Wednesday, February 24, 2016

Lawless innovation

A recent study (1) that argues that "constituency statutes have significant effects on the quantity and quality of innovation" in companies, seems to fall into the same trap of pitting stakeholder value against shareholder value. For many decades, the argument has been that companies and societies (e.g. Scandinavia) that focus on the value of stakeholders - employees, communities and the environment do better than those focused on shareholder value (e.g. US). This is a result of a wrong perception that a focus on shareholder value is based on "short term profits" and stakeholder value maximization is a long term process. There is significant empirical evidence that the market and investors are not "short term focused" and are fully capable of assessing and valuing any choices (short or long term) made by the mangers of the firm. Assuming that markets are myopic, without evidence, may not be a good thing.

It is important not to assume the first correlation found in the data is the underlying cause. Note that stakeholder value choices, unless they translate into shareholder value in any horizon, are value destroying. Further, "Quantity and quality of innovation," are difficult to measure. Few innovations are responsible for most of the GDP in the economy and in winner takes all markets, marginal benefit of innovation in aggregate is simply noise. A more interesting question is the structure, systems and strategies of firms (2) that encourage innovation. It is possible that innovative firms will remain so, regardless of the bureaucracies and statutes imposed on them.

Innovation emanates from the culture of the firm - not from the laws created by those, out of touch with the present economy.


(1) http://esciencenews.com/articles/2016/02/18/a.stake.innovation
(2) https://www.crcpress.com/Flexibility-Flexible-Companies-for-the-Uncertain-World/Eapen/9781439816325