Innovation is one of the hottest topics in global business today. Everyone and every company is striving to be “more innovative.” The role and focus of the board in innovation can vary dramatically with the nature of the company it oversees:
• In high-growth entrepreneurial companies, boards often view their role as guiding innovation. Typically they are seeking to enforce more accountability and discipline in a highly entrepreneurial company — without dampening the innovative spirit that lies at the heart of the corporate culture.
• In more-established companies, boards sometimes seek to stimulate greater innovation. While the board's choice of CEO has the most direct bearing on these efforts, many directors wonder what more they can do to reinforce and sustain a tone of greater innovation at the company they oversee.
It is not board's job to drive innovation. This is the job of management once the board has given the CEO that mandate. The role of the board is to facilitate innovation — by creating and supporting a corporate environment that fosters innovation, ensuring that the board is comprised of directors who can knowledgeably advise and question the company about the impact and risks of innovative strategies, and by developing a boardroom culture consistent with a tone of innovation.
Accountability vs. risk tolerance: A boardroom balancing act
When it comes to fostering an innovative corporate environment, the board plays a critical role in striking an appropriate balance between accountability and risk tolerance.
In entrepreneurial companies, one of the most productive ways for a board to inject greater accountability is often by working with the CEO to establish clear performance goals. The most meaningful goals address the “must-win battles” — what the company has to do in order to either stay alive or get to the next stage of growth. Once agreed upon, if the goals are not achieved the board needs to ask why: Is the company too scattered, with too many things on the go? Have resources been diverted? Should the strategy be modified? Should changes be made in executive roles or new management talent recruited?
In traditional companies, the issue is typically one of risk tolerance. Often, the board is more comfortable allowing the CEO to take a few “small bets” on innovative ideas or projects considered less risky because of their size and scope. Victories achieved with these smaller initiatives can then be used to “move the needle” on innovation within the larger organization — and with the board itself.
If something new or innovative is attempted that doesn't succeed, the reaction from the board is critical. Is it: “Fire those responsible” or “OK, you messed up, so try again”? Unless some tolerance for failure begins to permeate the culture, all those corporate screen-savers flashing the word “Innovate” will achieve little more than eye rolling. And those culture-forming decisions are often discussed — if not made — in the boardroom.
Quick fixes intended to stimulate innovation can sometimes have significant drawbacks. One board approved a new compensation scheme designed to provide financial incentives for “innovation”; 25% of the strategic goals involved investments in non-core business lines. In response, executives began proposing ideas to get the money and make their “quotas” — ideas that were neither well considered nor
financially viable.
Is board composition designed for innovation?
The board's role in both fostering and guiding innovation involves asking the right questions of management rather than dictating “what's to be done.” This can only be accomplished with the right team of directors at the board table.
Some key questions to ask about board composition are: Does the board have the capability to really advise the company as it makes changes to its strategy or business model? And to see and understand the key risks inherent in these sorts of changes? Is board composition sufficiently diverse that directors will be able to offer perspectives on a broad range of issues that will need to be addressed for these changes to be successful?
Traditional companies that aspire to be more innovative should consider the benefits of specifically recruiting one or two directors who have run or served on the boards of highly innovative companies and understand their issues and operating environments. These types of directors can bring an entirely different point of view and tangible experience to boardroom conversations about innovation. This background is even more crucial at the board
tables of high-growth companies; entrepreneurial CEOs and CFOs understand the
trajectory and issues that these companies will be grappling with and can make significant contributions in addressing them.
Does the board set a tone of innovation?
The board's choice of chief executive officer — and the tone which that leader sets at the top of the company — clearly has the most significant impact in creating a climate of innovation. But the board environment, itself, is also a factor in setting the “tone at the top,” one that is far too often ignored.
Innovative companies are typically characterized by vibrancy and passion. Yet many board meetings are so structured and formal that the boardroom climate appears disconnected from the rest of the organization: Directors occupy the same seats, the agenda goes relatively unchanged, and “death by PowerPoint” hangs in the air. Many boards describe their culture as “collegial” — and often that's said with pride. But very few innovative companies would describe their culture that way.
If fostering innovation is one of the board's objectives, a good place to begin is with the board itself. What changes would stimulate a more innovative and vibrant board culture — one that reflects the innovative tone the board wants to see throughout the company? Boards of highly innovative companies who are trying to instill accountability might consider some of their board practices through a similar lens. For example, are directors renominated year after year, even if their contributions are marginal? Entitlement and entrenchment are the natural enemies of innovation.
Every day, boards make decisions that can either cultivate or suppress innovation in the companies they govern. These range from major decisions, such as the choice of a more innovative or entrepreneurial chief executive officer, to smaller ones, such as tolerating repetitive board agendas largely focused on compliance issues. While the board's focus may differ with the nature of the company it governs, the tone and pace of the innovation in any organization truly begins in the boardroom.