Mutual Funds, Fiduciary Duty and Fairness

A case filed five years ago by three shareholders in the Oakmark Funds, run by Chicago-based Harris Associates, will get its day in court Monday when the U.S. Supreme Court hears arguments from the shareholders that the fees charged by the fund managers are too high and violate fidicuary duty – i.e., they are not set in the best interests of shareholders, as mandated by Congress almost four decades ago.

By some estimates, money-management fees in the mutual fund industry reached close to $100 billion last year in a $10 trillion industry, according to an article in The Wall Street Journal, which notes that “typically, the investment-advisory committee that manages a mutual fund takes a percentage of the assets.... That fee is negotiated with the mutual-fund board, which is set up to represent investors.”

The shareholders claim that Harris charged Oakmark “an effective rate of 0.88% on $6.3 billion in assets, nearly twice the 0.45% rate for an unrelated institutional client like a pension fund,” states The Journal. In addition, the shareholders cite “conflicting business and personal relationships among the trustees and Harris personnel,” including the fact that Oakmark’s board chairman, classified as an “independent director,” was a former Harris partner who continued to earn money from the firm, according to the article.

The Supreme Court’s case on mutual fund fees “is interesting for several reasons,” says Wharton legal studies and business ethics professor Richard Shell. “First, it shows that the problem of how business people set their own compensation in large firms extends to the mutual fund industry and predates the economic crisis. It turns out that mutual fund managers, like executives at big banks, have what some think is a pretty cozy relationship with the board members who set executive pay – and it may come as no surprise that those pay decisions are not always what an average shareholder would approve.”

Second, he notes, “it is further evidence that courts may be increasingly skeptical of the model that says, ‘Markets always get things right.’ Two Chicago-School, economics-minded judges – Frank Easterbrook and Richard Posner – sharply disagreed with one another in the lower court opinion in this case. Easterbrook said, ‘Trust the market and leave the pay issue alone.’ Posner said, ‘We can’t trust the market when there are conflicts of interest.’ Easterbrook got more votes than Posner in the court of appeals, but my guess is that Posner will win the day in the Supreme Court.”

A ruling is expected in June.

China's Local Private Equity Market Gets a New Boost

Renminbi (RMB) funds -- private equity funds raised in China's local currency -- have been in fashion of late. In August, U.S.-based private equity firm Blackstone Group and a number of its Western peers announced plans to set up their own RMB funds. Such funds have been underutilized but are now receiving renewed attention by foreign firms that are finding China’s private equity market more attractive than ever. “Right now, the A-share market [shares denominated in renminbi] is so good, and IPOs in the growth market offer a high price-to-earnings ratio,” says Joe Tian of DT Capital, a China-focused private equity firm in Shanghai.

Fueling this interest is ChiNext, China’s first Nasdaq-style stock exchange, which was formally launched in Shenzhen on October 23 to the enthusiasm of fund managers and private equity firms looking for an alternate avenue to exit investments.

Meanwhile, a host of factors, including China’s buoyant economy and expectations that the yuan will strengthen against the dollar, are driving investors to explore onshore options in greater numbers. Global private equity players hope that RMB funds will offer a new way to benefit from the growth of Chinese companies at a time when changing regulations are choking the old channel of foreign currency-based investing. Meanwhile, RMB funds allow them to tap China’s mounting pile of cash, which is poised to grow even more.

To read more about the rise of RMB funds in China, see the current issue of China Knowledge@Wharton.

Goal: More Milk with Fewer Cows

Is drinking organic milk from small farms kinder to the environment? Many Americans think so, but the data proves otherwise, argues David Galligan, a professor of animal health economics at the University of Pennsylvania School of Veterinary Medicine, who spoke during a recent conference at the Penn Museum called, “Globalization in Progress.”

A veterinarian and a dairy cow specialist -- whose quirky website includes posts such as the Net Present Value of a Dairy Cow -- Galligan believes most Americans are missing the big picture. Producing more milk with fewer cows, he says, means less input and less waste – and ultimately, less overall strain on the environment. “This is at the heart of the efficiencies of intensive agriculture – this dilution of these fixed animal costs, fixed maintenance costs,” Galligan says. “Because all of these animals produce manure, burp methane, consume resources and take up land space.”

For Galligan, this is more than theory. He backed up his argument with an interactive graphic analysis of figures from the United States Department of Agriculture. In 1950, the dairy industry supported 22 million cows and produced 117 billion pounds of milk – an average of about 5,314 pounds (about 664 gallons) of milk per cow per year. Today, the United States dairy cow population has dropped to 9 million cows that produce 176 billion pounds of milk – an average of 19,576 pounds (or 2,447 gallons) per cow per year. “That’s a tremendous story of efficiency,” Galligan says.

It may also be a story of environmental conservation, according to Galligan’s analysis. Based on the amount of milk the cows produced, Galligan calculated how much food each cow would have to eat – and consequently how much methane, nitrogen and phosphorus each would create. Analyze the output of noxious gases per cow, and things look bleak: methane, nitrogen and phosphorus gases have all steadily increased over time. Break it down by unit of milk, however, and a different story emerges: Since fewer cows are producing more milk, the overall emissions of methane, nitrogen and phosphorus per pound of milk has gone down.

Understanding the economics behind milk production and other forms of intensive agriculture is essential if the world is going to feed itself in the future, Galligan says. Based on current population growth, world food production will need to double by 2050, but arable land is expected to increase by just 1%, he notes.

“How will we feed these population centers?” Galligan asks. “Growing locally sounds good, but it can only put so many calories on the table and [generate] so many grams of protein per day. We [must] realize that we’re going to need intensive systems … to feed these large populations.... Society has a certain demand for animal products,” he says. “We should encourage production systems that minimize environmental impact while increasing production.”

Milk Yield Graph

Big Banks Offer Size and Reassurance, Despite their Shortcomings

Why don't big banks that "were recently on the verge of collapse" have to struggle to retain customers? The question is posed in an article in this week's New Yorker, which cites research published last year by Jack Bao, who at the time was a graduate student at MIT, and Alex Edmans, a Wharton finance professor.

The paper, "How Should Acquirers Select Advisors? Persistence in Investment Bank Performance," found that market share does not necessarily translate to the best returns for an investment bank's clients. "The entire industry seems to equate market share with quality, without stopping to check whether market share is actually positively related to performance," Edmans told Knowledge@Wharton, which reported on the paper last year.

The New Yorker article looks also at consumer banking, where four banks -- Citigroup, Bank of America, JPMorgan Chase, and Wells Fargo -- control commanding shares of consumer deposits, credit cards and mortgages. "This isn’t because the big banks have been making a special effort to be customer-friendly," the article states, "On the contrary, in the credit-card market they’ve slashed credit lines and jacked up interest rates. In retail banking, they haven’t capitalized on the benefits of size (like lower borrowing costs) to cut prices for their customers, the way big retailers like Walmart do. Instead, they typically pay lower interest rates on deposits than smaller banks do, and charge higher interest rates on loans. Overdraft fees, too, have typically been higher at big banks than they are at smaller ones."

The customers remain, according to the magazine, because it is hard to switch banks in an era of online banking. But it also argues that "the big banks have the further advantage of their brands, however tattered the brands may be. It’s nearly impossible for consumers to evaluate how healthy a bank is. So, at a time when banks are failing with some regularity, the size and ubiquity of these big banks is reassuring."

Why India's Garment Factory Boom Produces Jobs with Little Security

India has sewn its way toward a more reliable income for nearly 35 million garment industry workers in recent years. Agricultural laborers left the fields to work in factories that sprouted as the economy gained steam. But as demand for exports has dropped amid the global financial crisis, hundreds of thousands of Indian garment workers have found that their new line of work is on shaky ground. An industry council has said that thousands of the factories have shut down, taking 500,000 jobs with them. The number could reach one million, the council says. According to a new article in India Knowledge@Wharton, the sudden job losses highlight an industry where workers have few rights and where the support systems that help laborers in developed markets are lacking.

Can the New Version of Windows Undo the Damage of the Last?

The introduction of Windows 7 today is not a big deal for Microsoft. It's a huge and critical deal. As The Wall Street Journal reports from the launch event in New York today, the new operating system needs to address the perceived shortcomings of its predecessor, Windows Vista -- especially among business customers. Information technology managers largely shunned Vista, launched in January 2007, because of a reputation for bugs and a level of complexity so high that many customers would have had to buy new computer hardware to run the system.

"Microsoft made a mistake with this one," Wharton management professor Lawrence Hrebiniak told Knowledge@Wharton in a May 2008 article about Microsoft's future after Vista. "The company introduced something more complicated than [its predecessor, Windows] XP, and it requires more hardware." Wharton operations and information management professor Shawndra Hill called Vista "too complicated" and unnecessary. "We had Windows XP and were using it fine. Then Microsoft decided to provide us with something new. But there wasn't anything really new" about it.

Early reviews of the new system should cheer Microsoft. PCWorld magazine reports today that a survey of people who tested beta versions of the Windows 7 "suggests an adoption rate not matched since the introduction of Windows 2000, the acceptance of which was driven by Y2K fears." The survey, which was conducted by Information Technology Intelligence and Sunbelt Software, found that 78% of those beta testers had a good or excellent experience. "This strongly suggests that Microsoft has finally found the 'sweet spot' that Windows Vista so widely missed."

Notes The Journal: "Windows 7 also debuts as Microsoft struggles with problems it has never faced. In April, the company reported its first quarterly revenue contraction in its 23-year history as a public company. Windows accounts for between a quarter and a half of Redmond, Wash.-based Microsoft's $58 billion in annual sales." At the launch event today, Microsoft Chief Executive Steve Ballmer declared that "today is an important day for the computer industry. Certainly for Microsoft."

Certainly for Microsoft, indeed.

At Comcast, the Art of the Deal Drives Movement of TV Content to the Web

Comcast, the largest cable-television provider in the U.S., tells its hometown newspaper, The Philadelphia Inquirer, that it has lined up 24 cable channels to participate in a service that will allow its subscribers to view on the Internet all of the content they get from Comcast on television. The program was originally announced in June by Comcast and Time Warner, the second largest cable-television provider in the U.S. After a subsequent trial of the service last summer, with 5,000 customers, the company said it would make it available to all 24 million subscribers by January 1.

As noted in The Inquirer article and in a June Knowledge@Wharton report -- "Cable TV Follows Its Subscribers to the Internet" -- the service, now branded "On Demand Online," is part of a strategy by cable companies to hold on to their subscriber base as more and more television content becomes available on the web -- usually for free. Comcast's service will also be free -- but only to its cable subscribers. The programming will be shown on an enhanced web-based video player at Comcast's Fancast site and at Comcast.net.

Meanwhile, also in an effort to contend with the growth of the web as a distribution channel for video, Comcast continues its talks to buy a 51% stake in NBC Universal from General Electric. The deal Comcast is pursuing would allow it to eventually buy the whole content-gushing operation. Having content of its own could help Comcast weather a gradual migration of cable subscribers to the web. Comcast already owns a large portfolio of web channels, and it is the nation's largest distributor of broadband Internet access.

Comcast appears wise to have a hand in multiple distribution channels and in content. As Wharton legal studies and business ethics professor Andrea M. Matwyshyn explained in the June Knowledge@Wharton article, "There's not one model or platform that's going to clearly win" the biggest share of the video audience. "Increasingly, there will be individual viewing styles. Some consumers will stick to cable. Others don't like watching TV on laptops. Others don't want TV and will pick shows à la carte. Viewing habits will be consumer specific."

A New Book Offers an Insider's View of the Financial Crisis

The inside stories about efforts by government officials and top financial leaders to prevent the collapse of the financial system are emerging with the publication today of New York Times reporter Andrew Ross Sorkin's book, Too Big to Fail: How Wall Street and Washington Fought to Save the Financial System -- And Themselves. The Times offers a sample today -- describing the conference calls and meetings over possible deals to save Lehman Brothers.

The players, who eventually failed to devise a rescue plan, included Timothy Geithner, then head of the Federal Reserve Bank of New York, and Henry Paulson, the Treasury Secretary whom Geithner would later succeed; plus top Wall Street bankers such as John Mack of Morgan Stanley, Richard S. Fuld of Lehman Brothers, and Bank of America's Ken Lewis. During a recent visit to Wharton, Mack described in detail his efforts to save Morgan Stanley from Lehman's fate. His dramatic tale, which he said could be told publicly because of the pending publication of Sorkin's book, was covered by Knowledge@Wharton in an article and video.

Walmart Shakes Up Another Sector with Price Cuts

The opening of a big Walmart store nearby has long been bad news for local retailers. But now that it's flexing its muscles in new sectors and online, Walmart is also squeezing margins for big box retailers like Best Buy and even the dominant player in the virtual retail world, Amazon.com. Walmart, jokes Wharton marketing professor Z. John Zhang, "really is trying to take over the world."

Walmart's consumer electronics ambitions were described in an April Knowledge@Wharton article, Best Buy vs. Walmart: Is There Room for Both, and Others?, after the two retailers rushed to claim customers from the recently departed Circuit City stores. Now, it has triggered a price war online in an effort to divert sales from Amazon. The Wall Street Journal reported this weekend that Walmart's incursion into book sales comes as Amazon, which made its name in books, has tried to extend its reach into new territories, including consumer electronics and clothing. Walmart triggered the price war last week, announcing it would drop the price for the 10 most popular books online to $10. Amazon immediately matched the price point, then did so again after Walmart cut its price to $9. So far, Walmart's lowest price: $8.99.

"This is really a very good strategy for both companies," says Zhang, whose research often focuses on pricing strategies. Walmart and Amazon are "trying to attract people to their web site with a low price [for one type of product], and then get them to buy something else while they are there." And, he notes, Walmart is wise to pursue the book sector, because it provides a juicy demographic segment. "Who buys books? Generally people with more education. People with more education generally have more income that they can spend on lots of things."

But Walmart has a long way to go to catch up to Amazon in the online retail business, The Journal notes, and the gap has been growing. Amazon's advantage is that "people are already comfortable shopping there, so they're going to feel comfortable buying new things from Amazon." But Amazon can't afford to lose its dominance of the book market. "From Amazon's point of view, the book is their category. You can't lose that or the whole thing is going to collapse. The question is, how far do you go to defend it?"

Zhang expects Amazon will hold on to its core turf because, even with high-volume discounts, publishers cannot give one retailer a better price than a competing retailer. And if Walmart is selling books for less than the wholesale price, he says Amazon will likely hit them with a lawsuit over predatory pricing.

This price war comes just in time for the holiday shopping season, the first since the economy has started to recover from the financial meltdown of 2008. Retailers are "nervous about what consumers will do this [year]. It's not just about whether the economy is better or if [consumers] have more money in their wallets. During the crisis, consumers learned some good lessons about the value of thrift.... And there are a lot of unnecessary items on those shelves."

Making Sense of the Noise from Economic Indicators

The economic indicator du jour is a higher-than-expected 0.7% increase in industrial production for the month of September, the third-straight monthly increase. So the economy is getting better, right? But the unemployment rate climbed in September, to 9.8%, which seems like a bad sign. On the other hand, new claims for unemployment benefits fell last week by 10,000. What does it all mean?

Frustrated by conflicting economic reports, President Harry S Truman said he wished for a one-armed economist who could express an opinion that was not followed by a sentence beginning with "on the other hand." Today, still, the news is full of economic indicators, often pointing in different directions. So it is difficult for consumers, business leaders and economic policymakers to know the overall state of the economy on any given day.

Now, a Wharton finance professor, Francis X. Diebold, and two colleagues -- S. Borağan Aruoba, an economics professor at the University of Maryland, and Chiara Scotti, an economist for the Federal Reserve Board -- offer a kind of indicator of indicators that purports to measure the overall state of the economy on just about any given day. Their Aruoba-Diebold-Scotti Business Conditions (ADS) Index  measures the real-time state of the economy by six essential indicators: the quarterly gross domestic product; the monthly figures for industrial production, payroll employment, personal income less transfers, and manufacturing and trade sales; and the weekly measure of initial claims for unemployment compensation. The index is updated whenever one of the indicators is released or adjusted, which typically occurs about three times per week.

Using a complex "dynamic factor model," the index compares the latest figure in each indicator to the number that would be expected when the economy is behaving normally. Normal behavior is represented as a zero in the index. If all six indicators are better than they usually are, the overall index is a positive number. Today, the index, though still in negative territory, took a slightly upward tick thanks to the gain in industrial production. But in an interview this morning, Diebold and Aruoba warned that while the newest number is a good indication of today's business conditions, it will become more accurate as subsequent monthly and quarterly data are updated and factored into the index.

"The latest number is not as useful as the trend line," says Diebold. Using historical data, the trend line has been calculated back to 1960, and it clearly lines up with the eight recessions since then. Had the index been available during those previous recessions, it would have shown the beginning and end of those recessions long before they were declared officially by the National Board of Economic Research, of which Diebold is a member.

"This is not forecasting, it's nowcasting," which is gaining attention currently in economics, according to Diebold. "But you are going to make better forecasts if you start with an accurate measure of current conditions." He says the index is useful also for "business leaders who must make important decisions about increasing or decreasing production."

Absent the ADS index, says Aruoba, the parade of economic indicators provides more noise than information. "We're separating the noise from what we really care about." Still, he adds, the index is not the one-armed economist that President Truman wanted. "It's a six-armed economist."

Research Paper:

Real-Time Measurement of Business Conditions

An Animal Rights Group Criticizes IHOP. Do Consumers Care?

IHOP -- the International House of Pancakes -- is the latest restaurant chain to come under fire for the treatment of animals in their supply chain. So, we wondered, do consumers care?

According to an Associated Press report yesterday, the Humane Society of the United States filed two complaints with federal regulators alleging that the restaurant chain lies about the living conditions of the chickens that lay the eggs for its omelets and pancakes. The chickens are caged in spaces so small that they can't even spread their wings, according to the complaints. IHOP claims that its eggs are "cruelty free" and animals used for its food receive "dignified, humane treatment." The animal welfare group said that's not true, and that the Glendale, Calif.-based company is engaged in "false or deceptive advertising."

As the AP correctly notes, the Humane Society and its supporters have waged a long-running battle against the restaurant industry over the conditions in which chickens are raised.

Of course, many factors help determine customer response to such accusations, but a particularly interesting one is the "consumers' understanding of the brand's promise," says Wharton marketing professor Cassie Mogilner. The "promise" Mogilner refers to is the consumer's overall view of a brand -- what it represents, what makes it different from competitors. "If what [the brand] is accused of conflicts with that promise," the brand is in trouble, she says.

In other words, consumers would likely get very riled if a restaurant called the Free Range Diner was serving up eggs from tightly caged hens. Since IHOP builds its image around affordable, hearty meals, the damage to its image in this case may be relatively slight. 

Still, while the restaurant chain doesn't build ad campaigns around free range chickens, it does claim on the "social responsibility" section its web site to be "against the cruel treatment of animals." It says also that the company's suppliers "go beyond what is required by law" to ensure animals are treated well.

The Federal Trade Commission, and the Securities and Exchange Commission, where the complaints were filed, will have to sort out whether those claims amount to the misleading of consumers and investors. Meanwhile, IHOP probably should not anticipate a significant dip in orders for its "Bacon Temptation Omelet," though it should probably be careful about how it treats its pigs..

Can a BlackBerry be as cool as an iPhone? Well, it can certainly try. In fact, it has tried twice, coming up with a new version of its touchscreen smartphone, called the Storm 2. According to a report in today's New York Times, the new device is essentially a "do-over" of the original Storm, which BlackBerry's maker, Research In Motion, designed to help Verizon wireless retain customers who might defect to the AT&T wireless network, so they can use Apple's iPhone. Among the Storm 2's many improvements: It gives the user the sensation of pushing a physical button when pressing a number on the glass touchscreen.

The second effort by BlackBerry is another example of the degree of competition in the smartphone business, which Knowledge@Wharton described in a May article titled, "As Smartphones Proliferate, Will One Company Emerge as the Clear Market Winner?" The article noted that RIM co-chief James Balsillie had described the competitive environment as "a land grab," an analogy also used by Wharton management professor David Hsu: "For these companies, the ideal is to be the preferred next-generation smartphone. Once that happens, users are ... locked in."

Lock-in refers to the practice of requiring users to use hardware and software from a prescribed set of vendors. Apple has achieved a degree of lock-in with its iPhone and App Store; its customers can use only those applications available from Apple's online market. Part of the Storm 2's mission will be to convince developers to create software programs -- or apps -- to increase the phone's appeal. 

Giving the Problem to Apple

The keynote addresses at Adobe Systems' MAX developer's conference this past week in Los Angeles contained the usual spate of product introductions and partner announcements, including Adobe's plans to bring the Flash Player to most of the major smartphone platforms -- RIM, Symbian, Windows Mobile, Google's Android, and Palm's webOS. Apple's iPhone was conspicuously absent from the list.

Also in evidence was a more aggressive public stance toward Apple regarding the iPhone. Frustrated by its inability to deliver Flash to the iPhone, Adobe has apparently decided to lay the problem squarely on Apple's doorstep.

In the opening keynote, Adobe debuted a video titled "MythHackers," a parody of the MythBusters television show with Adobe CTO Kevin Lynch and Creative Solutions senior vice president Johnny Loiacono in the roles of the intrepid myth busters. Lynch and Loiacono read a letter from "Steve from Cupertino" who says he has heard that "it's not possible to run Flash on the iPhone." The myth hackers exclaim, "There's got to be an app for that!" and set out to "hack" the myth.

At the end of the clip, Adobe reveals that an upcoming version of Flash Professional will allow developers to use Flash to build iPhone applications, and the myth hackers triumphantly declare the myth about Flash on the iPhone "hacked." But Adobe didn't announce that Flash will run on the iPhone. These applications are native iPhone apps, not Flash SWF files that can be viewed on the iPhone’s web browser.

To a large extent, the announcement was a political move to do something -- anything -- to have a story about Flash on the iPhone (even if it doesn't actually involve Flash on the iPhone).

Adobe's tweaking of Apple didn't stop there. Adobe recently changed the message iPhone users receive when they go to Adobe's web page to install Flash. The text now states: “Flash Player not available for your device. Apple restricts use of technologies required by products like Flash Player. Until Apple eliminates these restrictions, Adobe cannot provide Flash Player for the iPhone or iPod Touch.”

This "in your face" attitude wouldn't be surprising coming from most technology companies, which often take an aggressive stance vis-à-vis their competitors. But this is a change of tone for Adobe, which historically strives to fly under the radar of its major competitors and to make friends with everyone else. As then CEO Bruce Chizen explained to Knowledge@Wharton back in 2004 regarding the company's relationship with its biggest competitor, Microsoft, "We get to partner with all of Microsoft's enemies, because we're a great alternative, and we don't really compete head-on with any of their big competitors."

Adobe's new tone regarding Apple underscores how critical the issue is for the company. In a conversation with the press during the MAX conference, CTO Kevin Lynch was asked about Flash on the iPhone yet again and stated "Flash needs to get there to remain relevant on the web."

Ultimately, Adobe's strongest tactic is its mobile partnerships with everyone except Apple. Once the full version of Flash is available for RIM, Symbian, Windows Mobile, Android, and Palm's webOS, it will leave Apple as the singular outlier. For Adobe and its partners, implementation may be the best revenge.

The U.S. 'Pay Czar' Is Said to Be Pressuring AIG on Compensation Plans -- Here's One to Consider

The Financial Times reports today that Kenneth Feinberg, the Obama administration's "special master" for compensation at financial companies that received government support during last year's financial sector meltdown, is pressuring AIG to alter some of its current pay packages. An alternative he and the company might consider can be found in a paper by Wharton finance professor Alex Edmans. AIG is the company that got itself in hot water last year for its proposal to pay $168 million in bonuses shortly after receiving $184 billion in taxpayer aid.

In the paper, titled "Dynamic Incentive Accounts," Edmans, along with Xavier Gabaix and Tomasz Sadzik of New York University, and Yuliy Sannikov of Princeton University, outline a system that escrows compensation for a set period of years stretching into the executive's retirement. As Knowledge@Wharton explained in an article about the paper, the longer time frame is designed to prevent the executive from taking short-term actions that may enrich the manager at the expense of the firm's future profits. The plan also provides a rebalancing mechanism to maintain a constant percentage of compensation in cash and stock, so that the executive always has sufficient equity in the firm to provide performance incentives -- even if the stock price falls.

Long-term measurements did not appear to be on the mind of an unidentified AIG insider who told the FT that any reduction in compensation "is counterproductive" and would "prompt some [AIG employees] to leave."

More from Knowledge@Wharton:

Outrage over Outsized Executive Compensation: Who Should Fix It and How?

A Wharton Corporate Venture Capital Expert Sees Wisdom in Google's Bio-science Investment

Corporate venture capital investments don't always have to be directly related to the company's line of business, and they don't necessarily signal a coming acquisition. Sometimes, they are just smart investments intended to help create a new market for a company's existing products or to advance technology that will add value to those products. Google's recent investment in Adimab may be an example of the latter, according to Wharton entrepreneurship and management professor Gary Dushnitsky.

Adimab is a New Hampshire start-up that, according to a recent New York Times "Bits" blog report, "can help pharmaceutical companies find effective monoclonal antibodies -- genetically engineered versions of proteins the body makes to latch onto invading pathogens." Pharmaceutical giants Roche and Merck have already signed up to use Adimab’s technology, which, according to The Times, "involves creating a huge library of candidate antibodies in yeast cells."

To be sure, Google could see the Adimab investment, estimated to be about $10 million, as an eventual money maker should the startup's success lead to an IPO. But in the meantime, Google and Adimab are likely to advance each other's core technologies: algorithms that filter through vast databases to find just the right thing -- whether it is the lyrics to "The Buzzard Was Their Friend" by Dan Hicks & His Hot Licks, or a monoclonal antibody that can halt the invasion of a deadly pathogen.

"Algorithms are at the cutting edge of drug discovery," says Dushnitsky, whose recently published paper, "Entrepreneurial Finance Meets Organizational Reality: Comparing Investment Practices by Corporate and Independent Venture Capitalists, found that the compensation of corporate VC specialists is an important factor in their success.

Another example of a firm winning an investment from Google is Pixazza, a Mountain View, Calif., company that has developed technology that enables consumers to mouse over images on web sites to gather more data and see related products. "The common thread here is that Google is being open to facilitating the development of technology that can enhance search," says Dushnitsky.

More from Knowledge@Wharton:

Want to Crank Up Corporate Venture Capital Performance? Consider Matching Independent VC Pay Packages

How Corporate Venture Capital Investing Increases Innovation