Shareholders, have patience. Be advocates for innovation, it’s in your long term best interest.

My business partner Kate Hammer sent me a piece yesterday by Steve Denning, published in Forbes, titled “The Dumbest Idea in the World: Maximizing Shareholder Value”. The title is provocative, and goes against a commonly held belief. Still, I have to agree with Denning. Actually, I’m agreeing with the research he based the article on, done by University of Toronto professor Roger Martin. Read the piece, it is totally convincing that the idea of maximizing shareholder value has upper management acting, not to innovate, but to simply juggle expectations and short term profits. This of course has a long term negative impact as it actually suppresses innovation. This ultimately means disaster for the company And the shareholder.

I won’t even talk about the relationship between stock price and executive compensation, it only adds more heft to this argument.

My add-on thought to this idea that shareholder value maximization is anti-innovation has to do with the difference between public company versus private company innovation. As a practitioner I’ve worked innovation projects under both scenarios. I find that what happens at the top filters down to nearly everyone in the organization. In public companies I often find that bigger ideas tend to be rejected nearly out of hand. That is, thoughtlessly. If it requires major capital, if it has a long development time, a radically different business model, cannibalizes other products, or necessitates new factories or tooling — forget it, it’s not really considered. Employees learn what top management wants to hear and they deliver, selecting ideas that are safe and short term. This mode of thinking becomes Business as Usual. Nothing wrong with safe and short term ideas, but if that’s all you’re doing you’re going to have problems.

On the other hand, I’ve seen that private companies seem more inclined to take risks. They are more likely to try new services (from providers like KILN) that might give them an edge. They value, and consider, big ideas. I mention KILN here because we’ve had the interesting experience of having small private companies (compared to the Fortune 500) buy our services with very simple sales cycles. In some instances they trial our IdeaKeg subscription service without even seeing us in person. This actually makes sense — IdeaKeg is a straightforward offering and the price point is such that it’s not such a big risk to simply try. Contrast this with five presentations to a bigger public company — and still no decision!

Risk aversion can be expensive even short term.

The solution for public companies is simple: focus on the customer first. Focus efforts on innovations that delight, please, and inspire prospects to buy. In the long run this is good for the shareholders, so, it’s not one at the expense of the other, it’s simply a more balanced, longer term, approach. The articles cites examples of companies that do it right, including P&G, Apple, and Johnson & Johnson. Those who didn’t, include BP and Enron. Need I say more?