Governing innovation by company boards
Tuesday, 11 August 2020
By Parmi Natesan and Prieur du Plessis
Boards are increasingly coming to recognise that innovation should be a regular agenda item, but actually what they should be doing about it remains somewhat opaque.
Traditionally, boards have tended to interpret their governance and guidance role as ultimately a somewhat conservative one, aimed more at steadying the ship than launching it into new ventures.
But it’s not quite that simple. Boards are realising that innovation is becoming more important with each year that passes. It’s always been important, of course, but technology-driven change is now bewilderingly swift and can disrupt and even destroy markets.
In short, even the most conservative investor would agree that innovation is something that is intrinsic to a company’s long-term sustainability, and thus properly falls within the board’s remit. After all, if innovation has a key role to play in a company’s sustainability, then ensuring that it takes place effectively falls within the board’s duties. Boards need to become more forward-looking.
The truth of this view has become brutally clear during the current COVID-19 emergency. Organisations able to innovate on the fly clearly did better than those who had to ramp up a more laborious response.
But if innovation is essential to survival and prosperity, then in the same breath one needs to acknowledge that it is also extremely risky. Innovation is often expensive, and many companies have actually got themselves into trouble by committing themselves to innovations that ultimately turn out to be destructive.
In other words, boards must combine a greater focus on innovation and forward thinking with their traditional role of risk management and governance. They need to govern innovation.
We are reminded here of the revolutionary insight of the King IV Report on Corporate Governance for South Africa 2016 that risk and opportunity are often two sides of the same coin, and that boards need to adopt a much more sophisticated and nuanced approach to risk and the opportunities it may conceal.
So far, so logical. However, it must quickly be acknowledged that several challenges exist. The first of these is that innovation itself is difficult to define, and the board needs to spend some time discussing what innovation actually is. It’s particularly important to understand that innovation is not an end in itself but is undertaken to achieve a certain goal, and that there may be different innovation approaches appropriate to the outcome sought.
A second issue that needs to be ventilated is the fact that, as noted above, it would typically be the CEO who is the innovation leader. It’s thus important that boards consider this when setting out the criteria for new CEOs, and when measuring the performance of existing CEOs. As is true with all the board’s functions, the board needs to be careful about striking the right balance between governing and managing or doing. In fact, one might argue that the need to govern innovation requires a slightly different relationship between board and management, with the board helping to shape the way that innovation interacts with the overall strategy.
As an aside, it’s worth noting here that an increased focus on innovation will make board diversity even more important. Different, independent viewpoints are of particular importance when it comes to identifying potential disruptors or the potential to disrupt competitors.
Perhaps the major challenge, though, is that there are precious few extant guidelines to help boards work out the details of how to achieve innovation governance. One of the few writers to have explored what innovation governance actually means is Jean-Phillippe Deschamps. Professor Deschamps has proposed a list of innovation-governance responsibilities that include defining who the main players in innovation are and their responsibilities, establishing the values underpinning innovation, defining how innovation will be measured, making decisions on innovation budgets, and establishing management routines regarding communications and decisions.
The full list appears in a useful research paper by the Australian Institute of Company Directors entitled “The role of the board in innovation”. The paper also makes the point, though, that these responsibilities need to be further refined by a more in-depth understanding of what innovation is and how it can be managed.
Jannie Durand, Chief Executive Officer of Remgro, suggests that innovation does not always need to be expensive as it can also be incremental such as new packaging or a new taste variant. “People often confuse innovation with technology breakthroughs, but innovation is sometimes just adapting your product to changing times, albeit a lot faster these days,” said Durand.
Innovation is clearly critical, and is likely to become more important as the connected world creates new risks and opportunities in the post-COVID environment. Forward-looking boards need to begin looking at what they mean by innovation, the role it should play in strategy and confront the real issues related to how they can govern a business process that depends on unpredictability to a large extent. Those that get it right will put their organisations at a distinct advantage.
||Dr Prieur du Plessis
Parmi Natesan and Dr Prieur du Plessis are respectively CEO and facilitator of the Institute of Directors (IoDSA); email: email@example.com