How boards can inspire to innovate

Governing boards might seem like the last place where innovation can happen. They are, after all, the company’s steadfast guidance system, charged with keeping an even keel in rough waters. Corporate directors are the flywheels, the keepers of the flame, the preservers of tradition.

All that is true, or least should be so, but companies are also constantly reinventing themselves – IBM, Nucor and Wipro bear only the faintest resemblance to their founding forms – and boards ought to be the leaders of those transformations, not the rear guards or the obstacles.

New products are, of course, the province of research and development teams or research partners. But new strategies and structures are squarely in the board’s domain, and we have seen a number of governing boards innovating with, not just monitoring, management.

If boards are viewed as management’s partners, not just its overseers, innovative ideas are as likely to come from their dozen or so directors – all of whom are likely to be highly experienced and certainly as dedicated to the firm’s prosperity as any dozen employees of the company.

Some boards have taken the principle further by forming their own innovation committees. The directors of Procter & Gamble, for instance, have established an Innovation and Technology Committee; the board of the specialty-chemical maker Clariant has done the same; and Pfizer has created a Science and Technology Committee.

The value of a board’s active engagement in innovation can be seen clearly at Diebold, a $3 billion company whose 16,000 employees make ATMs and a host of related products. Founded in 1876, the company has survived far longer than most major manufacturers because of a readiness to embrace new technologies – virtually none of its products today have any resemblance to those that existed 100 years ago – and its directors hope to ensure that the company incorporates new technologies to survive another 100 years.

To that end, Diebold recruited a new CEO in 2013, Andy W. Mattes, who had previously led major divisions at Hewlett-Packard, Siemens and other technology companies. In conducting its annual self-evaluation, the board found that a number of its directors had recommended that a board committee be created to work explicitly with the new CEO on technology and innovation.

After consulting the new CEO, the directors created a Technology Strategy and Innovation Committee with a full-blown charter requiring its directors to “provide management with a sounding-board,” serve as a “source of external perspective,” evaluate “management proposals for strategic technology investments,” and work with management on its “overall technology and innovation strategy.”

The chair of the new three-person committee, Richard L. Crandall – who is managing partner of the private-equity firm Aspen Partners, runs a round table for software CEOs and is a former CEO himself – was mindful of the lurking risk that directors might stray into the weeds and step on management’s prerogatives.

Accordingly, he worked out an explicit understanding among the CEO and his committee members on where the directors should and should not go. “I watch like a hawk,” he said, “to ensure we do not go too far.”

Diebold’s innovation committee members are on call for everything from brainstorming to networking. When Diebold executives began looking for new technologies the company could buy, Crandall and his two colleagues – all of them with roots in tech startup and venture capital communities – helped the CEO and his staff connect with those who would know or own the emergent technologies that could allow Diebold to strengthen its current lines and buy into the right adjacent lines.

Innovations at the top extend even to how the board itself operates, and Blackstone Group – one of the leading investment groups in the world – has been pressing the case. Sandy Ogg, an operating partner in Blackstone’s Private Equity Group, had previously served as a senior vice president for leadership and learning at Motorola and as chief human resources officer at Unilever.

Having thought a lot about what makes for effective company leadership, whether in the executive ranks or around the board table, Ogg now wants to know if the directors of an investment prospect for Blackstone bring a profile that is complementary to their CEO’s, “filling holes that need to be plugged.”

He wants to know how prospective directors will react if a CEO tells the directors to get lost. And at companies where Blackstone has invested, Ogg presses directors to “do the work” and not just be a “business tourist.” In other words, Blackstone has been innovatively working to engage their boards more than traditional norms allow.

Innovative companies that are not innovating in and around the board room run the risk of becoming less relevant. For example, we are familiar with the boardroom of one of America’s premier technology makers, which is dominated by a nonexecutive chair who underappreciates how vital and difficult it is to create new products in the company’s recurrently disrupted markets (the innovator’s dilemma).

The board has too few technology-savvy directors, and its nomination committee has blocked suggestions for more experienced innovators to join the board.

Without innovation in boards’ leadership methods, companies may come to see less innovation from below. Directors who learn to work with executives on product and service innovations constitute an invaluable – and free – asset in an era when creativity is increasingly at a premium. And for that, observed David Dorman, formerly the CEO of AT&T and currently the board chair at CVS Caremark Corporation, “We need a robust set of thinkers on the board who know the market place.” With that, the board can take responsibility for ensuring that its enterprise transcends the ever-present dilemma of innovating or dying.

 

(Michael Useem is a professor of management and director of the Center for Leadership and Change at the University of Pennsylvania’s Wharton School. Dennis Carey is vice chairman of Korn/Ferry International. Ram Charan is a business adviser to CEOs and corporate boards. Useem, Carey and Charan are the co-authors of “Boards That Lead: When to Take Charge, When to Partner, and When to Stay Out of the Way.”)

 

© 2014 Harvard Business School Publishing Corp Distributed by The New York Times Syndicate