I recently participated in a panel with C-level execs from leading India-based firms, including DLF, Godrej Group, Marico, and Nokia India, to discuss the findings of the 2008 IBM Global CEO Study. The study, based on interviews with 1,130 corporate and public leaders worldwide, identifies how companies are innovating their business models to cope with rapid business, technological, and societal changes.

While Western CEOs’ appetite for innovation is curbed by the US recession, the Indian CEOs in my panel seemed eager to capitalize on the twin-forces of globalization and rapid technology evolution to capture new market opportunities.

Unlike Western CEOs obsessed with new product and service innovation, Indian CEOs are reinventing their entire business models…again and again. Harsh Mariwala, Chairman of Marico Industries, explained how Marico, which started as a vegetable oil supplier, metamorphosed itself into a consumer goods company, extending later into skincare services, and is currently reinventing itself as an wellness experience provider.

Despite their gung-ho attitude towards business innovation, I sensed some insecurity among Indian CEOs: they recognize they can’t build the global enterprise of the future — one that is innovative and adaptive — unless they have a workforce that is innovative and adaptive. That’s why in the IBM study, Indian CEOs ranked the availability of talent — or people skills — as the most important factor that can stifle their astounding corporate growth.

While I agree with Indian CEOs that finding creative, entrepreneurial young workers is getting harder, the real problem lies with Indian CEOs themselves, or more precisely, with their arcane management style. They have yet to learn that you can’t mandate innovation from the top, since innovation is an organic phenomenon driven by voluntary employee participation.

Let me elaborate a bit. The Towers Perrin 2005 Global Workforce Study reported that, among the global workforce, Indian employees feel the least engaged by their firms. The culprit? The hierarchical structure of most Indian firms, many of which are risk-averse, family-run entities. As Adi Godrej, chairman of the Godrej Group, candidly acknowledges: “In India Inc, we have a bit of a (rigid) hierarchical structure that needs to be changed.”

I can’t agree more. Indian CEOs must recognize that they can’t have it both ways: they can’t continually innovate their business models, while also retaining their anachronistic command-and-control management style. Collaboration-minded Gen Y employees – half of India’s workforce is below 26! – won’t join or stay too long in firms locked in pyramid-shaped organizational structures. They would rather work in a collaborative corporate culture with a flatter org chart that promotes bottom-up decision-making. You could call it “Corporate Culture 2.0.”

Indian-born companies can learn a lot from India-based MNCs that are trailblazing Corporate Culture 2.0. Take Nokia India: it is a big promoter of “community-based innovation,” enlisting frontline employees in the ideation and commercialization of entire new product lines. As D. Shivakumar, managing director of Nokia India, explains it: “Once our Board approves an employee-driven initiative, we commit 100% to turning it into a commercial success.” Not surprisingly, Nokia India enjoys one of the lowest employee attrition rates among Indian companies.

To facilitate innovation in this new fluid and dynamic organizational context, Indian CEOs must invest in Web 2.0-enabled employee motivation technologies like prediction marketplaces, idea management apps, and employee blogs. Armed with these social computing tools, Indian firms can collect and rapidly act on their workers’ ideas for seizing emerging opportunities or mitigating budding risks. That way, if a promising business model is being hatched by a creative group of Larsen & Toubro (L&T) employees on Facebook, that idea can be rapidly roped into L&T’s corporate intranet for speedy execution by that same employee community.

In the spirit of social networking, I would like close this post by sharing with Indian CEOs a comment from one of their peers, R C Bhargava, chairman, Maruti Suzuki India: “The onus is on Indian CEOs to develop a culture in which all employees are encouraged to make mistakes and break the barriers of a hierarchy.”