Rising to the challenge

A new study by the AICD and The University of Sydney Business School has found that boards are responding to the need for a stronger focus on innovation in order to succeed in a rapidly evolving business landscape. 

The upheaval caused by the COVID-19 pandemic combined with intensified competitive pressures have prompted directors in Australia to adopt more innovative practices, according to the AICD and University of Sydney Business School’s 2022 innovation study. As a result, the majority of businesses are working towards improved business processes, structures, products and even new business models. This most recent study is a follow-up to one conducted in 2019, Driving innovation: The boardroom gap, which was the first of its kind in Australia and one of only a handful of reports globally to examine the role of the board in driving organisational innovation.

The new study — Innovation in the boardroom: Rising to the challenge — surveyed 859 respondents, making it one of the biggest studies on board innovation practices. One-on-one interviews were also conducted with 17 experienced chairs and directors, and a discussion with a reference group and a literature review compared Australian directors with their international counterparts. The study also analysed the digital skills of the ASX 200 director cohort, based on data compiled by OpenDirector.

Only a handful of survey respondents said that innovation is not a priority or is considered a matter for management alone. The increased focus on innovation has been expressed among all organisations, across the full range of maturity levels and sectors, including listed and not-for- profit organisations.

Encouraging signs of change

These findings are cause for “cautious optimism,” notes AICD managing director and CEO Mark Rigotti MAICD.

“In 2019, we found that Australian boardrooms recognised the importance of innovation, but struggled to prioritise it,” he says in the foreword to the study. “In 2022, we have found that the long journey towards prioritising innovation and making it part of the way we do business, has indeed begun.”

However, Rigotti adds that directors now need to maintain the momentum without the driver of necessity behind them. “The challenge for Australian directors now is to harness this innovative capacity and their own learning from the experience, to sustain and lock in innovation as business-as-usual practice within their organisations,” he says.

“This is a point of importance for boards to consider — if innovation was primarily driven by necessity, how do we now strive to innovate if the urgency has diminished?”

One of the report’s recommendations is to continue to challenge assumptions. The most common is around time frames, for instance, “It will take three years to achieve this goal”. Identify what worked and what can be replicated in other areas of the organisation.

“Boards need to capture that capacity for innovation that was driven by the necessity to survive, and translate that into business-as-usual practice,” states the report.

Elana Rubin AM FAICDLife, a non-executive director at Telstra, is optimistic that compressed decision-making hierarchies will remain in place, because the benefits of being nimble are clear to all.

“Things were delegated because it was just more efficient and effective to give people that freedom and ability,” she says. “There is a consciousness about not losing that nimbleness and not losing that greater sense of delegation and authority that people had.”

However, directors are also keenly aware that remote working arrangements can gradually diminish an organisation’s sense of identity — and with it the ability to innovate in a collective environment.

“Sometimes it’s important to have people come to work as a team and feel a sense of organisation,” says Eileen Doyle FAICD, a non-executive director of Santos and Airservices Australia.

“It’s that kind of collaboration that usually creates innovation.”

Innovation as a competitive advantage

The CSIRO has identified global “megatrends” that require innovation — both to capitalise on the opportunities and ride out stormy waters. These megatrends include adapting to climate change, geopolitical shifts and an increasing reliance on autonomous technology.

These factors combined require more from boards, which must move from being largely reactive to pre-emptive, says Andrew Stevens, chair of Industry, Innovation and Science Australia. He believes that the currently accepted period of “dwell time” is “not good enough in today’s world”. He wants to see more boards adopt a “predict and act” approach, which is more effective in driving growth and innovation.

The world’s best-performing organisations have been found by researchers to compete on the basis of innovation. Rather than trying to slow down competitors, they’re constantly striving to anticipate the future needs of their own customers.

With some way still to go before Australian companies can match the level of priority placed on innovation by their international counterparts, they ought not to be resting on their laurels, says Sally-Ann Williams GAICD, CEO of Cicada Innovations. She believes that the digitisation of certain processes and the shift from legacy systems was long overdue and should be seen as distinct from genuine innovation.

“Every board has played digital catch-up on something that they should have been doing for the past 10 or 15 years,” she says. “Now they’ve accelerated that, and that’s great. But I don’t think that’s innovation. That’s the bare minimum for efficient and future-proofing operations of your organisation.”

Breaking it down

It was clear from the study responses that innovation means different things to different businesses.

“It’s fair to say most boards don’t talk about innovation as a stand-alone topic,” says Wendy Stops GAICD, non-executive director at Coles Group. “They don’t say, ‘Let’s now talk about innovation’ or ‘How do we think about innovation?’ They don’t do that so explicitly. Because of this, I don’t think there’s an obvious innovation definition that all companies use.”

Nonetheless, there were some common threads throughout the responses, says one of the study’s authors, Associate Professor Massimo Garbuio of The University of Sydney Business School. “Innovation is about taking two ideas that have not been put together before and connecting the dots between them,” he says.

While innovation is most commonly associated with end-user products like an iPhone, or new technologies to enable these new products, innovation is also just as often about processes.

It is about thinking of ways to do things better, faster and at a lower cost. “Through the interviews, it became clear that innovation is the blue sky, big new products and services,” says Garbuio. “But innovation is also seen as continuous improvement. It means always thinking about how to solve problems in a different way. It’s not necessarily expensive, either.”

Interestingly, the most experienced directors do not explicitly refer to innovation in any specific sense in the boardroom. It is so embedded in the organisational DNA that there is no need to — it is borne out through behaviours.

“Mature boards don’t use the word innovation, it is just an integrated part of doing business — innovation is ultimately a mindset that needs to permeate the boardroom first and the organisation second,” states the report. “It sets up an environment that is open to change, embraces curiosity, thinks big and is ambitious, seeks calculated risks and learns from failure as well as finding opportunities in ambiguity.”

One of the report’s recommendations is for all boards to ensure that innovation is part of “how we do business” in both the boardroom and the organisation. Vision and leadership from the most senior leaders in the organisation have been identified as the most critical aspects for a culture that nurtures innovation. “Boards need to set the tone from the top,” says Garbuio.

Telstra chair John Mullen AO agrees. He believes boards have a healthy scepticism around new innovative ideas, but need to put “guardrails” in place to prevent a failure from execution becoming an existential threat to the company. “What you don’t want is to always prevent management from executing their ideas,” he says. “That stifles innovation completely. Management will end up asking, ‘What’s the point of putting that up?’ The board will never approve it. ‘Don’t take a risk or we’ll all get fired for making a mistake.’”

Layer cake

As Garbuio explains it, innovation and associated risks can be understood as a series of layers. The frontline workforce operates in close proximity to customers and can develop innovations on how to change the customer experience.

Next comes innovation at the business unit level, with different business units adopting different approaches on a project-by-project basis.

Finally, there is innovation at the company level, which is the portfolio level.

Garbuio recommends tailoring the degree of risk as appropriate. “You don’t need to take big risks everywhere,” he says. “You can start with frontline innovations, which show team members that there is opportunity to be innovative and change things. Innovation will be exciting for a lot of the talent you want to attract and also for the talent you want to keep.”

The study found that while innovation is a much higher priority than it was in 2019, risk appetites have remained relatively unchanged. By contrast, a study of 273 directors by international consultancy Gartner, found that 57 per cent of directors said that they have increased or expected an increase in risk appetite from 2021–22.

However, it is worth pointing out that in overseas markets like Singapore and the US, there is less pressure on dividends for public companies. This gives directors a longer time horizon and thus greater freedoms to be innovative and take calculated risks. In Australia, there may be an overemphasis on the short term that somewhat stifles innovation.

“Innovation takes time — and sometimes bigger investments — to achieve,” says Garbuio.

Williams agrees that the study highlighted that a focus on dividends causes short-term growth to be prioritised over long-term growth. “In Australia, if you’re a listed company, there can be a large focus on dividends and returns to shareholders.”

Get clear on risk appetites

Doyle encourages boards to be clear about the organisational risk appetite. A strong understanding will better enable boards to take measured risks. “When you do your risk planning, you need to be able to be clear about your risk appetite” she says. “You might have a really low risk appetite for safety, but you might have a higher risk appetite for new technology in particular aspects of your business. Or you might have a medium risk appetite in your dealings with government. This allows anyone in the organisation to understand the areas where they can take risk and those where failure is acceptable.”

Cognitive diversity is crucial

The report makes a series of recommendations for bolstering innovation — chief among them is developing an innovation mindset. This is critical to meeting the demands brought about by substantial uncertainty and disruption.

“The innovation mindset is developed through experience in facing challenges, fast- growing organisations and enterprise-wide transformations,” states the report.

It is critical for boardrooms to be comprised of directors with firsthand experience in innovative organisations as they are accustomed to questioning and pushing management. “Directors must be able to bring an ‘innovation mindset’ to board deliberations, while boards need to start hiring more directors with real- world innovation experience,” states the report. “In a typical board of around nine members, the chair should consider whether they have enough directors with an innovation mindset to shape the conversation.”

Study findings

• Innovation has clearly been prioritised as part of the boardroom conversation while risk appetite has not substantially increased.
• The involvement of directors in strategy and innovation adds value in achieving outcomes.
• Mature boards don’t use the word “innovation”. It is just an integrated part of doing business.
• The greatest drivers for a culture that enables innovation are vision and leadership, as they promote innovative behaviours, openness to new ideas and experimentation.
• The board needs a critical mass of directors who bring an innovation mindset and experience in innovative organisations. 
• Board education is crucial to developing and maintaining a shared focus on innovation.

Recommendations

• Constructively challenge the management team. Question long- standing assumptions on innovation possibility and time frame for implementation.
• Ensure innovation is part of “how we do business” in both the boardroom and the organisation.
• Directors must bring an “innovation mindset” to board deliberations. Boards must hire more directors with real-world innovation experience.
• A greater focus on emerging trends and potential impacts to business models is needed to predict future scenarios and be prepared to act.
• Gaining an outside perspective via experts, advisory boards and technology committees is critical to staying on top in an uncertain and complex environment.