Governance and innovation – what we have learned

For the first inquiry, we decided to focus on the link between governance and innovation. We chose that as the topic because we feel that enabling and encouraging innovation is going to be key to stimulating economic growth – a view shared by the Prime Minister, who spoke recently about the need to “fire up the innovation engine”.

We kicked off the Inquiry in June and, as those of you who have followed the updates we have put out since then will know, we have been gathering evidence in a number of ways. We surveyed IoD members, issued a consultation document and carried out research into the governance arrangements of innovative UK companies. We have also spoken to many experts in interviews and round table meetings.

So what have we found out?

First, the impact of governance on innovation varies depending on a company’s size and the stage it has reached in its life cycle. For some start-ups and SMEs the absence of governance may be a barrier, while for larger and more established companies the problem may be that governance becomes too focused on compliance.

Second, it depends on the type of innovation you are talking about. There is innovation that leads to the development of products, services or processes that are entirely new to the market. But just as important in terms of growth is innovation by individual companies that is new to them.

Despite these differences, we have been able to identify some characteristics that seem to be common to most successfully innovative companies. These are:

• There is a board level appreciation of the relevance of innovation to the company’s strategy and business model;
• Innovation is undertaken in order to achieve identified objectives or outcomes;
• Innovation is appropriately integrated into the company’s processes and activities; and
• There is a culture that encourages innovation.

A company’s governance policies and processes can help to establish and maintain these characteristics – or hinder them if boards fail to consider the impact on innovation when designing their governance arrangements. We found that certain aspects of governance are particularly relevant. They include:

• Having a clear purpose and values – A company’s purpose can provide direction and enable the board to identify the objectives that innovation are intended to achieve, while the values describe how they are to be achieved.
• Board composition – An issue that came up regularly was the importance of having people with an entrepreneurial background and creative mindset on the board to balance those who were seen as being more risk averse.
• How responsibilities for innovation are allocated – It is important that the role of the board in relation to innovation, and where responsibility for it rests within the company, are clearly defined. The CEO has a critical role as either the potential champion or enemy of innovation depending on their attitude.
• The frequency and nature of board discussion – encouragingly, one-third of the 700 IoD members who participated in our survey said they discussed innovation at every board meeting.
• The information and metrics used to inform the board’s decision-making – The typical financial and operational metrics used by companies measure short-term performance and are not always the right ones for assessing more speculative innovative activities with a longer delivery time. There is a need to develop more of a balanced scorecard.
• The use made of rewards and incentives – there is a particular issue with executive remuneration which is weighted towards conditions which discourage innovation. More widely, companies should review how they can use performance assessments, rewards and recognition systems for the whole workforce to encourage innovative ideas.
• Organisational structure and ways of working – this has to be company specific, and different considerations may apply depending on the type of innovation involved. But one recurring theme was the importance of internal collaboration and cross-working.

We plan to develop some guidance for board members to help them think through how to apply these findings to their companies. We are also preparing a set of case studies, drawing on some of the many interesting examples we heard about during the Inquiry. If any readers would like to highlight possible case studies or have practical suggestions for including in the guidance, please drop me a line at [email protected].

Finally, while the main focus of the report is on how companies can govern themselves in a way that supports innovation, it also looks at other issues such as the impact of ownership and regulation on their ability to innovate. We will be looking at those issues in our next post.