MISCONCEPTION 7: Wall Street Rewards Innovation

We learned in Chapter 4 that RQ allows companies to determine whether to increase or decrease R&D investment, and by how much. It also allows them to quantify the expected impact of the change in R&D on sales, profits, and market value. Given this ammunition, a request to increase the R&D budget in underinvesting firms should be a slam dunk for CEO approval. However, when I’ve proposed this to companies in the past, the typical reaction is, “There is no way we can increase R&D that much—the shareholders won’t allow it.”

Initially I was surprised by this reaction: (1) how could shareholders wield so much power, and (2) why would shareholders prevent companies from doing something in their own best ...

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