By Parmi Natesan and Dr Prieur du Plessis
JOHANNESBURG - Boards are increasingly coming to recognise that innovation should be a regular agenda item, but actually what they should be doing about it remains somewhat opaque.
Traditionally, boards have tended to interpret their governance and guidance role as ultimately a somewhat conservative one, aimed more at steadying the ship than launching it into new ventures. But it’s not quite that simple. Boards are realising that innovation is becoming more important with each year that passes. It’s always been important, of course, but technology-driven change is now bewilderingly swift and can disrupt and even destroy markets.
In short, even the most conservative investor would agree that innovation is something that is intrinsic to a company’s long-term sustainability, and thus properly falls within the board’s remit. After all, if innovation has a key role to play in a company’s sustainability, then ensuring that it takes place effectively falls within the board’s duties. Boards need to become more forward-looking. In the words of Niccolo Machiavelli (The Prince, 1532): “Whosoever desires constant success must change his conduct with the times.”
The truth of this view has become brutally clear during the current Covid-19 emergency. Organisations able to innovate on the fly clearly did better than those who had to ramp up a more laborious response.
But if innovation is essential to survival and prosperity, then in the same breath one needs to acknowledge that it is also extremely risky. Innovation is often expensive, and many companies have actually got themselves into trouble by committing themselves to innovations that ultimately turned out to be destructive.
“A board should be sensitive to the culture in a business, because innovation success is a consequence of creating the culture in which it can happen,” says Izak Smit, the chief executive of the Professional Provident Society.
“Many elements come into play: recognition and reward, core values, vision, allowing slack and permission to play, acceptance of mistakes and encouragement of risk-taking within boundaries, patience, allowing an element of 'skunkworks’.
"On a continuum it needs to find the right balance between a risk-avoidance climate on the one extreme, and a too cavalier approach on the other.”
In other words, boards must combine a greater focus on innovation and forward thinking with their traditional role of risk management and governance.
They need to govern innovation.
We are reminded here of the revolutionary insight of the King IV Report on Corporate Governance for South Africa 2016 that risk and opportunity are often two sides of the same coin, and that boards need to adopt a much more sophisticated and nuanced approach to risk and the opportunities it may conceal.
Some challenges
So far, so logical. However, it must quickly be acknowledged that several challenges exist. The first of these is that innovation itself is difficult to define, and the board needs to spend some time discussing what innovation actually is. It’s particularly important to understand that innovation is not an end in itself but is undertaken to achieve a certain goal, and that there may be different innovation approaches appropriate to the outcome sought.
A second issue that needs to be ventilated is the fact that, as noted above, it would typically be the chief executive (CEO) who is the innovation leader. It’s thus important that boards consider this when setting out the criteria for new CEOs, and when measuring the performance of existing CEOs.
As is true with all the board’s functions, the board needs to be careful about striking the right balance between governing and managing or doing. In fact, one might argue that the need to govern innovation requires a slightly different relationship between board and management, with the board helping to shape the way that innovation interacts with the overall strategy.
As an aside, it’s worth noting here that an increased focus on innovation will make board diversity even more important. Different, independent viewpoints are of particular importance when it comes to identifying potential disruptors or the potential to disrupt competitors.
Perhaps the major challenge, though, is that there are precious few extant guidelines to help boards work out the details of how to achieve innovation governance. One of the few writers to have explored what innovation governance actually means is Jean-Philippe Deschamps. Professor Deschamps has proposed a list of innovation-governance responsibilities that include defining who the main players in innovation are and their responsibilities, establishing the values underpinning innovation, defining how innovation will be measured, making decisions on innovation budgets, and establishing management routines regarding communications and decisions.
The full list appears in a useful research paper by the Australian Institute of Company Directors titled “The role of the board in innovation”. The paper also makes the point, though, that these responsibilities need to be further refined by a more in-depth understanding of what innovation is and how it can be managed.
Jannie Durand, the chief executive of Remgro, suggests that innovation does not always need to be expensive, as it can also be incremental, such as new packaging or a new taste variant. “People often confuse innovation with technology breakthroughs, but innovation is sometimes just adapting your product to changing times, albeit a lot faster these days,” said Durand.
Innovation is clearly critical, and is likely to become more important as the connected world creates new risks and opportunities in the post-Covid environment. Forward-looking boards need to begin looking at what they mean by innovation, the role it should play in strategy and confront the real issues related to how they can govern a business process that depends on unpredictability to a large extent. Those that get it right will put their organisations at a distinct advantage.
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things,” said Machiavelli.
Parmi Natesan and Dr Prieur du Plessis are respectively chief executive and facilitator of the IoDSA; email: [email protected]
BUSINESS REPORT