A wake-up call on innovation

Wednesday, 25 September 2019


    Australia’s risk-averse boardrooms are falling short when it comes to innovation, according to an Australian-first study carried out by the Australian Institute of Company Directors (AICD), in partnership with the University of Sydney Business School.

    A new AICD report, Driving innovation: the boardroom gap, has delivered a wake-up call to directors, who are struggling to drive the innovation necessary for Australia to turn around its lacklustre productivity growth.

    A risk-averse corporate culture is preventing boards from prioritising innovation, the research found, leaving Australian directors lagging their international counterparts.

    “Risk-taking, which is part of innovative thought, is becoming something that’s quite dangerous to one’s career,” David Gonski FAICDLife said in an interview for the report. “The board member who’s had a glorious career and is now 55 or 60 has an enormous amount to lose in a listed company board, and the listed company senior management has a tolerance for risk which is much less than what it was when I started out 35 years ago, as a director.”

    Five ways for boards to lead on innovation

    The report outlines five key recommendations for boards to improve their performance on innovation.

    1. Lift directors’ technology and digital literacy.
    2. Set clear expectations of management regarding calculated risk-taking to drive innovation.
    3. Develop a shared language with management, and clear narrative for investors/members on innovation.
    4. Ensure innovation features regularly on boardroom agendas.
    5. Establish a budget and executive incentives for long-term innovation.

    According to the study, which comprised an AICD member survey, interviews with directors, and global literature review, Australian directors recognise the importance of innovation but too often it is not a regular part of boardroom discussion. While three quarters of the directors surveyed said their organisation had an innovation vision or strategy, more than half of the respondents said that innovation has never been or was only occasionally on their board agenda.

    The missing link

    “The study tells us that innovation is often missing from Australian boardroom agendas,” says AICD CEO and Managing Director, Angus Armour FAICD. “It reveals that traditional risks are the focus rather than the risks – and opportunities - associated with innovation and disruption.”

    Directors surveyed identified the three greatest barriers to innovation as: human talent shortages (31 per cent); limited financial resources (28 per cent); and the market’s focus on short-term financial performance (19 per cent). “In interviews with directors, the problem of “short-termism” was also repeatedly raised as lying at the heart of the innovation challenge,” the report says. Members also see Australia’s regulatory environment as contributing to a risk-averse corporate culture.

    “We need to strike the right balance between regulatory and compliance obligations, and growth and innovation as core goals essential to our national prosperity,” Mr Armour said.

    The study also reveals that Australian boardrooms have low innovation and digital literacy levels, emphasising the importance of up-skilling directors and refreshing board composition.

    Notably, only 3 per cent of directors surveyed say they hold science and technology expertise, only 3 per cent indicate they have international experience, and 10 per cent say they bring innovation-related expertise to the boardroom.

    Just over half (57 per cent) of directors are not aware of the percentage of their organisation’s total expenditure allocated to R&D and innovation activities. Only 35 per cent said their board had the right skills and experience to assess both the ethical and practical implications of modern technology.

    In an interview for the study, experienced company director, Wendy Stops GAICD, highlighted the role of the board in driving innovation, “the board ultimately is responsible for the strategy of the organization. And so if the board’s not encouraging innovation and expecting the executives to keep innovation at the forefront, then the board’s not fulfilling its responsibilities”.

    Mr Armour says the study makes clear that that more needs to be done to broaden skills that directors bring to a board. “This can be done through education and upskilling, and by widening the talent pool of incoming directors,” he says. “It is encouraging to see that directors are acknowledging the importance of innovation, but directors need to make sure that innovation is more than just an irregular item on board agendas.”

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