Why short-termist CEOs file ambiguous patents

The primary function of patents is to make certain information public in exchange for temporary legal protection. Patent filing strategy, a central issue in innovation management, is positioned at the intersection of intellectual protection and informational transparency. On the one hand, an unclear patent description can reduce the risk of imitation by competitors, protecting the company from eroding its competitive advantage. But on the other hand, overly imprecise communication can escalate the risk of legal invalidation or disputes, exposing the company to hefty litigation costs.

A growing body of literature highlights the effects of competition on patent transparency, revealing textual obfuscation as a strategy to minimize short-term imitation risks. A comparison between patents issued by universities (which are less subject to competitive pressure) and private companies, for example, shows that the latter are generally more vague and less transparent.

When shareholders are playing the long game  and the CEO is near-future focused, a temporal agency conflict arises. (In agency theory, the shareholder is the “principal” who has certain goals, and entrusts managers, the “agents,” to achieve them.) Since imitation occurs in the short term, the CEO in this case seeks to prevent it by using language obfuscation techniques that make patents more cryptic.  But these same techniques expose the company, in the long run, to invalidation risks or legal actions from competitors. Institutional investors with a long-term horizon, in contrast, aim to shield themselves from these dangers through more transparent language.

For this study, we analyzed over 200,000 patents filed by US companies between 1980 and 2006, using established linguistic metrics to assess document readability.

We combined our empirical analysis with statistical techniques and regression models to examine the relationship between patent readability and corporate governance composition. Company size, the number of patents filed, profitability, and industry were  some of the factors we controlled for. Additionally, to track changes in patenting strategies over time, we adopted a longitudinal approach accounting for shifts in corporate governance and competitive dynamics.

Our findings demonstrate that corporate governance plays a key role in patent strategy. Specifically, institutional investors with a long-term vision favor greater patent readability, to mitigate the risk of legal disputes in the future. This effect intensifies in industries characterized by high competition and significant legal exposure. Founder-CEOs, who have longer tenures and perspectives than other corporate heads, lean more toward clarity compared to non-founder CEOs.

Efficient corporate management requires an alignment between shareholder and managerial objectives, which can only be achieved through board action. If the shareholders’ focus is longer-term compared to the CEO, the board should implement incentives that extend the latter’s time horizon. In other cases (such as firms with a heavy presence of hedge funds with very short-term horizons), the opposite approach may also be necessary.

The study highlights the need to keep the tension between protection and transparency in check. For managers, this means that when choosing between obfuscation and clarity, they must consider not only competitors, but also the company’s ownership structure and the dynamics of its industry.

Finally, future research could explore whether vague patent language can also serve as an indicator of technological risk exposure, similar to how financial statement ambiguity appears to correlate with higher financial risk.

Aneesh Datar, Mario Daniele Amore, Andrea Fosfuri. “Strategic patent disclosure: Unraveling the influence of temporal preferences.” Strategic Organization, 0(0). https://doi.org/10.1177/14761270241299756.