In May 2015 veteran corporate raider/activist Carl Icahn lobbied Apple to increase the size of its share buy-back programme. Icahn believes that this action will elevate the stock price, driving Apple to a billion-dollar valuation.
A similar belief in the power of the buy-back has driven many US companies to do the same thing over the past decade. This type of corporate action is considered high strategy in the C-suites of many multinational companies, but there is ample evidence that it harms long-term innovative capacity and growth.
Notwithstanding this unfortunate truth, having long been seduced by management and investment banking gurus, no self-respecting CEO can be without a buy-back strategy today. But what is really missing in many boardrooms is a real understanding of what happens in the laboratory/workshop/trading floor/programming hub; that, and the know-how to integrate this knowledge into the corporate strategy required to grow value for the long term.
It may at first seem unrelated, but Les Munro, the last surviving pilot from the legendary Dambuster squadron, died recently at the age of 96. Munro was a generation older than Icahn and a Kiwi, but the two men had something quite important in common. The wartime exploits of Munro and his men were enabled by an extraordinary period of innovation during the Second World War. Similarly, Icahn’s career was powered by a burst of unprecedented financial creativity in the 1970s that revolutionised mergers and acquisitions through the creation and issuance of junk bonds.
It turns out that hostile takeovers and war have a lot in common. When billions of dollars or millions of lives are at stake, if innovation increases the probability of success, then senior management pay attention. The boards of Trans World Airlines, US Steel and RJR Nabisco certainly paid attention when Icahn came calling. In the Second World War British Prime Minister Winston Churchill was directly involved in wartime R&D. A close friend of HG Wells, he has been personally credited with numerous (often outlandish) innovations, including most famously the tank.
This link between war and innovation can be traced back (and beyond) to the Ancient Greeks and Archimedes’s inventions in defence of Syracuse against Rome. Giant claws, catapults and the iconic death ray that set galleys ablaze by harnessing the power of the sun all sprang from Archimedes's mind, catalysed by the threat of imminent death.
The urgency of war has spurred advances in engineering, physics and medicine throughout history. One reasonable conclusion, therefore, is that war is a powerful catalyst for invention. But quantitative evidence of this is hard to procure using classical metrics such as patenting, since during war very little is patented, for obvious reasons.
In times of peace, the military remains one of the most significant and patient forms of capital to support fundamental research. This link has been studied extensively, revealing that the Pentagon's contribution to the creation of Silicon Valley was critical to its development.
In 2015, however, as Western military budgets shrink, it remains to be seen whether civilian government, venture capital and corporate budgets will pick up the slack in patient (not patent) investing.
For once, cash is not the issue. The total amount of money spent annually on R&D is astronomical, reaching over $1.5 trillion in 2014.
But ironically, while the amount of money categorised as R&D spending has increased, the productivity of this invested capital has decreased. Steve Jobs nailed the problem in a 1998 interview with Fortune magazine: “Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it."
The people you have, how you’re led and how much you get it – I would describe this as the operating system or business intellectual property of an organisation. This is what University of Oxford and London School of Economics Professor John Kaye calls “organizational architecture”.
In this context, the key questions for CEOs are as follows:
- What is it that makes us unique?
- How do we define and codify it?
- How to we protect it?
- How do we manage it?
- How do we communicate this value creation to a wider audience?
- What is the future and how do we win it?
Munro probably had little grasp of the physics behind the bouncing bomb, but the clarity of purpose, culture of innovation and urgency of the mission galvanised everyone involved to success. Icahn’s approach to investing followed a similar arc: identify the target, formulate a clear strategy and remorselessly focus on execution.
The CEOs of those Fortune 500 companies buying back stock are reacting to external events in predominantly tactical ways. But what if they stood back and asked these questions publicly and privately, every day, driving these questions to the heart of their organisations? Then they would create fundamental value with both short and long-term impact based around their core intellectual property.
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