The primary responsibility of the board is the long-term sustainability of the organisation in achieving its objectives. It is a truism that those organisations that remain the same in a changing world will inevitably be left behind. Innovation — literally, the making of the new — is essential not just for survival, but for any sustainable success.
Driving continual organisational renewal is challenging for directors who are also responsible for overseeing risk and compliance because all innovation entails risk. The biggest risk in a changing world is in not taking risks and fast becoming irrelevant. Innovation is hardly a new issue. Yet effective boards often need to explicitly support and drive organisational innovation. There are seven domains that boards can address to become highly effective at innovation.
- Framing innovation
Innovation can be many things. Boards need to understand and frame the kinds of innovation relevant to the organisation and decide on their priorities. Useful frameworks for innovation are publicly available.
A good exercise for any board is to select the frameworks most relevant for determining and communicating innovation priorities. Simple frameworks such as Nagji’s Innovation Ambition Matrix, McKinsey’s Three Horizons model, or Doblin’s 10 types of innovation can clarify priorities and roles for innovation.
- Clarifying risk appetites
Boards need a reference point for their discussions on the risks they are willing to take to create long-term value, and how they may be changing in response to an evolving business environment.
While most boards of significant organisations have a risk appetite statement (RAS) in place, this is often not specific enough to inform decision-making on innovation initiatives such as product or market extension, or business model shifts — or may need to be updated to address changed conditions. In many cases, the RAS clearly defines risks the organisation will not take, but doesn’t give clear insight into the degree of risk the organisation has the appetite to take.
The board of Victorian utility South East Water, which has won global awards for its innovation, reworked its RAS to be clear on where there is zero appetite for risk (water quality) and uses a sliding scale to indicate risk appetite for specific categories of ventures and innovation. This delegates authority risk-taking so many innovation initiatives do not require explicit board approval as long as they fit the frame.
Oxfam Australia’s RAS specifically says that it has a “high risk appetite for innovation” which helps to frame board decisions.
- Defining innovation strategy
Every significant organisation should have clarity on the role of innovation in achieving its purpose, and how it will support ongoing renewal. Many elements of an effective innovation strategy live at management level. However, important aspects require board input — and the overall innovation strategy should be approved by the board.
Key elements of a useful innovation strategy include the role of innovation in the organisation’s overall strategy, prioritisation of innovation domains (product/service, process, business model), processes to be established to support innovation including idea generation and venture development, structures such as roles and funding approval mechanisms, and how innovation initiatives will be communicated internally and externally. In particular, boards need to consider what measures of innovation will help them assess organisational health.
- Supporting a culture of innovation
The banking Royal Commission underlined the responsibility of the board for organisational culture. The challenge is to support appropriate risk-taking and experimentation that drives value creation, while drawing a clear line on regulatory and reputation risks.
One key way a board signals its attitude to management and staff is in its response to the inevitable failures associated with innovation. If failures are career-destroying, there will be no innovation. Boards need to be seen to support failure if it was approached constructively and useful lessons were learned. And executive remuneration models must support innovation that drives long-term value, potentially at some expense to short-term results.
- Board/executive relationship
One of the enduring discussions on the role of boards is where responsibility for strategy resides. Strategy advisor Roger Martin controversially suggested in the Harvard Business Review that if a board has to develop strategy on its own, then it probably needs to sack the CEO.
Addressing how the organisation will sustainably prosper in a changing world must be central to strategy. Shifts in technology, industry structure and consumer behaviour mean no business model can succeed unchanged over the long term. Strategy must be co-created by the executive and board. Rather than receiving strategy as fully developed for approval or questioning, boards should ask for the thinking behind the strategy. It is also the board’s responsibility to drive a long-term frame for strategy.
Sandra Davey and Alan Kirkland, chair and CEO respectively of Choice, went on innovation-focused executive development programs at Massachusetts Institute of Technology. This helped give them aligned frames and language around innovation and provided a foundation for establishing a shared vision of the role of innovation between board and management. The board of US insurer Allstate holds two board strategy days annually: one to explore strategic issues with management, and a separate day to make strategic decisions.
- Board structure
Among the skills that must be represented on any board is an understanding of not just technology and its impact on industry disruption, but also experience driving innovation. While some boards have added younger, technology savvy directors in recent years, that is rarely sufficient given the importance and complexity of the issues.
Sometimes, fuller renewal is required. In the face of substantial change in the business environment and a need to build and enact a long-term strategy, the owners of the Port of Newcastle renewed the board, appointing innovation expert Roy Green as chair to shift the direction of the organisation.
An increasing number of boards are establishing “technology and innovation” or “strategy and innovation” committees to explicitly address innovation issues, as they often require more attention than can be spared at full board level. It can be useful to have a standing agenda item on innovation or other explicitly long-term issues.
- Broadening thinking
Individually, directors should keep current with developments in their own industries and fields of expertise, and also in technological shifts and their implications. Learning is best done as a board, to develop common language and understanding of pertinent issues.
Bringing in experts on specific issues under discussion and on very broad topics, including future perspectives, technology developments and global industry disruption, can provoke new thinking and informed strategic discussions. It is increasingly common for boards to go together on “learning journeys” to Silicon Valley or other centres where relevant examples and insights challenge and broaden current thinking. Directors can also learn by taking roles on startups, bringing their experience and gaining real-world insights on the nature of high-speed innovation outside of the corporate world.