How to run an innovative company

Oct. 8, 2010
How to run an innovative company

For our annual How-To issue, there is perhaps no subject more topical in this dicey economic climate than how to charge up innovation. Many would argue that innovation starts at the top. If the CEO doesn’t promote creative thinking, you’re unlikely to see much down in the ranks.

A number of studies have tried to isolate the qualities of CEOs who run innovative companies. In one case, researchers from the National Bureau of Economic Research (NBER), Boston University School of Management, and the University of Toronto found that “overconfident” CEOs tend to run companies that were good at innovating. The researchers used the number of patents a company took out as a measure of innovation. In particular, they figured patents cited frequently in other patents and in general literature were probably the most innovative. As a measure of CEO overconfidence, they examined stock options given to CEOs but which were not exercised relatively quickly. It turns out there are strong incentives for a CEO to exercise stock options that are in the money. So CEOs who elect to hold onto them are either overconfident or they are not paying attention. The researchers figured overconfidence was the more likely explanation.

Interestingly, researchers found no boost in innovation by merely spending more on sales, capital investment, or R&D. In particular, a CEO who was overconfident didn’t spend more on R&D. Somehow the R&D just became more productive.

Then there is research by economists at the University of Chicago, Columbia Business School, and NBER about what kind of personality a CEO needs to lead an innovative firm. They studied CEOs who were brought in either by venture capitalists or leveraged buy-out specialists to run companies, and their ensuing success or lack of it. Companies later sold at a premium, or which had an IPO, were considered successful. Unsuccessful CEOs were those who were eventually booted out or whose company folded, was sold at a loss, or was disposed of under distress.

It turned out that CEO success correlated strongly with “execution-specific” skills. These are nuts-and-bolts qualities of getting work done that include unwavering resolve and workmanlike diligence. CEOs with “listening skills” and team-related skills didn’t fare as well.

Finally, there is work by academics who looked at pay levels for CEOs. They concluded there will always be a few cases where CEOs destroy their companies and walk away rich, but these are exceptions. In general, they claim, producing high returns for company shareholders is what generally determines CEO compensation. And being a CEO is risky, so there is a risk premium in their paycheck. Annual CEO turnover has risen by about 60% in recent years within the 2,500 largest publicly traded corporations in the U. S.

So there you have a formula for success. Innovative companies need CEOs who are cock-sure of themselves and don’t boost the R&D budget, who aren’t good listeners and don’t let obstacles or people get in the way, and who are paid a lot of money. Companies run by that kind of individual may be innovative, but don’t sound like places I’d want to work.

—Leland Teschler, Editor

© 2010 Penton Media, Inc.

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