Many of us know people who struck it rich in an IPO and then decided to retire or take time off. If a percentage of people in a company decide to leave the organization when it decides to go public, it is logical to conclude that innovation at the organization will begin to slow.
A new study by Stanford’s Shai Bernstein involved extensive analysis of patents from nearly 2,000 companies and discovered the patents at public firms were more incremental than those at private firms. In order to determine the value of a patent she analyzed the amount of times a patent application was cited in other applications. The idea being that breakthrough patents are cited more often and are of greater quality.
If you are wondering just how much less innovative public companies are than their private counterparts the answer may surprise you – there was a 40% decline in patent citations five years after a company went public.
Other than brain drain, reasons for a loss of innovation likely have to do with companies becoming more cautious when dealing with public markets which expect an easily digestible story and consistent earnings improvements.
This thought is backed up by the research as companies with separate board chairs and chief executives had less innovation and inventors were also more likely to leave such organizations.
Other reasons for less innovation could be people become comfortable at a certain point – a corporate culture can go from being “hungry” to “satisfied” when there is enough money available. The saying “fat cats don’t hunt” is fairly accurate and the proof may be that inventors who stayed at companies experienced a 48% decline in the quality of their patents according to Bernstein’s research.
What we don’t know from the research however is whether the more innovative companies are more competitive, make more sales and/or make more profit. It’s one thing to have a great patent – yet another to make a product and even more of a challenge to have it be something the market wants.
If we assume innovation is roughly equal to profitability level, this research may change the way companies are organized over time. I recently explored how Steve Jobs transformed our views on management as he became an often-cited reason for supporting the founder over an outside management team. Now however we may need to also rethink how boards are organized and whether it is a good idea to have the CEO be the chairman of the board as well.
Before we jump to any conclusions its worth pointing out PWC research shows 43% of the S&P 500 boards separate the roles and half the companies with a combined role have discussed the possibility of splitting the roles at the next CEO succession.
Whether this research becomes fodder for boardroom discussions is unknown at this time but we think it is worthy of consideration.