Will Boards of Directors please wake up?

I came across this article in Harvard Business Review the other day, titled “The Board’s New Innovation Imperative.”  Authors Linda Hill, a Harvard Business School professor and George Davis, Executive VP at MacAndrews and Forbes and formerly Global CEO and Board Practice Leader at Egon Zehnder Executive Search firm, interviewed a number of Fortune 500 Board members and CEO’s about the topic of…..you guessed in…breakthrough innovation.  They found what we already know…That CEO’s, already lacking confidence in their ability to benefit from investments in longer term, potentially game-changing innovation, are reluctant to push it unless their boards are in tune with the idea, and most are not.

Hill and Davis identify four reasons for the reluctance of board members to encourage real innovation:

  1. An Outdated Innovation and Risk Agenda: Board members believe their job is to protect companies from taking undue risks, and so they spend time on finance, operations and incremental innovation to sustain the core business.
  2. Insufficient Time: Boards don’t make time on their meeting agendas for strategic innovation. They are overwhelmed with the need to attend to compliance and financial monitoring.
  3. Lack of Expertise: Board members lack industry expertise or innovation experience, and so cannot make informed assessments about strategic innovation proposals.
  4. Unproductive Interactions between the board and management. The relationship between the board and senior management is shallow at best. Boards don’t want to press on touchy questions (such as, for example, how much time are we spending on the future?), and managers view the meetings as a time to “Tell and sell” rather than to have open, honest discussions about the opportunities and threats that lie ahead.

They make several suggestions for CEO’s, including setting the culture for honest dialogue, and reconsidering the board’s composition to ensure the talent needed is there.  Both are powerful ways to address the problem, though neither will work immediately.   Boards and Executive leaders of companies need to partner, and board members should extend themselves into their networks to help create new markets that the firm is working to enable.

It’s encouraging to see this article, especially given the turbulence that large companies have experienced of late with activist investors.  The severe shakeups that DuPont, GE and now P&G are undergoing given Trian Partners’ involvement seem to be having an effect. It’s easy to say that Activist investors invest to flip companies for short term gain of the partners.  But it’s hard to know for sure.  Trian’s white paper on P&G, detailing their rationale for their interest and recent investment to win a sit on the company’s board, for example, claims that the lack of breakthrough innovation is one of their chief concerns. We also know that Larry Fink, CEO of BlackRock investors, wrote a letter to Fortune 1000 CEO’s in 2016 decrying the short termism they exhibit in their innovation strategies and other governance decisions.

Could it be that large institutional investors, who are expected to deliver growth to those whose money they manage, will be the force that gets large established companies’ attention to breakthrough innovation?  I hate to see the iconic companies broken up in the heat of the battle.  Lots of Intellectual property is being tossed to the wind.  But maybe companies will finally learn that they can actually create new business platforms borne of breakthrough innovation if they have a persistent, high performing innovation function.

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