Innovation Vs Ethics: How Can Leaders Successfully Balance the Two?

Does this mean he is a CEO that is both innovative and ethical? Here Nick Pye, co-Founder at Mangrove and co-author of ‘Stretchonomics: The art and science of success’ explains what it truly means to mix ethics and innovation.

It is widely accepted that innovation is the lifeblood of most successful businesses. According to research by Maitland, nearly a third of FTSE 100 companies that state their corporate values claimed that ‘innovation’ was one of them. This was the third most declared value after ‘integrity’ and ‘respect’.  Innovation is symbolic; it means growth, it means change, and it represents the promise of a better or a different future. Innovation is the cool stuff that gets investors, customers and employees engaged and excited.

But is innovation wholly positive? Is all growth good? Recently a culture of unrealistic targets driving unethical behavior has come to light in stories of corporate accounting scandals and the artificial science of Theranos. Innovation and ethics poses some very real challenges.

The challenge comes from making money from doing things which by definition the business has not done before or from ideas your customers have never seen before. The unsexy truth is most innovation fails.  The numbers vary but generally only about one or two in 10 ideas make it to market and become successful long-term. Whilst there are a myriad of tools and techniques to improve the odds, the only real way to manage out risk of failure is to be less innovative. Closer-in ideas – introducing different “flavours” of existing offers – have much higher success rates but much lower returns. The odds improve because there is little stretch for anyone – customers easily understand the new proposition without much explanation and the business finds it easier to create and execute because the ideas are familiar. The downside is this sort of innovation often gets lost in the noise of the market and consequently represents poor ROI.

Innovation, even when brilliantly managed, is a gamble. Reward is the result of risk (tolerance for failure) multiplied by stake (investment – both one off and ongoing). But without risk there is no growth. Jeff Bezos, in his 2019 annual letter to stakeholders calls this out – “as a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out…. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.”

The ethical dimension kicks off around how we determine success and failure. For (most) companies who are not as open and accepting about the real nature of innovation, the challenge is dealing with failure. How does the business react when a new idea is not working out either in development or in the market. Does it look to learn? Does it ignore it? Does it sweep it under the carpet? Does it seek to find blame?

For many, the answer to the first question is no and yes or maybe to the others. These companies do not have a corporate growth mindset. Failure is, most often implicitly, not really expected, tolerated or allowed. The pressure for success drives everyone involved to only see one side of the equation, to make it happen at all costs, supercharging any natural confirmation bias.

The ethical challenge is that without the support to say no, individuals are implicitly forced to say yes, put forward cases they don’t believe in, do that which they don’t feel comfortable with. Ask any innovation lead, in any multinational, whether they have worked ideas though to market but known deep down that the numbers were optimistic or unrealistic, the answer will likely be yes.

Surely it is not right that so many who talk about innovation lack a clear strategy which is explicitly about permission to fail.  It requires a clear strategy linking corporate targets to innovation activities. It requires more than just positive words around permission to fail, it needs support and active management. Failure rates are a predictable, if unattractive, consequence.  It is possible to create “target” failure rates by project type. This is not to say that poor performance should be encouraged but the essence of any high performance team is about experimentation and improvement. Leaders have a responsibility to support those doing the tough stuff – that means backing up the talk, putting strategy and targets behind the values.