Disrupt before you are disrupted
Boards are in a unique position to help their companies redefine the future through pre-emptive innovation. It can be hard to know when to pull the trigger on changing a company’s course and to determine whether it is the strategy that should change or the CEO’s implementation or both. One director referenced former Cisco CEO John Chambers’ view that it’s not always that company leaders do the wrong things, but sometimes they do the right things for too long.
Strategy oversight is no longer a once-a-year exercise for boards. Instead, directors should have ongoing discussions with management that allow them to constantly review the company’s strategy and innovation initiatives, understanding that historical value drivers like scale, scope and efficiency have given way to digital technology’s power to upend (and sometimes displace) entire industries.
One way to jump-start the board and management dialogue on innovation is to use demographic, environmental, social and other megatrends as prompts for brainstorming potential strategic opportunities and risks. At the summit, attendees participated in a workshop based on an actual exercise conducted by the board and management team of an industrial company. Teams identified a range of possible new products, services, revenue streams and internal opportunities for change because of trends, such as the increase in extreme weather events, the aging US population, the rise of robotics and drones, and the increased focus on sustainability concerns. These “future-back” visioning sessions can be extremely useful tools, said Michael Kanazawa, of Ernst & Young LLP. “When boards create venues for these types of open discussions, it creates an opportunity to challenge long-standing assumptions in the company’s strategic plans that may be obsolete.”
Summit participants identified several other considerations for board oversight of strategy and innovation, including:
- Establish a clear and shared definition of corporate purpose as the foundation for the future strategy. Ask the question: why do we exist?
- Select leaders who have vision, not just the ability to generate short-term results. Adjust leadership succession and development criteria accordingly.
- In strategy sessions with management, ask leaders to share the strategic options that were not chosen, and why.
- Ensure that performance metrics reward innovation and recognize that some level of failure will be involved.
These and other conversations can start to change the company’s culture of innovation, leading to different results. But time is never on your side. One speaker at the summit summarized the call to action as, “you have to self-disrupt before you self-destruct.”
A new road map for oversight
One director explained that, “short-term results do matter — otherwise you won’t have the right to exist,” he said. “But they shouldn’t dominate long-term concerns.” He went on to explain that achieving the right balance involves governance to protect the long-term investor.
Boards should consider the Business Roundtable’s recent Statement on the Purpose of a Corporation, which suggests companies balance a short-term “stockholder perspective” with a long-term “stakeholder perspective,” encompassing employees, consumers and society.
The Chief Executives for Corporate Purpose (CECP) maintains that a company’s social strategy — “how it engages with key stakeholders, including employees, communities, investors and customers” — determines its success. The CECP calls for boards to consider several steps, including clearly defining the company’s purpose and discussing strategy at every meeting.
To act on these recommendations, boards and management may want to consider the four key drivers of long-term growth identified in the Embankment Project for Inclusive Capital (EPIC), which are talent, innovation and consumer trends, society and the environment, and corporate governance. EPIC’s Long-Term Value Framework provides an approach companies can take to identify and evaluate company-relevant key value drivers and develop nonfinancial metrics that can help clarify value and value creation.
The best boards are defined by diversity in their background and experience. For instance, some boards are adding academics and others who have never been general managers. This outside perspective can help identify challenges or risks that might otherwise be overlooked.
Bringing the outside in
How do board members keep up with all of the new technologies, business models and process innovations? Is the board digitally savvy? Does the board’s skills matrix need to be updated to reflect the skills and experiences that will be needed in the future? How do they get at the unknown unknowns? Or learn enough to oversee a duality of strategy and push for effective innovation?
Directors can address the challenge of understanding change by opening the doors of their boardrooms and bringing the outside in — in the form of new perspectives, new directors and new data. Outside points of view can be brought by customers and suppliers, investment analysts, regulators, academics and others, even if what they say challenges a cherished legacy. As one director suggested, “The new mantra is ‘What got you here, won’t get you there.’”
A particularly powerful approach, said Woody Driggs, Americas EY wavespace™ Leader, is giving board members and senior leaders an opportunity to experience emerging technologies together. “When we conduct immersive learning sessions with clients, it helps them reimagine business problems in a completely new way: it’s like doing three months’ worth of work in three days,” Driggs said. During the summit, directors spent time at Ernst & Young LLP’s Chelsea, New York, wavespace™, engaging with live demonstrations of blockchain technology, artificial intelligence, virtual reality and advanced data analytics.
At the end of the demonstrations, one attendee commented, “This experience showed me how easy it is for companies to fall behind. As directors, we must look for ways to encourage our own and our management teams’ exposure to digital disrupters on an ongoing basis.”
Indeed, consideration of value drivers has changed, and in this era of digital disruption, a transformative view of value drivers is critical.