A clarion call for board governance renewal

Innovation, technology and disruption tops the agenda

conference room discuss In his book, The Road Ahead, Bill Gates noted of the evolution of personal computing: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.” Twenty-three years later, that statement is more relevant than ever for today’s boards and audit committees as they navigate today’s choppy waters of innovation, technology and economic changes.

Now, more than ever, boards must actively work to understand innovation, technology, and economic trends that will impact the long-term growth of their companies. During “Board Governance in a Time of Disruption,” Grant Thornton’s Insight Exchange exclusively for board and audit committee members, Nichole Jordan, national managing partner, Markets, Clients and Industries, explained, “We know boards set the tone with management for the entire organization. Embracing the changes that are needed to maintain a competitive edge will empower the entire organization to adapt, grow and succeed.”

Peter Gleason, president and CEO, National Association of Corporate Directors, suggested that today’s complex environment requires boards and management to look differently at how they create their business strategy. “It requires looking at the environment we’re operating in and evaluating the assumptions that underlie our business strategy,” he said. “Those assumptions may be correct today but six months from now, they may not be correct given the changing regulatory, political and disruptive environments.”

Gleason added, “The status quo is not going to enable us to move forward. It’s going to enable us to stay current and that’s not enough. We’ve got to move forward at a faster pace in order to be competitive.”

Learn more: operating computerHow boards can build  risk-resilient organizations “Before organizations can succeed in today’s environment of constant disruption, boards must heed the clarion call for governance renewal,” asserted Sheila Hooda, independent director, Mutual of Omaha and Virtus Investment Partners. She emphasized that what is truly needed is a brand new way of thinking about board management engagement and the role that boards play in managing change and disruption.

“High performance governance leads; it does not follow,” Hooda explained. “A stronger partnership with management is needed to share ownership of the innovation strategy. This will require a higher level of trust and transparency and a heightened, though well-considered approach to risk that is embedded in the culture.”

Responding to the urgent call for governance renewal centers around six primary board priorities, according to Hooda:

  1. Board oversight of strategy discussions. No longer relegated to once a year exercises, integrated strategy discussions must be integrated with the technology, risk and culture agendas. They must serve as the core element of every board meeting and even via targeted discussions conducted between regular board meetings.
  2. Board composition. Facilitating breakthrough innovation and managing ongoing disruption very likely will require a rethinking of board composition, skills and processes. For example, boards may consider adding a digital director with deep skills in one or more advanced technologies, establishing an advisory board with technology advisors and consultants or collaborating with technology companies with deep expertise and specific skills sets.
  3. Strategy priorities. Discussions about innovation, disruption, the competitive landscape and technological changes must be prioritized as a core element of the board agenda. Sufficient time should be allocated to brainstorming, education, debate and discussion.
  4. Innovation metrics. Too often, organizations fail to define how they will track innovation and their preparedness for dealing with disruption. Such metrics need to take into account the time and resources dedicated to “white spaces”---the time spent on experimenting, thinking, brainstorming and trying different things across the entire organization, not just within a product development team.
  5. A risk-taking culture. Due to a high level of uncertainty in today’s changing landscape, Hooda suggests that organizations need to be willing to move beyond evolutionary innovation and embrace revolutionary innovation in order to truly differentiate themselves. This will necessarily involve managing risks that come with breakthrough innovation. “It’s difficult to predict, quantify and plan for innovation,” she said. “A lot of it comes down to gut, experience and sensing the markets and customer needs. Fostering a culture that is receptive to risk and possible failure is a critical aspect of board governance. Management needs to figure out ways to learn fast, fail fast and move on if things aren’t working.”
  6. Board oversight of the talent agenda. Often overlooked, talent strategies and the ability to transform an organization’s workforce helps companies to navigate disruption and foster innovation. In this context, Hooda noted that board oversight of a company’s innovation agenda includes having a clear mission for the talent agenda and aligning employee engagement and retention. “It includes reskilling and retraining to meet new work demands,” she said. “It also includes dealing with new workforce models and providing compensation and incentives to promote ethical environments.”

10 tips to ignite innovation

  1. Integrate technology, risk and culture strategy
  2. Define mission for talent agenda
  3. Co-own innovation strategy with management
  4. Ensure the board is fit for purpose
  5. Schedule time for big picture thinking
  6. Change the management and board dialogue
  7. Refashion board composition
  8. Tap into board diversity and new skills
  9. Rethink talent acquisition, skills and training
  10. Leverage benefits of data analytics
Leading through disruption and fostering innovation is not easy and will require a delicate rebalance of the fiduciary responsibility of the board and the executive power of management, Hooda suggested. Sufficient time should be allocated to brainstorming, education, debate and discussion.

A new board-management model With uncertainty and change around every corner, NACD’s Gleason noted that it’s critical to distinguish between hype and reality when it comes to innovation and be prepared to develop an adaptive governance environment.

Related topic: Businessmen talking in conference room Get future ready with audit outlook “Boards need to recognize that innovation probably is not going to come from one game-changing idea but rather from a series of innovations that change the way they think about their business,” Gleason explained. “That’s going to transform the company and require them to think constantly about innovation.”

However, doing so means taking a hard look and assessing whether there is an appropriate diversity of perspectives sitting around the board table. “Organizations need to determine whether they have the right perspectives to help them compete in an ultra, fast-paced competitive environment and assess whether ideas or technologies need to change in order to move in the right direction,” Gleason said.

To get there, management and their boards need to begin to have a different kind of dialogue, one that is characterized less by fully baked ideas and more about an open-door policy characterized by a free exchange of ideas and perspectives. Gleason suggested that shift requires a new vulnerability on the part of management and the willingness to seek out board members’ perspectives and honest feedback about ideas.

An adaptive form of governance also requires both management and boards to stay current which is a major challenge in the face of constant change. “We need to be creating some space to have blue ocean type of thinking so that you can discuss alternatives, changing assumptions and the competitive environment on a regular basis,” Gleason said.

Technology: business driver and differentiator In today’s complex environment, innovation, technology and disruption are intricately connected. Innovation driven by technology is disrupting industries and business models at an accelerated pace. From Blockchain and Internet of Things to artificial intelligence, augmented reality and machine learning, there is an endless list of new technologies to consider.

As Hooda noted, “Technology has moved from being an enabler of business strategy to becoming the primary driver and key differentiator. Literally, technology has become the heart of the business and brings with it both opportunities and unknown risks. Companies that do not accordingly modify their strategy to keep this whole disruptive technology tsunami at bay will lose their competitive advantage.”

Jeff Burgess, Grant Thornton national managing partner, Audit Services, suggested that boards and audit committees must be prepared to act as true change agents. “Embrace change, challenge your management and your auditors to drive the use of that change to improve the quality of reporting and audits to deliver greater value.”

While it’s difficult to predict technology innovations that will be coming through the pipeline over the next few years, Burgess suggests five key technologies will be critical to organizations’ innovation strategy:

  • Centralization. Look for auditors to expand their use of offshore and onshore centers of excellence to perform routine procedures faster and with greater quality.
  • Automation and robotics. Process automation will continue to be leveraged to eliminate broad categories of manual data entry which will allow for a greater degree of quality and efficiency.
  • Strategy priorities. Discussions about innovation, disruption, the competitive landscape and technological changes must be prioritized as a core element of the board agenda. Sufficient time should be allocated to brainstorming, education, debate and discussion.
  • Data analytics. Commonly used in most large firms today, data analytics will continue to gain importance and will provide management with better insights to improve the performance of the business.
  • Artificial intelligence. Some firms are beginning to experiment with artificial intelligence technology in the audit function. AI applications can be used to read large volume of materials such as in contracts and lease agreements, identify anomalies or discrepancies and pinpoint provisions which have the most impact on financial reporting.
  • Blockchain technology. This technology is gaining momentum and provides the ability to dramatically change the financial reporting process and lead to more efficient and higher quality auditing techniques.

Diane Swonk“Firms have lost a muscle memory on what hiring in a tight labor market really means.”

       Diane Swonk, Chief Economist
Despite the opportunities emerging technologies provide, Burgess acknowledged that change does not come easy. “There is a fear of the unknown,” he said. “What do the technologies mean? How are they going to disrupt our business? Will that disruption be positive or negative? Both embracing change and then driving change through a strong change management process will be extremely critical to the overall success of being able to employ these technologies.”

Labor shortage drives new talent strategies It is impossible to leverage any new technologies or execute an innovation strategy without taking into account economic forces, including talent and workforce trends. With the Federal Reserve signaling three rate hikes this year and forecasting a 3.6% unemployment rate by 2019, it’s clear that dealing with a labor shortage will be on the agenda of many businesses.

Diane Swonk, Grant Thornton’s Chief Economist, noted that “It’s really important to think about the composition of the labor force. Millennials are the most educated and diverse generation of workers we have ever produced, but they are still a moving target. We need to be able to tap into these workers in a different way.”

As acute labor shortages are emerging, Swonk suggested that companies will be forced to leverage technology to more effectively train and bridge a widening skills gap. “This means much more than standardizing tech teaching on computers. It means rethinking the how and who we hire.”

For example, companies will need to rethink how they use technology to recruit prospective applicants. Online job application systems are one prime example. “Our research suggests that that very technology is now becoming a barrier instead of a portal to hiring non-traditional but more loyal and productive applicants,” Swonk explained. “This is a whole new world and technology can be a key to unlock it but we’ve got to be very careful how we use that key.”

Gain more insights: Woman and man seated in lobby Put audit data analytics into action As firms struggle to fill skill gaps and attract top talent in a tight labor market, technology will play a key role as a lever for firms to get ahead of workforce challenges. “We’ve been lagging in technology so a lot of catch-up needs to be done,” Swonk suggested. “What works in Silicon Valley doesn’t always work in actual reality. While technology has actually increased the demand for very knowledge-based, highly educated, very sophisticated workers, it has also lowered the demand for lower-skilled workers. The combination means we’re always chasing a moving target. This is all happening at the same time that long-term unemployment has eroded skills and we’ve not invested in human capital. We’re going to need technology to bridge some of those skills.”

Swonk added, “Firms have lost a muscle memory on what hiring in a tight labor market really means. It’s been a long time since we’ve had such a tight labor market that anyone who could breathe could have a job.”

So how can firms get a leg up on these workforce challenges? Swonk offers these three guidelines:

  • Tap into diversity. The evidence is overwhelming that diversity improves decision making and the bottom line. Whether visible or invisible, diversity in all its forms can provide a workforce with those perspectives so critical to innovation and growth.
  • Leverage wisdom of older workers. Focus on retaining and retraining older workers to tap into their knowledge base and transition them into a new world of working that is less manual and more technological.
  • Rethink talent acquisition. Whether leveraging contingent workers or those from abroad, firms will need to change who and how they hire. Refashioning HR departments as portals, rather than barriers to entry alongside technology that can help bridge the skills gap will be critical to winning the war on talent.

Today’s boards and audit committees have a full agenda in overseeing their organizations’ strategy agenda integrated with innovation, technology, risk and culture. Staying current is critical to serving as a true change agent for the business. There are a variety of ways to stay current and leverage different thinking. From establishing advisory boards and consulting with venture capitalists and technology companies to attending a variety of technology conferences or leveraging the power of peer exchanges to share ideas and real world solutions, it’s incumbent on board and audit committee members to pursue a continual quest for learning in order to help drive the innovation agenda.

Contacts Diane Swonk Diane Swonk
Chief Economist
T: +1 312 602 8971

Nichole Jordan Nichole Jordan
National Managing Partner, Markets, Clients & Industries
T: +1 212 624 5310

Jeff Burgess Jeff Burgess
National Managing Partner, Audit Services
T: +1 704 632 3940