what directors think about innovation february 2018

Are directors responsible for innovation?

In Australia, the duties and responsibilities of company directors are well defined. One word that doesn’t feature in core descriptions of director responsibilities is “innovation”. Similarly, “innovative” may not be a term associated with individual directors on many boards. What is the role of directors in ensuring companies are sufficiently innovative and how are Australian company directors performing?

Businesses are missing much-needed opportunities

AICD Chairman Elizabeth Proust AO FAICD writes: “innovation must come from the top” and “innovation-led growth is essential to our [national] prosperity”. She observes that Australia’s complex regulatory environment often forces directors to exercise excessive caution and to avoid those “well-judged risks essential to entrepreneurialism and innovation”.

Whether excessive regulation is the primary inhibitor of business innovation is debatable. Self-imposed corporate bureaucracy may also be a factor.

Irrespective, Australia’s strength in science and invention is not matched by a capability for business innovation and commercialisation. Most business “innovations” have a low degree of novelty, relying on current best practices. It indicates Australian business leaders are failing to seek or realise growth opportunities. Will Easton, Facebook managing director in Australia and NZ, suggests Australian boards are not prioritising innovation anywhere near as much as their global peers.

What types of innovation?

To some, innovation means startup IT businesses and “disruptive technologies that put people out of jobs”. Innovation is simply “new ideas applied”, growing businesses in big and small ways.

Process innovations

These help do existing jobs more efficiently. Product innovations provide goods and services with new or improved value to customers. Both types of innovation draw on a business’s core competencies and tend to be lower risk.

Business-model innovations

These leverage novel technologies and supply-chain arrangements to deliver value to customers in entirely new ways. Conventional businesses find these innovations more difficult to conceive and implement. The rewards can be enormous, but the risks in achieving these transformations are also higher. Of course, the consequences of being outplayed by a new or nimbler competitor are equally substantial. While process and product innovations are valuable to individual businesses, it’s business-model innovations that drive economic growth and deliver wider social benefits.

Have Australians been too lucky?

Is Australia’s innovation performance poor because business leaders are too comfortable? Have 25 years of economic growth made us complacent? Is there a sense that the business-as-usual maxim will sustain success? Giving attention to strategy and innovation is a choice. It’s a choice to reprioritise board agendas, to reshape how work is done with management, to review the company’s risk appetite and to reflect on attitudes to ambition, risk, failure and learning. So, why might directors be making the choice not to give attention to innovation?

Mindsets about innovation

How we deal with a situation is determined by how we think about it. How we think about it is determined by the cognitive rules (beliefs) we apply. Motivation also plays a role, in which self-interest features prominently. Rational cases for action in the interest of the company can be trumped by innate preferences for comfort and avoidance of fear.

Directors’ attitudes to innovation include:

  • “It’s not what investors want; they prefer secure short-term returns.”
  • “It is harmful, disrupting and damaging the existing business.”
  • “There are too many barriers for it to be fruitful.”
  • “I’m achieving personal success without it.”
  • “It won’t affect me during my tenure.”
  • “Innovation is a risk to me in a fiduciary, capability and reputational sense.”

The foundations for such mindsets are beliefs that are often hidden. Examples include:

  • “Our sector is stable. We don’t face big threats.”
  • “Only big-bang innovation is worthwhile.”
  • “Innovation requires lots of money over a long period of time.”
  • “We can’t afford or manage failure.”
  • “Being in the middle of the [competitor] pack is fine.”
  • “We’ll copy others and be a fast follower when the time comes.”

When these beliefs are coupled with the typical busyness of boards, it makes innovation easy to avoid and excuse. (Quote source: Innergise)

Testing assumptions

People will accept or dismiss some of the aforementioned belief structures. The critical point is that directors will often be largely unaware of these choice-determining beliefs. Exposing and testing assumptions is crucial because they are often cognitive barriers that hold us back. Exposing assumptions also exposes underlying fears — such as, “Do I actually have a view on what’s important versus what’s presented to me [by management]?” — that impede change. Which assumptions might your board harbour? And which, if shown to be invalid, will unlock the greatest opportunities for personal/organisational growth?