Why Growing Companies Often See Their Most Innovative Employees Bolt

If you’re concerned about remaining scrappy and innovative as your head count grows, you should be — especially if going public is your endgame.

Shai Bernstein, assistant professor of finance at the Stanford Graduate School of Business, recently published a research paper about the loss of in-house innovation talent when a company goes public.

Bernstein divided inventors into three types: stayers, leavers, and newcomers. Inventors were about 18 percent more likely to become leavers after their companies went public. Far more startling, however, was that the stayers saw a 48 percent decline in the quality of their patents after their companies went public.

Bernstein’s findings offer a cautionary tale for midmarket executives. Even if you aren’t planning on an IPO (at least, not yet), the challenge of retaining your top innovators as you grow is a major concern. How should you address it? Build reached out to Bernstein for answers.

The Build Network: How can management incent potential leavers to stay and stayers and newcomers to keep innovating?

Bernstein: It’s not necessarily about incentives. It’s more related to the company’s project selection — the challenges that the inventive employees face and the types of tasks that they need to pursue. If the firm changes the projects that it pursues [and eschews long-term for short-term goals in an attempt to please investors], this is associated with employee turnover. The objectives of the company are no longer aligned with those of the inventors.

TBN: Your study also found that companies with separate board chairs and CEOs saw a much bigger drop in innovation and their inventors were more likely to leave. Would you recommend that CEOs also chair their boards?

Bernstein: This is just to suggest that when CEOs are more protected in some way from market pressures, they are more likely to take on more innovative or risky projects. When the CEO is also the chairman, he [or she] just has a higher level of job security. In these cases, I find that these companies are likely to be more innovative. The motivation for governance — for example, with Facebook — to keep the founders in charge is to keep the risk-taking there and shield the company from market pressures to do something short-term.