the 1990s, continues with commentaries from four recognized experts, each of whom addresses the survey results from a different perspective. Kenichi Ohmae, chairman of McKinsey and Company in Tokyo, addresses "The Perils of Protectionism." Ohmae argues that the old definitions of national boundaries and corporate interests reflect obsolete economic theories. The real test of national well-being, Ohmae suggests, should be the economic welfare of a nation's citizens. Sylvia Ann Hewlett, economist and former director of the Economic Policy Council in New York, analyzes the survey in terms of "The Human Resource Deficit." According to Hewlett, four principles should guide corporate strategies in the 1990s: human resource development should move up the scale of corporate priorities; a family-friendly workplace will attract and keep talented workers; companies will take limited direct responsibility for training and education; the private sector will promote public investment in social issues. James E. Austin, the Richard P. Chapman Professor of Business at the Harvard Business School, writes about "The Developing-Country Difference." In developing countries, Austin observes, managers display attitudes and follow practices that diverge from those in developed nations. In particular, the role of government, investments in education and technology, and environmental concerns set these nations apart. Michel Crozier, president of the Centre de Sociologie des Organisations in Paris, writes about "The Changing Organization." In the 1990s, Crozier argues, managers need to break from old management theories and practice, questioning hierarchy, control, distance, access to information-the whole managerial system.     

What business are you in? Classic advice from Theodore Levitt

For all the talk about management as a science, experienced executives know that strategic decisions and tactics depend heavily on context. No one understood this better than Theodore Levitt (1925-2006). A Harvard Business School professor renowned as a founder of modern marketing, he sought above all to use his knowledge to serve the needs of businesspeople. In a series of powerfully insightful--and delightfully written--essays in Harvard Business Review, he provoked readers to reexamine their settled thinking about vital issues so that they could better meet the needs of customers. Levitt had the gifts of provocation and generalization, offering ideas that startled readers but compelled them to think creatively and intelligently about their companies. Writing in a period when business was held in far less esteem than it is today, he rejected the easy contempt that many intellectuals had for managers and consumers. Levitt carried that practical approach to his tenure at Harvard Business Review from 1985 to 1989. As one of HBR's most intellectual and most populist chief editors, he understood that the magazine's main purpose was to serve as a kind of sophisticated translation, clarifying authors' raw-and sometimes rough-ideas for impatient, time-pressed readers. This tribute, a look into one of business's great minds, offers excerpts from six of Levitt's most influential HBR articles: "Marketing Myopia" (July-August 1960) "After the Sale Is Over..."(SeptemberOctober1983) "Marketing Success Through Differentiation-of Anything" (January-February 1980) "Production-Line Approach to Service" (September-October 1972) "The Globalization of Markets" (May-June 1983) "Creativity Is Not Enough" (May-June 1963).     

Leading from the boardroom

These days, boards are working overtime to comply with Sarbanes-Oxley and other governance requirements meant to protect shareholders from executive wrongdoing. But as directors have become more hands-on with compliance, they've become more hands-off with long-range planning. That exposes corporations and their shareholders to another--perhaps even greater--risk, say professors Lorsch, of Harvard Business School, and Clark, of Harvard Law School. Boards are giving the long term short shrift for a number of reasons. Despite much heavier workloads, directors haven't rethought their patterns of operating - their meetings, committees, and other interactions. Compliance has changed their relationship with executives, however, turning directors into micromanagers who closely probe executives' actions instead of providing high-level guidance. Meanwhile, the pressure to meet quarterly expectations intensifies. Directors need to do a better job of balancing compliance with forward thinking. Boardroom effectiveness hinges most on the quality of directors and their interactions, the authors' research shows. Directors must apply their wisdom broadly, handling compliance work more efficiently and staying out of the weeds on strategic issues. Using their power with management to evangelize for long-term planning, they must take the lead on discussions about financial infrastructure, talent development, and strategy. Reserving sacrosanct time for such discussions, as Philips Electronics' board does at annual retreats, is an effective practice: After one recent retreat, Philips decided to exit the semiconductor business, where it was losing ground. Individual directors also must not shy away from asking tough questions and acting as catalysts on critical issues, such as grooming a successor to the CEO. In short, directors must learn to lead from the boardroom.     

12 years of integrated reporting: A review of research

Stakeholders’ demand for forward-looking corporate reporting that includes both financial and non-financial stories opened the path for the evolution of a new form of reporting known as integrated reporting (IR). The purpose of this paper is to review the articles on IR published by the accounting, finance and management journals on the Australian Business Deans Council (ABDC) list of journals from 2009 to 2020. Our study reviews 210 articles on IR published by 64 journals. The findings reveal that the IR research spectrum has broadened over time and now includes more research into IR in practice compared with earlier research, which was mostly normative.     

Defining management accounting constructs: A methodological note on the risks of conceptual misspecification

This paper stresses the need for a sound conceptual specification of research constructs prior to fitting them to explanatory models. It emphasizes that in addressing the conceptual level of the predictive validity framework [Libby, R., Bloomfield, R., & Nelson, M. (2002). Experimental research in financial accounting. Accounting, Organizations and Society, 27, 775–810], special attention must be paid to two issues: (1) the production of a specific agreed-upon meaning and domain for each construct of interest; and (2) the specification and conceptual justification of the nature and direction of the epistemic relationships between constructs, dimensions and indicators (i.e., reflective vs. formative models; latent vs. emergent models). The paper highlights the importance of both issues especially in the case of practice-defined variables, and it provides guidelines on how to address both aspects of conceptual specification. While the issues raised are pertinent to many research areas, the paper concentrates on the implications for management accounting and control systems (MACS) research, using interactive use of control systems [Simons, R. (1995a). Levers of control. Boston: Harvard Business School Press] to illustrate how researchers should go about specifying meaning and epistemic relationships in MACS research.     

国内外知识转移研究现状的可视化分析

采用信息可视化工具——citespace,旨在分析国内外知识转移的研究现状,以ISI Web of knowledge和中国期刊全文数据库（CNKI）收录的知识转移的相关题录信息为数据源,详细分析了知识转移研究论文的时间分布、学科分布、研究的主要内容以及在中国的基金立项情况以后,得出结论：①知识转移研究论文的时间分布曲线略呈“S”型,2009年与2010年是知识转移研究的高峰期;②知识转移的学科研究分散,但Business＆Economics、Computer Science、Engineering、Operations Research ＆ Management Science、Information Science ＆ Library Science是知识转移研究的重点学科;③知识转移相关立项表现出了多学科交叉以及注重应用等特点;④知识转移研究内容主要集中于知识转移的模型以及影响因素,但也存在着很多不足.     

How global brands compete

It's time to rethink global branding. More than two decades ago, Harvard Business School professor Theodore Levitt argued that corporations should grow by selling standardized products all over the world. But consumers in most countries had trouble relating to generic products, so executives instead strove for global scale on backstage activities such as production while customizing product features and selling techniques to local tastes. Such "glocal" strategies now rule marketing. Global branding has lost more luster recently because transnational companies have been under siege, with brands like Coca-Cola and Nike becoming lightning rods for antiglobalization protests. The instinctive reaction of most transnational companies has been to try to fly below the radar. But global brands can't escape notice. In fact, most transnational corporations don't realize that because of their power and pervasiveness, people view them differently than they do other firms. In a research project involving 3,300 consumers in 41 countries, the authors found that most people choose one global brand over another because of differences in the brands'global qualities. Ratherthan ignore the global characteristics of their brands, firms must learn to manage those characteristics. That's critical, because future growth for most companies will likely come from foreign markets. Consumers base preferences on three dimensions of global brands--quality (signaled by a company's global stature); the cultural myths that brands author; and firms' efforts to address social problems. The authors also found that it didn't matter to consumers whether the brands they bought were American--a remarkable finding considering that the study was conducted when anti-American sentiment in many nations was on the rise.     

Creativity and the role of the leader

In today's innovation-driven economy, understanding how to generate great ideas has become an urgent managerial priority. Suddenly, the spotlight has turned on the academics who've studied creativity for decades. How relevant is their research to the practical challenges leaders face? To connect theory and practice, Harvard Business School professors Amabile and Khaire convened a two-day colloquium of leading creativity scholars and executives from companies such as Google, IDEO, Novartis, Intuit, and E Ink. In this article, the authors present highlights of the research presented and the discussion of its implications. At the event, a new leadership agenda began to take shape, one rooted in the awareness that you can't manage creativity--you can only manage for creativity. A number of themes emerged: The leader's job is not to be the source of ideas but to encourage and champion ideas. Leaders must tap the imagination of employees at all ranks and ask inspiring questions. They also need to help their organizations incorporate diverse perspectives, which spur creative insights, and facilitate creative collaboration by, for instance, harnessing new technologies. The participants shared tactics for enabling discoveries, as well as thoughts on how to bring process to bear on creativity without straitjacketing it. They pointed out that process management isn't appropriate in all stages of creative work; leaders should apply it thoughtfully and manage the handoff from idea generators to commercializers deftly. The discussion also examined the need to clear paths through bureaucracy, weed out weak ideas, and maximize the organization's learning from failure. Though points of view varied, the theories and frameworks explored advance the understanding of creativity in business and offer executives a playbook for increasing innovation.     

Leadership in literature

Business students nowadays are not, for the most part, poets. A growing proportion come to business school with a background in investment banking or management consulting and an undergraduate business major, rather than a degree in the arts and sciences. MBA students are already very familiar with business. A number of scholars and businesspeople have begun to question the scientific model that dominates business research and teaching. Formalized management tools work well enough if you're studying techniques for financial valuation, but less so when you're studying leadership and organizational behavior. Some argue that students could learn a lot more about these subjects if they took a course in literature. Examples from fiction can be as instructive as any business textbook. HBR senior editor Diane Coutu recently met with Joseph Badaracco, Jr., for a wide-ranging discussion of what leaders can learn from literature. For the past decade, Badaracco, the John Shad Professor of Business Ethics at Harvard Business School, has used classical literature to provide well-rounded, complex pictures of leaders in all walks of life-particularly leaders whose psychological and emotional challenges parallel those of senior executives. Fiction provides some of the most powerful and engaging case studies ever written. Unlike contemporary management literature, which is relentlessly upbeat, classical literature is unsparingly realist. Leaders often struggle and sometimes fail-and the stakes are high. When business leaders read about the conflicts of literary characters, they can better understand their own circumstances. We pay far too little attention to the inner lives of leaders. Business school courses seem to suggest that you can treat executives like lab animals and control their behavior through their environment. But behaviorism is not enough. Literature suggests that leaders should learn more about themselves if they want to succeed.     

Why mentoring matters in a hypercompetitive world

Professional service firms (PSFs), like so many other companies, are juggling the modern challenges of global competition, increased regulation, and rapid employee turnover. In a people-oriented industry, attrition has special import. DeLong and Gabarro, of Harvard Business School, along with former Morgan Stanley and Ernst & Young executive Lees, argue that a PSF can gain a much-needed competitive edge by renewing its focus on mentoring. The authors' in-depth interviews with professionals from more than 30 PSFs have yielded four principles for firms to heed as they rediscover this lost art. First, mentoring is personal. Rather than relying on standardized programs, mentors must frequently--and fairly--provide authentic advice and nurturing. Partners at PSFs know how to use their ample people skills effectively with clients; the benefits of using them with junior colleagues are even greater. Second, not everyone is an A player. A small dose of attention given to a B player goes at least as far as a large one offered to an A player. Since B players constitute about 70% of PSF staff, that's time well spent. Third, choice assignments are in short supply, which limits the number of learning opportunities available for associates. Good alternatives include shadowing senior professionals on assignments and taking on research or other projects that are not client-related but that nonetheless build expertise. Finally, mentoring is a two-way street. Protégés should not only learn from their senior counterparts, but also be taught to attract mentors--and to co-mentor one another.     

Calibration of Gaussian heath, Jarrow and Morton and random field interest rate term structure models

We show how the recently introduced Gaussian random field interest rate term structure models can be calibrated accurately and quickly to market caps and swaptions prices. We show how the calibrated random field model can be approximated arbitrarily closely with a multi-factor Gaussian Heath, Jarrow and Morton model. We argue that the Gaussian random field model is easier to calibrate and can be used as an indirect way to calibrate multi-factor Gaussian Heath, Jarrow and Morton interest rate models.This work was carried out when the author was at the Financial Options Research Centre, Warwick Business School, University of Warwick. I wish to thank Stewart Hodges for many helpful discussions and comments and Martin Cooper of Tokai Bank, Europe, for supplying the data used in this paper. I also wish to thank the Economic and Social Research Council and FORC for funding. An earlier version of this paper entitled Multi-Factor Gaussian HJM Approximation to Kennedy and Calibration to Caps and Swaptions Prices was presented at the 9th Annual Conference, FORC., Warwick Business School, September 1996. Another version also appears in the author's Ph.D. thesis. I am grateful to the helpful comments provided by Marti Subrahmanyam and the two anonymous referees. All errors are my own and the views expressed in no way reflect the opinion of my employer.