Long-term investment is neededas cure for what ails economy





Michael T. Jacobs.

Harvard Business School Press.

' 250 pages. $24.95.

We may never fix what ails the nation's economy, but at least we've created a growth industry in books that tell us how to try.

A recent entry in this endless series of recipes for economic nirvana comes from Michael T. Jacobs, who has served as a Treasury official in the Bush administration. The book is soundly argued and clearly a product of broad knowledge. But Mr. Jacobs writes in a stiff, careful way that limits the book's effectiveness. The often textbook-like style masks the urgency of the topic, as well as the passion for his case.

It's assumed that the United States is struggling in the ongoing competitive battle against its economic rivals, notably Germany and Japan. One big problem, we've so often heard, is that our business thinking is short-term, concerned so much with the next quarter's earnings report that longer-term considerations -- earning greater market share for a product or spending research dollars to build a better mousetrap -- are all but ignored.

Into this set of givens steps Mr. Jacobs. He links the short-term problem to a higher cost of capital that U.S. businesses have to pay, compared with overseas rivals. The usual suspects for this problem are interest rates (often too high), taxes (too high) and aggregate savings (not enough). But Mr. Jacobs convincingly argues that it's far more complicated. The high cost of capital and rampant short-termism are closely tied to what he sees as a skewed relationship between providers of capital (who are the owners of public companies through share holdings) and managers. Rather than a cooperative relationship that works for the long-term betterment of all involved, there often is an adversarial stance, or none at all.

"Today, a share of stock is a financial commodity, little different from an ounce of silver or a pork-belly futures contract," Mr. Jacobs writes. Even if institutional shareholders want to take an active role in companies in which they own significant stakes, "a complex web of laws and regulations [make it] virtually impossible for pension fund managers and other institutional investors to emulate the long-term, patient investors we find overseas."

In perhaps the most lucid chapter, Mr. Jacobs details what he seesas the "dysfunctional" corporate governance system, which works against the shareholder input vital to long-term business thinking. He explores the nuts and bolts of the proxy system and the role of independent directors, exposing many roadblocks to a cooperative owner-manager relationship.

How about the takeover, that oft-used tool of the 1980s? That's "too blunt an instrument to be relied upon as the primary source of [corporate] accountability," he writes. Besides, so many companies have takeover defenses and there are so many states now with anti-takeover laws that the hostile acquisition may be an endangered species.

Mr. Jacobs says the takeover should act like a wolf, which feeds "on the frail members of the caribou pack -- the sick, the lame and the genetically weak. By doing so, the wolves strengthen the entire caribou herd." This book would have been strengthened by more vivid images such as this.

It's a lot easier to list what's wrong than provide solutions, but Mr. Jacobs doesn't shrink from this task. Of a list of remedies offered in the final chapter, most intriguing is the author's advocacy of the creation of a "new breed of investment firms whose approach is to make significant long-term investments in a limited number of companies." These companies would gather some of the gobs of money institutions have to invest and buy sizable stakes in a diverse group of companies, preventing the ++ problem of putting too many eggs in one basket.

But the investment firms would really learn the companies' businesses, have representatives on the board, and have an investment time frame that stretched indefinitely. The walls between owners and managers would start to come down. An interesting concept, to be sure, but it's hard to imagine such radical changes on Wall Street, where the herd mentality runs so deep.

Mr. Lipschutz is a writer living in New York.

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