The Board’s New Innovation Imperative28 December, 2017 / Articles
The challenge of leading innovation is bringing about a sea change in corporate governance. Boards, once the dependably cautious voices urging management to mitigate risk, are increasingly calling for breakthrough innovation in the scramble for competitive advantage. We see this shift playing out across industries—notably at such companies as Ford, Coca-Cola, Nestlé, and Unilever, which are all struggling to address slowing sales in their core businesses.
Embracing innovation and its inherent risks requires that boards and senior management develop new ways of working together. As Mark Ganz, the CEO of Cambia Health Solutions—a company at the forefront of innovation in the health care space—told us, board meetings no longer consist of PowerPoint presentations by management followed by a few perfunctory questions from the board. “The model has changed,” he explained. “We now bring the board ideas that are not fully baked and say, ‘Help us with this.’” It took some time for the board to realize that management was asking not for the answer but for engagement, he said, but “once they got used to it, it dramatically improved the board–management partnership and the value board members bring to the work of the company.”
The desire to create new and different ways of working is not always accompanied by the ability to do so, however. Adopting new roles and norms feels uncomfortable—even unnatural—to most people. To help address this knowing-doing gap, we spoke with directors and CEOs from a range of industries about their boards’ capacity to support innovation and risk management. The results were sobering, though the tide seems to be turning. A few of the directors in our study were clearly laggards, even going so far as to argue that innovation was irrelevant in their very mature industries. A handful were trailblazers, like Mark Ganz. The majority were just beginning to work their way through the challenges of governing innovation, some more deliberately and successfully than others.
Through our research, we identified the common obstacles most boards face and gleaned insight into how boards can reshape their roles to effectively foster and support the kind of innovation that leads to substantial growth.
Why Boards Struggle with Innovation
Boards increasingly believe that to fulfill their obligation to ensure the long-term well-being of their companies, they have to support management in developing a compelling innovation strategy. And that means learning to embrace risk while continuing to mitigate and manage it as much as possible. In this inverted risk paradigm, boards are discovering that avoiding risk is the riskiest proposition of all. Paula Price, a director at Accenture, Dollar General, and Western Digital Corporation, told us that boards should aim to develop the organization’s “capacity to pivot” into uncharted territory with new products, services, business models, or ways of organizing or getting work done. Standing still or waiting to see how things turn out are not considered serious options in today’s often tumultuous environment. A member of one automobile company’s board confessed that they had discouraged management from making the leap to electric cars for years; now he feared that the company was playing catch-up.
CEOs and top management appropriately have more power than board members over corporate affairs and major decisions. But without the full support of the board, management is unlikely to take the big bets required to innovate. What frustrations do board members report when asked about fulfilling their growing obligation to govern innovation? We found four main concerns:
An outdated innovation and risk agenda
Most board members report that the lion’s share of their attention around innovation goes toward improving the organization’s capacity to execute its current strategy—that is, innovation to sustain the core: developing product line extensions, reducing cost structures to maintain healthy operating margins, improving customer-intimacy and -centricity to address rising customer expectations, and responding to new regulatory regimes and cybersecurity threats.
At the same time, these board members realize that doing the same things better, faster, and more cheaply is not enough. It is not enough, for instance, to make improvements that reduce costs in the supply chain. Companies are now trying to deploy digital supply chains that will allow them to offer different value propositions to customers and even create new business models. As one director put it, “Significant disruption is taking place, and whatever company is at the top today will not be at the top in 10 years. [We] must differentiate ourselves.” Another observed that his board’s “bias for short-term results” was stifling innovation; instead of pursuing breakthrough initiatives, the company was focused on evolutionary ones. Many directors acknowledged that it was not easy for CEOs to make the bold moves required to keep their companies competitive—especially given the growing demands of activist investors—and that boards were not doing enough to encourage management to pursue admittedly riskier initiatives that could reinvent the business.
Making time for innovation as an ongoing topic of boardroom conversation is a luxury few board members feel they have. Especially in industries undergoing regulatory changes, such as financial services, energy, and health care, directors reported feeling “overwhelmed” simply attending to the basics of compliance and financial monitoring. Even companies that were performing well struggled to dedicate time to innovation activities. Hasbro CEO Brian Goldner acknowledged the challenge: “It’s easy to focus only on the core business when it’s going great, but you have to find board time to focus on growth and disruptive activities.” Directors we spoke with understood the need to invest in strategic discussion and debate about innovation—as another CEO put it, “To think you can sit in the boardroom and talk strategy once a year means you’re out of the game and out to lunch”—yet competing pressures on their attention made it hard to find the time for proper consideration.
Lack of expertise
Many directors—particularly CEOs—express frustration that their boards lack the level of industry expertise and innovation experience necessary to make well-informed risk-reward assessments about proposals. One CEO we spoke with said he actually avoided innovation discussions with the board because he believed that the directors “were too far from the market” to assess the true expected value of a particular innovation project.
Unproductive interactions between the board and management
Historically, companies have maintained a bright line between the board of directors and senior management. Under this governance model, management’s role evolved into “telling and selling” strategy and the board’s role became to ratify the senior team’s vision. Many of the directors we spoke with consider these practices to be outdated; however, navigating new roles for the board and management in setting innovation strategy is proving to be the toughest challenge of all.