Orchestrating the future (2)

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Forms of corporate governance for strategic innovation.

If the organs of power in the company decide or should decide on innovation and strategy, in this 2nd part, we are going to consider some different forms of governance.
Orchestrating the future would be the harmonious integration of the following three items:

  • The management of a structured, constant and efficient innovation process.
  • The continuous review of the ‘content’ of this innovation process, the portfolio of projects and programs, aligned with the organization’s strategy.
  • The integration of both, with short-term operational plans, to form a single integrated management process.

Who thinks about the future?

Which means: who is responsible for orchestrating innovation strategy with short-term operations? How are innovation projects, strategic lines, possible and alternative future scenarios going to be integrated and reviewed regularly, with the current moment, the latest information and data, to make decisions?

See summary of the 1st article:

In the 1st article, Orchestrating the future (1) , my thesis was that starting from a certain company size, harmonizing and integrating innovation, as well as the strategic issues of the medium and long term, with daily operations in the short term is a problem that requires special attention.
We saw the evolution from an original process of S&OP (Sales & Operations Planning) towards an Integrated Management or Direction of the company or business. (Integrated Business Management), a main management process that aligns and synchronizes all areas of the business, with a regular, monthly and structured forum that integrates changes and includes problems and opportunities that arise, facilitating decision making.[1]
But it would still be necessary to really “Orchestrate” the future, to end up integrating the important decisions for the future in the medium and long term, which are key in the innovation strategy.

[1] George Palmatier and Colleen Crum. Transitioning From Sales & Operations Planning to Integrated Business Planning. Why Companies Are Evolving to Integrated Business Planning – And What They Are Gaining By Doing So – Oliver Wight Americas

Types of company observed

  1. Family businesses over a certain size
  2. Medium-sized companies, non-family limited or limited companies, with a single activity or business unit.
  3. Large companies, with several business units and a single shareholder (unipersonal) or few of them, and not listed on the stock market
  4. Large companies and publicly traded corporations. Also normally with several business units.
  5. Industrial or agricultural cooperatives
  6. Entities of the third social sector. (NGOs, normally Foundations or Associations)

There are excluded two clearly defined types:

  • Startups, small companies and micro-enterprises.
  • Microenterprises or small family businesses

In both cases, innovation decisions are made personally or in a small group by the entrepreneur/s or founder/s of the company. There are usually no doubts about his leadership, which is clear and not discussed.

Governance models:

One definition of an “innovation governance model” is one that describes how the top executive branch of a company has decided to assign responsibilities for innovation and strategic integration within the organization.
As we will see, the mission of promoting, directing and supervising innovation can be officially entrusted to a particular person, ‘full time’ or not, or it can be assigned to a team of directors, executives or members of the “board”.
Based on this, a preference or focus is already shown more towards the innovation “process”, or more towards the broader and more strategic “content” of innovation.
Governance defines who deals with the key questions; In a strategic approach they would be “content”: What, how much and where do we innovate?, while in the “process” approach they tend to focus on how, who or with whom and with what, we implement or improve the process ?
One thing that is remarkable is that very few companies seem to have taken a systematic approach to identify and compare potential models before choosing one.
When assigning responsibilities there are a number of possibilities.[1]

  • Related to people: the number, position and abilities of them. That is to say: a single person in charge or leader, totally dedicated to the task or not, or to a team of 2 or more people, normally from different functions, (multifunctional).
  • Related to the management or management level and their hierarchical relationships: Senior managers, including the CEO and the executive team, or managers and mid-level people, including or not specialists in fields that are considered key.
  • Totally internal people, or with the contribution of significant external people.

When these options are combined, the governance model is more precisely determined.
Personally, I think it is advisable to take into account possible conflicts of interest between short-term operations (operational processes: Sales, Marketing, production, Supply Chain, etc.), support processes (Finance, HR, IT, etc.) and processes to long and medium term: innovation and strategy.

Being part of the innovation and strategy management team implies a commitment to focus on the future of the company, without being unaware of what is happening in the present and possibly having other operational responsibilities. Sometimes it’s hard.

It is easy to get lost in front of the variety of existing denominations for the positions of directors, executives and property and, shareholders representatives, etc. These denominations in the bodies of governance, vary depending on the legal nature of the organization, business culture, country or geographical area where the company originates, etc. Just a few examples in a small raid. See chart:

Influence of the Origin of the company

The Anglo-Saxon model. A “Board of Directors” is the maximum representation of the property or shareholders, with a “Chairman of the Board” which is a representative role but in some cases may be the same owner or the majority in non-companies. listed and / or family. The Board appoints the “Officers” whose highest responsibility is the CEO, and several others, such as COO, CFO, CTO, CIO, etc. The CEO has the highest executive responsibility, but in some cases, depending on the “Board”, it may not be totally strategic. From there, there may be Presidents or Vice Presidents depending on the CEO or other top executives “Officers”, who exercise day-to-day operational responsibility in the different business areas or divisions.
Companies with Anglo-Saxon corporate governance systems have legislative controls on the ability of shareholders to exercise practical and day-to-day control over the company, as well as control over the “Officers”.
Company culture is often individualistic and based on strong leadership in all positions, and while it is changing, it is very much based on the idea of shareholder value and capital (stock price) growth. Therefore, the interests of shareholders continue to be considered paramount at the expense of other stakeholders. This affects and tends to condition its conception of the “future” and the long term, in such a way that at the end of the 20th century it came to affect its competitiveness as a system compared to that of the Japanese and Central European models, especially.
The Central European or German model. Sometimes called the Continental model, without forgetting that France has some notable differences, especially on trade union issues.
The unions model differs notably from the Anglo-Saxon system, it focuses in participating in the direction, management and control of companies, public or private, from a certain size. (“Mitbestimmung” or Codetermination)
The most important organs of power are the Board of Directors (Vorstand) and the Supervisory Board (Aufsichtsrat). Additionally, there may be a third body, the Council or Advisory Committee (Beirat). The Board of Directors runs the company and is made up of senior managers; the Supervisory Board supervises the Board of Directors (Vorstand) and can appoint or remove its members. The supervisory board is elected by employees and shareholders. The unions, through the Vigilance Committee, intervene in the management of the company (Co-Management), especially in long-term, investment and employment decisions.
The model is more focused on operating the core business in a sustainable and socially responsible manner. Shareholders are viewed as one stakeholder group among others, and as a result, short-term shareholder value is not viewed as the corporation’s primary goal.
The ‘Latin’, or South European, model.
We can include here the model followed mainly by Italian, Spanish and partly French companies (with some particularities), and also in a large part of Latin America.
Generally, corporate governance is structured as follows:
At the highest level: A General Assembly of Shareholders that is made up of people or entities that have capital invested in the company. It normally meets rarely, at least once a year, with few exceptions. In family businesses, the Assembly of partners and the Family Council. In Cooperatives, according to their degree, a General Assembly of Cooperatives and a Governing Council are formed, more or less broad or representative.
At the executive level: Board of directors: it is made up of the representatives of owners, investors and external directors of the company and is the highest executive level. He usually delegates to a CEO who assumes maximum responsibility. In cooperatives, an Executive Committee is usually formed on which the directors depend.
Management level: The General Director (Managing Director), to whom management usually reports, that is, all the people who occupy a management position in the company (Managers, directors).
Within these general lines, the structure can vary greatly from one company to another.
Unions in the “Latin” model have a more “political” orientation and tend to vary considerably from the Anglo-Saxon (Unions) or Central European model. Its maximum representation in the company is the “Company Committee” with representative functions for communication, participation and negotiation of labor issues.
The japanese model.
Governance patterns are structured around two dominant legal relationships: one, between shareholders, customers, suppliers, creditors, and employee unions; the other between administrators, managers and shareholders. Characteristic is the sense of joint responsibility and balance. the word for this balance is “keiretsu”, loyalty between different parties, with suppliers and customers.
Japanese regulators play an important role in corporate policy. Individual investors are viewed as less important than corporations or business entities, the government, and labor groups.

How is the practice?

Taking the above into account, let’s have a look, according to my experience, how the responsibilities of innovation and strategy are resolved and assigned in practice. Subsequent integration with short-term operating plans, to form a single integrated management process, is typically resolved according to the same model.
Depending on the number of people in charge or the composition of the responsible teams, these are the most used models:

a) A single executive director, CEO, managing director, chairman or CEO.

It is a very frequent model in large companies (types 3 and 4 indicated above) and also in some medium-sized companies of type 2 and 1, or medium-sized to large family companies and technology-based ones, although with their particularities.
The senior manager or CEO may be a recognized and charismatic leader, often the founder of the company. There are plenty of examples, especially on the Anglo-Saxon model. (Think Apple, Amazon, Google, Tesla, Oracle, Cisco, Facebook, and the like.)
Some companies have abandoned this model or may do so, when the founder or leader disappears and adopt another type of governance.
When the CEO is in charge of innovation and strategy, the message is often loud and clear to the rest of the organization: innovation is a top priority…or if there are other priorities, it will no longer be.

In some cases, open innovation will allow future acquisitions or “spin-offs”.
At the same time, these senior executives preferentially focus on issues of “content”, new technologies and products, markets or segments, rather than on the innovation “process” itself, which they normally delegate. The delegation of this process should be clear and to which people or team.
In large companies that operate in several sectors or segments, or business groups, generally with several divisions, the different heads of divisions may also exercise ultimate responsibility for innovation in their domain, so we can include them in this model.
However, they will always have the balance, or moderation of the president, responsible for the group, “board” or “chairman”, especially in matters of resources, personnel, long-term investments, etc.

b) One person in charge, Executive Director of Innovation. CIO, CTO or CRO

This system seems to be less common than might be expected. It deserves attention because it can give good results in some organizations. Given that the general responsibility for innovation falls on a single person, it will require the explicit support of the highest manager, CEO or the Board of Directors, especially on the issue of strategy.
Perhaps it is more traditional in technological or engineering companies, where the person in charge of Information (CIO), of Technology (CTO) or of R&D (CRO), is generally seen as a promoter of new products based on technology.
It is a more common model in large corporations, type 3 and 4, or in cooperatives of a certain size, type 5. Apart from this, some service or finance companies, where information technology predominates, such as banks, insurance, etc. The CIO or Chief Information Officer usually plays a key role in the governance of innovation within their companies, frequently assuming this responsibility.

In the Central European and Japanese model, and in sectors such as chemical and pharmaceutical specialties, with a strong scientific or technological tradition, the equivalent of CRO, as executive director or vice president of R+D+I, can also assume this role.
They are normally members of the senior management team and will often be the official spokesperson and promoter of innovation within the Board of Directors.
These ‘senior’ or ‘middle’ level executives or managers focus more naturally on the “content” of innovation, technology development and new products. Or also to the creation of new companies or divisions, almost always technology-based.
They generally focus on issues that affect the effectiveness of R&D and technological development but tend to intervene little in the non-technical parts of the company, changes in culture, operational areas such as marketing and sales, etc. nor in expanding the innovative effort to the entire organization.

c) A team of two senior managers.

The cooperation of two people as an innovation and strategy management team occurs, although less frequently. Most of times, they are managers of a similar level and who come from quite different or opposite specialties or functions; one more attentive to the “process” and the other fully focused in the “contents”, projects or innovation programs and with a strong relationship with the strategy of the company and the executive committee. It is more common in companies with a matrix organization, by processes or projects.
They are selected because, on the one hand, are persons with experience in processes and management of multifunctional teams, and on the other, a functional manager from some operative areas as Marketing or R&D, with a proven strategic capacity and vision of the future. We see this system more in family and/or medium-sized companies in the industrial area.

d) The Senior Management Team or Committee.

All the responsibility for strategy for innovation is assumed by the same senior management team of the company, or a smaller group thereof, including the CEO, and part of the executive directors or “officers”, or members of the Executive Committee.
It is a very frequent form of governance of strategic innovation, especially in large companies, both of the Anglo-Saxon and Central European models, (Types 3 and 4 above)
It may also be appropriate, considering innovation, as a multifunctional and multidisciplinary activity.

The composition of this team of senior managers varies greatly from one company to another.
Typically it can be a combination of technical and commercial leaders, marketing or experts in the type or segment of business. Support processes managers are rarely part of this team, but do help out on financial and HR aspects.
Depending on its composition, this model will tend to a greater degree towards the “content” of the innovation, according to what we have said previously. Therefore, it is advisable to delegate to a person in charge of the “innovation process” that will take care of its structuring and the measurement of its effectiveness.

e) An Innovation Steering Committee or Management Team.

Is a multifunctional team formed by executives , managers and specialists that form the “Steering Committee” or “Management Team responsible for strategic innovation.
It usually involves the appointment of managers, from various functions and from different hierarchical levels, to lead innovation and strategy as a cross-functional team. The group differs from the previous one, because not all its members are part of the senior management team. But the spokesman or person in charge of the team, normally is part of the Executive Committee.
It is perhaps the most widely used system in type 1 family businesses, incorporating in many cases external experts, but also in type 3 and 4 corporations. Significantly, it is also used in type 5 cooperative systems.
In my personal experience, the appointment of this team is usually made between executives, managers and specialists with knowledge, personal motivation and demonstrated commitment to innovation.
Many multinational companies, especially European ones, have chosen this model. As a governance system, it varies significantly from one company to another, both in the level of empowerment of the Committee, and in the approach, in some cases preferentially to the “innovation process” as such, and others more to the “innovation content”.

f) No one in charge

There are, of course, cases in which there is no one in charge of the subject, either as a person or as a team. Simply because there is no structured process for it or it is a temporary and non-continuous process.
In this case, we will surely find three reasons:

  • The one that is most explained when asked is that innovation is such an important part of the company that everyone feels responsible and acts to support it. This is based on management’s belief that innovation is everyone’s job and that therefore the company can count on each function playing its part in it.
  • Another reason is usually explained as the absence of a specific governance model due to temporary circumstances, such as a restructuring drive or the reorganization of a company. Some companies change their models so frequently, generally with each change of Executive Director or CEO, that they have only dealt with the most operational positions in the short term, because the medium or long term, for obvious reasons, they see as “far away”.
  • And finally it also happens, and I think still too frequently, the fact that innovation may not be perceived as really a priority. Generally because the priority focus is survival, or because the short-term operational reality is not satisfactory, for various reasons and it is considered urgent to focus on the immediate day-to-day. It may be because the organization is in chaos or lack of vision, which has led to low margins or negative results.

Conclusions

  • Are there any models that lead to better results than others? The answer that no. There does not seem to be any evidence, neither in my specific experience nor in multiple references consulted. It depends more on the personalized adaptation to the specific company or organization.
  • Could you recommend any system or model, above the others? Of course, but only knowing details of the company or organization, its origin, culture, situation, activity, vision and objectives.

With any model, and also depending on its implementation, we can find unsatisfactory results, and the reasons in general tend to be:

  • Neither the scope of the responsibilities of the type of governance chosen nor the relationships between those of the present and the future have been defined sufficiently broadly.
  • Many companies tend to focus either on the content (basically projects and programs), or on the process and its efficiency, but less frequently on both.
  • Sometimes it is forgotten that innovations and a strategy focused on products and services also require internal innovation in processes or others, that is, innovations in the business model, positioning in the segment or market, changes in culture or maturity as a organization etc
  • Communication between those responsible for governance of innovation and strategy with the operational ones, who have a better understanding of the real changes that occur on a day-to-day basis and who can determine “trends”. Within the communication problems we can also point out those of a poorly communicated or dispersed strategy.
  • Finally, we should mention both internal and environmental changes, normally accelerated and that cause:
    • Failures in the coherence and commitment of management over time.
    • Short-term pressures that dilute focus from long-term efforts;
    • A mismatch between the remuneration system, compensation and incentives, and strategic and innovation objectives.

In any case, the last necessary step for integration will be the proper structured operation of the periodic review of all processes. That is, how in practice, we integrate its operation, for example as already indicated in the previous article and in the following image and its reconciliation and periodic review, to make the appropriate decisions.

This would be the schema:

Periodic reviews in the previous scheme are considered every 7 to 8 weeks, that is, every two months, but they can be adapted to the complexity of the organization and its particularities.

If you wish to enter into a more in-depth analysis, focused on your case, and you think we can help you, contact here:

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Previous article: Orchestrating the future (1)

[1] Different Models in use for Innovation Governance. Innovation Governance in Theory & Practice Collection.  Jean-Philippe Deschamps. Professor of Technology and Innovation Management at IMD. Lausanne.

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