In my opinion, it is distance at the front of the stroke that is more important than distance at the back. So although a short rower can be told they can make up a difference by leaning back more at the finish, the addition to power I reckon is pretty small since this is after the true drive phase which happens when you engage the legs.
Short rowers may be really strong on the ergs, but in my experience, it's suprising how much of a disadvantage it can put them in when it comes to be in the boat racing at high rate and full pressure.
And on the comments of rowers not compressing enough at the front end: in my experience, actually trying to reach "further" than you naturally feel you should is most often a very bad approach - since the natural way someone attempts to get more length is to force their outside shoulder round, and inevitabley down, which although feels like you're getting more length - you're actually raising the blade off the water, and delaying the connection with the water. This can lead to unbalanced boats as well.
A lack of length is rather down to limits in flexibility (regarding lean) and incorrect equipment setup (regarding leg compression).
That's all just my own opinion though. Hmm I should try coaching...