It’s no secret that large, publicly listed organisations struggle to successfully explore innovation due to the short-term interests of their investors.
Eric Ries, author of The Lean Startup, has been a vocal advocate of a long-term stock exchange to support innovation. In his work with executives of large companies, he found that most felt pressured to make choices in service of short-term interests, even at the cost of the long-term potential of the business. This often comes down to misaligned incentives in the public marketplace and it’s something that also comes up time and time again in my work with listed companies.
This is a significant challenge, especially today when technology is fast displacing dated business models, technologies and ways of work at an ever increasing pace. Yesterday’s models of the world, which includes the short-term nature of our stock exchanges, no longer make sense. Our stock exchanges don’t reward innovation in a time when companies need to be innovative more than ever - with half of the S&P500 expected to be replaced in the next ten years alone. The impact of this misalignment goes far beyond companies and investors but is felt by the economy and society as a whole.
Balancing the short-term interests of key stakeholders with the long-term potential of the organisation is a delicate one.
Bansi Nagji and Geoff Tuff, proposed in a 2012 HBR article, Managing Your Innovation Portfolio, that companies that allocated about 70% of their innovation activity to core initiatives, 20% to adjacent ones, and 10% to disruptive ones outperformed their peers.
This has since been the conventional wisdom in corporate innovation circles.
Ever since The Biggest Startup article came out in 2013, General Electric (GE) has been held up as a poster child for this dual transformation approach.
They established Fastworks, the organisation’s lean startup framework, trained thousands of middle and senior managers to practice it, were glorified in countless articles, including mine on How GE Saved 80% in Development Costs and formed much of the basis of Eric Ries’ new bestselling book on applying the lean startup in large companies, The Startup Way.
But despite all of that, chief spearhead behind the movement and long-serving CEO Jeff Immelt was recently ‘retired’ from the organisation after 16 years.
Why? As Steve Blank points out in his observations on Immelt’s departure, GE’s stock-market value fell by about half during his tenure. “Its stock is trading where it was 20 years ago. So far in 2017, GE is the worst performing stock on the Dow Jones Industrial average.”
The move, Steve says, was conceived by activist investors Trian Partners who purchased 1.5% of the company and went on to influence other large institutional investors to oust Immelt and replace him with John Flannery, who has pledged to unload $20 billion of GE businesses in the next two years, stating that “everything is on the table” and that includes innovation.
I often write and talk about getting and maintaining buy in and how while senior executives and investors are happy to support innovation programs, as soon as dark clouds form above, innovation programs and their ambassadors are the first to go. In GE’s case, their vice chair for innovation, Beth Comstock, has already been replaced by Flannery by somebody from operations.
Already Flannery and the activist investors who got him there resemble a Gordon Gecko type of character. Who can forget Gecko, played by Michael Douglas in 1987s Wall Street, urging a young Bud Fox to “buy Bluestar Airlines and expand the company, use the savings achieved by union concessions and cut the overfunded pension”. This is simply a cost cutting pursuit to increase margins and ramp up short term returns, ultimately at the expense of the ongoing sustainability of the company. The additional problem with this approach is that after you’ve pillaged the towns, where do you go from there?
So how do organisations combat activist investors and short-termism?
While this is by no means easy to answer, nor do I imagine for a second that the following is by any means conclusive, a number of considerations for CEOs of large companies might include:
Don’t forget your core
As Nagji and Tuff pointed out, companies should invest the lion’s share of R&D into core activities. It’s much easier to maintain your innovation programs when the metric that the markets measure you by - your stock price - is commendable. Of course, this is easier said than done, especially in today’s environment of increasing volatility, uncertainty, complexity and ambiguity.
Avoid innovation theatre
While it’s tempting to set up an innovation lab, run a hackathon and proclaim that the organisation is “moving fast and breaking things”, movement without measurable progress is just that, and ultimately, if you can’t clearly demonstrate progress then you deserve to have your innovation program cut. On measuring progress…
For more on this concept which is running rampant across the globe, read Five Types of Innovation Theatre
Use the right metrics
Different types of initiatives require a different set of metrics. Early stage ideas and initiatives need leading indicators to track progress - awareness, engagement and so on - whereas later stage initiatives and business units need to rely on more traditional metrics to track progress - month on month revenue growth, net present value on so on.
By having the right metrics in place you can communicate progress more effectively and not run the risk of plugs being pulled because new initiatives aren’t generating your traditional month on month revenue growth targets after just six months.
Being able to clearly demonstrate progress means you can better sell your initiatives to key internal stakeholders and external investors.
For more on metrics check out The Business Case Alternative.
Tell a compelling story... and back it up
Today’s trailblazers like Amazon and Tesla keep their investors enamored by not only telling inspiring stories of where the companies are going, but actually delivering by way of new innovative products that capture the public’s imagination and their wallets - think Amazon Web Services, Alexa and Prime or Tesla actually commercialising an electric car that not only works, but is as fast off the mark as a Ferrari and looks almost as sexy as one. Because of that, both companies have been able to get away with not recording profits because investors believe in the long-term prospects of both companies. They believe in the story.
When Amazon records a profit it’s almost breaking news with one 2015 New York Times article reporting that “the e-commerce company beloved by Wall Street for its fast-growing ways did something completely out of character in the second quarter: It made a profit” (note: Amazon has consistently turned a profit, albeit a slim one, since March 2015).
Similarly, Tesla, despite a series of setbacks this year such as product recalls and undershooting the mark for quarterly production targets of its Model 3, has enjoyed a 50% increase in its stock price over the past 12 months (which mirrors the spike in Amazon’s stock price during the same period).
Issue dual class stocks
When Google listed back in 2004, they did so using a dual class stock. Such stocks give company founders ‘super-sized power’ over their businesses even if they only hold a small slice of the stock. This gives such companies the liberty of focusing on the long-term without fear of activist investors or hostile takeovers turning the ship.
However, dual class shares aren’t a perfect vehicle, they can be quite undemocratic at their core, and it’s not always a good thing for founders to have too much control, relative to which stage of the company lifecycle they’re in and the nature of their work.
Still, with short-termism running rife, dual class shares have become hugely popular amongst Silicon Valley’s tech titans and now the London, Hong Kong and Singaporean stock exchanges look to follow in the footsteps of the NYSE to introduce dual class stock listings.
Participate on a long-term stock exchange
While it is still a work in progress, Eric Ries’ vision for a long-term stock exchange is well underway, having made a filing with the SEC and gone on to raise US$18.7M from three investors. For more about the exchange visit LTSE.com
Don’t go public to begin with
Many of today’s large tech titans such as Airbnb, who recently raised US$1B in its Series F capital raise, are refusing to go public because quite simply, they have no reason to.
Tech reporter Alison Griswold points out that “going public requires all sorts of disclosures and investor transparency that most technology startups don’t want or need to deal with”.
There is a steady stream of funds available on the private markets by way of venture capitalists and private equity funds and now many are turning to ICOs, so with funding opportunities available sans the pitfalls of going public, it’s clear to see why companies like Airbnb refuse to do so.
I’m reminded of a quote from Thomas Kuhn, "true revolutionary progress happens only when a generation dies". I’d hate to end this article on such a sombre note but the reality may just be that in today’s fast changing world, many of today’s Fortune 500 companies whose roots hark back to the 20th Century, or in GE’s case, the 19th Century, with legacy infrastructure, processes and culture, renders them unable to truly transform and compete in this brave new world.
Like the once great Roman Empire before them, perhaps it’s best that such companies defer to Darwin’s law of survival of the fittest and free up capital and talent to focus on more productive and impact creating pursuits.
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