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A Wake-Up-Call for the Boards on Innovation

November 24, 2016 • Corporate Governance

By Alessandro Di Fiore, Jonas Vetter and Joachim von Heimburg

Today, innovation is not limited to products, but includes business models. Boards can play a critical role in shaping a balanced ambidexterity, raising the company executives’ strategic attention on the future prosperity of the company.

 

If you were to ask your Board “What are your main priorities?” chances are high that the response contains the terms “strategy” and “innovation”. In other words, formulating a strategy and setting a plan in motion that ensures the company’s prosperity in the long term.

In fact, a recent study at Yale School of Management has found that the average lifespan of a S&P company dropped from 67 years in the 1920s to 15 years today. On average a S&P company is now being replaced every two weeks, and an estimated 75 percent of the S&P 500 firms will be replaced by new firms by 2027.

Poking further, most Boards will also agree that in the face of rapid technology advancement and digitalisation, this is not only an R&D job, but increasingly means putting innovation at the centre of the overall company. Hence, today innovation is not limited to products, but includes business models. So it requires cooperation and collaboration. Innovation should be everybody’s concern!

So far so good. Yet, we observe that Boards frequently fail at spending enough quality time on the innovation strategy of the company. Given their fiduciary duty vs. shareholders, ensuring the long term company’s survival and prosperity is the very essence for which Boards and CEOs are paid. In fact, in many countries, board members can be made personally accountable by law if they negligently fail to make the business fit for the future.

Boards are packed with smart and experienced people who could provide quality input to the future of the company.

Why do they not deal with this challenge appropriately? Boards are mostly composed of highly respected, former and active CEOs or representatives of investors. They focus on the financial performance of their companies. That’s like driving a car by looking into the rear mirror.

In addition, the agendas of Board meetings are packed by operational items like approval of financial reports or risk management compliance items. Or the same agendas must cover pressing issues that need formal approval like the authorisation of investment decisions over a certain threshold. The topic of strategy is usually addressed by the CEO in a presentation style, i.e. sharing with the Board a super-executive summary of the company’s strategic plan with a time lot constrained by the other pressing agenda items.

This is a pity. Boards are packed with smart and experienced people who could provide quality input to the future of the company. It is not only an opportunity, but a “must do” for the board members of many countries due to their fiduciary duty vs. shareholders.



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