One area of thinking around innovation that doesn’t get much attention is how ownership and governance affects the ability of an organization to be innovative. It’s an issue that’s been playing on my mind for a few years but a recent conversation has prompted me to write down some ideas. First. I’ll just outline the conversation and then I’ll put down a few thoughts about links between corporate governance and innovation.
Andrew had been the innovation manager for a particular firm for a number of years. We never really collaborated on any projects but we often catch up over a cup of coffee to swap ideas. Earlier this year, I heard that he had left the company which surprised me because the company is known for its emphasis on innovation as a way of competing and generating new lines of business. Without appearing to be too blunt, I asked him why he left.
His answer was that he had gotten tired of banging his head against the wall and that there was no way that the company would really become innovative. There would always be a focus on small improvements and relatively short-term gains. When I asked him to explain what he meant by this, he said that the fundamental problem was the ownership structure of the firm. As a partnership, the way to become a partner was to sacrifice work-life balance for twenty years to get a substantial ‘annuity’. Asking partners to invest in more risky and longer term business proposals is really like asking them to risk their annuity for a return that they may never see. Getting short-term and incremental business improvements funded was no problem, but the partners were never going to have the necessary risk appetite for innovation.
I could see his point and I could also see the problem from a partner’s point of view. After years of stress and long hours to get the partnership, why would I be interested in the long-term future of the business? I have earned my reward, and nobody is going to take that from me until I retire. As an MBA student said to me in a class last night, becoming a partner is like a pie-eating competition and the prize is that you get to eat more pie.
In terms of the research, we really don’t know that much about ownership, governance and innovation. A colleague of mine, Kevin Hendry, has been doing some really nice work on how boards develop strategy. His research shows that boards behave very differently from each other because the legal duty of the director is quite ambiguous. While most people believe that the job of the director is to maximize shareholder value, Kevin points out that Australian law states that the duty of the director is to act in the best long-term interests of the company. The only time where there is a mandate to maximize shareholder wealth is when the company is subject to takeover.
I’d argue that innovation is in the long-term interest of every organization, but I suspect that most directors struggle with the concept. I’m not sure how many would be able to talk about the relevance of innovation to different industries or how leading companies successfully manage innovation. According to Kevin’s research some boards are actively involved with management in shaping strategy while others are more of a ‘rubber stamp’. A lack of knowledge on managing innovation may not be too much of a problem for a rubber stamp board but an interactive board who don’t understand innovation will probably be a major obstacle to the firm becoming more innovative. We need to do a lot more work to understand how board literacy and interaction with management shapes innovation strategy.
On the other hand, a lot of innovative firms that I know are owned by entrepreneurial people who have an appetite for risk and understand the innovation process. There may be a real advantage here for owner-operated firms.
John Steen is a Lecturer in Innovation Management in the University of Queensland Business School. He blogs about innovation at the Innovation Leadership Network.