Tag Archive: Disruptive Innovation

Five Leading Practices for Governing Innovation

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Technology is eroding traditional lines between industries and creating opportunities for innovators to disrupt incumbents. Findings from the 2017-2018 NACD Public Company Governance Survey suggest that boards are increasingly concerned about how to navigate technology disruption, with one third of respondents citing this as a trend likely to have the greatest impact on their company in the coming year. The rapid pace of change presents a significant challenge for boards as they look to sharpen their oversight. As such, directors, and the management teams they oversee, are searching for strategies that will enable them to adapt quickly to shifts in the business landscape.

Nichole Jordan speaks with directors.

The National Association of Corporate Directors (NACD), in collaboration with audit and tax specialist Grant Thornton, recently cohosted a director’s roundtable in Chicago, Illinois, where directors and industry experts discussed the tactics that have helped them learn at the pace of disruptive innovation. Special guests from Amazon Web Services (AWS) were also present. Nichole Jordan, national managing partner of clients, markets, and industries at Grant Thornton, discussed the following strategies for getting out ahead of disruptors based on her engagement with clients.

1. Utilize leading technology conferences and events. There are many reputable conferences and events centered around technology and innovation that directors should consider attending each year. These gatherings bring together renowned innovators and thinkers, providing attendees with an insider view that many outside of the technology industry do not have access to. This year, NACD partnered with Grant Thornton to host a group of directors for the CES Experience, a curated, board-focused tour of the Consumer Electronic Show (CES)—the world’s largest and most influential technology show. Participants were introduced to novel products and services and spoke with their peers about potential disruptions to their companies and industries. Outside of CES, Jordan suggested that directors also attend South by Southwest and The Wall Street Journal’s Future of Everything conference, among others.

2. Visit domestic and international companies at the forefront of innovation. Corporate executives and directors can now access the innovation centers of leading technology companies including Amazon.com, Google, Microsoft Corp., and Apple. Through offerings as varied as tours of innovative hubs, executive immersion programs, and corporate strategy sessions, boards can gain valuable insights into disruptive trends and how these may impact their own businesses.

Geoff Nyheim, director of US central area at AWS, provided an example of an insurance carrier taking advantage of Amazon’s offering. The insurance carrier was particularly concerned with the predicted growth of autonomous vehicles and the potential impact on their industry. The CEO brought his direct reports to AWS, where they spent three days talking through strategy under the premise that insurance claims would plummet due to disruption caused by the safety of autonomous vehicles. According to Nyheim, “when [operating under] that assumption, all sorts of different paths and creative ideas emerged” for the future of the company. Nyheim added that “a lot of other companies are in the same place, [but to their detriment] lack a similar urgency.”

One director commented that it’s just as important for boards and their management teams to get out of the country to visit innovation centers in India, China, and other emerging markets as it is to visit the ones to home. On such a trip to India, the director visited a General Electric Co. factory that produced equipment used to create computerized tomography (CT) scans, and was amazed by the advanced tools and research that he saw. Directors should find ways to experience a similar sense of wonder that’s applicable to their own industries.

3. Cultivate a collaborative business mentality. Though possibly counterintuitive, businesses need to consider building a sustainable ecosystem of partners for themselves. Jordan called out companies in Grant Thornton’s ecosystem, naming, “Amazon Web Services and NACD as partners.” Directors should challenge members of management to consider developing a set of networks, partnerships, or alliances that can be tapped into to generate and implement innovative solutions. One director agreed, citing an internal study at his company which found that “less than five percent of ideas [generated within the company] actually came to fruition.” The company makes large investments in research, leading the director to conclude that part of the problem may be that it is relying too heavily “on [its] own resources and [is too] unwilling to trust others to help in the innovation process,” one director said. He also briefly outlined how companies can leverage networks to collaborate with a trusted supplier. The tactic assumes that a supplier “gets ten percent of revenue from [your company, so you ask the supplier if they would be willing to] take that ten percent and put it towards creating products for [your company].” This kind of thinking can lead to mutually beneficial and innovative engagements that enhance operational effectiveness.

4. Integrate technology briefings into your daily routine. Directors should be purposeful about incorporating reading about technology into their everyday lives, and can do so by seeking out reputable publications that report on the business of technology. The Wall Street Journal’s technology department, Recode, TechCrunch, and Wired magazine are widely considered reliable publications that bridge the gap between management and technology. Following leading organizations and their CEOs on social media—Jeff Bezos, Elon Musk, Shelley Palmer, or Gary Shapiro, for instance—can also enrich directors’ technology diets. One participant observed that maintaining relationships with individuals in late-stage venture capital funds can also facilitate learning. Venture capitalists “evaluate hundreds [if not] thousands of proposals,” she said, and could keep directors apprised of bleeding-edge developments.

5. Monitor your company’s progress on innovation relative to its customers. Effective benchmarking of technology initiatives’ success will vary from company to company. As such, innovation efforts should be wedded to the current and future needs of its customers. Jeffrey Traylor, head of AWS solutions architecture for the US Central area at Amazon, Traylor suggested Amazon’s value of working backwards as a strategy for customer-centered innovation. “Before we [even] write the first line of code, we write a press release for three years from now, then write an FAQ,” Traylor said. “We ask [ourselves the following]: Who is the customer? What problem are we solving? What are the most important benefits to the customer? What does the customer experience look like?” For Amazon, innovation is about high intentionality and requires planning out how any new offering will benefit the end-user’s experience.

The board should also ensure that management views emerging technologies as a means to achieving long-term value creation, rather than an end in itself. As noted by a director at the event who oversees a company in the healthcare and life sciences industry, companies cannot succeed sustainably if they don’t innovate alongside the customer. “When we talk about innovation, it’s the people whose lives we’re going to make better. We innovate around the patients,” she said. For her company, “It’s not just about [developing a different] drug delivery system or [a new] device, [but rather] how can we prevent unexpected events, and connect caregivers and care systems to the patient.”

Jeffrey Burgess, national managing partner of audit services at Grant Thornton, rounded out the conversation, pointing out that innovation should not only be limited to the board and management, but also be instilled at every level of the company. “I think [of] innovation [as] more and more on the front lines,” Burgess said.  “You need a culture [that] embraces change, and you need change management methodologies, procedures, and processes that drive innovation.” To meet these challenges, directors need to ensure that they are surrounded by intellectually curious and well-informed peers who can work with management to develop a forward-looking vision for the company. As Traylor cautioned, companies with boards that do not cultivate this curiosity may leave themselves vulnerable to the “ruthless and unsparing” effect of innovation.

Oversight of Organizational Speed in the Digital Age

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Jim DeLoach

Jim DeLoach

A recent survey of executives and directors globally found that the top two risks discussed are disruptive change to the business model and the organization’s resistance to change. This incongruence captures what may be one of a board’s most fundamental fears.

No established incumbent wants to fall into the category of companies that were yesterday’s success stories but today are in decline, suffering “death from a thousand cuts.” Yet it happens all too frequently. One well-known CEO says it begins with “stasis”—a state of inactivity that leads to “irrelevance” and is followed by an “excruciating, painful decline” until, ultimately, there is an abrupt demise of the enterprise.

This kind of decline is unmerciful. Its low velocity is one of the primary reasons it is so difficult to spot. Left unabated, it leads a once-proud company to the point where very little can be done to save it as it continues down its committed path. In the digital age, cloud computing, robotic process automation, machine learning, and other technologies are disrupting every industry by presenting opportunities to reimagine business models. With physical locations, people, and infrastructure barriers virtually gone, it’s possible for “born digital” start-ups to disrupt an established company with a hyper-scalable business model that can accommodate rapid growth without significant upfront capital.

Time and speed in business have changed. Business has evolved beyond the tactical to emphasize a more strategic and holistic view of challenging conventional thinking and disrupting traditional ways of working as well as long-established value chains. Managing to the speed of business may seem like a strange notion to some, but why shouldn’t every organization evaluate its processes given the speed of change in the marketplace and within the industry? Considering the stakes, it’s worth a serious look.

Following are 10 thoughts on managing to the speed of business and its implications to board oversight.

  1. Set the tone for speed at the top. Directors should support the CEO in setting the tone for speed through both actions and words, emphasizing the importance of staying close to the customer, keeping an eye on relevant market trends, organizing for speed, and embracing change.
  2. Focus on high-velocity and high-quality decision-making. Many large companies make high-quality decisions but make them too slowly. There is a time and a place for formality, but for many activities, an unstructured approach is sufficient.
  3. Inculcate a culture of speed. Members of the executive team should have a stake in initiatives to improve and sustain speed. A company must be at least as fast as—and endeavor to be faster than—agile followers of the latest trends in its industry.
  4. Focus on the customer experience. The speed-conscious organization is customer-centric. Accordingly, it places strong emphasis on gaining access to market insights efficiently and in a timely manner, likely through big data solutions and advanced data analytics.
  5. Establish an organizational structure that directly supports lean business behaviors. Open, flexible, and agile structures with flat hierarchies drive efficiencies, speed up innovation cycles, and facilitate collaboration, communication, and faster decision-making and execution. Focused, dedicated teams armed with purpose and clear objectives should be empowered by executive sponsors to tackle well-defined tasks and assisted by appropriate alliance partners. Sponsors keep the effort on the fast track with a fail-fast mentality.
  6. Select the talent who will lead to success. Trite as it might be to say, the best and most diverse talent wins in the digital era. Talent strategy must set the foundation for speed.
  7. Understand external trends. Speed places a premium on recognizing global megatrends and their impact timely. Boards should ensure that management is focused on becoming more future-oriented, mindful of external developments, and resilient in the face of change in the digital age.
  8. Speed must deliver desirable outcomes. Speeding up processes and decisions is not the endgame. Outcomes that are on-strategy validate a faster process.
  9. Learn at the speed of business. A committed learning organization fosters a positive culture that embraces open-mindedness, critical thinking, fresh ideas, and contrarian points of view—all of which are vital to speed. Ongoing knowledge-sharing, networking, collaboration, team learning, and admission of errors and learning from them facilitate speed. Feedback loops regarding interactions with customers, suppliers, regulators, and other outside parties that maximize broad employee participation helps to root out unconscious bias.
  10. Speed requires effective change enablement. When processes and functions are reimagined, and products and services require improvement, the organization should have an established process to organize the necessary stakeholder commitment and drive the needed change.

What do Atari, Blockbuster, Borders, Palm, and Polaroid have in common? Each failed to keep pace with the market and suffered a long decline before entering bankruptcy or being acquired or liquidated. Each case illustrates how difficult it is to turn away from a business model or a segment of the market that has served the entity’s stakeholders well over the years.

Confidence in facing the future is what every director and leader wants. Speed is dictated by the market—meaning that external and internal factors influence it. The tailwind effect of embracing change and managing to speed breeds desirable confidence in the digital economy.

Jim DeLoach is managing editor of Protiviti. 

Basic Income: A Bold Solution to a Big Problem

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Peet van Biljon

While most corporate directors in the United States are focusing on the social and business impact of recent tax reform, some of them have another economic matter on their minds: the concept of universal basic income (UBI). This is our future, says a recent article quoting Silicon Valley’s Ray Kurzweil, Google’s director of engineering. Kurzweil is not alone. Other tech luminaries such as Marc Zuckerberg and Elon Musk have expressed support for it. Meanwhile, public sector leaders from Canada to Kenya are already looking at implementing this economic model.

So, what is UBI? One way to define it is to see what it is not. It was reported recently that Finland has discontinued its year-old UBI pilot. The Finnish government’s discomfort with handing out money with no strings attached got the upper hand. (However, Finland retains its generous unemployment, free college, and universal healthcare benefits.) While Finland is abandoning unconditional income guarantees, it will be lumping all government benefits together in a single monthly sum, a universal social credit. The UK government is following a similar lump-sum approach, the so-called universal credit. But neither is a basic income.

A true UBI is both universal (i.e. paid to every citizen), and unconditional, ( i.e. recipients do not have to meet any obligations to maintain their eligibility). The tax treatment of a UBI is intended to avoid any distortions normally associated with the transition point between social benefits and wage income. This distortion can be a disincentive for benefit recipients to start working. On the other hand, UBI is tax free; only additional income from other sources like wages, called the market income, is taxed. Even as market income goes up, UBI is not taxed. Tax brackets are designed so that a gross income (UBI + market) above a certain level makes an individual a net contributor, meaning what someone pays in taxes will exceed his UBI receipts. For example, with a 33.33 percent flat income tax rate, the recipient of an annual UBI of $12,000 will reach the breakeven point when her taxable market income is $36,000, on which she will be paying $12,000 in taxes balancing out the UBI. Every dollar of market income after that makes her a net contributor of taxes. The system is startling in its simplicity.

The modern idea of a basic guaranteed income has been around since Bertrand Russell made the case for it 100 years ago, but Thomas Paine proposed a form of basic income as far back as 1797. A close variant of UBI is the negative income tax, which entails payments only to those who would be net recipients under the basic income system, like those earning less than $36,000 in the example above.

So, why are so many leaders of institutions (from government and non-governmental organizations to corporations) looking at UBI right now? It is because of the ongoing unemployment trends in recent decades. In countries such as the United States, these trends are better reflected in a 20-year low workforce participation rate and precarious employment than in unemployment claims, which are currently low. There is widespread fear that the elimination of low- and medium-skilled manufacturing and administrative jobs will accelerate as new automation technologies such as artificial intelligence (AI)  spread like brushfire through the economy.

The predictions on the worker dislocation by AI and other automation technologies are piling up: In 2013 Oxford University researchers estimated that 47 percent of U.S. jobs had a high probability of being automated by 2033. This started off a range of estimates and predictions by consultancies, think tanks, and governments. For example, late last year McKinsey estimated that by 2030 between 400 to 800 million jobs worldwide may be lost due to automation, including 73 million lost jobs in the United States. PwC in 2017 estimated that up to 38 percent U.S. jobs are vulnerable to automation by 2030. On the low end is the Organisation for Economic Cooperation and Development’s 2016 measure, which estimated that 9 percent of jobs are highly automatable and another 32 percent have a significant risk of automation. There are also optimistic estimates of millions of new jobs being created by this technology—but most such predictions only offset the job loss. They do not erase the net loss that will surely result.

Both job losses and job creation have indeed been part of previous industrial revolutions, but that does not mean serious disruption can be avoided in the transition. We could have one or more lost generations of workers before the system rights itself. Just this past month, Brookings researchers provided a grim warning that with job dislocation around 38 percent (a forecast mean), “Western democracies likely could resort to authoritarianism as happened in some countries during the Great Depression of the 1930s in order to keep their restive populations in check. If that happened, wealthy elites would require armed guards, security details, and gated communities to protect themselves, as is the case in poor countries today with high income inequality. The United States would look like Syria or Iraq, with armed bands of young men with few employment prospects other than war, violence, or theft.”

This is a bleak future we all want to avoid. What’s needed is a policy response equal in size to the disruption. UBI may be a big part of the answer, but the concept is too often met by skepticism or outright hostility from business leaders who have a distaste for anything that smells like socialism.

Concerns for personal responsibility immediately come up when UBI is discussed: Won’t it take away the incentive for people to work? Won’t some people abuse it? Perhaps no one better addressed these concerns than that paragon of free market capitalism, Milton Friedman, in a famous 1968 article titled “The Case for a Negative Income Tax: A View from the Right.” Friedman pointed out that onerous conditions for social assistance interfere with personal freedom and dignity when large numbers of government bureaucrats have to screen and police recipients to make sure they do not violate eligibility requirements. It is also highly inefficient. Friedman argued that replacing the multitude of existing welfare measures with one unconditional payment would be much more efficient, increase the incentive to work, and reduce the number of permanent poor living off government programs.

More practically, if the UBI is set at a low-enough amount, and recipients keep their after-tax income from employment, ample incentives remain for people to find work to improve their status in life. For example, the Ontario pilot UBI for individuals is set at only $13,000 US per year per individual, and $19,000 US per couple. This is hardly enough to live a life of luxury on the dole.

For the same reason, companies need not worry that a modest UBI will drive up wages for low-wage workers, because the UBI might depress the labor supply.  It may do the opposite, that is enable more people to take low-wage jobs similar to the current situation where many low-wage workers in the United States are supported by the Supplemental Nutrition Assistance Program (SNAP, previously known as food stamps) program. It is estimated that U.S. taxpayers already provide working families  with over $150 billion in annual public support through the current patchwork of state and federal programs like SNAP, Temporary Assistance for Needy Families, Medicaid, and the Children’s Health Insurance Program. By design, UBI eliminates the so-called poverty trap in which people are discouraged to take work because they may earn less from wages than from the sum of these benefits. And since everyone from the CEO to janitor will get a monthly UBI directly from the government, there is no regulatory or administrative burden for companies. Furthermore, the UBI becomes a permanent safety net for laid-off employees who have exhausted their termination and unemployment insurance benefits.

Will UBI give struggling people the opportunity to lift themselves up or will it create a permanent underclass? Preliminary anecdotal feedback from the Ontario pilot is that participants are eating healthier, retiring debt, and feeling less stressed, enabling them to focus on economic advancement. This is consistent with the so-called Maslow argument for UBI. Longitudinal data is needed to properly assess the societal welfare effects of UBI and these are scarce, which is precisely why properly designed UBI pilots should be supported. One of the only UBI-like programs to have existed for years is the payment funded by casino royalties (currently about $12,000 annually) to every member of the Eastern Band of Cherokee Indians in North Carolina. The program has been extensively studied by social scientists who found compelling benefits: a 40 percent decrease in behavioral problems among poor children to a level equal to non-poor children, and a 22 percent decrease in minor crimes which means fewer kids in jail, and higher high school graduation rates.

The last big concern is the cost burden of UBI for a country. A full-scale UBI implementation could be partially funded by absorbing many existing programs into the single universal payment. Significant savings will also come from collapsing the large government bureaucracies currently employed in administrating those programs. A tiny new bureaucracy can send every citizen a monthly check or bank transfer, and the existing tax bureaucracy (e.g., the Internal Revenue Service) will process any taxable income and payments as usual. But some incremental public spending will likely be needed, and new revenue sources found for it.

Earlier this month, Canada’s Parliamentary Budget Office estimated the cost of extending the Ontario pilot to every Canadian citizen at the current rates, net of expected savings in existing spending, to be in the order of $23 billion (Canadian). To scale this to other economies like the United States, this is roughly one per cent of gross domestic product, and could be paid for with about three additional points on the federal Canadian general sales tax (GST).

UBI is a bold new mechanism for social support. But so was unemployment insurance and Social Security in their time. There are details to be worked out, and hypotheses to be tested, before rolling out such massive programs nationwide. The best way to do that is to proceed with, and copy, controlled experiments like the current pilot in three cities in the Province of Ontario. Board members and other business leaders would do well to monitor these developments and to keep an open mind on UBI. It may just save our society from the social havoc that could be wreaked by artificial intelligence.

Peet van Biljon is founder and CEO of BMNP Strategies LLC. He advises clients on strategy, innovation, and new business building. He focuses on Industry 4.0 and transformative technologies such as artificial intelligence, digitization, fintech, and the Internet of Things. He previously managed McKinsey’s global innovation practice from 2010 to 2015. Peet is an adjunct professor at Georgetown University, where he teaches a graduate course on innovation. He co-chairs the General Principles Committee of the IEEE Global Initiative on Ethics of Autonomous and Intelligent Systems (A/IS). Peet authored a book on business ethics, Profit with a Higher Purpose, and has developed Ethics-driven Innovation, an innovation process to help clients meet the highest ethical standards. He is an electrical engineer, licensed as a professional engineer in Ontario, and also has degrees in accounting and economics. All thoughts expressed here are his own and do not necessarily reflect those of NACD.