How future-oriented company boards drive innovation

Publicly-listed companies are under growing pressure to deliver short-term results while at the same time driving long-term innovation. It is therefore crucial for the board to focus on the company’s long-term strategic development. In academia and in the business community, there are increasing calls for bringing more relevant expertise to the boardroom to be able to master the challenges of the future. However, this expertise only pays off if directors actually share it as part of their governance responsibilities.

WU Professor Patricia Klarner, head of the Institute for Organization Design, investigates the role of the board in long-term, high-risk product innovation.
Within her study, Professor Klarner and her coauthors studied four leading pharmaceutical companies from the US and Europe. They interviewed board members and employees and analyzed detailed secondary data on the companies, their strategic activities, and the composition of the boards.

The gatekeeper role: Sharing innovation-related expertise

“One of our key findings is that the boards of innovative companies are characterized by a specific board design and specific governance behaviors. They pool their scientific expertise in specialized board committees. Committee members actively engage in an exchange of ideas with managers and employees involved in research and development projects to find out more about the company’s current activities and to contribute their own expertise,” explains Professor Klarner. “We found that in addition to official meetings, informal and spontaneous interactions with employees were particularly important factors in facilitating the exchange of ideas.”
A strong innovation culture on the board strengthens this dialogue between directors and the organization. Directors who reach out to executives and employees at the forefront of R&D to learn about and discuss innovation activities function as important gatekeepers for the entire board, sharing their insights with other directors who lack specific innovation expertise. In this way, the entire board – a body with a very diverse composition – is then able to discuss strategic aspects of the innovation pipeline.

Insights into the future-oriented board

To be able to steer long-term strategy, board members need to have expertise in areas of strategic importance for the company, and they need to share this expertise as part of their governance responsibilities.
The study shows that it is not only important to identify the expertise required from board members but also to set up structures to facilitate the exchange of knowledge between directors and the organization. “Specialist or ad-hoc committees are particularly well suited to achieve this goal,” Professor Klarner points out. It is also very important to evaluate the directors’ ability to communicate effectively with different employees. “In many cases, shareholder representatives and regulatory authorities only call for the disclosure of the expertise that the board brings to the table. It is equally important, however, that directors play an active role in strategic discussions and have the required soft skills,” says Patricia Klarner. This involves discussions about long-term strategic issues with specialists and people working in different areas.