The American national anthem is the only one that begins with a question: “Oh, say can you see…?” Other anthems are more assertive and less enquiring. For example, “La Marseillaise” is a call to arms, without any questions asked. The American anthem also ends with a question: “Oh say does that star-spangled banner yet wave?”
Since its founding, America has been an experiment, which by its very nature poses a question. Today, that question asks whether America can maintain its political, moral and economic leadership. Boards of directors have a significant role to play in answering this question. They are increasingly taking positions on critical ESG issues, notably climate change, social justice, and equity and inclusion.
Boards are going well beyond mere virtue signaling. To get out in front of these issues, they are leaning in and getting “front-footed” by taking proactive positions and making meaningful commitments, as BlackRock’s Larry Fink suggests. To animate and advance corporate initiatives toward sustainability and social responsibility, boards are incorporating ESG metrics into bonus plans using measures and standards such as greenhouse gas emissions, pay equity ratios and diversity indices.
However, ESG metrics are largely inward looking, gauging whether a company is being responsible for sustainable growth and for the fair and equitable provision of opportunities and rewards. There should also be metrics that are outward facing, assessing the company’s ability to grow and innovate, including its capability to develop new expertise and adopt new technologies. Directors should inquire about whether the company is open to new ways of doing business, which often would require significant changes in its business model. Is the company on the cusp of massive changes stemming from tectonic market shifts, competitive onslaughts and disruptive technologies? Does the company foster the necessary agility, resilience and creativity to meet these changes in market dynamics and technological advancements? How ready is the company for its future?
To get answers to these questions, directors should start out asking “What’s new?” inquiring about groundbreaking technologies, innovative products and processes, next-generation creations, new ways to go to market, productivity breakthroughs and reimagined businesses. In particular, directors should be inquiring about the size, focus and potential impact of the company’s R&D budget, challenging management assumptions regarding both its home-grown and outsourced opportunities for technological advancement. Is the company atop its industry leader board? Best in class? State of the art? Sufficient time needs to be allocated to board agendas so directors can explore how the company is encouraging innovation and fostering creativity.
Over the past few decades, large U.S. corporations have reduced their annual R&D spend from 1.7% to 0.7% of revenues. Many companies have come to rely more on outsourcing their R&D, as evidenced by Big Pharma securing their scientific advancement by acquiring or allying with small biotech companies such as Pfizer’s partnership with BioNTech. For many companies, outsourcing may be a better approach than investing in large, inhouse R&D departments such as the fabled Bell Labs and Xerox Parc.
As reported in The Economist, the U.S.’s R&D spend of 2.8% of GDP places it somewhere in the middle of developed nations, behind South Korea (4.5%) and Germany (3.1%) but ahead of Britain (1.7%) and the OECD average (2.3%). The U.S. government has made significant investments in basic research, notably through NIH, NCI, NSF, DOD, DOE and DARPA. The latter was established in response to Sputnik, which in 1957 orbited the earth every 68 minutes, reminding us with its harrowing “beep” that America was falling behind the Soviet Union in science and technology. A decade later NASA placed a man on the moon, but for the past half-century we have not returned and now have ceded much of human space exploration to private companies such as SpaceX. Last year’s landing of a Chinese spacecraft on the far side of the moon, along with its recent ascendency in other scientific frontiers, are evidence of the Chinese technological juggernaut, signaling this generation’s Sputnik moment.
In the creation and advancement of innovation, the U.S. government plays a vital role in setting overall goals and developing overarching policies. In his new book, How to Avoid a Climate Disaster, Bill Gates underscores the federal government’s role in managing the direction and pace of R&D in terms of research grants, loan programs, tax and other financial incentives, laboratory facilities, pilot programs and public-private partnerships.
The U.S. needs to continue to advance its competitive positions in critical technologies including clean renewable energy, carbon capture and storage, batteries, robotics, advanced materials, gene-editing, next-generation vaccines and therapeutics, artificial intelligence and quantum computing. In its $2 trillion infrastructure bill, the Biden administration is addressing many of these needs. However, the government’s role must be focused. We don’t need another Manhattan Project or another “moonshot mission.” As we have learned over the past half-century, promoting innovation can quickly turn into an exercise of trying to pick winners or, as is more often the case, losers such as the SST, Star War defenses and Solyndra.
Government should limit its involvement to funding longer-term high-risk, high-reward research by supporting top scientists and top universities, building public-private partnerships like those that brought forward COVID vaccines, implementing welcoming immigration policies to attract the best and the brightest to our shores, bolstering defenses against cyberattacks including offering cyber risk insurance, providing stronger antitrust enforcement and enacting taxation and regulation policies that encourage innovation.
Though the federal government plays a vital role in basic research, much of the responsibility for R&D, particularly “D,” falls upon U.S. corporations. Directors need to understand their company’s capacity to undertake innovation, which starts with an assessment of the nature and scope of its creative people, notably scientists and engineers in and around the company including on the board, who have the expertise and background to help identify, evaluate and adopt technological opportunities. Without these capabilities and skills, companies will fail to recognize and benefit from scientific breakthroughs and technological advancements.
A company’s longer-term focus, strategies and initiatives are often impeded by shareholder activists who seek near-term profits, by CEOs with limited time horizons given average tenure of just five years, and by compensation programs with so-called long-term incentive plans whose three-year rolling cycles provide annual payouts. Moreover, as Norm Augustine underscores in his article in this issue of Directors & Boards, the holding period of many investors has contracted from several years to several months, resulting in short-term time horizons. To overcome these impediments, boards need to “keep their eyes forward,” as the Directors and Boards headline trumpeted on the cover of its First Quarter 2021 issue. Since directors often serve six- to nine-year terms, they can and should take a longer view, which can be lifesaving for the company by being game-changing for its strategic direction.
When evaluating a company’s commitment to “the common good,” directors should assess not only its ESG initiatives, but also its commitment to innovation, notably its R&D pipeline, both in-house and outsourced. In the global competition among nations, scientific Excellence and technological Supremacy determines economic Greatness. This “ESG” focus will enable a board to help secure a successful future both for the company and for our nation. Like ESG metrics that gauge how virtuous a company is, these “ESG” metrics can gauge how innovative it can be. People like to work for, buy from and invest in companies that are not only virtuous but also innovative. And like the longer-term metrics being devised to gauge environmental impact, boards should incorporate into compensation plans some longer-term metrics that gauge the company’s readiness for technological breakthroughs, capacity for innovation, and willingness for risk-taking.
If corporate America falters in its commitment to innovate, other countries, in particular China, will leap ahead, becoming an existential threat to our health, safety and prosperity. America must maintain its strategic advantage and competitive edge. Boards of directors can help ensure the American experiment survives by fostering a corporate culture of innovation, creativity and risk-taking, which requires making the necessary investments in scientific research and technological development.