Defining Innovation in Relation to Risk and Failure

How can a board of directors oversee a company’s risks without choking originality? That’s just the question asked by those in attendance at Grant Thornton’s roundtable event on May 29 in Chicago. The discussion on “Innovation: Balancing Opportunities and Risk” was led by Grant Thornton’s Midwest Region Audit Practice Leader and board member Janet Malzone, and BPI Group US’s president and CEO Susan Gallagher.

Some of the first questions posed by Malzone to spur debate revolved around board innovation evaluations, looking to the future, and, naturally, risk. Much of the following conversation entwined innovation risks with failure as a driving force of cutting-edge thinking.

The Risks of Innovation

While Christopher Y. Clark, publisher and director of partner relations at NACD, noted that communication risks arise when discussing innovation strategy and culture with management and stake holders, Joan Steel of Alpha Wealth Advisors pointed out that reputational risks are some of the most important today.

Indeed, with more and more calls by investors and other stakeholders to pay attention to environmental, social, and governance (ESG) issues, companies that disregard today’s business trends are at risk of angering shareholders, employees, and consumers alike. In Steel’s opinion, board members must go about “expanding […] the definition of risk” to encompass these lesser-thought of and more nuanced dangers, which will ensure that boards think holistically about the risks that the company will take on while innovating.

According to Giacomo Marini, founder of Noventi Ventures and director at PC-TEL, however, public company boards tend to focus on risk management of their current businesses and “often ignore the biggest risk of all”: obsolescence. There are certainly risks that follow innovation, but, as Marini reminded the group, there are more risks for those who don’t innovate.

Fast Failure

“Innovation […] is about fast failure,” one attendee commented. “Failing fast” does not mean a company should continue spending money without thought until something sticks, however. Marini suggested that while “failing fast” is important in the process of innovating, a better approach for companies is to “iterate fast,” creating innovative yet planned-out ideas to put in place immediately after one attempt at innovation fails.

“If you start punishing too quickly for failures, you are not going to innovate,” Marini added. Failure can be positive when it comes to innovation, as long as board members and senior management agree on how far the envelope can be pushed within the company’s risk tolerance framework. Cultivating new ideas by allowing them to be tested—and to potentially fail—is the basis of innovation.

Mitigating Risk

According to Malzone, there are a few simple ways for your board to mitigate risk and become more innovation-ready:

• Structure your agenda in a way that makes plenty of space for forward-looking ideas, rather than strictly discussing events that have already taken place;
• Self-educate and ensure that you, as an individual board member, are aware of emerging technologies, burgeoning business practices at other companies, and trending topics of importance among employees and shareholders alike; and
• Use a talent matrix to plot where your board’s strengths and weaknesses lie, and focus on patching the holes to create a well-rounded and diverse group that will be better equipped to foresee and consider all risks of and paths to innovation.

For Chilton Capital Advisor’s President Frank Grossman, “innovation is something that you ‘do’, whereas risk is more focused on ‘how’ you do it.” To him, “they are complementary activities, not necessarily competing activities.” The risks of innovation inform how you innovate and, in turn, are shaped by how you innovate; risks should not inhibit innovation altogether.

Concurrently, Scott Clements, president and CEO of Onespan, said that one of the smarter risk mitigation strategies he has seen is to continuously take on small to moderate risks to stave off large enterprise risks, such as disruption and obsolescence.

Clements further suggested a way of allocating investment to ensure that long-term growth opportunities are protected from short-term operational demands. When it comes to your research and development budget, according to Clements, best practices dictate that 60 to 70 percent of the budget go toward sustaining and enhancing existing products, 20 to 30 percent go to new products that will bring in significant revenue in the near future (two or three years), and 10 to 15 percent be consistently spent on innovation game-changers that have the potential to become fruitful more than three years down the line, with the understanding that only some of those bets will pay off. This way, your company is spreading out the risk with a constant eye toward innovating.

Questions and Considerations

Throughout the conversation, Malzone provided thought-provoking questions boards should ask themselves:

1. How are we evaluating where we stand with innovation and innovative products and practices? Where should we be, and how do we avoid simply comparing our current innovation status to personal goals?
2. What won’t we have in a decade (technologies, products, industries, etc.)? Will our customer base remain the same, or will it exist at all in a decade?
3. What do we need to add to our enterprise risk management strategy in order to keep up with current business trends, and to look to the future?
4. What are our internal threats and how are we managing our people assets?
5. What are some of the main risks surrounding our largest assets and how are we disclosing these?

Another director added: “If you go too quickly, it’s risky. If you go too slow, it’s risky.” The questions to ask, then, are: How do you properly time your company’s pivot toward new innovative policies or products? How assertive should you be in this pursuit? Lastly, where does the market stand, and where does your organization stand? Are they both ready?

For additional highlights from this roundtable conversation, check NACD BoardTalk on June 18.