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Innovation at board level. …

Innovation at board level.

Are the board of directors in public listed companies a driver or barrier to innovation?

What should their role be?

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  • 1. REPORT Innovationby Azim Pawanchik, Alpha Catalyst Consulting Innovation 54 ON  BOARD PUBLIC LISTED | February 2012
  • 2. A s 2012 unfolds before us, many companies of our companies to embark on risky ventures means scramble to devise and formulate new lower chances of Malaysian companies growing through strategies for growth. Some continue on innovation and being in the same league as Apple, the same path by increasing efficiency Google or Facebook.and cutting cost, while others divest their non-corebusinesses or acquire other companies to increase Innovation push and pulltheir scale or gain access to new markets. The moredaring companies such as Apple Inc AAPL NASDAQ, In Malaysia, we only have one company that canGoogle Inc GOOG NASDAQ and Facebook opt for proudly walk in the shadows of Apple; AirAsia Bhdinnovation as their source of growth. Innovation as AIRASIA 5099. It is the only Malaysian company whicha growth strategy is very risky, but the returns are has ever been included in Fast Company ’s ‘ World’s 50substantial. At the end of 2011, Apple was named Most Innovative Companies’. The accolades for AirAsia runthe most innovative company and the most valuable a mile long, the latest being the ‘ World’s Best Low-Costtechnology company in the world. Apple, which has Airline’ for customer Product and Ser vice Quality at theconstantly been challenging Exxon Mobil Corp XOM 2011 World Airline Awards, one which they have won forNYSE for the number one spot as the highest-valued the 3rd consecutive year. True to the ethos of businesspublicly traded company in the US, garnered the title model innovation, in March 2011, AirAsia announced afrom delivering innovation after innovation; the kind new joint venture with Expedia Inc EXPE NASDAQ, thethat changed people’s lives, created paradigm and world’s largest online travel company. This is the firstlifestyle shifts, and turned conventional industries partnership of its kind between a low-cost carrier and anupside down. online travel agent anywhere in the world. In Malaysia innovation is still at its nascent stage, Even though established just a decade ago, AirAsiaas our companies are still efficiency-driven instead of has been key in transforming the Asian airline industr y.innovation-driven. The level of attention and investment Among others, it changed the skyline by introducing theinto innovation is still ver y low compared to companies region’s first long-haul low-cost airline; AirAsia X. Theirfrom developed countries. Many still associate innovation attempt to disrupt the market has not always been easy,with creativity, R&D and technology, and less with as early this year AirAsia X announced the cancellationprocesses, culture, design and risk. The lack of willingness of the London, Paris, New Delhi and Mumbai routes. In Figure 1: Elements innovation is most associated with Source: Leading InnovAsian - Embedding Innovation Culture in Malaysian Organizations (2010) February 2012 | PUBLIC LISTED 55
  • 3. REPORT Innovation Figure 2: The Barriers to Innovation within Malaysia Source: Leading InnovAsian - Embedding Innovation Culture in Mal aysian Organizations (2010) a report by a local newspaper, the withdrawal of the and courage to make innovation part of their company London route alone would affect 14,000 students. What culture and source of competitiveness? then would the impact be on their brand and investors; present and future? In this instance, what is the role Role of the board of the board of directors? Should the board tone down AirAsia X’s appetite for risk and ask them to focus only With the demise of Steve Jobs in October 2011, where they have proven to be successful, or should the Apple’s board has the gargantuan role to keep up the board allow them to be bolder and take on more risk, momentum of innovation and continue to grow the especially with the rise of competition from Singapore’s company. The board and its directors, who have so far budget long-haul airline, Scoot? been in the shadows of such a visionar y man who was Innovation is now a permanent agenda for companies both chief executive officer (CEO) and chairman of the operating in Malaysia with the launch of the New board, will now have to question their strategy, their role Economic Mode (NEM), 10th Malaysia Plan (10MP), the and possibly even their competency. If Malaysian listed National Innovation Act 2010 and many other related companies are expected to innovate too, do they have the initiatives. In 2012, the Environmental, Social and mix of visionar y board members who fully understands Governance (ESG) Index will be introduced by Bursa innovation and can ensure that their company is creating Malaysia to attract more socially responsible investment value through innovation? (SRI) funds into Malaysia. Surely, this in itself is a sign that One of the key roles of the board is to help overcome companies need to start thinking about their processes the barriers to innovation. The Malaysian Innovation and business models and possibly even about social Climate Report (2010) disclosed that the biggest obstacle innovation. The Companies Commission of Malaysia that many companies face is that they don’t have a clear Training Academy (COMTRAC) is also introducing their direction on where to innovate, secondly, they don’t really ‘ Triple Helix’ concept, weaving elements of corporate understand the customers’ needs and thirdly, many lack governance, corporate responsibility and innovation to the funds (or risk capital) to develop and commercialize spur companies to achieve a higher growth. The question their ideas (Figure 2). In our personal encounters with lies, are the board of directors of our public-listed top management, some blame the middle managers companies ready to take on the role to drive innovation in while others blame their board members for being too their respective companies? Do they have the capability conser vative.56 PUBLIC LISTED | February 2012
  • 4. Based on the our analysis, the board can add value solutions. However, in an Asian environment, how manyat four stages of the innovation process, based on the directors would be willing to speak up, out of the fearCatalyst for Change® Innovation Framework. of being labelled as a troublemaker or upsetting the chairman or CEO of the company?C1: Conception(where the strategic need and direction for innovation C3: Conversionis identified) (where the selection of projects are made) Here, the board must ensure that innovation is The board needs to provide the mandate for thepart of their board meeting agenda. In a majority of CEO to take on risks and allocate risk capital, and beorganizations, where the CEO’s tenure typically lasts willing to approve risky projects and accept that outonly a couple of years, they would be more inclined to of 10 projects, maybe only two shall be successful.focus on short-term gains rather than invest in long- As business environments become more and moreterm innovation projects. The board therefore needs to challenging, board members need to help organizationsmake certain that there is a balance of long- and short- distill their strategic direction. This is again whereterm growth. Think of the risks of remaining the same diversity of the board is an advantage. Whenand also of not exploiting emerging opportunities. venturing into new territories, the board can play a roleTo be able to do this, the board members need to be in evaluating risks. If too risk averse, the company willinnovation ready. Frequently, the board of directors in find moving for ward an arduous task and if the oppositeMalaysian companies comprise of retired senior officials were to happen, the company may find itself spread toofrom the government or private sector who bring thin.with them ‘status’, or financiers who only look at thebottom line. In both instances, they undeniably bring C4: Connectionwith them numerous years of experience however the (where the project is released into the market)question is how apt are they at digesting the new needsand demands of the market? Do they have the relevant Here the board needs to be prepared to supportfunctional experience? Can they understand and relate management in case of failure due to unexpectedto the customer base? The Malaysian Directors Academy market circumstances as the project rolls out. Failure(MINDA) has, since its inception in 2006, been exposing in such situations should be viewed as an investmentdirectors to new skill sets and mindsets required by into innovation. Both Apple and AirAsia X have hadthe board. In the recent years, this has also included their fair share of failures. If boards are more supportiveinnovation and the new role of the board. However, how of failure, it is easy for companies to move ahead intomuch of this new information has been transferred into innovation. This is when company culture comes intopractice in the boardroom? the picture. Innovation has relentlessly been publicized As with other things, per formance is key. The board as going beyond R&D and technology and instead hasshould be no exception. There should be clear and been touted to include mindset and culture. Booz &transparent evaluation criteria for all directors. In a Company also shared, in their 2011 Global Innovationsurvey conducted by Stanford University ’s Rock Center, 1000 Report, that the most crucial factors in drivingmore than half the directors inter viewed thought that innovation are strategic alignment and a culture thatthe board turnover is too low. What is the rate of no supports innovation. How then can the board displayre -election or removal of a board member? Are any and ensure transcendence of an innovation culturecompanies managing the succession planning for board throughout the company? What characteristics shouldmembers to ensure sustainability beyond the current they exhibit? How can the board inject innovation intoCEO and board members? the broad spectrum of governance?C2: Creation Conclusion(where a portfolio of breakthrough/radical ideas aregenerated) Innovation is critical for Malaysian companies, however we don’t have many success stories as yet. We need to At this stage the board needs to encourage their start somewhere and, within organizations, people lookcompany ’s management to provide a portfolio of to the top for signals that its time to change. Hencebreakthrough ideas. Different voices and diversity of to ensure that Malaysian companies can continueideas within the company should be allowed to emerge. creating value, its time for innovation to come into theIf absent, the board should question and push the boardrooms.management to do things differently and think of fresh February 2012| PUBLIC LISTED 57