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Board And Innovation

Innovation is one of the most important issues in global business environment, nowadays. Innovation involves creation and diffusion of new products, new processes, new methods, new business models. Global competition has made growth more challenging than ever. Companies must focus on innovation to grow and to be competitive and viable in the long-term. Innovation enables a company to make strategic move and to create competitive advantage. Companies need to reinvest themselves to survive and boards must be at the fore front of this transformation. Innovation is also critical for an economy in supporting growth and dynamism.

Governing boards may seem to be the last place for innovation in a company. However, there are studies showing that boards have a role of stewardship of innovation1. The role of the board is to encourage innovation by creating and supporting a corporate culture that foster innovation. This role could change according to the sector of the business but it seems that the key issue for success is working as a team with management of the company. If board and management behave like partners, innovative ideas could come from directors who are highly experienced and dedicated to the company2.

Critical role of the board is to set the tone at the top in creating innovation climate in the company. Boards may start to send signals by changing some of their existing practices and approaches to the issues like moving focus from compliance and past performance to future; mainly future trends, their effects on the company and competition and by spending more time on latter issues. Boards could play an important role in selection of CEO whose attitude to innovation would affect the tone at the top as well. CEO’s attitude towards innovation is an important determinant of top at the top. Numerous Board Chairs say that it is very critical to select right CEO to support innovation3.

Board must set appropriate balance between risk tolerance and accountability in fostering innovation. Risk and innovation represents two sides of a coin. Risk management deals with uncertainty in the downside and innovation deals with uncertainty on the upside4. Board must have a sufficient understanding of; business, need for innovation and related risk for doing or not doing innovation. Board’s risk management ability is important. In certain cases, boards’ attitude could be disastrous, considering the position of Kodak with the emergence of digital photography.

Risk tolerance is very important in fostering innovation in a company. Innovation could be attempted and the results could be unsuccessful. The response of the board determines the future of innovation climate and culture in such a case. Board could respond negatively and punish the responsible people or could approach with a positive attitude and say “OK this time it is failed, try again”. Unless there is some tolerance for failure in the culture, achievement of innovation efforts might be unsatisfactory. Financial strength of the company is an another determinant of risk tolerance issue. Funding and risk tolerance decisions are discussed and decided at the board.

Board’s understanding pf business and business expertise would help to identify sources of the innovation risks5.

  • Innovation risk could be internal like in the cases of introduction of new and untested technology or a risky and uncertain product concept. Board needs to understand risk exposure and nature and level of uncertainty to mitigate that risk. A good example for this type of risk is the risk exposure of newly introduced innovative derivative products in finance industry before 2008 financial crises. Boards did not exercise their governance roles related to risk management of innovative products since they did not have an understanding of innovative products. The industry had failures because of these innovative products.
  • Innovation risk could be external like in the case of development and spreading of new disruptive new technologies by competitors which would make company’s technology irrelevant. A good example to this case is; Apple launched iPhone which has satisfied communication, entertainment, data transfer, internet needs of consumers’ in contrast to competitors Blackburry and Nokia who have considered cell phone as only a communication item. Both companies were caught unprepared and disappeared from the market. These types of risk could be managed by constantly monitoring the emerging trends by management of the company and reporting these risks to the board. Boards should ask what if questions when strategic issues discussed as part of their governance function.

Companies needs to take risk to innovate. Boards’ mission is to stimulate management to take sensible and measurable risks. This could be achieved by establishing clear performance targets. These targets must address “must-win” battles that company has to do in order to survive or to move next stage of growth6. Then board expects management to report on innovation performance. When there is a problem in reaching these goals board must focus on the reasons like resource issues, to many issues to solve at the same time, need for new talent, etc. Board’s role in this process is to ask right questions and give guidance to help the management rather than dictating what should be done.

Commitment to innovation must be tied to core strategy7. The performance targets must be aligned to the core strategy so that innovation efforts could serve for the sustainability of the company. Therefore, innovation should be viewed as strategic opportunity and value creating initiative rather than as an expenditure item. Innovation must be a critical board agenda item. Digitalization becoming more and more important for the business so digitalization must be part of innovation agenda item as well. Boards spend much time on strategy and oversight, but they need to consider innovation as a part of directing strategy.

Innovation strategy has not been discussed in detail since it is not formulated separately in most of the cases. Board needs to ensure that following issues have been monitored and communicated to the board by the management8:

  • Perception of importance of innovation for the business and where this innovation could emerge,
  • How this innovation might change the future and what that means for the company,
  • What are the plans of management to fulfill demand for more innovative products and services in the future,
  • What are the plans, priorities, resource needs of management to deal with this challenge and how they support and boost innovation performance according their action plan.

Innovation is also part of oversight duty of board. They need to spend time to monitor innovation efforts of the company to ensure that efforts are in line with pre-determined principles and targets. Boards may set small number innovation effectiveness measures considering industry benchmarks and regularly follow them as part of oversight processes. Such measures could be; R&D expenditure, business development expenditure (input indicators), percentage of new product or service sales in total sales, growth rate of new product or service sales (output indicators). These could be determined according to industry and company needs.

Board composition is another important point in fostering innovation. Board must contain directors who could offer perspectives on a wide range of issues that need to be addressed for efforts to be successful. Some companies add their teams director/s who are experienced in innovation and operating environment and those people could bring different perspectives to the board. Diversity in the board seems to be another contributing issue. Diversity includes gender, age, tenure, executive and non-executive diversities. A research on effect of diversity has been conducted in 176 French companies9 between 2006 and 2008 showed that diversity has a positive effect on innovation especially in product, organizational and marketing innovations. Gender diversity has a positive impact especially on marketing innovations.

Some boards have decided to form their innovation committees. Value of board’s active engagement in innovation can be seen at Diebold10. Diebold is a company with $3 billion revenues with 16,000 employees and makes ATMs and a host of related products. Company was founded in 1876. The company had survived since it is ready to embrace new technologies. Diebold recruited a new CEO in 2013, Andy W. Mattes. He leaded major divisions in HP and Siemens. When board conducted its evaluation process in that year and found that some directors recommended to create a board committee to work with new CEO on technology and innovation. The main aim of the committee would be a partner to the management, not to manage innovation. Technology Strategy and Innovation committee was formed with a charter. Directors have been required to “provide management with sounding-board”, “serve as a source of external perspective”, “evaluate management proposals for strategic technology investments” and “work with management on its overall technology and innovation strategy”. Diebold’s committee helped to find new technologies and connect management to the people who would know or own such a business to strengthen the company.

Boards may support or suppress innovation with their attitudes. Board’s involvement would encourage management to focus on innovation. Creativity is at premium and working with the executives in innovation processes could be an invaluable opportunity. David Dorman, former CEO of AT&T said that “We need a robust set of thinkers on the board who know the market place”. Companies could make right decisions to innovate and survive with these kind of boards.

Notes
1. Dr. Robert Kay and Dr. Chris Goldspink, The Role of the Board in Innovation, Australian Institute of Company Directors – Governance Leadership Center, 2013, page 3.
2. Jean-Philippe Deschamps, Governing Innovation in Practice – Role of the Board of Directors, www.innovationmanagement.se, May 21, 2013.
3. Dr. Robert Kay and Dr. Chris Goldspink, The Role of the Board in Innovation, Australian Institute of Company Directors – Governance Leadership Center, 2013, page 7.
4. Dr. Robert Kay and Dr. Chris Goldspink, The Role of the Board in Innovation, Australian Institute of Company Directors – Governance Leadership Center, 2013, page 4.
5. Jean-Philippe Deschamps, Governing Innovation in Practice – Role of the Board of Directors, www.innovationmanagement.se, May 21, 2013.
6. Beverly Behan, Innovation Starts in The Board Room, Boards & Directors, Fourth Quarter 2014.
7. Michael Hartmann, Digital Innovation Governance: The Role of the Board in Creating Value, DeGroote Annual Digital Leadership Summit, September 30, 2015.
8. Jean-Philippe Deschamps, Governing Innovation in Practice – Role of the Board of Directors, www.innovationmanagement.se, May 21, 2013.
9. Fabrice Galia and Emmanuel Zenou, Does board diversity influence innovation? The impact of gender and age diversity on innovation types, XXII Conférence Internationale de Management Stratégique, June 10 – 12, 2013.
10. Michael Useem, Dennis Carey, Ram Charan, How Boards Can Innovate, Harvard Business Review, May 21, 2014.

References
· Australian Institute of Company Directors, Hargraves Institute, Governing Innovation for Performance, www.companydirectors.com.au, Director Tools, 2013
· Benjamin Balsmeier, Lee Fleming, and Gustavo Manso, Independent Boards and Innovation, May 5, 2015
· Beverly Behan, Innovation Starts in The Board Room, Boards & Directors, Fourth Quarter 2014
· Dale Renner, The Role of CEOs and Boards in Fostering Innovation, Probono Auatralia probonoaustralia.com.au
· Daniel Wolf, Innovation: The Board’s Role, www.trusteemag.com, January 2014
· Camilla Rygaard, Jakob Stengel, Radical Innovation and Board – Global Board Survey 2016, Deloitte, February 2016
· Fabrice Galia and Emmanuel Zenou, Does board diversity influence innovation? The impact of gender and age diversity on innovation types, XXII Conférence Internationale de Management Stratégique, June 10 – 12, 2013
· Jean-Philippe Deschamps, Governing Innovation in Practice – Role of the Board of Directors, www.innovationmanagement.se, May 21, 2013.
· Michael Hartmann, Digital Innovation Governance: The Role of the Board in Creating Value, DeGroote Annual Digital Leadership Summit, September 30, 2015
· Michael Useem, Dennis Carey, Ram Charan, How Boards can Innovate, Harvard Business Review, May 21, 2014
· OECD, Innovation Strategy 2015 An Agenda for Policy Action, June 2015
· Robert Kay and Chris Goldspink, The Role of Board in Innovation, Australian Institute of Company Directors – Governance Leadership Center, 2015

Dr. Erkin Erimez
eerimez@arge.com


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