KEY CONCEPT

What can you do when penny pinchers get in the way of your disruptive ideas – ideas that may bring the critical changes your company needs? Firms with a greater degree of accounting conservatism are less innovative because of an obligatory accounting practice of immediately provisioning for future losses. How can you get the breathing space necessary away from the demands of shareholders and the market to innovate and bring about change?

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IDEA SUMMARY

For big corporations, regardless of industry, making disruptive changes is not a question of money: many have substantial budgets. It is a question of mind set and how you position the innovative disruption on the balance sheet – and that can be the downfall of many innovations.

Giles Hilary in his paper ‘Does accounting Conservatism Impede Corporate Innovation’ makes the case that firms with a greater degree of accounting conservatism are less innovative because of the requisite accounting practice of immediately provisioning for future losses.

The negative effects of accounting conservatism on innovation are more pronounced when the pressure from the short-term institutional investors is greatest.

The research looks at Amazon. The markets have been very negative about every major innovation undertaken by Amazon due to the risks. But CEOs and CFOs have much to learn from Amazon, where constant innovation churns out products that contribute to revenue streams. Jeff Bezos, Amazon’s founder and CEO, has had the courage to think long term in an innovative and high tech industry, and has minimised the negative effects conservative accounting on innovation.

The pressure to meet fiscal and financial targets is great. Jeff Bezos takes a long term view saying “We will continue to make investment decisions in light of long term market leadership considerations rather than short term profitability considerations or short term Wall Street reactions”.

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BUSINESS APPLICATION

It is easier said than done but there are strategies and processes that can be put in place to change the culture of the business:

• Teach Innovation to CFO’s and Accountants: Surround them with others who think differently and act differently. Research showed CFOs’ creativity went up about 30-35% over nine to twelve months just by being around others who think differently and act differently. So in a situation where the culture is innovative, CFOs can elevate their relative capacity, enabling them to not just input the numbers, but to interpret the numbers strategically and help the company to go in a different direction.
• Creativity: In a culture where innovation is not key how can CFOs encourage greater innovation? Spend a few minutes each day thinking about a problem, and it will lead new questions which will create new solutions. Talk to people outside the industry to gain a new perspective. Its leads to creative ideas that can help a strategic thinking group of people to go in a new direction.
• Taking a longer term view: To encourage innovation, accounting should be facilitating the tolerance of failures at the initial stages of risky projects. CEO’s and CFO’s can learn from innovators such as Amazon.

Watch the Video of Hal Gregersen explaining his view of why he believes Accountants and CFO’s are killing innovation and ideas of what you can do.

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REFERENCES

‘Does accounting Conservatism Impede Corporate Innovation’ Chang, Xin et al. INSEAD White Paper (2013) DOI: 10.2139/ssrn.2189938

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