Cybersecurity, talent, risk, artificial intelligence, ESG: these topics have risen to higher priorities over the past few years among most private company boards. Innovation is also a high priority that can be woven into a board’s culture to help creatively address these challenging topics.
In the most basic terms, innovation is change. For purposes of board oversight, innovation can be viewed as creative change that produces meaningful results. A board must ensure that change within a private company is not being made only for change’s sake. Many firms are jumping on the ESG bandwagon without really understanding what results they are hoping to achieve. A board with an innovative mindset can insist on meaningful goals and results for key strategic initiatives.
While innovation is often associated primarily with new product development through research & development teams, it is just as important for corporate boards to focus attention on areas beyond products and services. In research conducted at Notre Dame University, it was discovered that “innovation resources” addressed multiple dimensions, including ownership and leadership succession.
Through sharing private board experiences at The Family Business Consulting Group, we find that innovation tends to happen more out of necessity or opportunistically. A board can set the stage for making innovation happen more deliberately or as the product of a firm-wide focus on meaningful change.
How can a board create a culture of innovation? Like raising responsible, productive children, it takes years of multiple touch points and constant real-life examples to create a culture of innovation at the board level. We have found the following 12 factors collectively can produce this culture for boards.
Board member diversity. A diverse board fuels innovation by encouraging the exchange of ideas and challenging conventional thinking. A clear list of board members’ qualifications that includes experience in transforming elements of a business and a track record of meaningful changes in a variety of industries will guide the selection of innovative board members. Avoid operationally heavy or tactical-driven board members. Instead, seek out those who have reinvented a division, a product line, a succession process or an entire business. Adjust the mix of board members so there are various backgrounds and skill sets around the table. One specific expert in the firm’s business is usually enough. The other members can come from organizations outside the industry, bringing fresh perspectives to the table. Innovation often emerges at the intersection of these diverse ideas and perspectives.
Degree of innovation. Depending on the business circumstances, multiple incremental innovations can be more advantageous than riskier radical innovations. In other scenarios, such as digital developments for internal systems and customer-facing transactions, the board can steer a firm into greater transformational changes. The board can play a key role encouraging the appropriate level of change needed — some incremental, some noteworthy and some bold or disruptive. With the board’s support, a family business in the office furniture market took the noteworthy move of branching out into the medical, hospitality and residential office furniture markets. For a private food flavor company, at an incremental level, a board member from the meat industry was able to guide the company to incorporate regenerative agriculture into its business.
Board agenda. Consider shaking up the traditional agenda that usually has the financials up front. As long as the business is operating in line with its plan and the financial material is sent out ahead of the meeting, spend the fresh brain cells at the beginning of the meeting on other strategic matters. Put finance at the end of the meeting. Put business development up front. Unless the main core business is in crisis, create a board agenda that includes limited time on the core business and a greater amount of time on future opportunities. At privately owned companies, there is much more flexibility in the agenda topics than at publicly owned companies, which must abide by the SEC’s provisions on compliance and regulatory matters.
Innovation moment. While some companies, particularly manufacturing firms, kick off a board meeting with a “safety moment,” why not ignite the meeting with an “innovation moment”? Recognize instances in which something creative has taken place in the business. One family board member once explained how the procurement team had shortened its supply chain by renegotiating agreements directly through the source and not a third party. Tap into board members’ observations, requesting that each of them bring an innovative event or activity observed since the last meeting. This often helps fuel rich discussions on other agenda topics throughout the meeting.
Innovation philosophy and process. A board should be aware of the company’s philosophy and processes. If there is no clear philosophy or process, the board can help drive the creation of these high-level guiding principles. Board members with experience in the growing concept of human-centered design and other concepts experienced in the more traditional stage-gate new product development can provide significant results-oriented innovative insights.
Governance structure. Whether a private company is using a fiduciary or an advisory board, it is often beneficial to add an advisory council for addressing a long-term strategic topic, such as sustainability, artificial intelligence or cybersecurity. Creating an advisory council around an emerging strategic topic allows younger board members, who tend to have more knowledge on these topics, to participate on the council. Older board members, especially those who have retired and have more time, are often great resources to conduct research on these topics.
Leadership succession. Succession is one of the most important responsibilities of a board. Put this topic on every agenda, even if it is only a short discussion. Require that every top executive have an emergency succession plan and identify potential successors, including outside options, if it is unlikely that a company will have inside candidates. Have each executive present to the board their leadership succession plan for a smooth transition and their plan for transition in a crisis. This will make them feel accountable and serious about succession. Board members can bring examples of successful and failed leadership succession processes in the companies with which they have experience.
Ownership succession. There are limited overall options for transitioning ownership — to family, to employees or to a third party — yet there are many creative ways to make each one happen. Bring in a succession expert to a board meeting so that everyone hears the same ownership succession options at the same time. Consider creating an ad hoc committee with board members when it is approaching time to dive deeply into the options. Adding a creative attorney and a financial expert really helps board members to think outside the normal options.
Strategic planning. This is a logical area where private board members can exert substantial influence. Most private companies demonstrate long-term continuity when they can balance the seemingly paradoxical terms of stability (core business) and innovation (new business). The board of a family business can demonstrate the value of balancing the concept honoring tradition and pioneering change during the planning process. For encouraging more innovation in a business plan, boards can be more demanding on executives to present the research (the “R” in R&D) to back any new venture or major initiative. Many execs tend to jump to the development (the “D” in R&D) with limited research to back up the initiative. Sufficient research increases the probability of meaningful innovative developments.
Collaboration and cross-pollination. Boards can foster collaboration and cross-pollination by encouraging interaction and knowledge-sharing among directors, executives and employees. This can be achieved through regular board meetings, retreats, joint projects or the establishment of an innovation committee.
Board minutes. Ralph Ward, publisher/editor of Boardroom Insider, explains that it is common for board meeting minutes to be transcribed, finessed, internally approved and then sent out with the package for the following board meeting, weeks (even months) later. A better idea is to get the minutes down on paper, get them approved by the chair and shoot them out to members as soon as possible after the meeting. Board minutes are a great to-do list of actions items, matters arising, commitments made and thought-starters from the meeting.
The chair. Encourage the board to appoint a chair who gets what it takes to create a culture of innovation. The chair will set the tone. Encourage risk-taking. Innovation often involves taking calculated risks. Private boards should create an environment where directors feel comfortable proposing and exploring new ideas, even if those ideas carry inherent risk.
Innovation Should Be an Organizational Priority
It is not valuable to have an innovative culture in the boardroom and not in the company. When company leaders realize the board has an innovative mindset, this sends the clear signal for creative behavior that will show up throughout the organization. Building a culture of innovation in the board is essential for an organization striving to profitably grow in today’s competitive and fast-changing landscape. By embracing diversity, encouraging incremental and radical transformation, and incorporating the rest of the touch points above, boards will help unleash innovative potential within the organizations they oversee. This will inspire creativity, drive transformative change and position companies as leaders in their respective industries.