The board’s role in driving innovation

Now more than ever, boards of directors are essential to innovation, writes Rod McNaughton.

Rod is professor of entrepreneurship and director of innovation and professional development.
Rod is professor of entrepreneurship and director of innovation and professional development.

Opinion: The pandemic accelerated the adoption of remote work and the use of technology to deliver goods and services. And although organisations quickly adapted to the changing conditions and innovatively modified their business models, products, and working methods, senior executives and directors have been left wondering how to keep up that momentum now the urgency has diminished.

A 2022 study by the Australian Institute of Directors and the University of Sydney Business School concluded that innovation should be a top priority for businesses, with boards of directors and CEOs actively leading their company’s innovation strategy.

Despite the historical lack of focus on innovation by boards of directors, boards must be involved and play a key role in fostering and guiding innovation.

Innovation is a critical factor in a company’s long-term sustainability and is essential to resilience in the face of shocks like the pandemic and climate change-induced natural disasters.

Board governance is traditionally associated with risk management. But risk and innovation are intertwined: risk management deals with uncertainty on the downside, and innovation deals with uncertainty on the upside. The board’s job is to manage this balance, prioritising innovation consistent with business objectives while minimising risks.

Innovation cuts across organisations, involving financial issues like growth strategy, technology and capital investments, and cultural topics like strategic orientation, learning, and knowledge management. Thus, a systems approach that manages all types of innovation as a portfolio is necessary. Boards and senior executives are crucial to coordinating this portfolio of innovation types, providing visibility and transparency to shareholders and employees for innovation strategy and investments.

Advocates for a bottom-up rather than top-down approach to innovation argue employees with the most customer contact and technical knowledge are best positioned to identify emerging customer needs. Incentivising and supporting bottom-up innovation culture is important but often insufficient without strategic direction. Boards can oversee top-down processes to determine and communicate innovation focus areas, provide resources, and foster a culture that supports innovation. It’s rare for an employee to be able to marshal resources from across an organisation on their own. Successful innovation requires collaboration within a framework established by the organisation and the allocation of resources to it.

Research has uncovered several board characteristics associated with innovation performance, although innovation inputs and outputs may be affected differently. For example, larger boards are a source of more ideas. But more decision-makers can make it challenging to agree on investments, making board size positive for innovation outputs but harmful for inputs.

Similarly, board composition drives innovation through directors’ intellectual and social capital, with research showing that board diversity is associated with innovation. Independent directors positively influence innovation performance through their knowledge of the environment, while executive directors can aid innovation because they understand the firm’s internal processes. However, directors’ equity is negatively associated with innovation, suggesting owners are more risk-averse and limit their support for new ideas.

Research also shows that meeting frequency is associated with innovation performance, underscoring the importance of having time to exchange ideas and make decisions without long waits between meetings. Social ties can also boost innovation when directors sit on multiple boards by increasing opportunities to access financing or collaborate on projects with other organisations. Finally, boards with a longer average tenure facilitate more innovation, resulting from increased knowledge of the firm’s processes and better communication between board members.

The board is ultimately responsible for innovation but cannot oversee day-to-day activities. Thus, boards govern through the organisation’s structure and the executives and managers they appoint, making decisions about these critical.

The internal organisation of a company is one of the principal factors influencing innovation. Therefore, companies must design an organisational structure that supports innovation to remain competitive and successful.

Firms renowned for innovation can have very different structures, and no one-size-fits-all design is best for innovation. Apple, for instance, is highly centralised, while Facebook is decentralised. Microsoft is loosely coupled, while Google is tightly coupled. The organisational structure must be designed to fulfil the organisation’s innovation and overall corporate strategy, especially what types of innovation it means to facilitate.

The delegation of decision-making within the organisational structure is another crucial governance decision. The responsibility of promoting and overseeing innovation can be entrusted to an individual, such as a chief innovation officer, or it can be the collective responsibility of a group of managers.

Whatever the approach, it must be aligned with other aspects of an organisation’s structure to achieve the desired results.

Overall, good innovation governance is crucial for organisations to succeed at innovation of all types, including new product development.

The board and senior management are responsible for determining the extent to which innovation is part of the company’s strategy and where innovation activities should be focused and resourced. To become more innovative, companies should first examine high-level factors that may hold them back, such as risk tolerance, organisational structure, decision-making processes, and incentives. 

Finally, the importance of board members and senior executives continuing their professional development and learning from experienced directors and successful cases is paramount so they can contribute to achieving innovation success.

Media contact:

Sophie Boladeras, media adviser
M: 022 4600 388