Research and development (R&D) and innovation are two crucial activities that contribute strongly to a company’s competitive advantage, market differentiation, revenue growth, cost efficiency, customer experience, brand, risk mitigation and overall success.
The Board plays a vital role in guiding and overseeing the company’s R&D and innovation activities. Its responsibilities include:
- Setting the strategic direction. The Board aligns R&D and innovation efforts with the company’s long-term objectives, including the goals and priorities for R&D and innovation.
- Approving budgets. The Board approves the budgets for R&D and innovation activities in line with the company’s goals.
- Providing support and resources. The Board supports R&D efforts by ensuring access to the necessary resources, such as talent (internal and external) and infrastructure. The Board should approve strategic partnerships that contribute to the achievement of the company’s innovation goals.
- Oversight and risk management. The Board oversees R&D and innovation activities to ensure that they are conducted in a manner consistent with legal, business and ethical standards. This includes managing the risks associated with R&D and innovation investments and projects, and ensuring that appropriate controls are in place.
- Monitoring performance. The Board monitors the performance of R&D and innovation initiatives, assessing progress towards strategic objectives and evaluating the return on investment. This may involve reviewing key performance indicators, milestones achieved and financial metrics related to R&D and innovation.
- Fostering a culture of innovation. The Board should ensure that top management fosters a culture of innovation within the company, encouraging creativity, experimentation and knowledge sharing among employees.
- Identifying emerging technologies and trends. The Board should stay informed about emerging technologies, market trends and competitive dynamics that may affect the company’s R&D and innovation strategy, and may provide guidance on adapting to changing market conditions and seizing new opportunities.
- Holding top management accountable. The Board should hold top management accountable for the company’s R&D and innovation performance, ensuring that resources are managed effectively and strategic objectives achieved. Effective communication between the Board and the top management team is essential for this oversight.
Three questions come up repeatedly in Board discussions of R&D and innovation and deserve a closer look.
Balancing incremental and disruptive innovation. Most of a company’s innovation effort goes into incremental improvements to existing products, processes and services: these are lower in risk, closer to customers and easier to measure. Disruptive innovation, which creates new business models or markets, is rarer, riskier and slower to pay back, but it is what protects the company from being overtaken. The Board’s task is not to choose between the two but to make sure that the portfolio is deliberately balanced. A practical approach is to ask management to present R&D and innovation projects as a portfolio, sorted by time horizon (short, medium and long term) and by level of risk, and to agree what share of resources should go to each category given the company’s strategy, its position in the industry and the pace of change around it. A company whose portfolio contains only incremental projects is usually under-investing in its future; one with only ambitious projects is usually over-estimating its ability to deliver them. The Board should revisit the balance at least once a year and whenever the strategy changes.
Protecting intellectual property. The results of R&D are worth little if they can be freely copied. The Board should satisfy itself that the company has an intellectual property strategy that fits its business: what should be patented, what is better kept as a trade secret, which trademarks and designs should be registered and in which markets, and how software, data and know-how are protected. Equally important are the contracts through which intellectual property flows: employment and contractor agreements should assign to the company the rights in what is developed for it, and agreements with partners, universities and suppliers should state clearly who owns the results of joint work. The Board should also ensure that the company respects the rights of others, since infringement claims can be as damaging as the loss of the company’s own rights, and it should receive a periodic overview of the intellectual property portfolio, its value and any disputes.
Comparing R&D spending with peers. There is no correct level of R&D spending; the right amount depends on the sector, the strategy and the stage of the company. What the Board can and should do is compare. Useful benchmarks are R&D expenditure as a share of revenue, the split between research and development, the proportion spent on incremental as opposed to new products, and the share of revenue that comes from products introduced in the last three to five years, each compared with listed competitors, sector averages and the company’s own history. Public sources are often sufficient: the annual reports of listed peers, sector studies and the EU Industrial R&D Investment Scoreboard. The purpose of the comparison is not to match the peers but to explain the difference: a company that spends well below its sector should be able to say why that is consistent with its strategy, and one that spends well above should be able to show the results.
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