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U of M researchers find that the words of a CEO can foretell a company's future innovation

Many stockholders wish they could look into a crystal ball to forecast a firm’s performance. Researchers at the University of Minnesota have found that they need something far less mystical to predict future innovations of firms.

“The answer lies in the words of the CEO,” said Rajesh Chandy, professor of marketing at the university’s Carlson School of Management. “By simply counting the number of future oriented sentences in annual reports we can predict future innovation by the firm.”

In the paper “Managing the Future: CEO Attention and Innovation Outcomes,” forthcoming in the Journal of Marketing, Chandy and co-authors Manjit Yadav of Texas A&M University and Jaideep Prabhu of Imperial College, London University, show that CEOs who focus their attention on future events, as well as external activities, lead their firms to earlier adoption and invention of new technologies and greater and faster development of innovations. In contrast, more attention to internal operations leads to slower detection, adoption and implementation of new technologies.

Words, not just actions, of the CEO set the tone to inspire, propel and motivate innovation by employees in a firm. To investigate their theory, Chandy and his co-authors studied empirical data collected from the online banking industry over eight years to determine innovation outcomes such as speed of detection, speed of development and the breadth of deployment of technology. By counting the number of future oriented words and phrases in letters to shareholders over this time span, they were able to predict the level of innovation by the firm up to five years later.

“The daily pressures from inside the corporation tend to take up the bulk of the CEO's time, overwhelming their attention spans,” explains Chandy. “But because the CEO sets the tone and culture, not thinking forward and outside of the firm has major negative consequences for innovation.”

The researchers advise CEOs to direct their attention outside their firm rather than toward internal problems, which are better left for others to solve. “The temptation to focus on fires within the firm may cause you to take your eyes off of your job,” said Chandy. “A CEO who focuses on the big picture, not the nitty-gritty, will influence the process of innovation and future outcomes of the firm more than one who has an internal day to day focus.”

David Ruth | EurekAlert!
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