Over the last few months I’ve met a wide range of CEOs from across the sector, and while everyone, of course, has their own challenges, one of the most common questions seemd to be “How do we get better at innovation and create a more entrepreneurial culture?”

My response is invariably to ask:

“How do your people think they will be treated when they fail?”

Innovation is the creation of something new. Something that hasn’t been tried before, at least, not in the way you intend to try it. And that means there’s a good chance that it might not work – the more innovative the idea, the less likely you’ll get it right first time.

Entrepreneurs get this completely. They know it will take trial and error. They know they will fail, fail, and fail again before they get something that works, and they thrive on that challenge. For them, that constant risk of failure is one of the main reasons they’re in the game. But for an employee, especially one worried about his or her future, taking a risk is often the last thing on their mind.

It isn’t just a third sector thing. Researcher Richard Thaler once asked 25 divisional heads in a global organisation if they would risk an idea that had a 50% chance of failing; success would double their revenues, but failure would halve them. Virtually every single one  of them said “No”. The personal risk was way too big. But the CEO, when asked, would have wanted them to take the chance: the 50% that doubled-up would more than pay for the 50% that lost out.

The larger the organisation, the more critical it is to accept, even to encourage local failures; to see them as a necessity for wider success. That might sound obvious to the executive team, but it’s a whole different ball-game if there’s a chance you could be that local failure. If you ask people to be innovative, and they think for one second that taking a risk and failing puts their job, their chance of promotion, or even just their reputation at risk, they will say “No” too.

Bottom Line:  People in charities can be just as entrepreneurial as anyone else, but if they’re in an environment that doesn’t embrace failure, it’s simply too risky for them to behave that way.

So here’s the advice: If you genuinely want your people to be more innovative and more entrepreneurial, the first thing you need to do is to completely rethink your approach to performance management, reward and recognition. You have to change their perception of “how we treat failure around here”. Crack that, and the rest will take care of itself.