News & Insights

Directors Governance Center

May 23, 2017

The Board's Role in Overseeing Innovation (LDN Report)

On March 21, 2017, members of the Lead Director Network (“LDN”) met in Washington, DC to discuss how boards of companies oversee innovation. King & Spalding and Tapestry Networks published a ViewPoints report that provides a summary of the discussion at the meeting.

LDN members discussed two main topics: when and where boards should get involved with innovation and how boards can oversee innovation more effectively.

Highlights of the meeting are as follows:

When and where should boards get involved with innovation?

LDN members discussed four areas in which boards can play an important role in corporate innovation: promoting strategic innovation, selecting the right CEO, encouraging employees to innovate, and maintaining guardrails on innovation.

Promoting and guiding strategic innovation

Boards should be closely involved in strategic innovation involving industry disruptions or shifts in business models. One member said: “With companies being disrupted, it’s the board’s role to constantly ask how the industry will change. Who will disrupt us? How can we disrupt ourselves?”

Another member said: “If you look at the statistics, the world is changing at a rate that’s like nothing we’ve seen before. Irrespective of the industry, every board has to ask how that might change who we are. If companies don’t see that, they will be casualties.”

Selecting the right CEO

LDN members agreed that selecting the right CEO is one of the most important concerns regarding innovation. One member said, “The board can’t run the company even if it tried. It’s all about if you have the right CEO. You have to have an effective relationship. You need a forthright CEO.”

Selecting a CEO can be a time-consuming process. Considerable time needs to be spent balancing the requisite technological expertise needed with other requirements of a CEO’s role, especially when technological expertise is scarce. One member noted: “We’ve been in this revolution for 30 years. Four or five years from now, things could be completely different. You need to pick someone with broader, fundamental skills, with the ability to manage the change that’s coming.”

Encouraging employees to innovate

Encouraging directors of a company to innovate can create significant competitive advantages. Members of the LDN discussed various methods to encourage innovation at the employee level. One member said: “We nominate people for an innovation award. We select five to 10 people and have them come to the board, joining us for dinner.”

Members also discussed the board’s role in enforcing innovation by promoting openness within the company’s work culture. One member stated: “The board’s role is to make sure there’s a lot of openness, that you can have the zany discussions – and that the CEO builds that throughout the organization. If management is defensive, there are signals. Maybe our role is overseeing the culture as it relates to innovation.”

Maintaining guardrails on innovation

LDN members also discussed the pertinence of checkpoints and guardrails throughout the innovation process. Evaluating the costs and issues of innovative projects is an important role for boards. One member stated: “On a program of any magnitude, we put together a separate group of people that looks at the costs and issues, and they have to be satisfied that the program will be competitive.” Boards also need to consider the pace at which innovative projects are moving at. Sometimes, moving at a slower pace can be more effective. One member said: “If you’re a shaper of the market and responding to innovation, you can leave a lot of latent value behind if you go too quickly. We need to encourage management to take risks, but also have boundaries.”

How can the board oversee innovation more effectively?

LDN members discussed three ways to strengthen board capabilities in overseeing innovation: board composition, using effective processes in overseeing innovation, and educating the directors.

Board composition

A 2016 analysis by Russell Reynolds Associates found that the percentage of Fortune 500 companies that had digital directors with specialized technological expertise varied by the size of the company. While 39% of the 100 largest Fortune 500 companies had such an expert, only 13% of the last 100 companies did.

While technological expertise can be useful, a director’s general capabilities are equally as important. One member stated: “You want someone who is a good board member but then has technological expertise as well.” Another said: “They need the capacity to be a great director, not just a great digital director.” With technological advances constantly occurring, a willingness to learn may be more important than technological expertise. One member said: ”We need someone who shows the passion to stay abreast of things, who is plugged in to startups, and who will not necessarily bring the answers, but the right questions.”

A director’s prior experience was another topic that was discussed. The wisdom of directors with broad business experience is important. One member stated: “You need people with experience and wisdom who have seen it. How to handle innovation failure is very important – you could stifle innovation for the next generation.” However, other members demonstrated a willingness to recruit a director without prior board experience. In a pre-meeting conversation, one member discussed strategies around introducing directors who lack board experience, stating: “If you bring someone like that in, you need to be careful with the onboarding process. The boards need to be aware and not recoil.”

Process for overseeing innovation

The process by which boards gather and digest information about corporate innovation can dictate how effective their oversight on innovation actually is. One member noted that candid conversations with the CEO are critical, stating: “It’s about making sure you have one-on-one time with the CEO. What’s worrying you? What are the trade-offs? They are more candid than if the whole management team is there. You need a trustful, candid relationship.”

LDN Members also highlighted the importance of channeling information from lower levels of the organization to the board. One member said: “It’s about finding people within an organization and making sure to give them opportunities to translate for the board what they see as impending change.”Other approaches discussed include creating an ongoing discussion on corporate innovation, welcoming dissenting views as a means of encouraging an open dialogue, and using technology committees to assist with oversight.

Director education

Having a board with a broad understanding of technology and its impact on adjacent industries is beneficial for a company. One member stated: “There needs to be minimal understanding by the entire board, and it needs to be carefully executed over many years.” At one member’s company, “competitive information is provided to the board, including monthly updates reviewing everything going on in the industry, with a broad definition of industry; the board gets extensive information.”

LDN members also discussed approaches that can be used to educate boards. One member stated: “In one board, we brought in consultants and speakers to talk about pertinent technological issues.” Another member described an approach focusing on the company’s exposure to disruption, adding: “We use a devil’s advocate approach. We appoint someone to tell us how they will wreck the company. In public companies, we use consultants. We hire a consultant to write an activist letter to the board. It’s startling but also constructive.”