Scanning the horizon: Boards balance innovation, regulation and risk

The heightened level of disruption calls for greater analysis and intelligence in planning, forecasting and investing in innovation. Directors have long made use of various risk sensing tools aimed at identifying potential threats across select areas of their companies’ businesses and industries. Largely employed in the areas of security, compliance and ethics, these tools are an invaluable component of the overall enterprise risk evaluation process. In today’s rapidly changing environment, however, there’s an increased need for boards to better leverage risk sensing tools in conjunction with preparing for and anticipating the future, including innovation and changing customer needs.

1 – Developing Anticipatory Risk Evaluation Processes The high cost of innovation and related execution risk requires boards to adopt a higher level of anticipatory functionality in their companies’ risk sensing processes, especially with regard to assessing the regulatory landscape. For example, search technology can now be customized with tailored filters to monitor for regulatory commentary, news and opinions across social media, press releases, blogs, trade associations and congressional meetings, among other platforms. This searching capability can be linked to regulatory topics that may impact very specific areas where a company is innovating. Whether managed in-house or through a third party, this customized scanning process can aid decision-making on investment spending well in advance, reducing risk.

2 – Integrating Risk and Innovation in Real time Boards have traditionally utilized risk evaluation analysis studies on an annual basis to monitor for issues that may impact their companies’ products, brands and operating systems. However, given the disruption occurring across so many industries, boards increasingly require quarterly risk evaluation reports, particularly as they invest in innovation. This process, which involves both scenario planning and visioning, can also be aided by bringing in external experts. By leveraging analysts from respected industry research firms like Gartner and seasoned operating experts from technology companies like Amazon, Google and Microsoft, boards are more likely to recognize disruption and develop new insights regarding the future. Their way of thinking is also more likely to be challenged with the addition of outside opinions, which is the goal of this process.

3 – Leveraging Regulation to Drive Innovation and Growth Sometimes, the tables can be turned, whereby companies can develop product, M&A and go-to-market strategies by anticipating regulatory change. This requires boards to analyze legislative trends with an eye toward how these developments can not only disrupt current business models but also support viable opportunities for growth. While not uncommon, the key is really about how companies monitor such change and embrace it through effective strategic planning. For example, Cummins, Inc., a leading designer and manufacturer of diesel and alternative fuel engines, made it a priority to work directly with regulators to gain a deep understanding regarding the science of emissions testing. By interacting with industry regulatory agencies, the company took a very proactive and transparent approach to developing best-practices in emissions testing methodologies. In turn, Cummins has evolved into a global industry leader in this space. Other industries where select companies have taken a similar approach include telecommunications, aerospace & defense and chemicals, to name a few.

Boards need to take into account what regulations and competitive developments may come to pass over a specific period of time and consider how such actions may impact innovation initiatives under way. Investment spending on new products and services should be combined with customized risk sensing processes that deliver ongoing insights in real-time. Boards can’t completely see into the future, but they can scan the horizon to anticipate change and the roadblocks and opportunities it presents. Given the disruptive environment, tailoring and accelerating risk evaluation is vital to good governance and effective planning.