Corporate Governance and the
Governance of Knowledge:
Lessons from the Telecoms Industry
Jackie Krafft and Jacques-Laurent Ravix
CNRS-IDEFI
250 rue Albert Einstein
06560 Valbonne
France
Tel : (33-4) 93 95 41 70
Fax : (33-4) 93 65 37 98
E-mail : jkrafft@idefi.cnrs.fr; ravix@idefi.cnrs.fr
March 15, 2004
Corporate Governance and the
Governance of Knowledge:
Lessons from the Telecoms Industry
Abstract:
Corporate governance has been in the recent years one of the most debated issues in
conventional economic approaches. Agency theory combined with financial indicators has
particularly contributed to the development of shareholder value as a key concept in
companies’ governance both at a theoretical and empirical level. In this paper, we argue that
an evolutionary perspective can be developed on the governance of innovative firms since (1)
conventional economic approaches only consider a restricted part of this complex issue, and
(2) this restricted vision applied in practice has driven the economic system into major
coordination problems and turbulences. Based on empirical investigations into the
telecommunications industry, and guided by a simple model of evolutionary game, we
propose new principles of corporate governance centred upon managerial entrepreneurship
and its role on innovation and industry dynamics. The outcome of our paper is a set of rules of
conduct for the manager and the shareholder(1).
Keywords:
Corporate governance, innovation, coordination of investments, industry dynamics, evolution
JEL Codes:
G 34, O 31, O 32, L 96
March 15, 2004
(1) The financial support from the European Union Directorate of Research is acknowledged.
This work was developed within the context of the key action ‘Improving the socio-economic
knowledge base’ as part of the project ‘Technological Knowledge and Localized Learning:
What Perspective for a European Policy’ (TELL) carried on under the research contract n°
HPSE-CT2001-00051. We are also indebted to the Commissariat Général du Plan,
programme “Corporate Governance”, project “Regimes of corporate governance: national
differences and firms strategies” (Project n°16, 1999-2001). Former versions of this paper
were presented at the EMAEE Conference in Augsburg (Germany), April 2003, at the JEPA
Conference in Nagoya (Japan), November 2003, and at the ETE Conference in SophiaAntipolis (France), January 2004.
1
1. Introduction
Corporate governance is the general system by which firms are owned and managed. Since
the late 1990s, new principles oriented towards the maximization of shareholder value have
largely penetrated the governance of most of the business companies in knowledge-based and
advanced economies. These new principles of corporate governance driven by shareholder
value imply that (i) financial considerations have a central role in the way firms are governed,
(ii) information asymmetries between the different actors (mainly shareholders and managers)
have to be eliminated, (iii) a contractual structure of organization has to be generalized within
the firm (OECD, 1999). Before 2000, these principles of corporate governance have generally
been introduced in order to increase companies’ internal efficiency, and to favor investments
in these companies through financial markets. After 2000, nevertheless, these principles were
highly questioned by commentators who alleged that corporate governance could have
accelerated the process of financial crash, and introduced high turbulence in firms’
demography and dramatic changes in market shares (Lazonick and O’Sullivan, 2002). These
contradictory phenomena led to a paroxysm in the info-communications industry (Krafft and
Ravix, 2001; Fransman, 2002) and shareholder value proved to be an important part of the
telecoms boom and bust. If maximizing shareholder value in corporate governance greatly
favored the financing of emerging firms via the stock markets and the acquisition of new
knowledge and competencies on the basis of mergers and acquisitions over the period [19981999], it also greatly affected the viability of these companies over the subsequent period
[2000-2002], and finally resulted in over-investment, excess capacity, downsizing, and a
sharp fall in the share price, revenue and profitability of both telecoms operators and their
equipment suppliers.
From an analytical point of view, basic fundamentals of shareholder value are inspired by
agency theory which shows that, for an individual firm, strategies implemented by the
manager (i.e. the agent) can be oriented by a better allocation of information and a
realignment of incentives on the basis of what the investor (i.e. the principal) wants (Schleifer
and Vishny, 1997; Zingales, 1998). Key performance indicators derived from financial theory
were further combined with these basic fundamentals to provide an operational content. The
conventional vision which resulted, nevertheless, holds essentially in a stable context, where
innovation is absent. Moreover, this conventional vision confers to the manager a limited role
2
in the organization of production and innovative processes, and leaves its entrepreneurial
capacity aside. These limits and restrictions motivate the development of an evolutionary
perspective on corporate governance since, within this framework, the entrepreneur plays a
central role in coordinating investments and ensuring the viability of innovative processes
(Antonelli, 2003; Witt, 2003; Metcalfe, 1998; Langlois and Robertson, 1995; Teece, 1996,
1986). Especially, this role is given a greater importance than maximizing short term
shareholder value (Krafft and Ravix, 2000; O’Sullivan, 2000a).
This paper contributes to show that conventional shareholder value principles generate a
restricted vision of corporate governance, and that this restricted vision applied in practice
drove innovative industries such as the telecoms industry into high turbulences. Consequently
we propose an alternative analysis of corporate governance elaborated from an evolutionary
vision of the coordination and viability of innovative investments. We describe in section 2
the basic framework which generated the conventional vision of corporate governance driven
by shareholder value. In section 3, we focus on the concrete situation in the telecoms industry
to stress that, in practice, shareholder value led to major coordination failures in the
management of equipment companies, as well as in their business strategies. In section 4, we
further argue on how shareholder value accelerated the booms and busts in this innovative
industry. In section 5, we investigate the analytical conditions for an alternative vision of
corporate governance which restores the key functions of decision making in an innovative
context, namely the management of complexity and the creation of new opportunities. In
section 6, the coordination of innovative investments is formalized by an evolutionary game
model confronting two innovation strategies: a long term strategy based on firms’ cooperation
and a short term predatory strategy. We show that the system naturally evolves towards the
prominence of the predatory strategy, and generates coordination failures leading to a decay
of long term innovation. In Section 7, we derive new criteria for corporate governance in
order to reverse this tendency and support long term innovative strategies.
2. The conventional vision of corporate governance: fundamentals
on shareholder value
The economics of shareholder value is based on a joint combination between agency theory
and financial theory. Well known results on the resolution of principal-agent problems applied
3
to corporate governance were combined with performance evaluation of companies to provide
the now prevailing principles of shareholder value.
2.1. Agency theory on corporate governance
Conventional models of corporate governance refer to an agency perspective in which the
division between financing (risk-taking) and managing (controlling) functions leads to
difficulties (principal-agent problems) in the relation of managers (the agent) and shareholders
or more generally investors (the principal). The problem is essentially to persuade the agent to
behave fairly on behalf of the principal, and to avoid any discretionary behavior. The general
solution to this agency problem is to grant managers a highly contingent, long term incentive
contract ex ante to align his interests with those of principals (Shleifer and Vishny, 1997). The
formalization, strongly based on a complete contract hypothesis, provides the essential
requirements of corporate governance oriented towards shareholder value within a context of
transparency of information and generalization of contractual relations in organizations. These
models are associated with three kinds of implications: (i) they need strong rationality
hypotheses based on common knowledge requirements 1 , (ii) they reduce problems of
organization to simple incentive misalignment problems2, and (iii) they exclusively focus on
the control of the so-called discretionary power of managers3. Apart from the relation between
shareholder and manager, corporate governance can also take into account different kinds of
stakeholders, such as employees, minor shareholders, clients and partners, which can be
formalized within multi-agent / multi-principals models requiring the same characteristics in
terms of complete contracts and strong rationality (Laffont and Martimort, 1997).
Complementary approaches are also developed on the basis of transaction costs (Williamson,
1988, 2000), and property rights (Hart, 1995a) in order to consider weaker rationality
hypotheses, and higher costs of negotiating and writing down contracts. This literature more
deeply relies on notions of incomplete contracts and residual rights of control 4 which are
1
The principal knows that, with an optimal remuneration scheme, he can have access to private information
hidden by the agent. On the other hand, the agent knows that he will have to deliver his private information to
the principal as soon as the optimal remuneration contract is signed.
2
Internal organization, as well as business strategies are primarily analysed in respect with the elimination of
information asymmetries between principals and agents.
3
Managers are generally endowed with private information which is conducive to manipulation and
opportunistic behaviours.
4
The asset owner has the residual right to decide how to use the asset in cases where the contract is silent on the
occurrence of some event affecting this use.
4
absent of agency theory. Despite these differences, transaction costs and property rights
literature generally come up to the same conclusions as agency theory concerning the rules of
governance of large publicly held companies (Hart, 1995b). These rules imply general
mechanisms of control which may take various forms (board of directors, proxy fights, hostile
takeovers, corporate financial structure), but are always oriented towards monitoring and
disciplining management in the interest of shareholders and investors.
The basic analysis is further complemented by elements of financial theory in order to value
the contract between shareholder and manager, and base the remuneration of managers on
companies’ performance. With these elements, corporate governance evolves from an agency
problem to a problem of financial value creation.
2.2. Financial theory on the maximization of shareholder value
The evaluation of companies via shareholder value is specific to the 1990s, and focuses on the
profitability of invested capital. Thus, it differs from former criteria: cash flow in the 1980s;
accounting ratios (price earning ratio and net profit) in the 1970s, size (assets, annual
turnover) in the 1960s. In the last decade, a number of consulting firms developed their own
model for value creation and proposed criteria mainly derived from traditional net present
value. For instance, the shareholder value criteria was developed by Mac Kinsey, the total
share return to total business return by BCG, and the economic value added and market value
added criteria (EVA and MVA) by Stern Stewart.
What is new and specific to corporate governance in the 1990s is the shift of these criteria
from corporate finance to corporate governance purposes. In practice, these criteria were
applied not only to the company as a whole but also to each division or economic activity of
the company. Each division, each segment of activity of the company could thus be
characterized by a particular EVA and MVA, and the performance could be evaluated on this
basis. In order to maintain good ranking in terms of EVA and MVA and maximize
shareholder value, it is often necessary to develop industrial strategies such as cooperations or
M&As, or by contrast cessions and downsizing. These rankings also serve as a guide for
potential investors and shareholders. For firms themselves, they became key elements in the
annual reports to evaluate their own activity, to attract new investors, and to finance
takeovers. The performance of companies, characterized by an individual EVA and MVA,
5
was also compared to the EVA and MVA performance of other companies in the industry
acting as a benchmark.
In the 1990s, shareholder value became a key opportunity to attract both financial and human
resources. In quarterly and annual reports, companies could communicate their financial
results, and show how these results were related to efficiency gains from one period to the
other. The diffusion of companies’ financial results was greatly increased and thus became
easily accessible to the environment of these firms (financial analysts, potential investors,
competitors). In addition, stock options policies were largely detailed in quarterly and annual
reports, and acted as a positive signal for new human competencies to come and work for the
firm 5 . In the meantime, shareholder value was a key information for investors and
shareholders to select the most performing companies and the best investment plans among a
collection of possibilities. This targeted outcome became a critical issue in high tech
industries such as the telecommunications industry.
In the next two sections, we show that the recent history of the telecommunications industry
was highly influenced by both dimensions of corporate governance: the agency and financial
aspects.
3.
Shareholder
value
and
coordination
failures
in
telecommunications: a principle-agent story
Telecommunications has certainly been the industry which was the most affected by the
financial crash in 20006. We argue that, in this crisis, shareholder value principles of corporate
governance played a both crucial and devastating role. Shareholder value was implemented in
most of the key companies of this industry to increase their internal efficiency, and also to
attract investors for their external growth. But today the inevitable conclusion is that
maximizing shareholder value contributed to erode the performance of these firms, and
significantly threatened the viability of the whole industry. What did happen in this industry?
What was the impact of shareholder value in the coordination of innovative investments? This
5
6
See O’Sullivan (2000b).
See Business Week (2001), and Business Week (2002).
6
section addresses these questions by focusing on major innovators of this industry, the
equipment suppliers.
3.1. Quantitative and qualitative change in innovative investments
Since the mid 1990s, top equipment suppliers in telecommunications were faced to a double
challenge7, which especially affected their innovative investments:
 A quantitative net increase of their R&D expenses was necessary, since their clients –
the telecommunications operators – which formerly were the major technology
providers decided to exit this activity in a context of fierce price competition. In a few
years, the initial split of R&D expenses (on average, 15% of annual sales for telcos,
5% for equipment suppliers) was completely reversed (thus 5% of annual sales for
telcos, and 15% for equipment suppliers).
 A qualitative improvement of the technologies to be provided was also needed for an
extended set of applications, since traditional telephony (fixed telephony on copper
cable based on commutation and transmission systems) tended to co-exist with, and
eventually be superseded by, new modes of communications (IP access and mobile
telecommunications, on the basis of radio access, satellite connections, optical fibers).
For equipment suppliers, this double challenge involved thus the engagement of large
innovative R&D investments, oriented towards the development of new competencies. At that
time, nevertheless, the rising share price of these companies attracted many investors. In this
period of telecoms booming, financial markets could generally provide a potential investor for
each company’s project of investment, provided these investments were expected to create
value on stock markets.
3.2. Shareholder value and the coordination of innovative investments
The industry can broadly be separated into two groups of firms: the first one regroups the
incumbents, the traditional equipment suppliers, whose entry date is generally before the mid
1990s and whose activity started with commutation-based telephony; and the second one is
The reference to a ‘double challenge’ is here a simplification. For a more detailed description of what occurred
in the telecommunications equipment industry, see Fransman (2002), Calderini and Garrone (2002), Hicks
(2001).
7
7
essentially composed of entrants, the new equipment suppliers, which entered since the mid
1990s and whose IP and wireless based activities started with the Internet and mobile
revolution. In Fig 1 below, we visualize these two groups of firms and indicate the name of
essential companies in each group.
Incumbents
(commutation based)
Entrants
(IP/Wireless based)
Lucent
Northern Telecom
Alcatel
Ascend
BayNetworks
Cisco
Nokia
Fig 1: Incumbents and entrants in the telecommunications equipment industry in the mid 1990s
Necessary quantitative and qualitative changes in innovative investment policy soon imposed
some important coordination problems resulting in reconfigurations on the industry structure.
Telecommunications equipment companies developed various business strategies over time to
ensure a coordination of innovative investments:
1. Cooperations over the period 1995-1998
Some bilateral collaborations occurred between major incumbents and entrants: Alcatel
multiplied these bilateral collaborations with Ascend, BayNetworks, Cisco, and Nokia on
optical fibers technologies and mobile access; while Lucent and Northern Telecom
preferred a more exclusive bilateral collaboration, respectively with Ascend and
BayNetworks. These collaborations were intended to favor the creation and diffusion of
new technologies between incumbents and entrants, to exchange knowledge and develop
new articulated competencies, and to render the quantitative and qualitative coordination
in R&D investments possible.
2. Mergers and acquisitions over the period 1998-2000
A series of large M&As occurred between incumbents and entrants, generally highly
supported – and sometimes originated – by shareholders and investors. During the period
1998-2000, annual reports of top telecoms equipment companies stressed the fact that
these firms were primarily governed in the interest of shareholders and that, in this
perspective of shareholder value creation, these companies massively relied on M&As to
8
acquire new competencies8. The underlying idea of shareholders and investors was that
new knowledge and competencies could be acquired more rapidly by M&As (essentially
stock for stock M&As), rather than inter-firm cooperation; thus, within a given time span,
the value created by M&As was expected to be higher than the value created by
cooperation.
 Northern Telecom acquired BayNetworks in August 1998 for 6,900 million $. The
M&A was arranged on a stock for stock transaction: 1 stock of BayNetworks equaled
0.66 stock of Northern Telecom. The new company became Nortel. This M&A was
supported by shareholders and investors as the best opportunity to implement the
quantitative and qualitative change in innovative investments, and thus the acquisition
of competencies in new technologies. We can note, however, that this did not preserve
Nortel which soon had to face important losses in revenues and decreasing share price
(470 million $ of losses, i.e. –0.71$ in share price in the first quarter of 1999; against
32 million $ of losses, i.e. –0.06$ in share price in the first quarter of 1998).
 Lucent acquired Ascend in July 1999 for 20,000 million $. The stock for stock
transaction was the following: 1 stock of Ascend against 1.66 stock of Lucent. The
new company was simply called Lucent. In this case, net revenues were increased
significantly just after the M&A (4,466 million $, i.e. +1.52$ in share price in 1999;
against 1,035 million $, i.e. +0.34$ in share price in 1998), and thus shareholders and
investors were confirmed in their strategy.
 Alcatel which still privileged cooperation with Cisco (the only major optical fiber
leader which remained at that time independent) was significantly penalized on stock
markets. In September 1998, Alcatel faced a sharp fall in share price (-50%, i.e. from
1,022 FF to 510 FF, while in the meantime Lucent, Nokia, and Cisco remained
relatively stable), and was deemed by its investors to follow Nortel and Lucent
M&As’ strategies to consolidate investments and competencies in new technologies.
Thus, from December 1998 to December 1999, Alcatel acquired Packet Engines (315
million $), Xylan (2,000 million $) and Newbridge (7,100 million $) to strengthen the
optical fiber and mobile access pool of activities.
8
See Lucent, Nortel and Alcatel annual reports in 1998 and 1999.
9
The wave of M&As thus submerged first American companies, and second European
companies9. In each case, financial analysts played a decisive role setting in these M&As,
since they published severe reports on incumbent equipment companies, stressing their
myopia and inertia compared to new entrants. In the late 1990s, these reports provided by
large, good reputation consulting companies promoting corporate governance by shareholder
value (such as Salomon Smith Barney, Merrill Lynch, in the specific domain of
telecommunications) were taken with great interest by incumbent companies’ largest
institutional investors (such as Brandes Investments which invested in Lucent, Nortel and
Alcatel). For financial analysts, the argument was the following. Incumbents behaved
myopically since they were unable to consider that their usual clients (AT&T, France
Telecom, Deutsche Telekom, BT) could shift rapidly from traditional commutation-based
services (in which Alcatel, Lucent and Nortel were world leaders) to IP-based and mobile
services (in which new entrants such as Cisco and Nokia were top competitors). The relative
inertia of incumbents which resulted from this myopic behavior fostered the technological gap
between commutation and IP/mobile networks, as well as the competitive gap between
incumbents and entrants. For financial analysts, the only possibility to fill this gap was, for
incumbents, to acquire new entrants, provided incumbents had a sufficient market
capitalization. The point of view of financial analysts on Alcatel was even more severe. This
incumbent company had developed cooperation agreements with companies (Ascend and
BayNetworks) which were now part of its direct competitors (Lucent and Nortel). This
argument, together with the notion of critical size that Alcatel could not achieve, further
motivated the development of M&As by this company. With this vision of the evolution of
the telecommunications industry, widely shared among financial analysts, investors and
shareholders were thus enjoined to claim the implementation of M&As strategy from
managers.
Corporate governance oriented by financiers and shareholders led to the prominence of
external acquisition over internal development of competencies. From a business strategy
point of view, this resulted in the dominance of M&As to deal with the coordination of
innovative investments which accompanied the Internet and mobile revolution. Corporate
governance directed towards the maximization of shareholder value involved that
shareholders re-appropriated the function of control which was formerly assigned to
It thus followed the expansion of corporate governance oriented towards shareholder value whose “ideology”
(Lazonick and O’Sullivan, 2002) was created in the US and progressively penetrated Europe, and later Japan.
9
10
managers, and profoundly restructure the companies. In that respect, shareholders and
investors imposed large M&As to managers, and made them accept to abandon cooperation
strategies10. A few years later, nevertheless, this trend in the recomposition of the industry
structure generated major coordination failures, and drove the most innovative part of the
telecommunications industry close to a disaster.
3.3. The telecommunications equipment industry in the early 2000s
The telecommunications equipment industry in the early 2000s can be characterized by the
following general stylized facts:
 This industry is still innovative, since R&D expenses are high – though decreasing –
and the percentage of R&D/sales is generally 10% to 15% (see Annex 1).
 Revenues and share prices are greatly affected, and this provides only limited
opportunities for future growth (see Annex 2).
 Downsizing is generalized in the industry (see Annex 3).
The role played by shareholder value in this period can provide us with additional stylized
facts. In fact, companies (such as Lucent, Nortel and Alcatel) which faced the pressure of
their investors and shareholders to elaborate M&A strategies were much more affected,
compared to companies (such as Cisco and Nokia) which were not submitted to such a
pressure:
 Shareholder value favored short-term investments over long-term investments.
Though firms were not opposed to develop long term investments, investors tended to
impose short term choices on managers as soon as profit warnings were
communicated.
 For Lucent, Nortel and Alcatel, the evolution of R&D was characterized by an
important bust (see Fig. 1a and 2a), while this evolution only slowed down or
stagnated for Nokia and Cisco (see Fig 1b and 2b).
 The scope of the coordination failures experienced by these companies, which is
illustrated in terms of R&D, revenues and share prices (see Fig 3a,b and 4a,b), was
10
When S. Tchuruk, CEO of Alcatel, announced the acquisition of Xylan, his former cooperation partner,
commentators and business analysts qualified this drastic change of strategy as a “reluctant bargain” for the CEO
(Réseaux & Télécoms, 1999).
11
greater for Lucent and Nortel, compared to Alcatel which delayed the implementation
of M&A strategies and finally had a smoother profile of evolution.
These stylized facts show that shareholder value clearly interacted with industrial dynamics
and resulted in many cases into durable and cumulative coordination failures, especially
affecting the innovative R&D investments. Coordination failures in Alcatel were relatively
less important compared to its competitors11. These stylized facts lead us also to the following
conclusions. When R&D investments and thus innovation play a major role in industrial
dynamics such as in the telecommunications equipment industry, shareholder value is not
adapted to the governance of firms. Shareholder value tends to reinforce short term market
pressures at the expense of longer term cooperative forms of inter-firm relations designed to
coordinate innovative investments, leading to the acceleration of the ups and downs in
innovative industries.
4. Shareholder value as an accelerator of ups and downs: a
corporate finance story
During the late 1990s, more advanced sectors of developed economies experienced the top of
the wave of the technological revolution which started in the former decade. Innovation
activities thus required a massive need for funds. Companies appealed to a larger base of
lenders, and more specifically to stock market investors. Recurring to the stock market
implied for the companies as borrowers to ensure a higher degree of information availability
and a greater transparency. Improvements in accounting disclosure resulted in more available
and timely data on potential borrowers. Shareholder value emerged at this time as a tool
adapted to a better allocation of information, and to the improving discipline of the actions of
managers. On the other hand, deregulation in the financial sector produced more competition
between more numerous financial institutions. These in turn developed new instruments to
assess and spread risks, which attracted investors and ensured a better power of control for
shareholders. In the early 2000s, however, this “financial revolution” (Rajan and Zingales,
2001) led to new puzzles concerning corporate finance, and the management of innovation
and business strategies.
11
This can be related to Alcatel’s initial refusal of financiers’ pressure, and this relative inertia preserved its
results though the company finally complied with shareholders’ requisites.
12
In the telecoms industry, EVA/MVA criteria have fully played their roles in the evaluation of
segments of activities of companies, in the ranking of firms in stock markets, and in the
benchmarking of the performance of different companies within the same industry. Fransman
(2004) shows that this benchmarking activity prevailed during the boom period since most of
the companies had little track record on potential earnings either because they were de novo
entrants, or because they changed drastically their traditional activity, and thus a high
uncertainty characterized their future performance. This especially applies in the telecoms
equipment supplier industry, where de novo entrants have developed a complete new range of
activities, IP or wireless related; and where incumbents initially specialized in commutation
systems were deemed to implement drastic technological changes in order to survive. Because
of uncertainty, professional investors, as well as financial analysts, which are normally
supposed to provide long term forecast had no option but to focus on short term prevision
based on the evolution of stock market. In this situation, stock markets are dominated by the
beauty contest phenomenon described by Keynes, according to which the judgment of players
is based on the expected judgment of other players leading to a vicious circle in expectations
of stock prices.
In the telecoms boom, those characteristics resulted in two distinct phases. The first phase was
an acceleration of the process of exuberance: “Rising telecoms share prices, initially justified
by the new opportunity for profits opened up by telecoms liberalization and the Internet, were
reflected in benchmarks, leading, via the beauty contest process, to further rises in share
prices” (ibid, p. 21). The second phase was a contamination process: exuberance affected the
other financial markets, as well as real markets in the telecoms industry since overoptimistic
expectations increased real investments of companies operating in network, equipment and
applications. In the case of equipment suppliers, the increase in share prices sustaining a high
market capitalization, and the exuberance concerning future profit opportunities due to the
changing technological paradigm (from commutation to IP and mobile), led to the
development of ambitious R&D investments and to the enlargement of the pool of
competences supported by large M&As. In this mania phase, the gap between real
performance and market performance of companies, i.e. between EVA and MVA, was
considered as a minor problem since companies with these ambitious R&D programmes were
supposed to foster their EVA and fill the gap in the near future. Regarding corporate
governance, this speculative trading activity also generated a distorted mechanism of
13
incentives for top managers, since their own compensation schemes (stock options) were
ultimately based on the evolution of the share price of their companies. Top managers
sustained speculative strategies which were against the interest of innovation, as well as
against the other members of the company (Carpenter, Lazonick, and O’Sullivan, 2003).
Over time, after the turning point of March 2000, new available information contradicted
former optimistic expectations, since only meager profits were generated by companies which
began to publish profit warnings regularly. The accumulation of debts, due to the large
process of M&As, acted as a negative signal, involving a massive disengagement of investors
which previously sustained the companies in these strategies. The gap between EVA and
MVA which was neglected in the first step was now part of the reality that the market had to
take into account. This resulted in a financial crisis, involving dramatic declining share price.
As well as shareholder value reinforced the optimistic and self fulfilling expectations in the
boom period, this mode of corporate governance accelerated the pervasive effects on financial
and real crisis in the busting telecoms industry. Top managers, anxious to please the market,
developed a new series of short term strategies such as restructurings, downsizing, and cost
cutting especially affecting R&D, which reinforced the panic movement of investors 12. In
both cases, shareholder value reinforced and confirmed the irrational behavior of the market.
This market-oriented short-termism led to replace the productive rationale by a purely
financial one. The result was a neglect of the productive coherence of the telecoms industry
which was conducive of major failures in the coordination of innovative investments. In order
to remedy this kind of catastrophic path, it is necessary to investigate alternative forms of
corporate governance in which decision making is centered on the organization of production
and the development of innovation.
On short termism, see Gompers and Lerner (2003, p. 1357) which stress that “(…) investors are too optimistic
about stocks that have had good performance in the recent past and are too pessimistic about stocks that have
performed poorly”. Palley (1997, p. 547) also shows that managers naturally tend to short-termism, since
“rational own reward maximizing managers may choose projects that have intrinsically lower net present values
but yield higher returns in the earlier part of their lives”. For an alternative vision, see Holmstrom and Kaplan
(2001, p. 138) who argue that: “Large swings in stock prices arise precisely because the market takes a long view
of growth expectations”.
12
14
5. An alternative vision of decision making in corporate
governance
Financial and short term solutions tend to leave aside managers as key deciders. If we follow
the conventional vision of corporate governance, we are thus entitled to ask whether
financiers still need managers as decision makers. In this section, we argue that the role of the
decision maker in corporate governance is central. First, as a manager, and according to the
works of Chandler, the role of the decision maker is to organize the complexity of the
corporate environment. Second, as an entrepreneur, according to Schumpeter, the role of the
decision maker is to find new opportunities for corporate development. These Chandlerian
and Schumpeterian functions of the corporate decision maker show that, in an innovative
framework, the main object of the governance of firms lies in the coordination of innovative
investments. This is a crucial part of strategic decision making that cannot be exerted by
investors and financiers.
5.1. The decision maker as a unique Chandlerian manager
Shareholder value considers that the owner of the firm is necessarily the principal and that
decision-makers and other agents are supposed to act in the interest of the owners. According
to Rajan and Zingales (2001), important contributions in economics, sociology and
management science have shown that firms composed of different variety of resources in
short supply are valuable to the production process. The “critical resources theory”, building
on the observation of human capital intensive firms, defines the organization as consisting of
a pool of unalienable assets (i.e. strategies, ideas or skills), that are tied via complementarities
between insiders and outsiders. According to this theory, firms’ boundaries cannot be limited
to property rights considerations (contrary to agency theory as well as the new property rights
theory à la Grossman Hart Moore). The power of alienable assets owners is weakened by
talents and other ‘unique unalienable’ assets, the control of which has to be built up through
“a variety of mechanisms such as internal organization, work rules, and incentive schemes”
(ibid p. 207)13. In these conditions, the incentive mechanism must not lead astray or alter the
role of the manager in organizing internal as well as external corporate complementarities. As
Sometimes, managers can ‘fire’ shareholders. The case of Saatchi and Saatchi is documented in various
articles (Rajan and Zingales, 2001; Hall, 2001): after an attempt of investors to disciplining the management
board, the manager Maurice Saatchi left the company with most key executives and clients.
13
15
Carpenter et al. (2003, p. 1026) argue: “the problem with strategic decision making (…) lay in
the incentives, not the abilities, of senior executives (…) driven by stock price performance”.
The characteristics described above are not limited to human capital intensive firms. The firm
can be interpreted as a pool of resources, more generally. Chandler (1977) argues that firms
are composed of a triple investment: productive investment, management investment and
marketing investment. The productive dimension involves the constitution and formalization
of relations with suppliers, the managerial dimension means the organization of hierarchical
and horizontal collaborations (top management and executives), and the marketing dimension
underlines the importance of specific relations between the firm and its network of clients.
This threefold decisional structure must ensure internal corporate coherence mainly among
top management and executives, and externally this structure must organize the network of
different agents, such as clients, suppliers and investors, related to the firm’s activity. In this
perspective which is often termed as the ‘stakeholder perspective’ (Blair, 1995), the firm is
embedded in a three-dimensional governance structure. Corporate governance is not only a
problem of value, but also a question of organizing the complex relations among insiders and
outsiders. Chandler (1977) shows that this governance structure supported by a triple
investment has provided the emergence, viability and growth of managerial firms, mainly by
sustaining the feasibility of their innovation projects. Chandler (1992) stresses that this type of
problem can be related and incorporated within the “dynamic capabilities approach” to the
firm, which is inspired by the works of Marshall, Schumpeter, Penrose, and significantly
developed by contributions of authors such as Teece, Dosi, Lazonick, and Nelson 14 . This
approach is clearly related to the Schumpeterian perspective.
5.2. The decision maker as a Schumpeterian entrepreneur
Within the agency theory framework, all the interactions between insiders and outsiders are
described by contract as the basic unit of analysis. Because of the complexity of these
interactions, the reference to the Schumpeterian tradition is here more appropriate. Within the
classic treatment of routines, bounded rationality and tacit knowledge (Nelson and Winter,
1982), the evolutionary theory of the firm focuses on the dynamics of organizational and
technological capabilities within the firm and the way they are structured by a selection
This term of “dynamic capabilities” was formerly developed by Langlois and has generated analyses focused
on the boundaries of the firm by authors such as Loasby, Foss and Fransman.
14
16
environment (Teece, Rumelt, Dosi and Winter, 1994). By repetition and experimentation, the
process of organizational learning improves the realization of usual tasks and creates new
opportunities for economic development.
Innovative firms develop specific production plans and are mainly endowed with local,
private and tacit knowledge, but the source of their competitive advantage stems from
dynamic capabilities rooted in high performances routines operating inside the firm,
embedded in the firm’s process, and conditioned by its history (Malerba and Orsenigo, 1996;
Dosi and Malerba, 2002). In an innovative firm where dynamic capabilities are implemented,
“the key role of strategic management is appropriately adapting, integrating and reconfiguring
internal and external organizational skills, resources, and functional competencies toward
changing environment” (Teece and Pisano, 1994, p. 538). This innovative behavior takes
place in a rivalry context where other firms behave by imitation and replication in order to
preserve the value of their particular set of competencies (ibid, p. 549).
5.3. Decision making in an innovative framework
Innovation generally requires a description of the collective learning processes leading firms
to undertake a quantitative and qualitative coordination of investments, and further to achieve
a stable type of productive interactions (Metcalfe, 1998; Antonelli, 2003). Within the
evolutionary framework, the governance of innovative firms has to be reconsidered since,
compared to agency theory, information is necessarily imperfect and impedes the definition of
an enforceable contract between shareholders and managers. Moreover, firms are involved in
different types of inter-firm relationships. The interactions among different categories of
actors inside the firm must be articulated to the way in which firms interact with their
industrial environment. Finally, for managers, fairness and trust go together with the
entrepreneurial capacity of implementing innovation, and thus creating new opportunities for
growth.
An investigation into the corporate governance of innovative firms claims for a previous
exploration of the process of coordination of innovative investments, focusing on the adaptive
behavior which firms experience during this process. This drives us to explore new kinds of
modeling which tend to promote an evolutionary vision of the behavior of innovative firms. In
an innovative, i.e. highly uncertain environment, this perspective allows to investigate how
17
companies develop a common experiment over time, and coordinate progressively, eventually
on the basis of long term co-operations and M&As15.
In what follows, we choose to develop an evolutionary game model in order to describe the
basic mechanisms of the innovative choice. This model shows that short term market
pressures lead to coordination failures in the process of creation of a new technology,
suggesting that corporate governance should not be reduced to short term market choices but,
rather, should favor innovation through long term cooperation. This model is a first step in the
process of inferring new criteria for corporate governance, to be provided in Section 7.
6. A basic model of investment coordination in an innovative
framework
6.1. Initial requirements
In a complex environment, investments decisions supporting innovation are characterized by
a very weak degree of information concerning future opportunities and events that shape the
innovation process. The main problem for an innovative firm is to develop a set of sequential
rules to cope with this processual uncertainty in order to structure and articulate the
innovative process over time. The decision maker is confronted to two kinds of uncertainty:
an uncertainty emerging from the productive relationships with his partners, and a market
uncertainty generated by the actions of its competitors16. Each single firm interacting with
others has thus to face a mix of rivalry and cooperation. The decision maker has then to
organize two kinds of investment coordination sustaining the profitability of his innovative
choice:
- the coordination of complementary investments which, if they are implemented by partners,
will increase the profitability of the innovative choice; and
- the coordination of competitive investments which, if they are engaged by some rivals, will
decrease the profitability of the innovative choice17.
In this context, we could say that “common experiment” is likely to be more important than the hypothesis of
“common knowledge” of conventional game theory.
16
These notions are termed as “productive uncertainty” and “competitive uncertainty” in Lazonick (1991).
17
The coordination of different kinds of industrial investments is inspired by G.B. Richardson (1960) who
provides a powerful, but literary treatment of this question. A first attempt to model the coordination of
15
18
In a highly uncertain environment, the industrial system based on such firms’ interactions
may experience coordination failures implying that erroneous choices are made affecting the
development of innovation. The crucial issue is then to avoid the persistence of such
disequilibria over time and limit their cumulative effects. The following model provides
indicators which contribute to build rules of decision for innovative investments. As we will
see, these indicators come in the form of thresholds conditioning the engagement of
complementary investments and limiting the engagement of competitive investments.
The model is adapted to the description of economic outcomes when decision makers know
very little about other’s payoffs or strategies. If we assume that players do not systematically
attempt to influence other players’ future actions, and that the distribution of players’ actions
changes gradually, strategic interaction over time can be modeled as an evolutionary game
(Weibull, 1995; Friedman, 1996; Saviotti, 1996). In this kind of model, decisions are
mechanically implemented irrespective of any prior informational specification. Instead of
referring to a common knowledge hypothesis, they focus on actual face-to-face relations
giving room to what we call a common experiment. Agents do not consider all the strategies
tried out in the population, but rather try to imitate or reproduce a greater number of times in
the following periods the strategies which average a better success than all the others. This
model is adapted to a vision of the industrial system where technology has to be created step
by step, in a situation of a great uncertainty on the outcome of the innovative process.
6.2. The model
Let us consider a two-dimensional linear evolutionary game in which firms come from two
strategically distinct populations: firms which implement complementary investments
(population 1 players, with a payoff matrix A); and firms which implement competitive
investments (population 2 players, with a payoff matrix B). Each population has two
alternative actions: to invest (pure strategy 1) or not to invest (pure strategy 2). Population 1
players can be considered as a set of potential cooperative firms which are willing to
undertake together the complementary investments required for the realization of a given
innovative project, while population 2 players are seen as competitors engaging rival,
predatory investments designed to question the feasibility of population 1 project. A concrete
complementary and competitive investments was made by N. Foss (1994). Our own model is in the line of these
former contributions.
19
illustration of this situation can be found in the competition between a group of firms which
decide to join their efforts to develop a major, long term innovation and a group of
competitors undertaking investments in the same field to provide a less sophisticated
innovation, more rapidly available. We noted, as a general principle, that the engagement of
complementary investments increases the profitability of long term innovation, while the
engagement of competitive ones decreases the profitability of this innovation. This principle
can be expressed by the following decision tree and gives the corresponding ranking of
returns (Fig 6):
Population 2 player
pure strategy 1
Payoff population 1 player = -3
Payoff population 2 player = 1
pure strategy 1
Population 2 player
pure strategy 2
Payoff population 1 player = 3
Payoff population 2 player = -1
pure strategy 1
Population 2 player
pure strategy 1
Payoff population 1 player = -1
Payoff population 2 player = 3
pure strategy 1
Population 1 player
pure strategy 1
The payoffs ranking is
the following:
a12>a22>a21>a11
b21>b11>b22>b12
Population 1 player
pure strategy 2
Population 2 player
pure strategy 2
Payoff population 1 player = 0
Payoff population 2 player = 0
pure strategy 1
Fig. 6 : Decision tree in the coordination of complementary and competitive investments
The game is then specified by the payoff matrices A=(ahk) and B=(bhk), where ahk  R (payoff
to population 1 player) and bhk  R (payoff to population 2 player) when population 1 player
uses pure strategy h and population 2 player uses pure strategy k.
-3 3
A=
1 -1
B=
-1 0
3
0
Populations 1 and 2 are considered as large populations of firms. Initially, each population is
divided into the fraction x1  [0,1] (respectively y1  [0,1]) of players in the population
currently choosing pure strategy 1, and the fraction x2 = 1-x1 (x2  [0,1]) (resp. y2 = 1-y1, y1 
[0,1]) of the population choosing pure strategy 2. As the population state (x 1,x2) (resp. y1,y2)
changes, so do the payoffs to the pure strategies. Changes in the population states are
20
governed by the replicator dynamics. Firms are randomly drawn two by two from these
populations to play the game (one firm from each player population). If the payoff to a player
in the first (resp. the second) population depends only on the distribution of actions (y1,1-y1)
in the other population (resp. x1,1-x1), the replicator dynamics can be expressed as follows, by
a system of time derivatives of the population state (x°1, y°1) which depends on the payoffs
difference between the first and second pure strategies:
x°1 = [(a11-a21)y1-(a22-a12)y2]x1x2
= [(a11-a21)y1-(a22-a12)(1-y1)](1-x1)x1
Using the numerical example:
x°1 = (3-5y1)(1-x1)x1
y°1 = [(b11-b12)x1-(b22-b21)x2]y1y2
= [(b11-b12)x1-(b22-b21)(1-x1)](1-y1)y1
Using the numerical example:
y°1 = (3-x1)(1-y1)y1
From these equations, we see that 3-x1> 0 for all x1 [0,1]. Thus y°1 is always increasing. On
the other hand, x°1 decreases when 3-5y1 < 0 (that is when y1 > 3/5), and increases when 35y1 > 0 (that is when y1 < 3/5). In this case, the first action (first column) is dominant for
population 2 players and the second action (bottom row) is the best reply by population 1
players. This is characteristic of an iterated dominated strategies game, where the corner
(x1,y1) = (0,1) is the unique Nash Equilibrium. This Nash Equilibrium is automatically an
Evolutionary Equilibrium because it is a solution by iterated elimination of dominated
strategies (Fig 7).
y1=1
3/5
x1=1
0
Fig. 7 : Replicator dynamics in the coordination of complementary and competitive investments
21
This graphic shows that the proportion of population 2 players deciding to engage competitive
investments (noted y1) increases monotonically along any solution orbit. The proportion of
population 1 players deciding to engage complementary investments (noted x 1) increases
when y1 is below 3/5, and decreases when y1 is above 3/5.
What we can infer from the results of this game is that market forces lead firms to naturally
adopt the "predatory" strategy. Thus, long-term innovative strategies become less and less
profitable, and the population of firms willing to undertake such a behavior decreases to
finally equal zero. By contrast, the rival predatory strategy becomes more and more prevalent
and, in the end, every firm belonging to the second population is effectively engaged in a
short-term plan. Thus, within this game, market forces fail to ensure by themselves technical
progress.
The coordination of complementary investments can be realized in an "isolated" population
(population 1 implementing pure strategy 1) (see Krafft and Ravix, 2001). But when this
population is confronted to another one implementing competitive investments strategies in
the same technological field, the complementary strategy becomes a dominated one and is
likely to be eliminated. These coordination failures render necessary the elaboration of
organizational solutions which can be initiated either by public policies or by the firms
themselves. Our formal analysis suggests for instance that industrial and competitive policies
are needed to encourage and protect cooperation among firms from predatory behavior during
the period of development of innovation. Temporary exemptions which are delivered by the
European Commission can be seen as a concrete tool implemented in order to favor long term
cooperation between innovative firms on a given project in a context of fierce predatory
strategies 18 . These policies can be interpreted as means to shift the curve to the point
(x1,y1)=(1,1), where both competitive and complementary investments are made. The model
suggests that corporate governance also has a crucial role to play in innovative strategies.
Shareholder value short termism leads investors to naturally over invest in predatory
strategies. At the opposite, the evolutionary perspective leads the manager to sustain long
term innovative strategies. In what follows, we elaborate on these principles.
18
Formally, this implies to extend the formalization to go beyond the purely adaptive behaviors and capture the
intentional behaviors of firms, that is to move from replicator dynamics models to learning evolutionary games
(Kandori, Mailath and Rob, 1993; Samuelson, 1997). In this case, the learning process should be focused on the
delayed acquisition of a specific knowledge about technology and market relations. The issue is to take into
account the gestation of investments as well as the necessary delayed transmission of market information
generated through market processes (See Krafft and Ravix, 2001).
22
7. Implications for the governance of innovative firms
The respective roles of shareholders and managers can now be reconsidered in greater details.
The separation between shareholders and managers was a central characteristic of the
managerial and multi-divisional firm which appeared at the beginning of the 20th century
(Berle and Means, 1932; Chandler, 1962; Williamson, 1985). The so-called “managerial
revolution” had two strong implications: first, professional managers became prominent in the
control of the firm and were identified as the dominant social class in managerial capitalism;
second, the firm was separated into divisions behaving as single independent units whose
individual performances could be compared 19. These social and organizational innovations
were at the origins of one of the most impressive success story of the US industry.
Shareholder value sustains a somewhat distorted interpretation of this story, since (i)
shareholders are supposed to re-appropriate the function of control, while historically this
function was assigned to professional managers; (ii) the multi-divisional firm, formerly
intended to rationalize the organization of production, now results in the mere possibility of
restructuring industry on the basis of pure financial criteria.
This misinterpretation of the economic nature of the managerial firm leads to the dominance
of short term innovative strategies. This situation can be remedied by implementing a
corporate governance in which managers are the key decision-makers in production and
innovation. According to the principles exhibited in section 5, the role of the manager lies in
the reconciliation between the Schumpeterian entrepreneur and the Chandlerian manager, that
is to innovate and to organize ex ante the planning of production. Restoring the main
competences of the manager does not mean that the role of the investor becomes simply the
one of a supporting actor. In fact, the investor is also restored in his main capabilities, i.e. the
ex post control of innovative choices. The thresholds of complementary and competitive
investments exhibited in the above model (cf. section 6) set the limits between predatory and
long term innovative behaviors. Thus, they can be used as decision criteria and allow us to
derive the following sequence of rules of conduct for the manager and the shareholder.
This situation is still prevailing even if “the average multi-unit enterprise today is less vertically integrated
than its counterpart in the Chandlerian era” (Langlois, 2003).
19
23
7.1. The role of the manager in the ex ante coordination of innovative investments
The role of the manager in an innovative environment is to ensure the viability of the firm,
which is performed by the ex ante quantitative and qualitative coordination of investments. In
the abstract conditions of our model, this general purpose can be translated into simple rules
of actions20. First, the manager has to maintain complementary investments over a minimum
threshold, which means that the manager must provide continuity in the process of innovation
engaged by the firm. Second, the manager has to maintain competitive investments under a
maximum threshold, i.e. the manager must limit strategies of competitors in order to preserve
its own market position.
From a corporate governance point of view, these rules mean that the manager must be
endowed with sufficient elements of discretion in order to organize the coordination of
innovative investments. In this purpose, he must be able to develop industrial strategies and
organize his competitive environment by implementing a coherent set of actions, based on the
development of mergers, acquisitions, and cessions, as well as different forms of inter-firm
cooperation (alliances, joint venture, R&D collaboration). These strategic interventions
influence the level of complementary and competitive thresholds and, in an uncertain world,
create trust and signaling effects, providing partners and rivals with a basis of “credible
beliefs” (Richardson, 1960), or “credible interactions” (Leijonhufvud, 1993).
As an illustration of these rules, the evolution of the telecommunications industry tells us that
managers should have avoided in 1998-1999 strong and radical changes imposed by investors
(such as in Lucent and Nortel’s case), and prevented themselves from investors which forced
them to copy competitors’ strategy (such as in Alcatel’s case). Though these companies
engaged in a first step long term cooperation strategies sustaining the development of
complementary investments, they were sooner or later obliged by shareholders to shift to
M&As which were considered as the efficient structure to counter the competitive threat
coming from new entrants. While ownership remained largely and for a long time separated
from the managing function in incumbent companies, owners and especially large investors
progressively integrated the function of control by imposing business strategies motivated by
These formal conditions are more in connection with the “cautious” CEO (Business Week, 2004) than the
“superhero” CEO (Business Week, 2000).
20
24
financial performances on stock markets. Managers accepted to implement these strategies
since their remuneration scheme was indexed on such performances.
Alternatively, in Cisco and Nokia, managers were key actors in the innovation process, and
they could choose by themselves the adapted structure of organization. In Cisco, decision
makers were essentially three men (Valentine as the main venture capitalist, Morgridge and
Chambers as top executives) which acted as managers, and not as owners. These managers
were distinct from the initial founders of the company, and always maintained their decision
making independent from investors, including largest institutional investors (Carpenter et al,
2003). In the process of developing radically new technological systems, the new entrants
engaged a long term innovative strategy mainly based on complementary investments,
consisting of a wide range of actions such as the development of collaboration with security
systems companies, and the multiplication of advanced and diversified services to clients.
These actions deepened their core competencies along with the engagement of
complementary investments and, in turn, led to an increase of the competitive gap by limiting
the engagement of competitive investments from incumbents in these activities.
7.2. The control of the investor on the ex post feasibility of innovative choices
Contrary to agency theory, the problem of the investor is not to limit the discretionary power
of the agent, but rather to control this power. Except in stationary environments, this control
cannot be done simultaneously but in a sequential timing. Contrary to agency theory again,
transparency does not consist in quantifying future payoffs that are in fact unpredictable. The
investor needs some credible evaluation criteria in order to exercise his control over the
actions of the manager.
Investors must require from the manager to provide them with information (documents,
reports, etc.) explaining strategies developed in order to meet the viability thresholds of
complementary and competitive investments. Using these criteria, the investor has to verify
that the manager does not engage the firm into erroneous actions. The investor checks ex post
that the manager implements productive and organizational decisions (cooperation
agreements or M&As) necessary to maintain complementary investments over their viability
threshold, and competitive investments under their viability threshold. Consequently, when
M&As’ strategies are based on such productive criteria, it is much easier for the investor to
25
evaluate and control the manager’s trustworthiness, especially his propensity to “empire
building”.
As we already mentioned, the case study in telecommunications exhibits two essential
innovative strategies dedicated to the acquisition of new competences, sustained by two
different visions of corporate governance, both resulting in diverging paths of evolution. On
the one hand, managers implemented progressive organizational changes on the beliefs that
new competences have to be developed step by step. On the other hand, drastic organizational
changes were imposed by shareholders on the beliefs that new competences could be acquired
rapidly by large M&As.
Shareholders and investors of Cisco and Nokia accepted the managerial strategy oriented
towards a progressive development of competences, and based on the engagement of
complementary investments using M&As as well as internal development in an innovative
breakthrough. This attitude resulted in the fact that Cisco and Nokia outperformed their
competitors in the early 2000s.
In the case of Lucent, Alcatel and Nortel, investors drove managers to engage imitation
strategies essentially based on competitive investments, in order to fill the technological and
core competencies gap separating them from new entrants. As a matter of fact, the strategy of
these incumbent companies was to acquire new competences on the basis of M&As which
were deemed to provide them in the short run with the possibility to penetrate newly emerging
domains dominated by Cisco and Nokia. This predatory strategy dominated in the short run,
since incumbent companies significantly threatened their IP-based competitors, eventually by
acquiring some of the biggest actors in the market. However this short term strategy soon
collapsed in the early 2000s.
8. Conclusion
While conventional approaches have monopolized the issue of corporate governance, with an
extensive reference to agency and corporate finance problems, we argued that further
advances can be provided from an evolutionary perspective. This evolutionary vision is
particularly necessary in this issue since we saw that (i) conventional theory only tells part of
26
the story by focusing exclusively on shareholder value and the limitation of managers’
discretionary behaviors, and (ii) this story has driven the real economic system into major
coordination problems and turbulences. Based on empirical investigations into the
telecommunications industry, and guided by a simple model of innovative investments’
coordination, our aim was to propose new principles for the governance of innovative firms.
These principles are centered upon a sequential governance pattern: the manager is in charge
of the ex ante coordination of innovation, the role of the shareholder being the ex post control
of the feasibility of the innovation strategy.
27
Annex 1: R&D in telecommunications equipment industry
4,5
5
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
1997
4
3,5
3
R&D Lucent
2,5
R&D Nokia
R&D Alcatel
2
R&D Cisco
R&D Nortel
1,5
1
0,5
0
1998
1999
2000
2001
1997
2002
Fig 1a : R&D expenses in Lucent, Alcatel and Nortel (in million $)
Source: Companies 20F forms
1998
1999
2000
2001
2002
Fig 1b : R&D expenses in Nokia and Cisco (in million $)
Source: Companies 20F forms
25
20
% R&D/sales
Lucent
15
% R&D/sales
Alcatel
10
% R&D/sales
Nortel
5
0
1997
1998
1999
2000
2001
2002
20
18
16
14
12
10
8
6
4
2
0
% R&D/sales
Nokia
% R&D/sales
Cisco
1997
Fig 2a: R&D/sales in Lucent, Alcatel and Nortel (in percentage)
Source: Companies 20F forms
1998
1999
2000
2001
2002
Fig 2b : R&D/sales in Nokia and Cisco (in percentage)
Source: Companies 20F forms
28
Annex 2: Revenues and share price in telecommunications equipment industry
45
35
40
30
35
25
30
Revenues Lucent
25
Revenues Alcatel
20
Revenues Nortel
15
20
Revenues Nokia
15
Revenues Cisco
10
10
5
5
0
0
1997
1998
1999
2000
2001
1997
2002
1998
1999
2000
2001
2002
Fig 3b: Revenues of Nokia and Cisco (in million $)
Source: Companies 20F forms
Fig 3a: Revenues of Lucent, Alcatel and Nortel (in million $)
Source: Companies 20F forms
Fig 4b: Share price of Cisco (CSCO),and Nokia (NOK)
(Basis 0 in 1997)
Source: http://www.quote.bloomberg.com
Fig 4a: Share price of Lucent (LU), Nortel (NT), Alcatel (ALA)
(Basis 0 in 1997)
Source: http://www.quote.bloomberg.com
29
Annex 3: Downsizing in telecommunications equipment industry
Companies
Lucent
Nortel
Alcatel
Cisco
Nokia
1998-2000
126,000
94,500
113,000
20,000
58,000
2000-2002
35,000 (-72%)
56,000 (- 40%)
60,000 (-53%)
14,000 (-30%)
52,000 (-10%)
Fig 5 : Total number of employees in telecommunications equipment companies
Source: Companies 20F forms
30
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