As directors look ahead to help their companies identify and navigate disruptive forces, innovation will be a critical capability.
Continuing high levels of uncertainty, potentially game-changing advances in technology, the adoption of non-traditional business models, and other external forces, such as changing demographics and geopolitical pressures, all are transforming the business environment. As directors look ahead to help their companies identify and navigate disruptive forces, innovation will be a critical capability. During an August 11 webcast as part of the NACD’s Directorship 2020 initiative, panelists discussed questions that directors ought to ask and trends to watch as they consider whether the right level of information and discussion about innovation is happening in the boardroom.
“Remaining constant is not even remotely an option,” said moderator Susan Angele, Senior Advisor with KPMG’s Board Leadership Center. “Companies that innovate successfully have a strong competitive advantage. You can become a disruptor, you can respond to disruption, you can do a little bit of both, or you can be left behind.”
According to KPMG’s latest global CEO Survey, while innovation is viewed as a top strategic priority, only 25 percent of CEOs polled said innovation is embedded in everything they do.
Status quo risk
Companies that are strong leaders in their core business are often the ones that are left behind. “The world has changed,” said Adam Hartung, managing partner with consultancy Spark Partners. “Changes in the market often make that unique element obsolete. If you only focus on one thing and the market changes, you can find yourself in big trouble.”
Focusing your strategy on a strong, successful core business while remaining unaware of key trends and shifts happening in the marketplace exposes companies to status quo risk, said Hartung, giving the example of encyclopedia companies, which continued to focus on producing books even as the market shifted toward accessing information online. “Status quo risk put them out of business,” he said. Understanding status quo risk and making the decision to change while the business is still successful is difficult but can be rewarding. “If you are aware of and understand key trends and see market shifts, it can be very valuable,” he noted. Sonya Sepabahn, a board member at Genomenon and Cooper Standard, referenced current trends—the sharing economy, crowdsourcing, internet of things, mobile, virtual reality and artificial intelligence—and commented that they have potential implications for all companies, no matter how traditional their existing industry may be.
Innovation on the board agenda
To allow more time to discuss innovation, boards should spend less time talking about routine execution of existing plans. “Rather than talking about whether the company is doing things right, the board’s time should be spent discussing whether the company is doing the right things,” said Hartung. “Talking about how the company runs on a regular basis is like driving the bus looking in the rearview mirror,” he said. “Assuming the current business is working well, boards should focus more on whether the company is putting its resources, management talent, and money into the things it needs to do to be successful in the future.” That means leaving time on the agenda to talk about trends and their implications for the business, and asking “will what we’ve done in the past produce the same returns in the next year and two years or three years out?” said Hartung.
Equally as important is ensuring that the company is tracking appropriate metrics around innovation. A poll taken during the webcast showed that while many directors say their boards track metrics such as revenue from new products, resources allocated to new products and/or customers, and revenue from new business models, few track resources allocated to white space—and more than 20 percent reported tracking none of those metrics. “More focus needs to be allocated to white space, because the true disruptions actually tend to come from there,” said Sepahban.
While choosing the right metrics around innovation is a difficult task, and the answers will differ from company to company, “it’s absolutely necessary,” said Sepahban. And whatever metrics are chosen should apply equally to those with profit and loss responsibilities—not just to a small group of people on the management team. Angele noted that communication about the innovation metrics the company has chosen is also important—especially for public companies. “Make sure that investors understand what you’re doing and why, particularly if any of those metrics aren’t considered standard,” she said.
Questions directors should ask
Sepahban wrapped up the discussion with five questions that all boards should ask management with respect to innovation:
The first two questions help ensure that the board is looking at the market and competitors from a broad enough perspective. The next two questions focus on the approach the board takes to encourage, enable, and implement the practices, processes and environment necessary for innovation. The last question about engaging startups highlights the importance of external engagement. “No matter how great the board or company, the ability to be agile and see trends coming is by definition limited unless you’re engaged externally,” said Sepahban.
The panelists agreed that having the right mix of directors in the boardroom to encourage innovation is key. “Diversity in the boardroom—not just of gender and race, but also diversity of thinking—is more important than ever to get new ways of looking at the business and new ways of thinking about trends in the external market and applying them to what’s going on in the company,” said Hartung.
Innovation ought to be a part of every board discussion. “It’s not something you do once a year, or even just at regular intervals like once a quarter. It’s an ongoing board conversation that needs to occur,” Sepabahn said.
Finally, boards should not underestimate the influence they exercise simply by asking questions. “If management is not focused on it, the board should keep pushing and asking questions,” said Angele. “At some point, innovation will come onto the agenda. The board has the power to make that happen.”