*Originally posted on NACD BoardTalk on July 1, 2019*
Innovation is top of mind for most C-Suite executives and directors of companies, and both have every reason to prioritize innovation as part of the company’s strategy. According to a study by Credit Suisse, the average lifespan of a S&P 500 company is now less than 20 years compared to 60 years in the 1950s. Additionally, Mercer’s 2019 Talent Trends Survey found that 73 percent of executives predict significant industry disruption in the next three years, up sharply from 26 percent in 2018. In many industries, continued innovation is critical to a company’s ability to survive and thrive.
In the recent past, having a dedicated, centralized innovation team seemed like the obvious answer to this corporate imperative, and companies made the move to create such teams – the number of corporate innovation centers has grown from over 300 to 580 from 2015 to 2017. Unfortunately, the success of these innovation centers has been mixed. Centers that tend to lag in performance usually have unclear strategic goals, suboptimal set-up, and vaguely defined success metrics.
Developing a culture of innovation requires commitment from the top, starting with the CEO. The company’s CEO needs to define what innovation means to the firm, be its biggest advocate, and get the entire leadership team’s buy-in and support – including the backing of the board. Boards should make sure that the innovation strategy is forward looking with a balance of incremental and disruptive goals. Once the vision is defined, leaders need to infuse innovation into the company’s DNA by cultivating an open-minded and intellectually curious culture that is ready for change.
To truly embrace a culture that is open and prone to innovation, CEOs are also looking to their chief human resources officers (CHROs) to help lead this cultural change and drive innovation.
The role of the CHRO has evolved, and it has never been more critical for the board to focus on this role’s ability to drive a culture of innovation throughout the organization. To enable innovation at scale, having a sound people strategy is equally important as having the right infrastructure, processes, and tools.
When considering the CHRO’s role in setting the framework to build a workforce that drives innovation, the board should consider how the CHRO is leveraging the following four building blocks:
1. Talent Identification
The most important building block for the CHRO’s talent strategy is identifying the right people. One could argue that innovation is an innate skill, and not a skill that is developed. In reality, the answer is, “it depends.” The company’s definition of innovation drives the types of talent needed, whether the talent can be developed from within, and if recruitment from outside needs to happen. People also have varying degrees of innovative talent. Organizations may have a limited number of innovation whizzes available to create transformative ideas, but many are capable of developing incremental innovations to improve existing solutions or modernize core businesses with the right training, support, and tools.
The board and management need to think beyond traditional approaches to identify the right talent and teams to lead innovative initiatives. Depending on the level of disruption required, the board and management may need to urge the CHRO to consider external talent such as seasoned entrepreneurs to get an injection of fresh ideas. The CHRO should keep a close pulse on innovation teams on a regular basis, and report back to the CEO and board to ensure the firm has a strong pipeline of talent suited for innovation.
2. Diversity and Inclusion
It is no secret that diversity drives innovation. Diversity in this context extends beyond gender, race, and ethnicity, and includes experiences, expertise, perspectives, and even working styles. Individuals with differing thoughts can result in dissent and conflict, but this should be viewed as the gateway towards developing breakthrough ideas. Inclusion must come hand-in-hand with diversity. One can only maximize the potential of a diverse team when each individual’s differences are respected and valued. In addition, a diverse and inclusive workforce ensures that the innovations created are reflective of the organization’s diverse customer base. The board should embrace and work with the CEO and CHRO to measure how diversity and inclusion impacts innovation and the company’s people strategy on an ongoing basis.
3. Performance Management
Since innovation development processes are agile in nature, workforce performance management and metrics should align with “test and learn” principles. The “test and learn” approach ensures that projects can fail fast and pivot as needed. To encourage such behavior, performance management also needs to allow continuous and open feedback to enable individuals to adapt according to project needs. The board and CEO can make this feedback loop a priority by measuring how the CHRO structures performance reviews at the firm.
Disruptive innovation initiatives require a longer time horizon to realize their potential and impact. As such, these initiatives should not be measured on a quarterly basis. Setting key milestones that could be an early indicator of success will help boards monitor progress. Although driving revenue, profit, and return on investment growth are the ultimate goals of innovation, non-financial metrics are not to be ignored and are arguably equally important. These metrics include, but not limited to, enhanced company brand, increased ability to attract top talent, improved customer satisfaction, speed to decision making and execution, ability to break down silos, the number of ideas in the pipeline, and increased digital presence and digitization across the firm.
4. Learning and Development
In this rapidly changing environment, it is critical for all employees to be on top of key trends and develop new skills – the board included. Besides formal training courses, entrepreneurs and start-ups are excellent channels for corporate “intrapreneur” learning. Including exposure to these resources as part of a corporate people strategy could yield measurable benefits that the board could use to assess efficacy of the program. As an example, Mercer piloted a learning program with NewCampus, a startup that invites entrepreneurs around the world to share their expertise and experiences with Mercer colleagues. This type of alternative learning is a great source of inspiration for new ideas. For companies with dedicated innovation centers, having rotational programs will enable organizations to build stronger innovation muscle, share what has been learned, and develop skills with broader employee populations to achieve greater impact.
For CHROs to drive innovation, they need to innovate and reimagine the HR function they lead. The CHRO and his or her team at entrepreneurial companies are more progressive in their thinking, willing to experiment, and thrive on setting new industry standards. If companies believe that their people are the ultimate sustainable competitive advantage – the power for creating innovations for the firm – the CHRO and that person’s entire team should be the key to unlocking human capital potential at the firm. The board and CEO need to empower the CHRO to experiment, and that could be as simple as trying out new technologies and policies. The time to do so is now.