I like Jeff Bezos’ line: “Good intentions don’t work, mechanisms do.” To me, it sounds like a full support of my conviction that endless talks about establishing a “culture of innovation” is a distraction, rather than an enabler, in fostering corporate innovation. Instead of chasing chimeras, organizations should start implementing concrete corporate policies helping innovation take root. Over the past few months, I’ve posted a series of pieces (here, here, here, here, here, here, here, here, and here) outlining specific socioeconomic factors that favor or obstruct innovation.

When looking for these factors, I closely followed a theoretical framework created by Gustavo Manso in 2011 postulating that the optimal incentives motivating employees to innovate must include a combination of tolerance for failures in the short term and reward for success in the long term. Tolerance for early failures allows the employees to take risks at the initial stages of the innovation process without incurring the negative consequences of failed projects. The reward for long-term success encourages the employees to explore risky ideas that may allow them to achieve innovation breakthroughs in more distant future.

In this post, I’m listing these specific factors organized in two (“for“ and “against”) groups.

A. Factors promoting innovation

A1. Stricter labor laws, such as 1988 Worker Adjustment and Retraining Notification Act (Acharya et al., 2010) and the U.S. wrongful discharge laws (Acharya et al., 2013) (but see B1).

A2. Firms’ family ownership (Kammerlander and van Essen, 2017).

A3.  Firm-friendly bankruptcy laws (Acharya and Subramanian, 2009) (see also B4).

A4. Engaging risk-tolerant VC investors (Tian and Wang, 2011).

A5. Greater use of long-term incentives, such as stock-option grants, as a way to compensate employees involved in innovation activities: CEOs (Francis et al., 2011), heads of corporate R&D (Lerner and Wulff, 2006), and non-executive employees (Chang et al., 2015).

A6. Better employee treatment, as measured by the KLD Socrates (Chen et al., 2016 and Mao and Weathers, 2016) or MSCI ESG STATS (Mayer et al., 2016) databases.

B. Factors obstructing innovation

B1. Unionization (Bradley et al., 2015) (but see discussion in Doucouliagos, 2017 below).

B2. Income inequality (Doucouliagos, 2017).

B3. IPO (Bernstein, 2017).

B4. Creditor-friendly bankruptcy laws (Acharya and Subramanian, 2009) (see also A3).

The results of the above studies suggest that firms may increase the efficiency of their corporate innovation by modifying its termination and compensation policies. Here, I want to offer two specific recommendations:

• To place employees involved in strategic innovation projects on fixed-term employment contracts (as opposed to employment-at-will). Alternatively, tenure-like positions may be created for the same employees. Whatever the arrangement, employees should be assured that they have a fixed “window of opportunities”—say, five-six years—to make progress before any administrative decisions regarding their employment will be considered.
• To make stock option grants the principal incentive for engagement in innovation projects–as opposed to cash bonuses and multiple non-monetary recognition and rewards.

Admittedly, capitalizing on the effects of bankruptcy laws and VC investors’ risk tolerance isn’t straightforward. However, firms should consider local bankruptcy codes when choosing the location of their innovation centers. And startup companies ought to be aware of the failure tolerance level of VC investors they choose.

A larger point, however, is that we must finally move from words to deeds when dealing with innovation. Implementing specific corporate policies is a much better way to promote it than finding topics for meaningless discussions.

The image credit: http://matthewgates.co/tipping-scales/

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