Are accountants and CFOs killing innovation?
What can you do when penny-pinchers get in the way of your ideas to make necessary, often disruptive, changes in your company?
When Dell announced in February its decision to take the company private, founder and CEO Michael Dell said the move was part of a strategy to “continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers”.
One could have added that the deal was needed to give Dell breathing space — away from the demands of shareholders and the market — to re-boot its strategy and recover lost profits from its PC business, badly hit by sexier, more innovative products such as Apple’s iPad and Amazon’s Kindle.
For big corporations, making disruptive changes is not strictly a question of money; it is a question of mindset and how you position the innovative disruption on the balance sheet, which can be the pitfall.
AMAZON BOSS’ LONG-TERM VIEW
INSEAD Associate Professor of Accounting and Control Gilles Hilary, in a research paper Does Accounting Conservatism Impede Corporate Innovation?, makes the case that firms with a greater degree of accounting conservatism are less innovative because of — among other things — the requisite practice of immediately provisioning for future losses.
“The principle of accounting conservatism is to recognise losses as soon as they become probable, but delay the recognition of profits until there is a legal claim to the revenues generating them and that revenues are verifiable,” he says. “The negative effects of accounting conservatism on innovation activities are more pronounced … when the pressure from short-term institutional investors is greater.”