Innovation is essential for value creation, both for individual companies and for the UK economy as a whole. The development and diffusion of new processes and technologies is a significant driver of economic growth and productivity.
It is not just an issue for high-growth or technology-led companies. All companies should aim to be innovative in their own terms. Meeting the economic and sustainability challenges that face the UK—such as the transition to net zero—will require both breakthrough and incremental innovation.
In many respects, the UK has a good story to tell. In 2021, it was ranked as the fourth most innovative economy in the world. However, look below the headline and it is clear that our performance is mixed. Evidence shows that while some UK companies and sectors are highly innovative, there is a long tail of non-innovative companies of all sizes. That is something that needs to be addressed if the economy is to thrive.
There are many different factors that affect whether and how organisations innovate, such as the availability of skills and capital and public policy measures such as tax incentives. However, unless companies are governed in a way that is conducive to innovation, they are unlikely to be in a position to take advantage of new opportunities.
This is the reason that The IoD Centre for Corporate Governance launched an inquiry earlier this year to explore the extent to which companies’ governance arrangements and the actions of investors and regulators encourage or deter innovation. We have now completed the evidence-gathering phase of our inquiry, and will be publishing a report on our findings before the end of the year.
As always seems to be the case when assessing the impact of governance, it is difficult to establish a definitive link between specific practices and innovation performance—particularly if you are speaking to organisations ranging from small start-ups to major listed companies, as we have been doing.
An agile approach
One observation we have made from those discussions is that the function of governance in relation to innovation may differ depending on a company’s size and age. In many start-ups, its main function appears to be to create a structure to help turn an idea or technology into a profitable product or service. By contrast, for larger and more established companies, one of its functions seems to be to recreate the characteristics of successful start-ups—being agile and joined-up and having a culture that encourages innovation.
While it is not possible to point to any single governance practice or combination of them that will ‘fix innovation’, some recurring themes have emerged from our research and discussions. They include:
• There does seem to be some correlation between diversity—in the broader sense of the word—at board level and successful innovation. In our discussions, particular emphasis was placed on the importance of having individuals with an entrepreneurial background and creative mindset on the board to balance those who are more risk-averse.
• While the board does not necessarily need deep expertise in technology or other building blocks of innovation, it does need to understand how innovation is relevant to its own business model and strategy. What is not understood is not valued.
• Successful innovation is a company-wide—not a standalone—activity. An idea or technology needs to be implemented in a way that helps the company to meet its objectives. This has implications for organisational structure and ways of working to ensure that all parts of the company are aligned and willing and able to contribute.
• On a related point, many of the people we spoke to emphasised the importance of having a corporate culture that is conducive to innovation, in which employees felt they were encouraged to bring forward ideas and had ‘permission to fail’. Our impression was that many boards struggle to operationalise this in terms of, for example, incentives and performance assessment.
Risk and regulation
As well as considering the impact of companies’ governance structures and processes, we have also looked at the role of investors and regulators.
Many of those we spoke to working in or with companies lamented the shortage of ‘patient capital’ in both public and private markets. Successful innovation often requires a long lead time and always involves an element of risk, neither of which appeals to owners seeking quick returns.
As regards regulation, there were two main messages. In the view of many of those that we spoke to, the cumulative effect of regulation has been to make boards more risk-averse and, consequently, less willing to invest in innovation. There was also a desire for regulators to take greater account of the impact on innovation when developing rules and policies.
We will be addressing all of these issues and more in our report. We will shortly be announcing the publication date and details of the launch event, so keep an eye on the Centre’s website and social media for details.
Chris Hodge is senior adviser at The IoD Centre for Corporate Governance