Corporate transparency

Jeff Bone jbone@jump.net
Tue, 08 Jan 2002 15:07:14 -0600


Dave Long wrote:

> >                                           Problems (for innovators)
> > *primarily* occur when DISCREDIT or COPY succeed.
>
> Problems for innovators primarily
> occur when LAUGH succeeds.

You're confused.  LAUGH has no external impact.  If it does, it's no longer
actually LAUGH, it's DISCREDIT.

> > DISCREDIT and BUY are unnecessary in a world with enforced transparency,
> > and COPY becomes trivial --- therefore innovators have no incentives.
>
> Why would BUY be unnecessary,

Because enforced transparency skews things in favor of "make" in a "make vs. buy"
decision.

> or
> COPY be trivial?

Because if *all* corporate knowledge is required by law to be publically
available (design docs, source code, marketing plans, customer lists, customer
feedback notes, etc.) the only difference between the innovator and the imitator
is human effort.  And the imitator will usually have more available human
resources / dollars / cycles than the innovator does.

> Transparentland
> dominant players will still laugh *
> at the innovators.

Only the dumb ones.  Smart ones will recognize innovation when it occurs
elsewhere and move quickly into COPY mode, squashing the innovator in the
process.  (Microsoft, anyone?  They are the master of DISCREDIT / COPY / BUY,
btw.)

> Some of those
> innovators will still succeed,

Not if they are immediately squashed by smart, dominant players.  Indeed, as this
happens time and again, FUD becomes a constraining factor to innovation.  Here's
the basic argument, informally:

Given:  there are smart dominant players. (MS)
Assumption:  Transparentland
Induction:  COPY strategy made easier, higher chance of success vs. alternatives
Deduction:  DISCREDIT, BUY de-emphasized
Deduction:   Risk to innovator greatly increased, risk/reward even less
attractive
Implication:  incentives for innovation less favorable
Conclusion:  less innovation occurs in transparentland

Bottom line:  if you make innovation a riskier process --- i.e., you increase the
chance of a loss of all investment (time, money, etc.) while keeping the expected
payout static --- less innovation will happen.  There're not only many good
logical, mathematical, and economic arguments to be had to that effect (and this
argument doesn't get over the bar on any of these levels, btw ;-)  --- it's also
COMMON SENSE.  At least, it seems so to this entrepreneur.

> In both worlds, trade secrets are
> not that important to innovators'
> success; COPY becomes nontrivial
> with entrenchment, not obscurity.

But avoiding COPY on the way to entrenchment is a (the?) key to successful
entrenchment.  And it's a very, very nontrivial activity, and one that
transparency makes even more difficult.

> In a world where shareholders were
> limited to owning but one stock at
> a time, I would be able to agree,
> however:

Dude, I'm near the give-up point, here.  I have already successfully defended my
position on this; I have no idea how you're gleefully stringing these
non-sequiters together to form conclusions but such as it is your process isn't
something I can argue with logically, and clearly common sense isn't a good
persuasive tool here.  ;-)

> In a transparent world, the optimal
> strategy for the shareholders (who
> can own P, Q, and R) may be that P
> sticks to its knitting, which would
> encourage innovation at Q & R.

Unless successful innovation at Q & R decreases the value of P --- which, I would
assert, is often the case with disruptive technology.  Also consider:  the
dollars in Q & R are more "at risk" than the dollars in P;  only somebody acting
for other than fiduciary reasons would sacrifice existing value (and
self-reinforcing value growth) at P in order to invest in Q & R.  A reasonable
investor would invest in all three and expect them to compete;  successful
competition by P would increase their value in P by a small amount while probably
losing the small investments in Q & R, while a successful run by either Q or R
would likely only erode P's value a little and increase the value of Q|R
significantly.  (I.e., the risk/reward is much higher for Q/R.)  A
Transparentland reasonable investor would almost never invest in Q/R, since the
risk/reward is *much* more weighted towards risk and, in all likelihood, all the
benefit / value will be realized by current / increased investment in P as P
successfully executes a COPY against any Q/R foolish enough to make a run at
something strategically important.

> Perhaps it is better to disagree
> here (and hence on the main point
> as well), as I recall you arguing
> that Mr. Dell, even as an officer
> of Dell, should be free to pursue
> his own interests before those of
> his shareholders.

I NEVER argued that.  You're stating your own conclusions (Mr. Dell's activity
was equivalent to putting his own interests ahead of those of his shareholders)
and them claiming that I share them.  I don't: if your conclusions were correct,
then NO CEO should draw ANY compensation whatsoever, much less ask for it.  I
think that's ludicrous;  fiduciary responsibility != eleemosynary obligation.

I did argue that meeting Mr. Dell's compensation interests was (is, will be) in
the best interests of his shareholders, and further that neither Mr. Dell nor any
excutive is in an ethically weak position when stating their own compensation
needs to some external fiduciary who will then determine whether or not to meet
those needs.  The checks-and-balances of corporate structure prevent such n
ethical quandry / conflict of interest;  the CEO cannot and does not determine or
approve his own compensation package.

jb