Danny Davis interviewed for AICD Company Director Magazine
Domini Stuart investigates how directors can help create innovative organisations well able to prosper and stay ahead of the competition.
INNOVATION AWARE GOVERNANCE
Innovation is at the heart of the strategy directors are required to oversee.
“It is heavily implicit in directors’ formal responsibilities that they should have a strong understanding of the major innovations going on within the organisation and provide guidance in this regard,” says Geoff Martin, a senior lecturer at Melbourne Business School.
However, as a director and business adviser specialising in innovation, Danny Davis is concerned that many directors are ill-equipped for what he describes as innovation-aware governance.
“This is very different from the governance of innovation, which leads people down the path of controlling innovation and doesn’t end well,” he says.
“Innovation-aware governance is an enhancement of existing governance practices that takes into account the agile and fast-moving nature of business today.”
He suggests that, as part of their fiduciary responsibilities, directors need to know whether an organisation has an appropriate investment in its own future. However, once a project has been approved, the board may not see or hear of it again for years.
“If directors are blind to the extent, balance, progress and return on their complete portfolio of investments in innovation, they risk failure under their watch or, at the very least, less than optimal returns on the organisation’s resources,” continues Davis.
“Yet, where they do get information, it’s generally in sporadic reports that bear no resemblance to previous updates.
That means the board is unable to review and address any gaps or to correct investments that are not aligned with the organisation’s strategic direction. As a result, companies often end up pursuing the wrong projects.”
Danny Samson, professor of management at the University of Melbourne, agrees that a good board will take a dynamic approach to governance.
“Directors should be able to see a dashboard where all innovation activities are formally project-managed and milestones are aggregated and reported very regularly,” he says.
“They also need to be tough-minded enough to kill off any innovation projects that are underperforming. Many organisations and their boards do this badly, letting these projects go on for too long and throwing good money after bad because they lack this discipline.”
WHAT TO DO?
Most directors are aware they need to innovate to survive but Davis sees a disconnect between knowing this and knowing what to do.
“Various options are thrown around, such as creating a culture of innovation and cultures of learning and thinking,” he says.
“They all have merit, but they leave directors with little to do beyond putting out a policy directive or a ‘wish’.”
Davis also wonders whether we have realistic expectations of the board’s input into strategy.
“For the past 10 or 15 years, directors have been hearing they need to be involved in developing strategy,” he says.
“However, my research suggests boards are not well constituted to do this. Meetings tend to be agenda-driven and strategy is not something that can readily happen in that forum.
“A one-day off-site strategy session will do little more than leave boards moderately informed about a strategy someone else has developed.
“A board can certainly add value by reviewing strategy, but many of the initiatives that characterise the most successful companies, particularly in this digital economy, are not broad-scale strategies you can capture in a three- or five-year plan and then pursue without further interrogation.”
John Meacock, managing partner NSW for Deloitte, suggests boards can also add value by acting as the company’s “strategic radar”.
“In turbulent times, senior management tends to be very focused on the business model – it’s the old story of working in the business rather than on the business,” he says.
“Directors can help to lift management up out of the day-to-day by identifying innovative business models and, especially in these days of digital disruption, asking it to look closely for areas where things can be done in a different and more effective way.”
Deloitte’s recent survey, Board Effectiveness: The Directors’ Cut (Edition 4, 2013), revealed a surprising degree of concern about lack of linkage between innovation and productivity.
“Clearly, there’s growing awareness that having an innovative approach to your business model and processes, as well as your products or services, is an important factor in increasing productivity,” says Meacock.
“In the case of Deloitte, a stated part of our strategy is that we achieve 30 per cent of our revenue from new or substantially new services – services we weren’t providing two years ago. A strong component of the strategy is measuring to see whether we’re achieving that.
“It is important for directors to understand that a simple process of monitoring and review like this can provide a strong stimulus for increasing productivity through innovation.”
EXERTING A WIDER INFLUENCE
Directors’ influence isn’t necessarily limited to board meetings.
“Depending on the circumstance, I think directors can also interact with the CEO and executives outside the boardroom, showing leadership and encouragement a little further down the line,” says Samson.
“Employees love to see such involvement when it is done well – not as interference, but as connecting up the high-level strategic view with the innovation projects.
“I was on the Transport Accident Commission board in Victoria for nine years and we found that subcommittees and special project arrangements provided useful ways of doing this.”
Samson believes directors should lead from the top by setting the tone and also developing or approving a strategy for innovation.
“This must look not just at short-term issues but also at long-term renewal of products, services, technologies and new business models,” he says.
“Directors should also indicate to executives, on behalf of shareholders and the company, the extent to which innovation is prioritised in their competitive strategy and the extent of the risk they’re prepared to take.”
According to Martin, lack of guidance in this area is a common problem around the world.
“Many directors and CEOs give little indication of what they consider to be an acceptable level of risk-taking within the firm,” he says.
“They also fail to communicate what this actually looks like.
“A strong risk culture is defined by having a clearly articulated policy with regard to risk taking, but one reason why this is so rare is that it’s hard to achieve at the operational levels.”
Martin says defining a company’s risk tolerance isn’t easy, but some of the larger multinational corporations are doing so
by describing “high risk” decisions to employees.
“For instance, making certain modifications to a product may be described as high risk. So too could be pursuing a particular approach to acquiring new customers or advancing a change in marketing strategy such as altering segment emphasis,” says Martin.
“Spelling out what is a high-risk decision and what is not makes each individual aware of what risk-taking means and what the management team is comfortable with.
“I would advise board members to encourage the top management team to develop operational measures of risk-taking and to consult key company stakeholders regarding what they are comfortable with.”
When major innovation-related decisions need to be made, such as which research and development projects to pursue, Martin suggests asking employees to document the cost of a particular initiative and also the maximum potential for loss if it goes wrong.
They could also be asked to estimate the probability of failure.
“Where the potential dollar loss exceeds a certain level, the project will automatically go to senior managers and/or the board for approval,” says Martin.
“This process could reduce the probability of a failure that would threaten the organisation’s survival. It will also help directors to focus their knowledge, expertise and networks on the projects where they will add the most value.
“Failure is an important part of learning and advancement, but formal processes should be in place to limit the chances of catastrophic failure.”
There is a delicate balance between reasonable caution and accepting the risks associated with innovation. Meacock is concerned that an increasing amount of compliance could force directors to be more agenda-driven and push them down a more risk-averse path.
The Deloitte research has also uncovered a particularly Australian approach to innovation, risk and failure.
“We interviewed more than 100 chairmen and CEOs from Australia’s leading companies and quite a few of them expressed the view that failure is considered to be un-Australian,” says Meacock.
“They said they felt the need to avoid taking risks and cited a number of structural and cultural barriers to risk-taking, including the fact that failure is not really acceptable here.
“They contrasted Australia with places like the US, where it’s considered okay to fall down two or three times and keep getting back up again.”
INNOVATIVE WAYS TO INNOVATE
Last year, pharmaceutical company MSD was included in the BRW’s Top 50 Most Innovative Companies list for the first time.
Vice president and managing director of MSD in Australia, Dr Susanne Fiedler, believes that attracting the right talent is the first step to developing a culture of innovation.
The second is providing an environment conducive to generating new ideas and new ways of working.
“Innovation at MSD extends from ideas-driven workshops and in-house development of new technologies to online portals where staff can submit product and process ideas,” she says.
“We also use alliances with external partners to help research, discover and drive the innovation of products and business processes.
“And, MSD’s motivational personal growth programs for staff are designed so that all employees are pursuing their interests and developing key skills, improving our capability for innovation.
“Moving forward, we’re focused on implementing a cutting-edge innovation strategy and making our existing products, services and processes the best in the industry.”
The nature of MSD’s business positions innovation firmly at the centre of its mission, operations and business philosophy. Many traditional companies, and particularly larger organisations, are less well placed to accommodate the more disruptive aspects of innovation.
“It can be very difficult for these larger organisations to create a new business model without the antibodies of the organisation rejecting it,” says Meacock.
“At the same time, many start-ups struggle to conform to traditional structures and models.”
This has created a clear rationale for the “lean start up” approach to innovation, where a company either creates a separate external body or makes a series of external investments rather than trying to innovate within its existing corporate shape.
“Qantas and Jetstar are a good example,” observes Meacock.
“Jetstar was 100 per cent owned by Qantas, but allowed to run completely separately and in a very different way. If Jetstar had started within the Qantas structure and with the same set of constraints, I don’t think it would have got off the ground.
“NAB and UBank is another example. UBank is backed by NAB but, again, it runs as a separate operation with a totally different business model. It’s an online-only operation, but it’s the fastest-growing bank in Australia and is ranked number five.”
Other large corporates are fostering new models and new technologies by building a portfolio of investments in smaller organisations.
“The board can approach this strategy in two ways,” says Meacock.
“It can see it as an opportunity in that it is backing a range of different ideas to see which will become successful. Or it can see it as risk minimisation, because there might be a good idea in there and if it misses it, it will be in trouble.
“Either way, I think this is a smart way to support and encourage innovation. But, if you have a profitable business, the decision could seem economically irrational.
“You’re creating a disruptor that, initially at least, is likely to be running at a lower margin in the hope that its margins will increase as your traditional business starts to decline.
“That’s always going to be a very strategic and, of course, very tough call.”
Some boardroom questions on innovation:
· Do we have a culture of innovation?
· What is our strategy to nurture innovation?
· What have we invested in innovation?
· Do we have the right talent to foster innovation?
· Do our business structures and procedures encourage innovation?
· How is innovation managed?
· How is innovation reported to the board?
· What is our tolerance to failure on innovative projects?
· How do we limit our chances of failure?
· How do we handle underperforming projects?