Corporate directors and executives alike recognize that today’s pace of change continues to accelerate and that firms need to innovate to stay ahead. But are boards doing enough to support innovation, as they should? We conducted a survey of over 5,000 board members from around the world to find out.
We found that, overall, innovation does not rank as a top strategic challenge for the majority of boards. Although directors in certain industries are more aware of the threat of disruption, the widespread lack of board-level engagement in innovation processes could be a major blind spot and a potential liability.
Setting Priorities
We found that concerns about innovation fall behind other issues for most directors. Fewer than one-third (30%) of respondents to our survey see innovation as one of the top three challenges their company faces in achieving its strategic objectives, and just 21% think that technology trends are a major strategic challenge. Innovation ranks fifth, after more-conventional concerns such as attracting and retaining top talent and the regulatory environment.
Boards’ abilities to foster innovation clearly fall short when compared with their other activities. When we asked directors about the effectiveness of their board’s processes for supporting innovation, 42% rated their processes as above average or excellent. In contrast, 70% of respondents think their boards have effective processes for staying current on the company; 69% for compliance; 66% for financial planning; and 55% for risk management — although we should note that managing risks is a crucial consideration when pursuing innovation. Still, it’s telling that board members rate their boards better on risk management than on innovation.
When we examined responses by industry, we found that directors in the health care and IT and telecom industries were most likely to consider innovation a top strategic challenge for their firms. These firms also had higher-rated processes for innovation. This isn’t all that surprising given the level of innovation activity in these sectors, but directors operating in similarly disrupted sectors should take note. Only 13% of directors in the energy and utilities industry consider innovation to be a major strategic challenge, but the swift growth of renewable energy companies and such developments as the use of drones for monitoring oil and gas production suggest that no industry is impervious to the forces of innovation.
We also found that a focus on innovation tends to go hand in hand with longer-term time horizons. Companies that are organized around creating and enhancing value over the long term were more likely to have boards that prioritize innovation, as compared with companies that are primarily focused on achieving short-term results. Laying the foundation for innovation requires a forward-looking mindset throughout the firm and the board.
The effectiveness of board processes for supporting innovation is also positively correlated with overall board performance. In other words, the boards with strong innovation processes tend to be the ones that are performing well on all fronts.
Director Recruitment and Skills
In light of boards’ lackluster performance on innovation, are they proactively taking steps to address their weaknesses? Recruiting directors with technological expertise is one avenue through which boards can boost their innovative capabilities. When we asked directors which three areas of expertise they prioritized when filling their most recent open board seat, just 13% highlighted tech expertise. Instead, boards typically looked for expertise in their firms’ industry (51%), strategy (34%), and financials (30%).
Again, we found differences among industries. Just over one-fifth (22%) of boards operating in the IT and telecom industry sought tech expertise when filling their most recent board seat, higher than in any other industry. We also observed that boards of larger companies were more likely to seek new directors with technological expertise. When we drilled down, we found that boards with more members and boards that were more effective overall were also more likely to prioritize tech expertise, suggesting that boards might need to meet a certain size and performance threshold before they start branching into skills such as technology. In the words of one director, there is an “imbalance between the need to focus on governance and compliance, while the importance of innovation and disruptive influences are noted but less focused on.”When we asked directors what they found most challenging in their role as a director, one-third (33%) reported that they struggled with keeping on top of new technologies. This proportion was similar for men (34%) and women (31%), but was much higher for older directors (39%) than for younger directors (27%). Fostering diversity in demographics is one pathway boards can use to ensure that a wide range of viewpoints and areas of expertise is represented.
How Boards Can Foster Innovation
To address the knowledge gaps and get up to speed on new initiatives within the firm, directors suggest organizing site visits and tours, participating in innovation sessions and workshops within the firm, and “doing their homework” on industry trends.
Directors should also take stock of how timea is spent at board meetings and reallocate discussion time as needed. As one director noted, “We spend a lot of time on operational strategy — growth, acquisitions, etc. — [and] not much on risk, people, innovation.” Periodic reviews of board agendas can help to carve out and protect time for discussions around innovation.
Boards also need to have honest and thorough discussions about the board’s weaknesses and needs when formulating criteria for new directors. Some might even want to consider increasing their membership to ensure that they have the skills they need as a team and that they represent a wide enough array of perspectives.
To better understand the competitive landscape, directors suggested engaging with management. They should ask such questions as, “In what areas and where will technology innovation impact our business?”; “How are you incorporating the latest customer and technology trends in your innovation strategy?”; and “How can this company devote adequate resources to innovation in its product offerings in light of debt and capital requirements?”
Finally, boards should always be checking that they have the right CEO in charge. A CEO who focuses on short-term results at the expense of creating long-term value might not be making the right decisions and investments to promote vital innovation within the firm.
Source: Harvard Business Review, August 28, 2018.
