Innovation has occupied the minds of senior management teams for quite a while now. But it has moved up the agenda in boardrooms too in the last few years. The challenges of creating forward-looking organisations in a fast-changing world requires all hands on deck, and boards – which have traditionally been the cautious voice speaking at one remove – are increasingly being asked to become directly involved in the push for competitive advantage.
This pivot is changing the boardroom landscape and driving a growing demand for directors whose expertise is relevant to the strategic direction of the company.
It is also changing the dynamic between boards and management teams. Board meetings are moving beyond the traditionally prescribed model of static presentations followed by questions to a more fluid structure where the boxes still get ticked on the formal stuff but there is also robust engagement on pressing issues within the business.
Enlightened chief executives are increasingly looking for more from their boards in terms of supporting innovation while also helping to manage and mitigate risk. Companies that successfully harness this capacity usually have an innovative culture to start with and are open to the practice of encouraging directors to talk to employees – especially about R&D, according to new research led by Prof Patricia Klarner, director of the Institute for Organisation Design at the Vienna University of Economics and Business.
Directors who reach out to executives and employees at the forefront of the R&D function as important gatekeepers for the entire board
“One of our key findings is that the boards of innovative companies are characterised by specific governance behaviours,” she says. “They pool their expertise in specialised committees and actively engage in an exchange of ideas with managers and employees to find out more about the company’s current activities and to contribute their own expertise.
“We found that, in addition to official meetings, informal and spontaneous interactions with employees were particularly important factors in facilitating the exchange of ideas.
“Directors who reach out to executives and employees at the forefront of the R&D function as important gatekeepers for the entire board,” she adds. “They can share their insights with other directors who lack specific innovation expertise and, in this way, the entire board – often a body with a very diverse composition – is able to discuss strategic aspects of the innovation pipeline.”
Klarner chose the pharmaceutical industry for her study because it is at the forefront of innovation, and the companies she examined were already some way down the collaborative road outlined above. Large companies usually have large boards, so splitting them into committees was a logistical necessity, but Klarner says the collaboration principle will still work within much smaller organisations where implementation may in fact be less complex and faster.
What’s key is a willing mindset and establishing a structure that can facilitate the easy exchange of knowledge between directors and the rest of the organisation. However, Klarner adds a caveat pointing out that an ability to communicate with people at all levels within a company is vital.
Companies want directors who can hit the ground running in terms of being able to contribute to the strategic direction of the business
“In many cases, shareholder representatives and regulatory authorities only call for the disclosure of the expertise that the board brings to the table. It is equally important that directors play an active role in strategic discussions and have the required soft skills,” she says.
Mark O'Donnell, managing partner of Odgers Berndtson in Ireland, says a perceptible shift in the approach to recruiting directors began about four years ago and has accelerated in the last two.
“We’ve largely seen an end to the appointment of the ‘all-rounder’ and more of a focus on specific experience and skillsets. Companies want directors who can hit the ground running in terms of being able to contribute to the strategic direction of the business, and the selection process for directorships is now as rigorous as any executive search,” he says.
These changes should go so some way towards assuaging the irritation of CEOs who often opine that their boards lack industry and innovation experience. As one CEO put it: “I need a board that supports me and my team to take risks. I also need them to understand emerging issues, from new regulatory regimes to cybersecurity threats.
“Directors who think conversations about innovation are not within their remit are no use to me, nor do I want a board that just ratifies decisions. That’s an outdated concept and if it means having to negotiate new roles and boundaries then so be it.”
Thora Mackey, chief operating officer of the Institute of Directors in Ireland, says the pandemic has "highlighted the importance of boards that are agile and have a balance of skills that are future-proofed and alert to innovation and risk".
A sentiment monitor prepared by the institute in the first quarter underlines just how important this agility is. Over a third of participants said they were transitioning between strategic plans due to the impact of Covid-19, while a further 15 per cent were still implementing their pandemic-related emergency strategy.
“Boards should always be focused on the future while being mindful of the lessons of the past; what’s different now is the pace of change, especially in terms of technology, innovation and customer behaviour,” Mackey adds. “We have seen a significant shift in the commitment to diversity on boards and this goes beyond gender diversity to include experience, skills and age. Additionally, there is much greater emphasis on ensuring that directors have undertaken training to prepare them for their role and that they remain up to date with best practice and governance.”