Renewal and innovation capabilities are vital in the modern business economy. The combined forces of globalization and technological progress are changing competitive conditions more rapidly than ever. The biggest identified risk that companies are facing now is the risk of being disrupted by competitors with new innovations based on new technologies, new offers and new business models.
The turbulent context has implications for boards of directors, who collectively assume the legal responsibility for a company, including its future. The current context thus makes innovation and corporate renewal key priorities for boards.
Our research has focused on how boards deal with the innovation and disruption challenge. This research confirms that boards, if they wish to be effective in their fiduciary obligations for the corporation, and its future, face a disruption on their own, if they are to effectively address their many challenges. This research further strengthens earlier findings by McKinsey, which identified major gaps in boards’ understanding: 84% of board directors lack strong understanding of the dynamics of their firms’ industries, 78% miss complete awareness of how their firms create value, and 76% do not fully comprehend their strategies.1 The research does show improvement, with boards indeed spending more time than before on strategy, but many lack an effective framework to guide them in their efforts to integrate strategy with innovation and feel they do not collaborate effectively with management in the task.
Motivated by this diagnosis, we propose a necessary and easy-to-use framework for boards consisting of three fundamental competences – sensing, pivoting, and aligning – that effective boards must master to carry out their responsibilities in our turbulent economy. We also present concrete practices, identified in our research, that support boards eager to avail themselves of these fundamental board competences.
A shift toward more dynamic and innovation-focused strategies
As a response to our turbulent environment, more dynamic models for strategic management have been developed. However, the combination of strategy and innovation has nevertheless not been treated extensively in existing strategic frameworks.
A few notable exceptions are Blue Ocean Strategy by Kim and Mauborgne, and Fast Strategy by Doz and Kosonen covering characteristics of strategic innovators that we found as well in our research. These approaches are however formulated primarily for the organization and its management and insufficiently explicit on how to best guide the board in the development of such strategies.
A focus on better frameworks and practices for boards
Our research focus on how boards integrate innovation components in their strategy work, on whether boards provide a satisfactory frame when guiding management on strategy and innovation, and what effective boards do to organize this discussion with the management.
During the last two years we have performed two research projects in close collaboration with selected company boards, practicing board members, managers, academia, and business advisors. Our empirical observations have led to the identification of three distinct, yet related competences that boards need to master if they are to create suitable conditions for the corporate renewal and innovation needed for long term value creation. These three competences are:
- Sensing for better and faster insights into the external environments of the corporation – essentially understanding markets, customers and technology;
- Pivoting these insights into an innovation engagement with management leading to a renewed strategy formulation;
- Aligning decision-making and ultimately resource and asset allocations, turn “strategy as intent” into a new reality both inside the corporation and for the customers.
The second capability is specific to the board and might be the key research contribution. Pivoting is identified as the key intervention of boards in this discussion: it consists in the decision by the board to force the management to review the current strategy, as a result of having sensed and developed new fundamental insights in the corporation’s environment. The recurrent question of “who develops and decides strategy?” is thus answered collaboratively. Boards needs to sense and prioritise the most material impacts of new insights and ensure that management leverage them when returning with new strategic and innovation proposals. We regard pivoting as the critical value-adding activity by the board, but it can only be truly value adding if preceded by high quality sensing, and followed by effective alignment of the organization and its resources.
For boards eager to apply the proposed framework into their functioning, an overview of the three sequential board competences, with concrete better practices, are presented in Table 1.
Traditional models and practices of corporate governance are an adaptation to a world of hierarchical organizations and rather ill-suited to future organizations and market dynamics. A rethinking of corporate governance practices is needed to support long term value creation in a context of fast changing markets, disrupted value chains and novel ways of working.
We found that boards need to improve their engagement with shareholders and stakeholders in a continuous process of Sensing, Pivoting and Aligning. Pivoting is the key disrupting action for existing operations and strategies, triggering the need for alignment in a changed innovation context for the organization.
There is a need of further research on characterizing board effectiveness in steering corporate renewal, as well as greater experimentation by engaged and future-oriented directors.
The research – a brief description
The research includes two Vinnova funded projects, OSIRIS and SISU Boards, exploring how boards can strategically address the innovation and renewal challenge in more effective ways. Authors have during the period June 2017 to May 2019 performed extensive literature studies, and interviews with senior executives and board members, and also implemented new ways of working in boards of companies participating in the research. The literature review covered both academic research and a broad range of reports from corporate sources such as advisors and auditors. In-depth interviews were performed with around fifty board members and experts globally, and four board workshops with up to 120 board members, including surveys, were held. Finally, we also drew upon insights gained through running education program for board directors at INSEAD and at the Swedish Academy of Board Directors, and from running webinars at INSEAD Directors Network.