What type of corporate culture is best for innovation? One that tolerates failure.

What type of corporate culture is best for innovation? How ought firms and managers encourage their workers to be more creative? And if those workers fail in the pursuit of creativity, is that necessarily a bad thing?

These are the questions we wanted to answer in our latest paper.* We used life sciences as the backdrop of our research comparing similarly accomplished scientists who received either financial support from the Howard Hughes Medical Institute (HHMI), the large non-profit biomedical research organization, or federal funding from the National Institutes of Health (NIH). The HHMI money lasts five years and is often renewed (at least once); the program “urges its researchers to take risks … even if it means uncertainty or the chance of failure.” The NIH grants, on the other hand, last three to five years, have more specific aims, and their renewal is far from an assured thing.

Among other things, we looked at how often these scientists published articles that were among the top 5 percent or top 1 percent of the most cited papers in their fields. We found that the HHMI-funded scientists produced twice as many papers in the top 5 percent in terms of citations, and three times as many in the top 1 percent, relative to a control group of similarly accomplished scientists funded by the NIH. But they also were more prone to underperform relative to their own previous citation accomplishments. The take-away lesson is clear: biologists whose funding encourages them to take risks and tolerates initial research failures produce breakthrough ideas at a much higher rate than peers whose funding is dependent upon meeting closely defined, short-term research targets. But there is a cost associated with these long-term incentives, since they also  lead to more frequent “duds.”

Our findings have implications for the innovative process in other industries. A corporate culture that tolerates failure is key to motivating employees to take initiative and be more creative. Managers must cut workers some slack, and cultivate an environment where workers are allowed to fail, and learn from those failures.

Take 3M, the technology conglomerate, and the story of Post-it Notes. In the 1970s, a researcher named Spencer Silver worked in the company’s laboratories trying to develop a super-strong glue. Silver created one, but it wasn’t as strong as what 3M already had on the market: it attached to objects, but wouldn’t easily stick to them. Silver didn’t know what to do with his invention. Six years later, another 3M scientist, Arthur Fry, remembered the weak adhesive as he was trying to figure out a way to get his bookmarks to stay in place in his church hymnal. With the light adhesive, the bookmarks stayed put, yet lifted off without hurting the pages. The Post-it Note was born: 3M began distributing them in 1980, and today they are a popular office product.

As a manager, the goal is to create an atmosphere where workers want to try new things and feel confident that they will not be punished if they fail. It’s tricky, though, because this culture also gives workers an out, or permission to slack off. There’s a fine line between freedom and oversight. The challenge for managers is to distinguish between interesting failure, and just plain failure. The key difference is that with interesting failures, the worker learns something. Interesting failures also allow for further experimentation and exploration. Just plain failure, on the other hand, is usually the result of a worker who’s been allowed to shirk.

In order to promote a failure-friendly environment, workers must see that the payoff for success is big. They must see that they will be rewarded for trying new things. The payoff must go to both the employee who has the initial failure and the person who has a long-term success.

Certain companies and industries are able to foster innovation better than others. Apple, for instance, has a clock speed that encourages innovation. If one of Apple’s engineers gets a good idea for a handheld device, the company can act on it immediately and within a few years, put it on the market. Retailers, too, benefit from the ease of replicability. In 2000, Bank of America, the financial services giant, turned Atlanta-area branches into “consumer laboratories” where the company could experiment with different approaches to customer service and product development The company put its most creative, most radical-thinking managers in these branches. BofA experimented locally, and then rolled things out that were successful.

The best way for a manager to make their firm more failure friendly is to make a public example of interesting failures. They need to recognize and reward things that happened in their firm  – research discoveries, adjustments to supply chains, tweaks to product offerings – that may not have been immediately successful, but eventually helped solve a problem, or did something to improve the bottom line. Managers need to communicate the idea that failure is tolerated. This is one way to foster entrepreneurship in larger organizations.

*Incentives and Creativity: Evidence from the Academic Life Sciences; Pierre Azoulay and Gustavo Manso, MIT Sloan School of Management, and Joshua Graff Zivin, University of California, San Diego; Rand Journal of Economics (forthcoming)

Pierre Azoulay is Zenon Zannetos (1955) Career Development Professor; Associate Professor of Technological Innovation, Entrepreneurship, and Strategic Management

Gustavo Manso is Maurice F. Strong Career Development Professor of Management; Associate Professor of Finance

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