Boards, innovation and disruption

Disruption and innovation are key strategic priorities for today’s businesses, and boards must be equipped to deal with the challenges. KPMG Innovate partner James Mabbott explains how they should prepare.

In recent years due to lower barriers to entry, increased customer mobility, pervasive technology platforms and globalisation of business we are seeing innovation and disruption featuring at the top of strategic priorities for boards and executives alike.

Yet most boards are ill-equipped to deal with a world in which the new normal appears to be one of no normal as industries and long held business paradigms face rapidly changing landscapes. Where today’s weak signals of change are tomorrow’s industry giants and competition comes from both within and outside your industry.

This increases the pressure on boards to move quickly to ensure they provide appropriate challenge, direction and governance to executive teams. And they need to do so whilst managing potentially complex commercial, financial and reputational risk issues against long term share-holder interests. Something that upstart challengers don’t have to contend with. Existing companies have customers, revenue, and profit – they also have legacy systems, processes and cost structures. So the modern director faces a particularly challenging landscape.

In order to make sure the board is best equipped to support an organisation to understand and respond to disruption and build innovation into its core there are a number steps directors and executive teams can undertake.

1. Get educated

Understanding disruption and innovation is two-fold. First developing a familiarity with the tools, techniques and methodologies of innovators whether from within or outside your industry so as to understand how your own approaches measure up. Second seek to identify and understand the emergent players in your industry that aim to disrupt your business model so as to identify new business models, acquisition opportunities or threats to be managed.

2. Make a commitment

The Board with the executive needs to define and set the agenda in terms of what innovation means to the organisation (e.g. improving business efficiencies, upgrading or developing new products/services, developing new approaches to market or even new markets) and why the organisation needs to innovate (e.g. to increase revenue, minimise cost, adapt to change in market conditions, keeping up with competitors/taking market share from competitors). Clear direction and commitment from the board creates permission and opportunity for innovation.

3. Examine your culture

Innovation at its heart in an organisation is about culture and culture in simple terms is the sum of the behaviours in an organisation. The way you treat your people, the way they treat each other and the way you interact with customers. To build an innovation culture requires looking across and within key organisational structures: strategy, risk appetite, remuneration, and investment. As a board you need to ask how does innovation and disruption align to these key organisational structures? Is our operating model conducive to, or, does it prohibit our ability to innovate? How have we defined innovation for our business?

4. Be transparent

Innovation requires transparency. The board should have visibility of the innovation pipeline and processes should exist within the organisation to allow the sharing, development and investment in innovative and creative ideas.

For each of these areas the board should be asking key questions:

Strategy

• Does innovation and disruption feature in our business strategy?
• What time horizon does our strategy cover?
• How have we defined innovation? And where do we want to innovate?

Remuneration

• How are executives rewarded for taking risk? Are outcomes and consequences in line with the strategic agenda?
• Over what time horizon are incentives paid?
• Have we set explicit innovation goals and do we reward them?

Risk appetite

• Does our risk appetite support innovation activities?
• What risk behaviours do we want and how do these align with our desired culture?

Investment

• Have we allocated funding to innovation projects?
• Do we have an innovation investment pipeline that is reviewed at board level?
• What expectations have been set with shareholders on the balance between returns and investment in future growth and innovation?

Transparency

• Have we communicated our innovation agenda? Are our expectations clear?
• Do we have processes, tools and systems in place to allow for the transparent and easy sharing of ideas?

Processes

• Do we have an innovation process?
• Do our processes allow for easy engagement with innovative businesses? Could we procure from a start-up?

In addition to the above questions boards need to also consider the make-up and composition of committees and board members. Are the right skills present at the board table, do our advisors and management teams have the right experience and capability and do we provide adequate time, energy and attention to discussing and acting on the challenges and opportunities that innovation and disruption present?

Ultimately the role of the board and executive is to provide leadership, to give permission to the broader organisation and create space for innovation to occur. To set the tone and provide freedom within boundaries because so much of the innovation you seek will come up from below and it is your duty to provide the opportunity for this to happen.

For more on KPMG Innovate

James spoke on the panel 'How to foster a culture of innovation’ at the 2017 Australian Governance Summit.