Are you ready to catch the next wave of innovation? (Part 2)

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According to Bloomberg, a financial data and media company, by late 2015 global corporations held over $15 trillion in cash and cash equivalents – a staggering fourfold increase over the previous ten years. “The Cannibalised Company”, a special report by Reuters news agency, profiled how S&P 500 companies as a group gave almost all their 2014 profits back to shareholders. For the venture capital and shareholder-driven CEO, buybacks have a double amplifying effect of increasing not only share price by decreasing the number of shares available, but of also increasing earnings per share even if total net income remains flat.

Clever financial massaging has ensured happier shareholders for the past decade, but when these buybacks come at the expense of innovation and jobs, well then competitiveness suffers, and this strategic financial management madness begins to bite back. American and European businesses have not become less competitive because of immigrants or outsourcing and trade deals, but because they have systematically neglected to invest in their future. According to Gary Pisano, a professor at Harvard Business School: “The U.S. is behind on production of everything from flat-panel TVs to semiconductors and solar photovoltaic cells.” Annual data compiled by the US Commerce Department supports his view. Their studies show that the reluctance of the C-Suite to raise capital investment and invest in new innovations have left companies with the oldest plants and equipment in 60 years. The same is true of almost every developed nation.

This is an alarming negative trend and there is growing evidence that since the 1970’s meaningful innovations – those that generate step change improvements, economic growth, prosperity and wealth – have been on the decline.  Economists like Robert Gordon argue that the innovation fruits of the past have been snapped up, and the economic growth we’ve become accustomed to is gone. We may think we are living in a fast pace d, technological age but even the platform that has fuelled the digital and mobile revolution, the Internet, was invented in 1969. It’s not that organisations have stopped innovating, it’s just that, on the whole over the past forty years, these innovations have been evolutionary rather than revolutionary.

Nobel Prize winning economist Robert Solow’s seminal work made the connection between meaningful innovations and growth.

The conundrum: If the low hanging innovation fruits have already been picked and growth is on the decline, then  a growing and uncomfortable realisation is that the world is staring down a new economic era characterised by decades of shifting demographics, subdued growth, lower profits, higher inflation, and dwindling global trade. This goes some way to explaining why productivity gains and wages have been flat in the US and Europe for the past thirty-five years. Over the past two-hundred years every generation has realised a doubling in lifestyle and wealth over the previous generation, but this is no longer a guarantee.

While Robert Gordon makes a provocative point, I do not agree that the world has run out of meaningful innovation fruit. Humans have achieved a lot but we are not done developing. We are not living sustainable, happy and fulfilled lives. We are not living in ecologically sustainable ways and there is still far too much inequality. There remains heaps still to do before we run out of meaningful innovative opportunities.

The problem is that most organisations have given up on being remarkable. They are too motivated by cost savings, incrementalisation, avoiding risk and financially massaging share price rather than investing and inspiring their people to dream big and deliver meaningful innovations.

There are a few notable exceptions such as GSK, IBM, GE, Alphabet (Google) and Tesla, but on the whole over the past three decades there has been a dearth in meaningful innovations. This represents a huge problem staring down the face of capitalism in the form of rising populism, growing competition and activist consumerism. But it also offers up new opportunities, because it’s not too late to make a significant difference.

A group of vanguard companies have recognised this and started focusing on the longer-term future, and investing in remarkable projects that build meaningfulness for the communities they service. Recognising this strategic shift, Fortune magazine launched their Change the World List, a list of 50 mega-corporations that have placed delivering meaningful societal benefits at the heart of their organisation’s purpose and strategy. This is an important nascent development in capitalism history because it represents a shift in the mind-sets of CEO’s and Boards in recognising the role business plays in positively taking society to higher levels.

Even Jack Welch, whom many regard as the father of the “shareholder value” movement, admitted to the Financial Times that: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy,” he said. “Your main constituencies are your employees, your customers and your products.”

A growing chorus of CEOs are joining Mr Welch. These astute business leaders have recognised how damaging the strategy of shareholder maximisation has become to the competitiveness of businesses in developed nations over the last thirty years, since the strategy of shareholder maximisation became popular.  Alibaba CEO Jack Ma has stated that “customers are number one; employees are number two and shareholders are number three.” Paul Polman, CEO of Unilever – a client of TomorrowToday – has decried “the cult of shareholder value.” Whole Foods founder John Mackey has condemned businesses that “view their purpose as profit maximization and treat all participants in the system as means to that end.”

The recognition that the business of business isn’t just about creating profits for shareholders, but also about delivering meaningful benefits within their communities and the world they influence, is gaining momentum. As a result, an exciting wave of remarkable business innovation is beginning to take-off.

The question is, are you ready to catch this wave?

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