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.     

Partial acquisitions in emerging markets: A test of the strategic market entry and corporate control hypotheses

In this paper, we examine the motivations of acquirers undertaking partial acquisitions in emerging markets by testing two competing hypotheses: the market for corporate control hypothesis and the market entry hypothesis. We find that targets of cross-border acquisitions outperform targets of domestic acquisitions in the pre-acquisition period. While cross-border acquisitions have no significant impact on target firms' operating performance, targets of domestic acquisitions experience significant improvements in operating performance and substantial changes in ownership structure after the acquisition. The evidence suggests that domestic partial acquisitions in emerging markets serve as a market for corporate control, while cross-border partial acquisitions are motivated by the strategic market entry rationale.     

Local authority assistance to ethnic minority owned small firms: Some recent survey evidence from Britain

This article reports the results of a questionnaire survey of assistance to ethnic minority businesses by United Kingdom local authorities with large ethnic minority populations. The majority of respondents had no special provision for ethnic minorities. A variety of initiatives were found in the third of authorities who had any provision at all; a small number of authorities emerged as having considerably more experience and more initiatives than others.     

APX: An Integrated Knowledge-Based System to Support Audit Planning

Auditors who must express an opinion on the financial statements of publicly held enterprises must perform a series of risk assessments as the basis for selecting appropriate audit procedures to be performed. Although many auditing expert systems have been developed for individual components of the audit risk assessment process such as inherent and control risk assessment, none integrate these assessments to arrive at the ultimate objective of assessing the allowable level of detection risk which drives audit procedure selection. This paper discusses critical design concerns for audit planning expert systems in light of the integrated nature of the steps involved in the audit planning process. The design and development of an integrated audit planning expert system called APX (Audit Planning eXpert) is also discussed. A distinguishing feature of APX is that it not only performs the individual types of risk assessments but it also integrates the resulting assessments to arrive at allowable detection risk. The knowledge acquisition and system development process are described to illustrate some of the mechanics of developing such a system.     

Financial health and airline safety

Agency‐cost models suggest that firms may pursue riskier strategies in times of financial distress. For example, stockholders of financially weak firms in industries where quality cannot be observed ex‐ante have an incentive to compromise safety and quality to maximize current period profit. However, there exists only a modest amount of empirical evidence that relates financial health to the risk‐taking behavior of firms. We explore this relationship for the airline industry. Using bond ratings to proxy for financial health and airline mishaps to measure safety, we find a significant correlation: airlines with higher quality bond ratings are less likely to experience mishaps than airlines with lower quality ratings. On average, a whole letter grade better bond rating is associated with a 10% lower probability of a mishap. Copyright © 2004 John Wiley & Sons, Ltd.     

Stairway to heaven or highway to hell: Liquidity,sweat equity,and the uncertain path to ownership

We study a setting in which a principal contracts with an agent to operate a firm over an infinite time horizon when the agent is liquidity constrained and privately observes the sequence of cost realizations. We formulate the principal’s problem as a dynamic program in which the state variable is the agent’s continuation utility, which is naturally interpreted as his equity in the firm. The optimal incentive scheme resembles what is commonly regarded as a sweat equity contract, with all rents back loaded. Payments begin when the agent effectively becomes the owner, and from this point on, all production is efficient. These features are shown to be similar to features common in real‐world work‐to‐own franchising agreements and venture capital contracts.     

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.