Arpit Gupta, For More Corporate Raiders: (my bold):
There’s welcome news that a hedge fund operator – David Einhorn – has bought up large chunks of Microsoft with the intent of forcing the ouster of the CEO Steve Ballmer, presumably replaced with a CEO more responsive to shareholder interest. The end goal is a more productive use for Microsoft’s capital.
I think this is great news. The key here is that the interests of Microsoft’s CEO and the interests of Microsoft’s shareholders are different; and we as a society ought to sympathize more with the interests of Microsoft’s shareholders.
Basically, Microsoft has been earning monopoly rents based on intellectual property that locks in network advantages. Yet Microsoft’s comparative advantages really extend only to the sort of monopolistic domination embodied in their control of OS and enterprise software….
We don’t want the people who made a lot of money in the ‘90s deciding what to invest in today; in general people and organizations don’t manage to remain at the entrepreneurial frontier all of the time. We want shareholders to take the billions they made from Microsoft and give it to the Microsoft of tomorrow.
Karl Smith made a similar argument earlier in the year about Microsoft, Burning the Corporate Commons:
There is a simple way out of this: shutdown the Online Services Division, double or even triple the dividend and payout the current profits to shareholders….
My sense is that this Burning of the Corporate Commons is a major source of loss in the US economy. In essence Microsoft is captured by its corporate bureaucracy, a group that is more interested in the continued existence of the company than in maximizing profits. The entire point of capitalism is creative destruction, that old firms die as new innovators come along. However, modern firms lock up much of their profits in a war chest designed to keep them from dying. This is pure economic loss. It’s bad for shareholders and its bad for America.
First, the original financial markets no-arbitrage financial engineering conclusion is that dividend policy doesn’t matter (Are there still financial engineers who read this blog? I’ve wandered so far over the years…). Tax issues aside, one can replicate the dividend policy they want just by buying/selling the underlying stock. (I’m not full M-M, as I think capital structure matters a lot.)
But the point stands. Is it true though? Let’s generalize away from Microsoft for this. Is the statement: “We don’t want the people who made a lot of money in the ‘90s deciding what to invest in today; in general people and organizations don’t manage to remain at the entrepreneurial frontier all of the time” actually true?
We shouldn’t necessarily assume so – in the same way that don’t want a talented lawyer to retire after their first big court case because we want fresh blood in the courtroom, it’s not clear that successful incumbent managers wouldn’t continue to innovate. And there’s also something about oligopolies with some market space to breath to take real chances innovating new products. If there’s ground-level knowledge needed, surely that can be contracted out?
Is there a good way to test for some sort of persistence in innovation, returns against R&D, or something? I could be convinced either way, but these arguments are presupposing what needs to be proved.
Here’s Michael Lind arguing that Goliaths are innovative in Democracy magazine:
Far from celebrating small businesses as the laboratories of innovation, Schumpeter argued that a major incentive for private-sector innovation was the prospect that a business could obtain a monopoly or near-monopoly position on the basis of inventions and be assured that a stream of assured profits would repay its investment. Schumpeter believed that in modern industrial capitalism, which he called “trustified capitalism,” the solitary inventor like Alexander Graham Bell or the young Thomas Edison had been replaced by the corporate laboratory like mid-century Bell Labs, which existed only because AT&T was a monopoly. Undercapitalized firms in a competitive market have no money to invest in basic R&D, and the few firms with deep pockets have little incentive to bring about technological breakthroughs that will be shared by their competitors. Schumpeter concluded that the large corporation in an imperfectly competitive market is “the most powerful engine” of economic progress: “In this respect, perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency. It is hence a mistake to base the theory of government regulation of industry on the principle that big business should be made to work as the respective industry would work in perfect competition.”
Schumpeter’s argument that firm size drives innovation received powerful support in 2002, when one of America’s leading economists, William Baumol, published The Free-Market Innovation Machine. Baumol rejected the idea that economic progress is driven by the competition of firms to lower prices. Arguing that innovation has replaced price as the critical arena of competition, Baumol argued that most important innovations originate from large, oligopolistic firms, not from individual entrepreneurs or small businesses. According to Baumol, the sharing of technology among firms in imperfectly competitive markets can benefit innovation and economic growth.
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