Topics:   Corporate Governance,Risk Management,Strategy

Topics:   Corporate Governance,Risk Management,Strategy

June 18, 2019

Three Approaches for Encouraging Innovation

June 18, 2019

Can a commitment to innovation survive in a company struggling with corporate culture?

This was the question tackled at Grant Thornton’s recent roundtable discussion, led by its Midwest Region Audit Practice Leader and board member Janet Malzone and BPI Group US’s president and CEO Susan Gallagher, that shed light on the current shifts happening in corporate governance and how to oversee these changes without stifling creativity.

While much of the discussion focused on the risks associated with innovation, the event also drew attention to the idea that directors should expand their focus beyond keeping risk at bay if they wish for their companies to continuously grow. Many directors who attended the event were certainly concerned about what they could do to encourage innovation to bloom from the boardroom—and plenty of insights on how best to foster opportunities for ingenuity were shared.

Approach One: Through Culture and Talent

Christopher Y. Clark, publisher and director of partner relations at NACD, was quick to note that “somehow, [culture] always kind of sneaks back into these major topics.” A few other directors explained this succinctly.

“If you don’t get the culture right,” one director said, “you’re not going to get the talent.”

“And if you don’t get the talent—” another director started. “Then you don’t exist,” the third finished.

While these directors’ sentiment points directly to one of the risks mentioned in the previous roundtable blog—obsolescence—it also unleashes an opposite idea: that a certain corporate culture allows innovation to grow. A workplace culture that fosters and welcomes new ideas from all levels of the organization will, by definition, uncover more possible ways to innovate.

Joyce Cacho, president of Adinura Advisory Services, gave insight into how a workplace culture of innovation might be influenced by and be used to attract newer generations of employees—digital natives—and thus encourage the development and scaling of original ideas.

Underpinning the hyper-connectivity of future employee talent is the pipeline’s shift to demanding that their social and environmental priorities be part of their lives wherever they spend their time, whether as an employee, as a volunteer, or socially. This is a notable break from employees of past eras. Today’s low unemployment rate in the US brings a marked increase in younger employees choosing work opportunities in for-profit enterprises, where innovating delivers income rewards and addresses their environmental and social concerns.

Such engaged employees have the ability to spur innovation—surrounding sustainability, diversity, technology, and more—at the highest levels of an organization by wanting to intersect their private and work-related goals. When employees are given the chance to voice their opinions to executives, who then grow and report on the success of those ideas, directors have the opportunity to encourage a thriving culture of innovation. Such employees are also drawn in the first place to businesses that welcome change and want to listen.

Approach Two: Through Management, the Board, and Effective Challenge

Scott Clements, president and CEO of Onespan, expressed his hope to “demystify innovation” by boiling it down to this uncomplicated fact: “There’s a job to be done, and you’ve identified a new or different way to do that job better.” Clements also hopes to see more directors mentoring management executives in the future to both broaden the perspectives of management and deepen directors’ understanding of the business. It is the board’s job to communicate clearly and collaborate with the C-suite in order to cultivate deeper comprehension and innovation.

Along a similar vein, Frank Grossman, president of Chilton Capital Advisors, reported that one of the boards on which he serves encourages its senior executives to serve on other boards, in order for them to gain insights into how other companies approach corporate governance. Developing best practices is not a static process; it requires continuous investment by the management team and a willingness to be open to new ideas and approaches.

Another great method for setting a tone of innovation from the top? According to Gallagher, directors should advocate for management to expand their own skill and knowledge sets while also prompting them to act by questioning them to think in new ways. Today, if they are doing things the way they have always done them, they are most likely falling behind.

While collaborating with management to oversee an innovative culture, directors and executives also need to agree on how best to weigh the merits of and pursue innovative opportunities so that the company can move forward. Effective challenge—that is, analyzing risks objectively through independent board members and other experts to find weaknesses, constraints, and presumptions, and to eventually improve upon risk management strategies—is part of this process of collaboration.

“[U]ltimately the board has to be aligned with the management team about the level of risk being taken. How much of the firm’s resources and assets are being deployed around a particular strategy?” Clements questioned. “A fundamental disconnect between the board and management about the level of risk can really damage the board’s trust in management.”

Approach Three: Through Open Innovation

Cacho considered that “maybe innovation is about examining increasing budgets for research and development, or for mergers and acquisitions, or for both.”

Clements tied this to “open innovation,” in which a business sources innovative ideas and knowledge from outside of the company. Clements noted that some types of companies—such as venture-backed firms—are better equipped and, in fact, financially structured to assume these types of risks and see innovation bloom. With such open innovation, a corporation has the ability to partner with or invest in a portfolio of such relevant, financially-capable businesses in order to incubate innovation and shield the company from the biggest risks.

For innovation to occur within the company, leadership must protect and fund such risk taking. “Innovation by definition is disruptive to the firm’s norms, so you very, very often will have to take that idea or that concept and really pull it out from the rest of the company and set it off as a separate activity with a high level of management sponsorship so that it doesn’t get killed or starved by the broader organization,” Clements said.

Questions to Guide Your Board’s Discussion

  1. Gallagher questioned, “How are organizations training management teams to absorb all these new inputs and yet stay focused, and how are boards helping management teams set a strategy so that they’re iterating with new inputs and yet still have a strategic path to drive forward?”
  2. Grossman wondered, “What other opportunities are we missing because we made the decision to head down this path?”
  3. Malzone asked, mainly about mergers, “What are we buying, why are we buying it, [and] why are we not doing it ourselves?”
  4. How can your company better use your employees to implement and find open doors into innovation?
  5. Who benefits from your innovative opportunities?

Organizations are “always making a choice between, ‘Do I protect against a risk or do I drive and invest in an opportunity?’,” Gallagher noted. “Those challenges blend today.” In the current corporate governance climate of failing fast for innovation, risk and opportunity indeed encourage one another to make way for the future.