Board Oversight of R&D
Whether you call it research and development (R&D), intellectual property (IP) or development and operations (DevOps), creating new products and processes represent both big risks and potentially big rewards. The board needs to know what’s happening and when.
Gail Lione, a board member at Badger Meter Inc. and senior counsel at Dentons, teaches a course on intellectual property at Georgetown University Law Center.
R&D investment is critical for long-term value creation, and boards need to understand it. But boards also need to understand and have oversight over how that investment fits into the IP strategy of the company and drives the overall corporate strategy.
She cites In Re Clovis Oncology, Inc. Derivative Litigation, a pharmaceutical development suit. The court noted the expertise and experience on the board but questioned whether the directors had exercised the necessary oversight.
In the company’s eagerness to get a lung cancer treatment to market before a competitor, there were discrepancies in how clinical results were presented. The board may have been unaware of or may have ignored the reports. Either way, the Delaware Chancery Court held that there was enough evidence to move ahead with litigation over whether directors breached their fiduciary duty.
“Boards not only need to ensure that compliance plans are in place, but also they need to monitor that compliance,” Lione says.
But there is a balance needed. Boards need to know enough about the company’s R&D investments to perform oversight, but also need to avoid getting into the day-to-day management of them, she says.
One approach she used when she served as executive vice president, general counsel, secretary and chief compliance officer at Harley-Davidson was the development of a patent strategy council that spanned departments, including the chief styling officer and the company’s top three engineers. The council met quarterly to set IP strategy which became part of the overall corporate strategy and product plan which the board approved.
Another role of the board is to streamline R&D with director expertise, says Merline Saintil, a director for several tech firms.
“I firmly believe in the power of having a digital director,” Saintil says. “I think this is about looking at a board’s composition and board matrix.
“Not many in the Fortune 500 have technology committees. Often, I see DevOps in the risk committee. But there have to be full board-level conversations as well.”
Saintil considers this a time of “hypergrowth.” The pandemic accelerated that growth and directors should lean into innovation.
Even in a time of hypergrowth, not all development will be an overnight success. Paul DeNicola, a principal in PwC’s Governance Insights Center, says part of board strategy is the “tension between the long-term results versus the short-term pressure.”
To play a long game, the board may want to structure CEO compensation that could lead to R&D results.
“It might take 10 years for something to really develop,” DeNicola says. “You may want to set up long-term compensation in that case and even factor in how succession will affect R&D.”