Corporate Eye

Innovation and Corporate Governance: Risks and Opportunities


At first glance corporate governance and innovation seem to have no relationship.

Corporate governance is, or perhaps should be, a rigidly defined set of principles and practices that are well codified. Innovation, on the other hand is not well defined, being somewhat free wheeling and creative.

Organizations are facing unprecedented rapid change and an ever increasing demand for faster decision-making. They must adapt to changes both inside—such as multi-generational employees and changing organizational arrangements—and outside the company such as regulations, competitors, and technology. 

While this is happening, the current menu of business tools and techniques is becoming less effective. The tools that worked in a Newtonian, mechanistic business world are too rigid and less effective. We are now in a Quantum world where chaos and complexity are the norms. 

The evolving business landscape demands that companies deal with “wicked problems”.  Wicked problems are messy, they are complex, don’t have direct solutions, cause experience and tools to be irrelevant, are based on conflicting, contradictory information and are connected with other problems. A wicked problem is so puzzling and confusing that it seems insoluble. This is where innovation comes in.

Perhaps this BusinessWeek article quote says it best:

“What was once central to corporations — price, quality, and much of the left-brain, digitized analytical work associated with knowledge — is fast being shipped off to lower-paid, highly trained Chinese and Indians, as well as Hungarians, Czechs, and Russians. Increasingly, the new core competence is creativity — the right-brain stuff that smart companies are now harnessing to generate top-line growth. The game is changing. It isn’t just about math and science anymore. It’s about creativity, imagination, and, above all, innovation.”

Companies  need innovation to launch new products, services and to reduce costs. Innovation is also risky since the outcomes are somewhat uncertain and could take more time and costs than anticipated. This is the nexus with Corporate governance. The Board needs to balance the need for innovation with the associated risks.

A simple definition of innovation governance is provided by Professor Jean-Philippe Deschamps  (Switzerland based IMD business school) :

Current innovation management techniques and organizational solutions tend to focus on many – not all – of the hard aspects of innovation, but much less on its softer elements. The scope of innovation is so broad that few companies appear to have thought deeply about what it takes now and will take in the future to steer and manage innovation in an integrated way, across all its aspects, hard and soft.

Innovation governance should be a key issue for Boards. As Steve Lennon puts it:

So directors need to establish a framework of corporate governance that can deliver two things that normally go together like oil and water: more innovation and less risk.

As tough as it may seem, this dilemma is at the heart of every director’s duty.

Yet, according to a report from Capgemini Consulting:

  • only 42 percent of respondents have an explicit innovation strategy;
  • only 43 percent of respondents say they have a formally accountable innovation executive.
This indicates that many companies need to look more carefully at how they govern innovation. Future posts will profile companies with best practices and other issues related to innovation governance.

 

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Ed Konczal has an MBA from New York University's Stern School of Business (with distinction). He has spent the last 10 years as an executive consultant focusing on human resources, leadership, market research, and business planning. Ed has over 10 years of top-level experience from AT&T in the areas of new ventures and business planning. He is co-author of the book "Simple Stories for Leadership Insight," published by University Press of America.
 
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