An article from Bloomberg reports that companies in the Standard & Poor’s 500 Index are “poised to spend $914 billion on share buybacks and dividends this year, or about 95 percent of earnings.”
95% of earnings – Doug rightly says “wow” and offers a thoughtful set of observations

“Every organization that enjoys free cash flow makes a decision on where to allocate that resource. If the opportunity available to the organization meets or exceeds the hurdle rate—the desired, expected rate of return—then, in theory, they invest in that opportunity. If not, then no: the organization returns the cash to the investors. Of course, earnings come after investments the organization makes in innovation—research & development expenses, for example. Many do invest a lot in R&D”

He then remarks “And yet…..and yet” ….

“This offers the implicit message from the firm to the investment community: “we do not have a better use for this cash (i.e., the ideas we might pursue do not seem as promising and as compelling as we would like).”

“We know that we cannot cut, or cost save, our way to growth. By extension, we know that we cannot grow a business for the long-term by returning all profits to the investors. Doing so suggests a lack of vision—a lack of acuity into what the customer wants and what the market demands”.

Then you begin to read through the Bloomberg article

“Companies in the Standard & Poor’s 500 Index really love their shareholders. Maybe too much!  Money returned to stock owners exceeded profits in the first quarter and may again in the third”

The Bloomberg article goes on “Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300 percent since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start ploughing money into their businesses”

Some further quotes from the Bloomberg article
“You can only go so far with financial engineering before you actually have to have a business with real growth,”

“Buybacks are something corporations can take control of and at low borrowing costs, they’re a viable option,”

“If management can’t unearth future opportunities for growth, as a shareholder, I lose confidence.”

“Buybacks have become sort of the low-risk medicine in the C suite,”.

“The reality is capital expenditure comes with risk, a significant amount of risk, especially in a slow-growth world. Buybacks offer a lot of flexibility.”

So you do have to ask the really hard question: where is the future REAL growth going to come from?

So why are our companies not ploughing additional money back into their business, partly it serves the interest of top management who are often compensated on EPS. Businesses today remain utterly reluctant to buy new equipment, build factories or hire more workers, while management regards the recovery as uneven, it has regarded the buyback strategy as the best bet. How totally wrong!

Clearly the view that your own stock is under-priced, you believe your strategy is the right one and you are certainly not going to sit on hordes of cash, it is perhaps value-destroying to “our” shareholders. Yeah right including mine!

This is where the whole compensation of management has gone off the rails. If tenure at the top is shortening- as it is- then pushing your stock price performance helps for a two to three-year period helps you as the manager.

Yet it really is simply “kicking the future down the road” for others to deal with, if it is not too late. It is very unlikely these buybacks will help the performance of the company over a decade but then again most management has ‘cashed in their chips by then.

Simply too much cash and buy-backs are stopping innovation and new growth

Now of course if this ‘bull market’ does come to the end of its run this year as many are predicting then the ‘game’ of improving financial ratio’s gets so much harder. Buybacks do reduce the assets on the balance sheet (cash is an asset), the return on assets (ROA) increases and if the shares bought back are ‘retired’ the return on equity (ROE) equally goes up.

Today our markets and the investors view higher ROA and ROE as the greater positive over the need to invest in the promise of a better future.

Yet change is stirring, new business models are revolutionizing industries, crazy ideas will be creating new markets and this call of the unknown holds an interesting promise of future ‘higher’ returns. The Darwinian effect is raising its head and innovation holds one big key to evolving differently to manage in these changing times.

Are these prop-up ratios providing short-term relief, holding strategies to what would otherwise be an ailing stock from poor investment in innovation or new assets or helping them get out of excessive dilution? These signal a company struggling.

The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.

Do you recall the Capitalists Dilemma?

I am sure many of you can recall the article in the HBR “The Capitalist’s Dilemma” by Clayton M. Christensen and Derek van Bever from the June 2014 Issue.

This is where they outline the three types of innovation 1) Performance-improving innovations replace old products with new and better models 2) Efficiency innovations help companies make and sell mature, established products or services to the same customers at lower prices and 3) Market-creating innovations, our third category; transforming more complicated or costly products so radically that they create a new class of consumers or a new market.

We are today often failing to create the market-creating innovations. Market-creating innovations need capital to grow—sometimes a lot of capital and risk and this is deemed unhealthy in today’s more uncertain environment but you are ‘creating’ lots of cash by running lean.

Buybacks are safer, the risks lower and top management projects their confidence that this is better for shareholder wealth. Shareholders take the money but over time I would certainly argue lose confidence in a lasting future and constantly switch shares to chase the cash! So shares get propped up even more and the circle starts again and the future gets sacrificed just that little bit more.

The Capital Dilemma article was suggesting the need for a New Orthodoxy of New Finance.

It does recommend the emancipating of management. “Many managers yearn to focus on the long-term but don’t think it’s an option. Because investors’ median holding period for shares is now about 10 months, executives feel pressure to maximize short-term returns. Many worries that if they don’t meet the numbers, they will be replaced by someone who will. The job of a manager is thus reduced to sourcing, assembling, and shipping the numbers that deliver short-term gains”

Re-evaluating differently

While we value innovation alongside non-innovation in the same way the demands for returns on investment place unfair demands on internal innovation projects. Investing in the future is so much harder and while there is this lack of confidence in new innovation, alongside this lack of external pressure for different judgements, we are looked into that diminishing short-term viewpoint dominating our boardrooms.

Hopefully, if this present bull market does end, innovation, the source for new growth, alongside greater mergers and acquisitions (M&A) suddenly gets its ‘growing’ voice back in the boardrooms. Suddenly corporate behaviour moves from financial prudence and cash becomes released for accelerating real expansion.

We have lacked the right type of investment in the future

I just wonder if those at the top really understand that it is not just cash that will ‘create’ innovation when they require it when they have that sudden need to chase for real growth if the stock markets suddenly turn against them? This acceleration and sources of new growth come from driving new innovation.

If they have not been sustaining investments in their resources; their assets and their people and we know these have been far more diluted through this pursuit of lean management, dispersing most of the gains with the cash piles achieved, then the company is in real trouble.

They might soon realize that real innovation and the skills needed have been running on ’empty’ or just the past fumes of low-octane incremental fuel, with little sustaining power, apart from this propping up the short-term.

This sudden realization might create a sheer sense of scrabbling. A scrabble just to regain those forgotten skills and bring real lasting health back into our companies where people are valued again for what they can bring.

It would be nice to see a pursuit of growth back on the agenda, through pushing all the buttons needed surrounding innovation, and to see top management really earning their place, unearthing future opportunities for real growth, something shareholders will be increasingly looking to see.

Risk and opportunity are the ‘yin and yang’ for innovation and when you are looking to really grow to give really valuable shareholder return then top management is going to have to re-learn much.

“Recognizing the power of ‘yin and yang for innovation’ can give you the order of things and how and why they relate to each other. Complementary and conflicting opposites do contribute to a greater innovation understanding but they do need consistent attention to manage”

It is critically important to have this ‘flow and balance’ and allow it to constantly evolve.

Let’s get back to investments that are about the future and that need a healthier appetite for innovation investments.

The post Is all investment about the future? first appeared on Building Your Innovation & Ecosystem Intelligence.

Can we recognize yin yang as a dual force of innovation?

Scholars tell us that there are two natural complementary yet contradictory forces at work within our universe.

The Chinese call these ‘Yin Yang’. Yin is regarded as more passive, receptive, more outside-in, whereas Yang is more active, creative and inside-out. These are seemingly opposing forces but interconnected and interdependent; one gives rise to the other, they actually reinforce each other.

Yin & yang seemingly have the following characteristics: they are opposing yet equally rooted together; they have the power to transform each other and eventually are balanced out.

Yin Yang in Idea Management

As a good example of these opposite forces, we often are required to generate many different ideas and apply the countervailing need of selecting from among those that best can meet the organization’s objectives. It is critically important to have this ‘flow and balance’ and allow it to evolve constantly.

So by this example, we see that ’ Yin and Yang’ are both dynamic,  sometimes opposing forces, constantly interacting with each other balancing conflicting needs (and aims) and recognizing that one determines the other and you need them both to strengthen innovation. We need these two opposing forces in all we do to manage the ideas for innovation. These often do conflict with one another in their needs and actions. Still, they both need to be in force to bring out all that is needed to be evaluated in the idea process, so real innovation occurs for ‘something new that gives additional value’.

This balancing of yin and yang needed in the above idea management example follows a constantly changing course, but there is also a natural order. Equally, though this seemingly is always within a constantly evolving innovation system that reflects the constant change around us.

We cannot get ‘fixed’ in our ways, and it is this constant flow that system engineers have often never fully understood within managing the innovation process. Often they want to separate the parts of the system, attempting to take out the ‘conflict’ innovation truly needs to have constantly.

Yin Yang in risk and opportunity

‘Risk and opportunity’ are yet another of those two opposites for the yin yang of innovation that also need that constant balance for innovation to thrive. We need to arrive at our own point of “chi” to balance these. To arrive at this balance, we should look for the right interactions between the two sides, for instance:

• Recognition that on each side of the coin (risk/opportunity) will enable better decisions
• You seize better opportunities with confidence if you can quantify the risks.
• Recognition of the two can help you allocate funds more wisely
• You achieve a better delivery on an improving scale of understanding both aspects
• You anticipate problems far earlier

Moving the organization from being risk-averse through experimental to seeking opportunities needs a constant force and attention. Managing its tension is essential to gain a greater innovation effect. Effective risk management depends equally on the good quality of information- the same as “seeing” opportunity; it simply needs a good framework that provides suitable scope for sensible risk-taking and exploring the opportunity.

Yin and Yang of Creativity

Being creative has both a yin and a yang aspect also. Creative people tend to be smart and quick yet naïve at the same time and need often reminding them of the whole system and how their ideas can or cannot fit into this. As we are aware, creativity needs a fun and relaxed environment yet a large measure of professionalism.

The need for an open brainstorming environment needs to be balanced with ensuring this is well-structured to capture the purpose of the brainstorming. We all have ‘unconscious skills’ that need stirring and awakening. We are often asked more often to connect all the often conflicting ‘pieces’ to see a new possibility or resolve a difficult problem.

Having different perspectives available that provide diversity opens up our minds yet equally allows for placing these random pieces into a new order.

So the ‘yin and yang’ are needed in the creative process of innovation. You need the two opposites of managing differences and harnessing diversity to be in conflict actively and equally complement each other to bring out better results.

Yin Yang for designing positive tension into innovation

Then we actually need to build a greater ‘tension’ into our innovation processes. Finding the balance or appropriateness to achieving innovation goals are not natural tensions; they need to be designed in. Within innovation, understanding the context is critical; it needs to be fully understood, equally coordinating the outcomes are critical as well. Both create tension and need to be explained.

Context gives us the purpose, the bounds, the outline in structures and capabilities, roles and commitments to achieve the result that is being required. The coordination is what leadership is concerned with, to keep bringing the parts back to the whole as the outcome needed. The pursuit of operational excellence is another example. It often becomes an end unto itself and gets somehow disconnected from the mission of generating growth and creating value.

So yin yang describes how polar or seemingly contrary forces are interconnected and interdependent, often in conflict but needing to be complementary opposites within a greater whole. Successfully managing the natural tensions should be viewed for innovation as not conflicts to be avoided but as opportunities to be managed and converted. This gives a greater coherence and consistency from ‘open’ participation and engagement.

Leadership has the role of getting the right balance, the right design tension into the innovating system, to bring out the best from this participation of all the opposing forces for greater innovation opportunity.

Recognizing yin yang evolves.

Finally, we also have to recognize evolution and, by extension, that innovation is constantly moving on. As the universe is changing every day, finding a common method to discover the unchanging rules in any activity is not easy. They all are constantly changing, and we must somehow recognize this in our appreciation of supporting innovation. The ‘fluidness’ in innovation makes it hard to manage.

How do you get the balance right in managing the innovation activity? It is not an easy one to solve and needs constant management and causes consistent concern. Looking at innovation differently, more adaptive in nature might help. The opposing forces of yin and yang are important to consider within this.

Recognizing the power of ‘yin yang for innovation’ can give you the order of things and how and why they relate to each other. Complementary and conflicting opposites contribute to a greater innovation understanding, but they need consistent attention to managing.

Who did say managing innovation was easy?
 

The post The yin yang of innovation understanding first appeared on Building Your Innovation & Ecosystem Intelligence.