How boards can innovate
Companies are forever having to reinvent themselves and boards should be at the forefront of those transformations
Governing boards might seem like the last place for innovation. They are, after all, the company’s steadfast guidance system, charged with keeping an even keel in rough waters. Corporate directors are the flywheel, the keeper of the flame, the preserver of tradition.
All that is true, or least should be so, but companies are also forever having to reinvent themselves — IBM, Nucor and Wipro bear only the faintest resemblance to their founding forms—and boards ought to be at the forefront of those transformations, not rearguard or resistant. New products are, of course, the province of R&D teams or research partners. But new strategies and structures are squarely in the board’s domain, and we have seen any number of governing boards innovating with, not just monitoring, management.
If boards are viewed as partners with management, not just overseers, innovative ideas are as likely to come from their dozen or so directors—all highly experienced and certainly dedicated to the firm’s prosperity—as any dozen employees of the company. Some boards have taken the principle further by forming their own innovation committee. The directors of Procter and Gamble Co., for instance, have established an innovation and technology committee; the board of specialty-chemical maker Clariant AG has done the same; and Pfizer Inc. has created a Science and Technology committee.
The value of a board’s active engagement in innovation can well be seen at Diebold Inc., a $3 billion-company whose 16,000 employees make ATMs and a host of related products. Founded in 1876, the company had survived far longer than most major manufacturers because of a readiness to embrace new technologies— virtually none of its products today have any resemblance to those of 100 years ago—and its directors hope to ensure that the company incorporates new technologies to survive another 100 years.
To that end, Diebold recruited a new chief executive officer (CEO) in 2013, Andy W. Mattes, who had previously led major divisions at Hewlett-Packard Co., Siemens AG and other technology-laden companies. And then, in conducting its annual self-evaluation, the board found that a number of its directors had recommended that a board committee be created to work explicitly with the new CEO on technology and innovation—not to manage it, but to partner with management on it. With the concurrence of the new CEO, the directors created a technology strategy and innovation committee with a full-blown charter requiring its directors to “provide management with a sounding-board”, serve as a “source of external perspective”, evaluate “management proposals for strategic technology investments” and work with management on its “overall technology and innovation strategy”.
The chair of the new three-person committee, Richard L. Crandall—the managing partner of private-equity firm Aspen Partners Llc, who also runs a roundtable for software CEOs and is a former CEO himself—was mindful of the lurking risk that directors might stray into the weeds and step on management prerogatives. He accordingly worked out an explicit understanding among the CEO and his committee members on where the directors should and should not go. “I watch like a hawk,” he said, “to ensure we do not go too far.”
Diebold’s innovation committee members are on call for everything from brainstorming to networking. When Diebold executives began looking for new technologies it might buy, Crandall and his two colleagues—rooted in tech start-up and venture capital communities—helped the CEO and his staff connect with those who would know or own the emergent technologies that could allow Diebold to strengthen its current lines and buy into the right adjacent lines.
Innovations at the top extend even to how the board itself operates, and Blackstone Group Lp—one of the leading investment groups in the world—has been pressing the case. Sandy Ogg, an operating partner in Blackstone’s private equity group, had previously served as a senior vice-president for leadership and learning at Motorola and chief human resource officer at Unilever Plc. Having thought a lot about what makes for effective company leadership, whether in the executive ranks or around the board table, Ogg wants to know if the directors of an investment prospect for Blackstone bring a profile that is complementary to their CEO’s, “filling holes that need to be plugged”. He wants to know how prospective directors will react if a CEO tells the directors to get lost. And at companies where Blackstone has invested, Ogg presses directors to “do the work” and not just be a “business tourist”. In other words, Blackstone has been innovatively working to get more out of their boards than traditional norms might have allowed.
Innovative companies that are not innovating in and around the boardroom run the risk of becoming less so. For example, we are familiar with the boardroom of one of America’s premier technology makers, which is dominated by a non-executive chair who underappreciates how vital but difficult it is to create new products in its recurrently disrupted markets (the innovator’s dilemma). The board has too few technology-savvy directors, and its nomination committee has blocked suggestions for more experienced innovators on the board.
Without innovation at the top in how boards lead, companies may come to see less innovation from below. Viewed affirmatively, directors who learn to work with executives on product and service innovations constitute an invaluable—and free—asset during an era when creativity is increasingly at a premium. And for that, observed David Dorman, former AT&T CEO and now board chair at CVS Health (formerly CVS Caremark), “we need a robust set of thinkers on the board who know the market place”. With that, the board can take responsibility for ensuring that its enterprise transcends the ever-present dilemma of innovating or dying.
Michael Useem is professor of management and director of the center for leadership and change, Wharton School, University of Pennsylvania. He is also the co-author of Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way, HBR Press, 2014.
Dennis Carey is vice-chairman of Korn/Ferry International. He is also the co-author of Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way, HBR Press, 2014.
Ram Charan is a business advisor to CEOs and corporate boards, and coauthor of the book, Boards That Lead, with Dennis Carey and Michael Useem. He is the author or coauthor of 18 books, including the best-seller Execution.
©2014/Harvard Business Review
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