Good governance: the surprise essential for catching lightning

From start-up to blue chip, businesses have long understood that the ability to successfully generate and bring innovations to market is crucial to corporate success.

Now governments are catching up, with innovation increasingly viewed as a critical economic driver. You need only look at the range of innovation-based investment vehicles on offer to see how important the issue has become amongst policy makers. In the UK alone, Innovate UK, the governmental agency supporting innovation through grants, has co-invested £4.3bn into 8,500 different projects since 2007.

But there’s a problem. As referenced here last December, 40% of start-ups fail after just two years, with the figure spiking to 90% within the first five. More established companies may be shielded from such devastating outcomes, but the results aren’t much better. Despite the interest and initiatives, companies across the board are consistently struggling to translate investment into success.

It’s tempting to attribute this to the mercurial nature of innovation. Catching lightning in a bottle isn’t easy after all. But what if the problem isn’t just the lightning? What if the problem is the bottle?

A new study by Grant Thornton UK LLP suggests it might be. Spanning a decade of data from ten different industries and over 500 FTSE-350 companies, the research proves that an organisation’s ability to create and protect value is integrally linked to that often-underestimated part of corporate life, governance.

The findings show that companies operating best practice governance, those that invest in developing a robust decision-making infrastructure rather than treating it as a box-ticking exercise, succeed. They are better at creating and selling goods and services that people want. They are more efficient at using the financial resources at their disposal. Impressively, their total shareholder returns are more than double those of companies with poor governance.

What’s more, the research identified six priority areas of governance in the top performing companies and noted that the financial performance of companies that were doing less well, but progressively invested in their decision-making infrastructure, significantly improved. In short, the report shows why to invest in governance and how best to do it.

But what does this mean for innovation?

Good corporate governance doesn’t create value in itself. It does, however, create an environment with clearer purpose and stronger strategic intent; it helps focus capital, people and cash flow on a clearly articulated, shared goal rather than allowing them to be diverted across a range of agendas. It helps create the bottle.

Aligning strategic and cultural intent to clear corporate objectives prevents the development of microcultures, whilst a sharper focus on those objectives results in better decision-making at every level. Taken altogether, these elements result in both increased productivity and managing physical and financial resources more efficiently. Good governance won’t innovate for you, but it will help you build an environment that could allow innovation to flourish and succeed.

Governance can feel a million miles away from the cut and thrust of innovation, but when viewed as good practice, rather than a compliance exercise, governance structures can enable the informed decision-making needed to take those innovative leaps in a secure environment.

All of which is to say that if innovation is the key to business success, then perhaps the next innovation should be around our approach to governance.

For further information about good governance see the website of the United Nations-sponsored Institute for Responsible Leadership.