Innovation and growth are critical to any company, but neither comes with a simple road map. Strategy and execution are owned by management, while the board’s role is to provide oversight, perspective and constructive challenge. The board must strike the right balance between passively following management’s lead and trying to run the innovation agenda itself.
Let’s start with where innovation and growth come from: Growth can come from expanding the core business, entering adjacent markets, creating new businesses or some combination of the three. These growth paths can be pursued internally (organically), through strategic partnerships or through M&A. When the executive team sets an innovation and growth strategy, it should manage it as a portfolio rather than evaluating each project on its own.
Ownership also shapes the company’s appetite for innovation and growth. A family-owned company may take a long-term, multigenerational view; a founder-led business may benefit from an independent board’s external perspective, particularly to expand into new markets; and a private equity-backed company may require growth to fit within a defined investment thesis and time horizon.
The board’s role is to assess whether the company is taking an appropriate level of risk, pursuing the right mix of opportunities, balancing investment in growth with the needs of the core business, allocating capital effectively and ensuring the management capabilities required to achieve its goals are in place.
Different growth mechanisms bring different risks. Organic growth creates technical, market-adoption and time-to-market risk; partnerships introduce execution, alignment and dependency risk; and M&A brings valuation, integration and cultural risk. Recent performance, company maturity and market conditions are other factors that will influence a company’s risk profile.
The question is not simply whether each opportunity is attractive, but whether the company is pursuing the right combination of opportunities for its risk tolerance, resources and time horizon. Not every innovation project will succeed, making it critical for the board to consider these risks across the entire portfolio, not project by project. The board should also challenge how much the organization can realistically take on at one time.
Here are five questions the board should ask to pressure test growth strategies:
- Is this the right opportunity, and why us? Does this leverage or create a differentiated capability that will help us succeed? Does it align with the overall company strategy and culture? For example, if a manufacturer is considering launching a software-enabled service, does it have the talent, business model, sales capabilities and customer relationships needed to compete successfully? The board also should test if the opportunity is real, identify risks or warning signs management may have missed, and bring an external perspective on emerging technologies, competitors and market evolution.
- Can the company execute? The board should challenge whether the resources, talent, operational capacity, capital and bandwidth exist to pursue the innovation portfolio while supporting the core business. For example, if 70% of growth is projected to come from M&A and the leadership team lacks M&A experience, capabilities will need to be added. More broadly, if the company aggressively pursues the innovation portfolio, what else will suffer? Â No company can do everything. Ask what the company will gain and what it is willing to give up.
- Do the economics work? Ask what investment is required, what return is expected, the timeframe for both and how this compares with other uses of the company’s capital. The board should also understand which assumptions most influence the economics, such as pricing, adoption, margins or time to market, and how sensitive the return is if those assumptions change. Alternatively, if near-term economics aren’t the primary consideration, how is management justifying the expense?
- How will we stay on track? The board should understand how management plans to monitor key milestones and regularly communicate progress on the project, partnership or investment so it can assess performance against plan. Due to the uncertain nature of innovation, the board should also expect management to regularly revisit the original business case as new information emerges and adjust the portfolio accordingly. A quarterly dashboard could include the percentage of expected growth from core, adjacent and new businesses; milestone status (on schedule, delayed, pivoting, stopped); acquisition pipeline; status of major assumptions; and capital spending versus budget.
- What is the downside? Management should model the impact on the business if the project does not meet expectations. The board should challenge the critical premises, understand how much capital is at risk and ensure there are clear decision points if milestones are missed. In some cases, that may mean a constructive discussion about pivoting or stopping the project when the original thesis is no longer supported by evidence, rather than simply because execution is difficult. The board should also understand what, if any, value can be recovered if the project is discontinued.
Innovation is not a “yes or no” question. Innovation is full of challenges and uncertainty. The board can bring discipline to how opportunities are evaluated and how decisions are made. The role of the board is to push management to think further ahead, define assumptions and success criteria, ensure the appropriate resources and capital exist, and challenge management to make the hard choices among competing priorities.
The board’s role in innovation and growth is to question the status quo.