To come up with new ideas, companies need to think about the future and be willing to take some risks. Innovation involves trying out new things, making improvements, and seeing what works in the market. This takes time and patience.
But there’s a problem. Many CEOs, the top leaders of companies, often focus on short-term goals because that’s how they’re rewarded in their jobs. This can make it tough for company leaders to push for innovation.
Supporting innovation
Research from George Mason University highlights how the short-term nature of publicly listed companies can inhibit innovation, but not if the age difference between the CEO and other members of the C suite is bigger than average. The study found that if that was the case, firms seem to be “more” innovative than normal.
The study looked at data from big companies in the S&P 1500 list from 1992 to 2016. The researchers checked details like how old the top bosses were, how much they were paid, and other important stuff using a database called S&P ExecuComp.
What they found was that younger executives, who have more years left in their careers, are more patient when it comes to waiting for investments to pay off. This patience is different from what CEOs, the big bosses of companies, usually focus on – things like how well the company is doing financially and the stock price.
This is important because it’s like a kind of “internal governance.” It helps prevent problems between the people who own the company (shareholders) and the people who run it (management). The board of directors is in charge of this, but if the directors are not closely involved in the everyday work of the company, this governance might not work as well.
Internal goverrnance
“Independent directors, for example, don’t know the business very well. They have less conflict of interest but are not always capable,” the researchers explain. “Subordinate managers run the company day to day. They have enough stake in the future of the company. They have incentive and capability; they don’t need to be educated. They should serve as better internal monitors to make sure CEOs are doing the right thing.”
When the researchers looked more closely at their findings, they discovered that certain situations and relationships were better for keeping an eye on things within the company. For example, they found that it’s important for the CEO and the highest-paid non-CEO executive to have different long-term perspectives for innovation to happen.
However, when they looked at just the difference in how long the CEO and the CFO (the person in charge of the money) plan for the future, it didn’t seem to matter much. This is a bit unusual because usually, it does matter. One reason might be that CFOs don’t often become CEOs later in their careers, so they might not have big long-term goals. So, if companies want to encourage innovation by using the different ways their top executives think about the future, they should think about who has the most power and influence.
Also, the positive impact of keeping an eye on things within the company for innovation disappeared for the oldest companies in the study. This suggests that really old organizations might be too stuck in their ways to benefit from differences in how top executives think about the future. And CEOs who are experts in a particular area, rather than being good at lots of things, didn’t seem to be influenced by age differences. This might be because they don’t need as much advice from their top executives on technology-related issues.
Gao suggests top management teams should be well-balanced in terms of aspiration and mindset, in addition to possessing complementary skills and professional experience. “Our story is compatible with the extensive research literature on the advantages of diversity…You need people with a longer horizon, but also enough power that they make an impact. When the board designs the corporate governance structure, this should be a factor that they consider.”
