consequence. It has often been observed in recent years that some large, mature companies have wasted resources on investments with little prospect of success, maintained excessive overhead, hoarded cash, and misdirected resources to unwise diversification. These problems, which appear to have afflicted a number of companies in mature or declining industries, may have the same root cause: lack of effective monitoring of management because of fragmented ownership and limited owner information and influence in corporate decisions. This cause should be addressed directly rather than through costly proxy battles and takeovers, which take place only after performance has severely deteriorated.

In short, there are tradeoffs with respect to corporate governance. In the Japanese and German systems, important classes of investors have inside information and a role in corporate governance. The near-permanent nature of their holding mitigates asymmetries in information available to them compared with other classes of investors. In the United States, fairness is maintained by preventing nearly all investors from having special access to information or influence on management. This extracts a cost, however, in terms of the balance between short- and long-term investment in established public companies and the ability to free up resources from companies with no profitable investment opportunities.

In the United States there are some notable exceptions to these corporate biases against longer-term time horizons and investments. Indeed, the investment and capital allocation systems that support entrepreneurial ventures are remarkably similar in important respects to the capital allocation systems in Germany and Japan for larger, well-established enterprises.17 In the United States, venture capitaists own major stakes in companies, sit on corporate boards, are deeply informed about investment choices, are influential in corporate decisions, and expect to retain a substantial stake in the venture for a number of years. This does not violate principles of fairness because virtually all of the investors in companies in the start-up phase have access to what would be viewed as “inside information” in a publicly held company. The one significant contrast with the Japanese and German systems is that in these new U.S. ventures, managers and employees typically also own stock as a result of the compensation policies that senior management and venture capitalists adopt. This further aligns investment and employee interests around long-term performance.

17

Burton McMurtry in the forthcoming companion volume. For a more detailed treatment, see W. Sahlman (in press).



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