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Key Findings on Governance & Innovation

13 December 2022

Key Findings on Governance & Innovation

Over the last few months, Morrow Sodali has been supporting an inquiry by the Institute of Directors’ Centre for Corporate Governance looking at the link between how companies are governed and their ability to innovate.  A report setting out the findings of that inquiry was published on 30 November.

Morrow Sodali, Nestor Advisors, and our advisors already have close connections with the Centre for Corporate Governance. Our Senior Advisor, Stilpon Nestor, sits on its Advisory Board. 

Innovation is an important topic and this is why Morrow Sodali offered to support this project by funding new research into the governance characteristics of UK companies with a track record of innovation. Innovation is indeed crucial to the future prosperity of both individual companies and the economy as a whole and to meeting the sustainability challenges that face us all. Companies should view it as a strategic imperative, and we know from our own experience of working with companies that their governance arrangements have a major influence on their ability to deliver the strategy. 

In the report, the Centre identifies some characteristics that are common to all successfully innovative companies. The characteristics are: 
  • There is board-level appreciation of the relevance of innovation to the company’s strategy and business model;
  • Innovation is undertaken in order to achieve identified objectives or outcomes;
  • Innovation is appropriately integrated into the company’s processes and activities; and
  • There is a culture that encourages innovation.
As the report explains, the exact relationship between governance and innovation depends on the company’s circumstances. Too much formal governance at an early stage in a small company, or governance that is too focused on compliance in a mature company, can stifle innovation. 

At the same time, an absence of governance can cause problems as companies grow, and highly innovative companies can sometimes grow very quickly. The recent collapse of FTX appears in part to be an example of a company whose governance failed to keep pace with its increasing size and complexity.

Bearing that in mind, the Centre has identified some components common to all company’s governance systems that are particularly relevant to innovation. Companies are encouraged to review their structures, policies and processes to make sure they help rather than hinder innovation.

Starting at the top, the attitude of the board is perhaps the single most significant factor. Unless innovation is prioritised and promoted by the board it is highly unlikely to flourish, so it needs to inform decisions about board appointments and balance.

We know from supporting many companies on their board effectiveness reviews that assessing intangible attributes like ‘attitude to innovation’ in potential board candidates and anticipating how that might affect the dynamics of the board can be very difficult. But there are a couple of indicators in the Centre’s report.

The first is diversity, in the broadest sense of the work. The research we sponsored seems to show a correlation between board diversity and innovation, something that has also been identified in previous academic research. The report also suggests having board members with an entrepreneurial or creative background as a way of counterbalancing any tendency towards risk aversion.

Another important aspect highlighted in the report is the need for be clear about where the lead responsibility for innovation rests. The report notes that it needs to be at a high enough level to be both visible to the board and able to exercise the necessary authority. In many companies it will be the CEO; ideally it should always be at C suite or executive committee level.

At least for larger companies, it is worth thinking about also giving an innovation remit to a new or existing board committee. The research we funded suggests that many innovative committees have board committees with at least some innovation-related activities in their remit.  

Once lead responsibility has been assigned, the necessary next steps are to map out the lines of accountability throughout the company and put in place the policies and processes required to support its strategic aspirations and operational needs – something we have helped many companies to do. 

This may not be the most glamorous aspect of governance but it is essential if the board’s good intentions are to be implemented in practice. It is part of the broader message in the report about the need to think about how to integrate innovation most appropriately into the company’s activities. Innovation is not something that ‘just happens’, there needs to be a supporting structure in place.

Other factors identified in the report include the information used by boards when taking decisions regarding risk appetite and resource allocation – it considers the type of metrics that boards typically use undervalue innovation – and the rewards and incentives used to encourage innovative ideas from within the company. Once again, the Centre suggests that companies should review the relevant policies to ensure that they are not inadvertently discouraging innovation.  

In a recent speech, the [UK] Prime Minister talked about the need for “the mindset and culture of innovation to permeate every aspect of what we do”.  That is also one of the main messages in the Centre’s report. Boards need to think about how they can imbed innovation throughout the company. Hopefully, the report’s findings will help to prompt them to do so.

Download the full paper here: Public Inquiry: Governance and Innovation - Report of findings
Key Findings on Governance & Innovation
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