How Innovative Is Your Organization?

Well-crafted opinion surveys can be used within organizations to provide insights, even at small sample sizes, by demonstrating the prevailing breadth of views on a particular issue or question.

The range of responses is often wider than the participants in the survey — or the leaders of the organization — expect.  In part, that’s due to the fact that there is a natural dispersion in how people calibrate their responses on a rating scale (which can be exacerbated by poorly-worded questions).

In addition, the members of an organization have a spectrum of beliefs, even on matters that appear to be (or are reported/marketed to be) settled business.  Some individuals hide their beliefs due to social pressure, while others may have changed their views but not voiced them yet.

Consider ESG, the hot-button issue of the day.  Within a typical investment team there is usually a range of views about how investment and ESG issues should be balanced (or if they should be balanced at all).  Now think about such a team operating within a nonprofit organization; cultural disconnects between investment personnel and others are common and differences of opinion on ESG can be stark.

Zooming out even further, an investment committee made up of industry professionals — or a board of directors — may think about the ESG question in divergent ways, to say nothing of donors and prospective donors.  Arriving at shared beliefs can be a challenge (or a battle); understanding the landscape comes first.

The “investment innovators curve”

In a similar fashion, surveys are commonly used throughout the industry to reveal the range of opinions and actions across organizations.  For example, Fidelity Institutional surveyed a variety of asset owners for its paper, “Understand Your Placement on the Investment Innovators Curve.”

It asked the respondents to self-characterize their organizations as fitting into one of these classifications:

Innovators:  “We are frequently one of the first to try a new asset class or investment approach, even if it’s extremely new and/or unproven.”

Early Adopters:  “We are not the first to try a new asset class or investment approach, but will quickly follow if we notice others are trying it.”

Early Majority:  “We are curious about new asset classes or investment approaches, but are more pragmatic.  We’ll wait until it’s more common/established before investing.”

Late Majority:  “We adopt a new asset class or investment approach out of necessity.  Once it’s mainstream and has clear, demonstrated value, we’ll invest in it.”

Laggards:  “We are very risk averse when adding new asset classes or investment approaches to our portfolio.  We would rather be late to a new investing trend than bear the potential risks involved with new approaches.”

Fidelity has been tracking decision making by institutional investors for two decades.  The question on innovation this year was “designed to help firms define and understand the philosophical drivers of their organization’s processes and investment approach.”  (The use of word “firms” several times in the paper is odd; “asset owners” would be a better choice.)

Not surprisingly, those on the tails of the innovation curve — innovators and laggards — operate quite differently.  The governance structures of the former allow for decision making to be pushed down in the organization, providing for greater flexibility, more creativity, and more expansive allocation choices.

Innovation in your organization

Among Fidelity’s recommendations for organizations:

Explore best practices within your philosophical peer group to better understand emerging trends or potential changes you need to make in order to achieve return targets.

Incorporate this new dimension into how your organization evaluates itself; build a plan to consistently benchmark your portfolio and organizational performance against your peers on the Investment Innovators Curve.

Inherent in them is the standard industry operating procedure of benchmarking, with the suggestion to do so specifically against organizations that have similar innovation profiles.  Essentially, “don’t try to play someone else’s game,” which is generally good advice.

But such benchmarking tends to land on asset allocation, which is easier to compare than other organizational attributes, and Fidelity’s work mostly points in that direction.  (A webinar that was a follow-on to the paper offered very little about innovation; it mostly dealt with long-term capital market assumptions, asset allocation, and the like.)

However, another recommendation that was offered is spot on:

Use the innovators curve framework as a starting point for discussing and agreeing on your firm’s investment philosophy and its inherent trade-offs.

The various positions along the innovators curve have their pros and cons, their (apparent) risks and returns.  Where is your organization and where you think it should be (and why)?

A simple survey using the scale and descriptions proposed by Fidelity is likely to surface quite a range of views — within the investment team, throughout the governance chain, and across other stakeholders.

There is much more to do beyond that, including breaking down what innovation means to you, checking your work to see that your self-characterization matches what the evidence shows, and building an R&D effort to support the choices you make on how to position your organization.  But start by finding out where everyone thinks you are now.  You may be surprised.

 

Future postings will focus on specific topics in innovation and R&D — in the Asset Owner category and across all of the Investment Ecosystem offerings.