Governance and innovation may seem anathema to one another and yet boards need to find a way to balance the two when discussing value creation. If NEDs are too cautious, executives can grow frustrated by missed opportunities. On the other hand, if they’re overly gung-ho about new ideas and projects, shareholders will ask some tough questions.
Reece Donovan, Group CEO of Nomad Digital, a wi-fi provider for the transport sector, likes how non-executive directors can support the executive team in seeing the wood for the trees. “They can give you an obvious insight that is sometimes missed by people who are working on these projects every day,” he comments.
He provides an example from a recent meeting where a NED suggested that, given the work the company does monitoring connectivity and installing wi-fi on trains, it should move into fleet management. Up until that point, it was something the team had never considered before. “This is the kind of thinking that drives innovation,” says Reece.
The flipside to this is when opportunities are lost because a chairman and NEDs are overly risk averse. Ian Gibson, Board Mentor at Criticaleye and Chairman of Norbrook Laboratories, recognises that NEDs have to question – in a constructive way – how much risk innovation exposes a business to. “When the executives are enthused by a new idea, what NEDs have to do is take a step back and consider what the downsides could be if it doesn’t work out,” he explains.
“It is the responsibility of NEDs to really question executives, without dampening down their desire to improve. The business has to be protected and should not end up in a place where it is too exposed.”
However, the right balance needs to be achieved. Ian recalls a situation arising where the board got it wrong after a CEO proposed to move an engineering business into a new area: “The NEDs and the Chairman got really concerned about this, which resulted in a series of extra debates and reviews over months and, ultimately, the new opportunity was missed.
“From that moment on, those from the Chief Executive downwards were not really at one with their non-executive colleagues. They felt that a transformational opportunity had been lost because the NEDs were too cautious and unsettled by the thought of something different.”
According to Ian, the NEDs in this case were looking for the sort of assurances and knowledge that the real world simply doesn’t provide. “Sometimes, you reach the point where you have to make a leap of faith because there isn’t the time to answer every question,” he says.
DNA of Innovation
It usually falls on the shoulders of the chief executive to drive conversations about innovation. Paul McNamara, CEO of EValue, a technology and solutions provider for the financial services sector, argues that, in terms of the board, “they should be seeking to understand if enough is being done to stay ahead of competition or ahead of market trends”.
He continues: “Equally, the board needs to ensure that the financials can cope with the level of investment that is required for innovation to be successful. The board should be there to challenge and support.”
In addition to this, he notes that discussions outside of the boardroom can be incredibly useful and illuminating. “Getting the non-execs to meet people in the business, or people who are adjacent to the business, will allow them to pick up new perspectives that they can take back to the boardroom,” he notes.
Tensions arise once NEDs start to get too involved in the details around execution. Amy Francis, Senior Relationship Manager at Criticaleye, comments: “When NEDs are discussing innovation with the executive team, an effective chairman will understand how to create the right level of support versus challenge.
“Although it’s absolutely right for NEDs to enquire about new ideas and the risks around delivery, you don’t want them delving down into the minutiae of how such projects are going to be delivered.”
Ian Stone, Board Mentor at Criticaleye and NED at China’s tech giant Tencent, which owns businesses that include WeChat, QQWallet and Tencent Video, explains that NEDs can positively immerse themselves in an organisation by taking steps such as looking at a company’s internal audit function. “That way they get to know how things work and are executed, and also what risks innovation and change may pose to the company,” he says.
As for the topic of innovation, Ian states that it should be ongoing, constant and engrained within the culture of both the board and the entire organisation. “In Tencent, all functions are thinking about new ways of doing things, engineers, HR, legal, finance, as well as through M&A and the business teams.”
Reece at Nomad Digital notes that a mix of backgrounds and perspectives will only serve to improve the quality of discussion around innovation, especially at board level. “Going back ten years, in my experience, [boards] were traditionally comprised of people from a financial background. Although it is important to look at a business through a financial lens, there is value in having more diversity on the board.
“Diversity in terms of operational roles, people roles and product roles. It is very important to have a broad range of experiences on which to draw,” he concludes.
Robert Leeming, Editor, Criticaleye
Top Priorities for NEDs Over the Next 12 Months
- Retaining key talent and developing skills
- Digital disruption
- Improved performance management
- Recruiting people with new skills
Source: Criticaleye NED Retreat Survey 2017
Click on the following link to find out more about Criticaleye’s Non-executive Director Retreat 2018