The Academy also asked me to contribute an article to their magazine Board View. The piece is below, providing a high-level view on the role of company directors in driving innovation.
I find it interesting how little attention seems to be paid explicitly to the role of directors in innovation. Many aspects of driving successful innovation are operational, so within the purview of management. However there are critically important roles for boards of directors to play in innovation, and innovation must be squarely on directors’ agenda.
How Directors Can Drive Innovative Organisations
As the pace of change in the business environment increases, driven by technological and social shifts, innovation is moving to the centre of value creation in organisations. Efficiency and effectiveness in well-established business processes and business models are of no value if those models are being destroyed by new products or new classes of competitors.
One of the most important trends is that competitive advantage in almost every domain is eroding at an increasing pace. Price leadership can readily be trumped by low-cost suppliers or innovative distribution models, advances in product and service quality can quickly be copied by fast-followers, and distinctive business models are undermined by changes in the business landscape.
The one residing competitive advantage is in the ability to innovate consistently. Organisations will never again be able to rest on their laurels. Whether companies are already industry leaders or are striving to grow their market presence, they must be able to reliably generate new approaches to their business.
Becoming an innovative organisation is an ongoing journey. Those companies that have a long history and legacy, for example formerly state-owned firms, often require many shifts in culture, process and structure to become consistently creative. Yet even younger organisations born out of ground-breaking technologies must focus on keeping dynamic as their processes become established and bureaucracies grow.
Five domains of innovation
Organisational innovation is multi-faceted. There are five primary domains of innovation that business leaders need to understand and focus on:
- Product innovation. Companies must consistently generate new products or services, and improvements on their existing products. Product innovation should be and often is an existing capability, yet improving at generating new and attractive market offerings is a major driver of shareholder value.
- Process innovation. The business processes that underpin all organisations are often long-established. Continuous incremental improvement of processes should already be built into organisational functions. However more significant reconfigurations of business processes can lead to major efficiencies or potentially significant new opportunities.
- Marketing innovation. In a world in which attention is increasingly scarce and messages are flowing in novel ways, innovative approaches to attract new customers and increase revenue from existing customers are critical.
- Organisational innovation. As communication technologies emerge, new demands on organisations develop, and more-demanding generations enter the workforce, there are possibilities to restructure organisations to be more effective. These shifts can not only facilitate efficiently achieving business outcomes, but also in attracting the most talented.
- Strategy innovation. As the landscape of value creation is reconfigured, existing strategies and business models are almost invariably being eroded, requiring renewal or sometimes replacement. Strategy innovation is perhaps the most central – and most important – aspect of innovation for today’s organisations.
The role of directors in driving innovation
Directors play a critical role in guiding and supporting innovation in the companies they oversee. Clearly the hands-on responsibility in driving innovation in organisations falls to the CEO and executive team, in turn delegating the hard work required to the appropriate managers. However there are seven domains in which directors hold overt responsibility for innovation:
- Engaging with innovation strategy. The CEO and executive team must not only be able to articulate an over-arching strategy for the organisation, but also to define the role of the different types of innovation in that strategy, and how these initiatives will be implemented. The board needs to engage with, challenge and stimulate the CEO in defining and agreeing on an appropriate innovation strategy for the company.
- Driving strategy innovation. Directors need to be involved in establishing a well-understood approach to strategy and business model innovation. Both the board of directors and the executive team need to recognise that any existing business model will have a limited life. They must together develop clarity on how they will generate new strategies that will drive continued business growth in a changing world.
- Hiring and supervising key management. Since the CEO and executive team hold primary responsibility for innovation, the board of directors must ensure that the CEO has the relevant capabilities and mindset. Innovation capabilities must be a primary factor in assessing potential CEO candidates, and considering whether top executives remain the right people for their roles in a changing business environment. Directors need to be consistent and clear with CEOs in identifying innovation as a dominant consideration in their performance assessments.
- Overseeing innovation risk. Many innovation initiatives are built in to how the business is currently run, with relatively little concomitant risk. However larger innovation projects can entail direct financial risk, which may need to be assessed with a different eye to usual projects. Innovation may also entail other risks including strategic, legal and reputational risks. As noted below regarding governance, it is important to balance potential benefits with any assessment of possible risks.
- Assessing innovation effectiveness. Among the many performance indicators that the board needs to monitor are measures of innovation. The appropriate indicators will depend on the organisation and its industry, but should include leading indicators of innovation where possible, as well as those that demonstrate improvements in innovation effectiveness.
- Supporting a culture of innovation. In many ways the primary driver of innovation in an organisation is culture, where staff and executives feel the motivation and opportunity to try new things in an effort to build the organisation. In particular, innovation always entails risk, and a culture of innovation must accept and even encourage considered risk-taking. While a culture of innovation must be demonstrated from the top by the CEO and executive team, in turn the board of directors must enable, support and provide a lead in the attitudes and mindset from which effective innovation is born.
- Establishing governance that supports innovation. Governance – in establishing structures and processes that define accountability and mitigate risk – is the domain of the board of directors. Yet the inherent risk-aversion of traditional corporate governance structures has a real potential to quash innovation, in turn possibly risking the very future of the organisation. It is the responsibility of the board to establish governance structures that balance risk and potential benefits, and also consider the very high organisational risk of not undertaking innovation, even if contained risks are incurred in that process.
It is safe to say that well-established innovation capabilities will be central to the sustained success of any organisation in the future. It is the responsibility of directors to make innovation a corner-stone of the oversight they provide their organisations. More than ever, they have the opportunity to use their experience and accumulated insights to drive innovation in their companies, making this central to their organisations’ growth and success.