1. There is no longer any
argument that even the
largest and strongest
companies need to innovate
to survive. Volatility in the
Forbes Fortune 500 list of
top global companies has
doubled in the last 15 years
and continues to grow.
An organisational capacity for
innovation is now a required core
competency for any entity wishing to
succeed in the global digital economy.
The evidence is well documented
and compelling. A 2013 report from
PricewaterhouseCoopers1
suggests
that the most successfully innovative
companies are likely to have 62 per cent
more growth than their peers over the
next five years. Another 2013 report, from
the MIT Sloan School of Management,2
identifies that organisations which
were masters of both innovative
digital initiatives and transformational
management skills recorded profitability
26 per cent above average, while
organisations which had neither lagged
by approximately 24 per cent.
The same report revealed that those
organisations which excelled only
in digital competency were 11 per
cent behind their peers, while those
which excelled purely in management
disciplines were approximately nine per
cent ahead of the game. This confirms
the expectation that technology for
technology’s sake is a costly error,
while tightly-run businesses are
profitable, but not sustainably so.
Research has shown that that
good governance contributes to
a healthy bottom line. However,
great governance, which extends to
emerging as well as traditional realms
is the hallmark of highly successful
companies.
The question is: what is the innovation
that drives great companies?
There are multiple definitions of
innovation. I define it as the complete
portfolio of investments in business
improvement — small to large; timid to
radical; efficiencies; new process; new
product; new markets … everything.
Innovation-aware governance aligns
the intent and focus of the organisation
across the complete range of activities
that are required to compete in the
volatile online and global economy.
Ideas are a dime-a-dozen. Choosing
the right ones and having the capacity
to scale them into the market is the key
to success. This is where governance
can deliver the greatest value.
Governance in a volatile economy
Innovation for competitive success
involves a far broader sweep of
activities than the traditional big-ticket
items that come to the attention of
the board. Generally, it is only large
proposals that survive the arduous
hurdles of organisational decision-
making processes. Yet organisations
need to adapt to an era of ‘business-
agile’ practices, that is, they need to
be fast-moving, adaptive, responsive
to the needs of customers, reactive
to movements in the markets and
capable of the timely realisation of
By Danny Davis, ‘The Innovation Coach’
Innovation-awaregovernance:
anenhancedframework
forgrowth
• Establishing a
governance framework
that underpins
innovation for the next
generation of business
success
• Developing
organisational
capacity and clarifying
the director’s role in
innovation
• Governance-led
entrepreneurial
cultural change
Trends & special topics
98
This article was first published in Governance
Directions, the official journal of the Governance
Institute of Australia.

2. opportunities.
Those leading need to ensure that their
organisations are not only open to
learning, but also have the capacity to
change in response to their environment.
The organisation needs to be capable
of controlled experimentation, and able
to adopt successful experimentation
into its core business. The organisation
needs to manage its investment in
initiatives that define its future. Leaders
need to deliberately embark on a journey
through unknowable economic contexts.
Agile, innovative businesses implement
a broad portfolio of traditional and non-
traditional change. For example, Apple
would not have achieved its meteoric
rise to success through invention
alone. Each major development had
to be supported by a string of minor
improvements, efficiencies and step-
changes in its accounting practices,
human resources, shipping, image
and brand and other aspects of
the business. Under the autocratic
leadership of Steve Jobs, the entire
organisation maintained a ruthlessly
aligned focus on commitments to
outcome and a spectacular capacity
for change in order to achieve its
commercial success.
A new model is needed
However, being constantly lectured
about the innovation practices at
organisations such as Apple, Google,
Oracle and even garage-based
start-ups offers little to a mature-
stage Australian organisation which
cannot adopt practices from these
environments. Dictatorial, ‘god-like’
CEO styles are anathema to the
culture of the Australian workplace
and generally unacceptable within our
market ownership regimes.
An alternative approach is required
to enable Australian organisations to
compete and succeed in the globalised
economic context. It needs to be an
approach that builds on our natural
strengths and reverses our natural
weaknesses.
Corporate governance is one of the
core strengths of most mature-stage
Australian organisations. However,
as it stands, Australian directors
and executives are often not able
to engage on a range of critical
‘innovation-based’, competitive issues.
They risk being blinded as to whether
their organisations are appropriately
invested in their own futures. There is
nothing to be found in the profit and
loss statement or the balance sheet
that gives visibility to the quantum,
status, direction, appropriateness or
intent of their portfolios of investment
in innovation. Sporadic, project-based
business cases are a point-in-time
pretence of an understanding of
an uncertain future. Traffic lights
and dashboard systems are a nod
in the right direction, but create no
understanding of value, consequence or
the direction of strategic development.
In a volatile economy, a director’s fiduciary
responsibility extends beyond compliance
and financial probity. A board needs to
ensure that the assets of an organisation
are being invested appropriately and
managed expertly to maximise future
value. How can a director truly fulfil their
fiduciary responsibility if they have no
visibility of and no control as to whether
the resources of an organisation are
being applied effectively and optimally to
initiatives that add to the value of a brand,
competitive positioning, commercial
success and operational effectiveness?
Strategy alone does not go far
enough
Boards have been told for over
20 years that they need to be
more engaged in strategy. Indeed,
authorisation of an appropriate
strategy is one of the core
responsibilities of the board.
But many boards struggle with
strategy. Boards are not constituted
to engage effectively in a process
of detailed strategy development.
Traditional board practices lend
themselves more readily to
compliance-based activities (agency
theory of boards) than to delivering
an operational contribution (resource
theory of boards).
Being engaged with strategy development
becomes even more difficult as the
shape of strategy changes to be more
flexible to operate responsively, agilely
and experimentally in volatile, technology-
driven and disruptive markets. A one-day
offsite session once a year is insufficient
for a board to become engaged actively
and constructively as a partner in strategy
development in the current economic
climate.
A solution to this critical issue needs to
operate effectively within the constraints
and limitations of what a board is
actually able to achieve. The modern
board needs frameworks that allow
it to engage appropriately through a
balanced, comprehensive view of the
organisation’s investment in of all types
of innovation. Boards need to ask: ‘Do
we have an appropriate spread of early,
mid and late-stage developments, large
and small developments, risk and return,
and cash-sinking and cash-producing
development?’.
Boards can ensure they have oversight
of how each initiative fits within the
governance framework, by highlighting
early-stage overspends and delivery
delays and ensuring that project ‘mercy
killings’ are undertaken or deferred.
With appropriate visibility, the board can
consider a wide range of fundamental
questions such as: ‘If we brought to
fruition everything that we are currently
working on, who would we be?’, or ‘Is
that who we want to be?’. This ultimately
enables them to ask: ‘Are we invested
appropriately in our future?’.
Innovation-aware governance enables
the leadership to consider strategic
options in terms of their effect over
time on the portfolio of investment,
its balance and the broader range
of corporate outcomes. Leaders can
consider gaps, or imbalances that
may be emerging in the portfolio
and determine what actions are best
suited to address them. Are increased
investments in innovation or research
and development appropriate? Should
executives consider partnerships or
joint ventures? Or are there strategic
acquisitions, mergers or portfolio
purchases that would better realise
brand objectives?
An organisation that operates a board-
friendly practice of informed, up-to-
date, evidence-based decision-making
in relation to investing its resources
has a huge strategic and competitive
advantage over less disciplined
competitors.
99Governance Directions March 2014
Trends & special topics

3. Governance for performance and
growth
Expertly governed organisations can
be more competitive in the market,
more efficient with their use of capital
and increase their capacity to make
successful investments in their
performance and productivity. Using
corporate governance as the pivot for
organisational improvement has three
distinct areas of benefit:
1. As outlined above, governance can
be used effectively to optimise
an organisation’s portfolio of
investments in its future and align
all levels of the organisation in its
execution. This guides what the
organisation works on.
2. Corporate governance is the key to
maturing and nurturing (targeting
and measuring) the organisational
capacity for innovation, which are
the capabilities of the organisation
(skills and processes) to identify
opportunity and successfully
deliver real commercial outcomes.
This guides how the organisations
works.
3. Finally, as demonstrated below,
corporate governance can be used
as a pivot for internally-led, light-
touch, low-risk transformation into
a dynamic culture of innovation.
This guides how the organisation
makes change happen.
Governance as a pivot for change
Corporate governance is not only
about what happens at the board level.
Governance practices infiltrate every
level of an organisation to align intent
and activity and deliver effective and
timely bi-directional communication of
expectation and performance.
Innovation-aware governance, done
properly, is comprised of small,
achievable, step-by-step enhancements
that implement more advanced versions
of existing management disciplines
across the organisation. Better
disciplines with a practical application
are compelling for most Australian
professionals. They will readily adopt
professional approaches that give them
opportunities to improve their craft.
Nuanced, cultural transformation driven
by good governance practices is a ‘sweet
pill to swallow’ that helps to satisfy the
‘what’s-in-it-for-me’ dilemma of many
business improvement initiatives.
And further, cultural transformation
‘locked in’ to governance practice
delivers sustained change. Governance
frameworks provide a platform for
sustainable, continuous improvement in
culture and practices.
Conclusion
Governance can be the ‘hero’
in creating a successful growth
culture appropriate to our economic
challenges. Far from being the
roadblock it is often portrayed to
represent, improved governance
practice is the only way to developed
sustainable capacity for change in
mature-stage Australian organisations.
It is the successful means of mobilising
and aligning complex organisational
resources and applying them
appropriately so that an organisations
can compete successfully in the
volatile, global, digital economy.
The introduction of innovation-aware
governance practices represents
a valuable ‘capital improvement’
investment in the performance and
capability of organisational machinery.
Danny Davis can be contacted at
danny@theinnovationcoach.com.au or
visit www.theinnovationcoach.com.au
or Twitter: @TheInnovCoach.
Notes
1 A previously unpublished analysis of Fortune
500 historical data undertaken by Danny Davis,
2013 PricewaterhouseCoopers, Breakthrough
innovation and growth, 2013.
2 Capgemini, The Digital Advantage: How
Digital Leaders Outperform their Peers in
Every Industry, MIT Sloan School of
Management, 2013.
3 Geneca, ‘Doomed from the Start? Why a
majority of business and IT teams anticipate
their software development projects will
fail’, 2011.
Cause and effect
Many mature-stage organisations tell themselves that they don’t have the time or money to innovate. However, staff at all levels will
admit that they although they are extremely busy, they believe that they are committed and invested heavily in a range of ‘wrong’
projects. A 2011 survey3
of business and information technology executives engaged at all levels of project initiatives concluded that
’70 per cent think that their projects are usually or always doomed from the start’. Bad projects fail more frequently than good ones.
There has been a 30-year obsession with quality but now is the time to focus on value. As noted by management guru, Peter
Drucker, 'Management is doing things right; leadership is doing the right things'.
Innovation does not need new money or new resources. Innovation-aware governance can lead to more informed decision-
making, in turn helping organisations obtain better value from current expenditure and projects
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