Thursday 9 November 2017

How Boards Drive Innovation

I was invited by the Malaysian Directors Academy (MINDA) to be a panellist at the Bursa Malaysia's Power Breakfast session on innovation. While this was certainly an honour, the bonus was I would be sharing the stage with Ross Dawson, a technologist and futurist from Australia whom I respect very much.

Ross started by sharing his observations on the global state of play around innovation. It was made clear that for companies to remain sustainable and continue to create value for their customers and shareholders, they have to keep on innovating. Otherwise, products would be less competitive, cost will go up and the very business models which worked in the past may have been overtaken by time and competitors.

I shared my observation on how the Securities Commission (SC) decided to facilitate the adoption of financial technology (fintech) by introducing regulatory frameworks for Equity Crowdfunding and Peer-to-Peer lending platforms. At the moment, such funding platforms would only be useful for the small-medium enterprise sector which is small relative to the size of the Malaysian capital market which exceeds RM 1.3 trillion Ringgit. If the SC did not have the innovative mindset, such space would remained a mystery.

A day earlier, when opening the SCxSC 2017, the SC Chairman, Tan Sri Ranjit Singh announced that the platforms had succeeded in promoting 450 campaigns, raising RM 50 million in a space of more than a year. 70% of the businesses which benefitted were founded by women and youth while 40% of investors are below the age of 35.

At present, both the SC and Bank Negara Malaysia are at the forefront in transforming the financial services landscape by enabling financial institutions and market intermediaries to test their ideas through regulatory sandboxes which allow both sides to experiment. This sandbox approach is very revolutionary for regulators which are well known to be risk-adverse in their approaches towards formulating regulation.

So, how would the board influence innovation? I shared the following points:

Board could steer companies toward being more innovative especially at the strategic level. By challenging management to be clear of the market landscape, market positioning, differentiating from competitors and developing brands which actualise those strategic intents, management would have to develop and implement innovative business initiatives. This would over time, inculcate the mind and culture of innovation.

The other issue around innovation is the risks-tolerance towards failures. Would the board expects all initiatives to be successful or they could be sending signals that failures are part and parcel of business? By indicating the board's tolerance,  people would be encouraged to explore and test new ideas and would be less restraint to take some risks. However, this does not mean that governance processes are abandoned but managing risks out of innovation should be part of the framework.

I do not believe that there should be a specific board committee on innovation as such mindset should be applied across all aspects of business. What is more important is the tone and support provided by the board in enabling the companies under their care to test and explore new grounds, guided by boards which are aware of the changing business landscapes, understand where the opportunities are and what could possibly go wrong.

Coming back to Ross, he also explained about the scope of innovation. Innovation is not about applying new technology but it covers broad areas including business models, products and processes. Hence, companies have ample opportunities to be innovative but they need to be very strategic and focus so that positive results could be derived out of such investments.

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