Bringing Opportunity Oversight Onto the Board’s Agenda

Corporations are awash in cash. In early 2013, nonfinancial U.S. corporations had more than $1.5 trillion in cash and equivalents.1 However, a recent survey of 50 Standard & Poor’s 500 companies found that they were planning to increase capital spending by only 2%, indicating a dearth of big growth opportunities.2 Given the sluggish economy and the level of cash on hand, one would think the top priority for many companies would be finding investment opportunities where they can create value — and that management and boards of directors would be focusing on this pressing challenge together. Yet, in the current discussions about the growth challenge, the pivotal role corporate boards might play seems to be missing. Why does the business community appear to be giving short shrift to the board’s responsibility and effectiveness in overseeing the creation of value? One reason, we believe, is that the business community has lowered its expectations about what boards can and should do. It has come to expect boards to act more as watchdogs and stewards of existing value than as creators of new value.

Boards of directors have two broad responsibilities on behalf of shareholders and other stakeholders: overseeing the protection of existing value and creating new value. Even though most boards take growth seriously, in practice their responsibilities have evolved to the point where oversight has become unbalanced.3 Risk management and risk-based thinking dominate many board agendas, and board members devote much of their time and energy to risk issues. Moreover, there is a well-developed risk-management industry to support boards in risk oversight.4

Unfortunately, boards devote far less attention and resources to overseeing the creation of new value. Although opportunity oversight is as central to value creation as risk oversight is to value protection, few boards of directors get deeply involved in overseeing a company’s underlying opportunity-generating capability.5 A company’s opportunity-generating capability is how it searches for, recognizes, creates and pursues value-creating opportunities. Although it’s common for boards to pay attention to individual opportunities as they arise, the phrases “opportunity oversight” and “opportunity-generating capability” are rarely heard in boardrooms.

The imbalance between board risk and opportunity oversight is a potentially serious problem. From many decades of consulting experience, we know that a preoccupation with risk and a neglect of opportunity can have a dampening effect on a company’s long-term competitiveness and growth. An imbalance at the board level can set in motion unexpected and unwanted consequences, cascading down and amplifying through the organization, that become a brake on growth, resulting in de facto opportunity aversion.

Although risk-management advocates claim that their frameworks can accommodate risk and opportunity, we are skeptical of those claims. Behavioral economics has shown that people are hardwired to be risk averse; potential losses tend to loom larger and to appear more immediate and likely than gains. This can lead to distortions of perceived risk and to poor judgments.6 Risk thinking is what-can-go-wrong and probabilistic, while opportunity thinking is what-can-go-right and oriented toward possibilities. Risk and opportunity, although interlocked in delivering shareholder value, are systemically different and often in conflict with one another. The challenge for corporate boards is to recognize the imbalance between risk and opportunity oversight, to strengthen opportunity oversight and to make this adjustment without undermining the importance and effectiveness of risk oversight.

Opportunity Oversight

Just as boards monitor and address the company’s risk, they also need to oversee the company’s opportunity-generating capability. Most companies continually search for opportunities — everything from new technologies and products to new businesses — and boards tend to discuss the most significant ones. But few boards are committed to understanding and actively overseeing the organizational capabilities that affect the quantity and quality of opportunities the enterprise considers. Nor do many boards actively oversee the components and evolution of the enterprise’s overall portfolio of opportunities.

Ensuring the development of the company’s opportunity-generating capability should be an integral part of the board’s role in value creation. The board should ask two questions: “Is the enterprise capable of realizing the opportunities its strategy depends on?” and “Is the enterprise capable of adapting the strategy to important emerging opportunities?” In the board’s capacity as opportunity overseer, it should have a well-informed point of view about:

• the company’s overall approach to recognizing and pursuing opportunities,
• the current state of the enterprise’s opportunity-generating capability,
• how that capability aligns with the enterprise’s strategic challenges, and
• top management’s action plan for enhancing that capability.

The building blocks that make up a company’s opportunity-generating capability can vary. Partnerships with significant customers, involvement with industry groups or advisory boards, a well-funded R&D budget and a proven commitment to market research may be relevant components. More comprehensive elements might include having forward-looking radar — the ability to recognize important trends and shifts in the environment early — as well as skills in managing innovation and an opportunity-aware organizational culture.

Initially, determining how to accomplish an adequate assessment of the current state of the enterprise’s opportunity-generating capability and how to identify the organizational building blocks of opportunity-generating capability may seem overwhelming. But it is no more overwhelming, or less important, than an adequate assessment of the organization’s risk-management capability.

The Oversight Imbalance

Protecting existing value, specifically the financial interests of the owners of corporations, was one of the primary reasons boards were established in the 1800s.7 Board duties have grown and evolved since then, but risk oversight has retained its primacy. Over the past 20 years, legislatures, regulators and shareholders have been asking boards to exercise even greater oversight of risk, to the extent that boards, in effect, are expected to anticipate almost all instances of bad luck, bad decisions, bad outcomes and bad management.

As the number and complexity of risk-management practices expand, it is not surprising that boards devote so much of their attention to risk. Nor is it surprising that the demand on a board’s time and energy has, in many cases, exceeded the limited supply. What is surprising is that the oversight imbalance, which could threaten long-term competitiveness and growth, is relatively unchallenged.

Correcting this imbalance will require a concerted effort, because risk is so entrenched in enterprise-wide management practices and perspectives. It is far more difficult to quantify future opportunities that are contingent on multiple variables than it is to quantify potential losses of identifiable assets, revenues and market value. Board members, top management, accountants, analysts and academics all rely on common risk concepts and frameworks; they use a common language. But a common language and a shared understanding of opportunity oversight doesn’t yet exist.

When we discuss the oversight imbalance with managers and board members, we tend to get two responses: “Opportunity management is the CEO’s job” and “The board doesn’t have the experience, time or skill to oversee opportunity.” We agree with these comments. Building and managing the enterprise’s opportunity-generating capability, like building and managing the enterprise’s risk-management capability, is a critical CEO responsibility — one that has not received much oversight attention from the board. Given its importance, this needs to change. Currently, most boards do lack individuals with the expertise and experience necessary for opportunity oversight. This also needs to change.

Opportunity-Generating Capability

When we say that companies must have strong opportunity-generating capability and that boards should be effective at opportunity oversight, we are not simply referring to companies that stress innovation, make large R&D investments or are active in acquiring other businesses. Such initiatives may or may not be relevant aspects of opportunity-generating capability. Nor are we referring to annual board reviews of strategy and business plans, which are important processes that typically include attention to opportunities. Rather, we mean the combined ability of organizational and management processes to search for, create, identify, develop and realize value-creating opportunities — reliably and consistently. Effective opportunity-generating capability and board oversight require an active, constructive partnership between the board and senior leadership — and a board that understands and monitors how the company achieves and maintains a high level of value-creating performance.

Based on our experience, successful opportunity approaches are ones that integrate strategy, processes and people over time. The diversified conglomerate 3M Co., for example, is widely recognized as a company that has created long-term value through a well-tuned opportunity-generating capability. Company brochures point to its “culture of innovation” as its value-creating hallmark.8 But “culture” and “innovation” by themselves do not adequately capture 3M’s deep opportunity commitment. Rather, 3M prides itself on what we might call an opportunity philosophy , describing it this way: “Throughout history, many great thinkers have embraced the maxim that the best way to predict the future is to create it. In this regard, 3M’s business model is to foster organic growth by inventing new products that previously did not exist.”9 The company supports this goal by consciously managing an integrated opportunity-generating capability that blends more than 40 technology platforms, HR policies (including opportunity-linked compensation, career development and its 15% rule, which allows technical employees to use 15% of their paid time to pursue their own ideas) and a variety of organizational processes. These include creating internal marketplaces for ideas, support of exploratory investments, strategic partnering and an organizational culture that encourages sharing ideas, risk-taking and persistence. Few companies have been able to reproduce 3M’s formula.

At 3M, management has learned not to take the company’s highly developed opportunity-generating capability for granted. In 2001, when leadership introduced an enterprise-wide Six Sigma program, it didn’t anticipate that the program would undermine the company’s opportunity-generating capability by squelching creativity.10 More active opportunity oversight might have seen this potential downside. Realistically, a company’s opportunity-generating capability is a moving target. The balance between opportunity and risk must be dynamic, and each enterprise needs to find and protect its own balance.

Companies can attempt to build opportunity-generating capabilities internally or they can attempt to acquire them. Despite recent stock price declines, it’s worth asking where Apple Inc.’s shareholder value would be today if Steve Jobs and his management team had not imagined immense market opportunities and built the necessary internal capabilities to pursue them. Monsanto Co., by contrast, chose to acquire G.D. Searle & Co., in an effort to transform from a chemical company past to a life sciences future.

In 2010, the CEO of Unilever PLC, the Anglo-Dutch consumer goods company, publicly challenged the organization to double its revenues while cutting its environmental footprint by 50% by 2020. These goals are a commitment to shareholders and the investment community, and they require Unilever to pursue an unprecedented range of opportunities and to invest heavily in expanding its opportunity-generating capabilities. Although management believes that breakthrough technologies are likely to come from R&D, it also believes that opportunities flow from a deep understanding of consumer tastes, habits and behavior. The company is pursuing opportunity through investment in six global research centers and more than 100 global and regional development centers. At every stage of the product development process, R&D is expected to collaborate with development teams to ensure that breakthrough ideas line up with the Unilever brands. Unilever sees its opportunity-generating capability as a balancing act: “on the one hand correctly identifying the next breakthrough technologies, and on the other being able to rapidly respond to competitor activity, or an opportunity to gain market share.”11

By contrast, the recent travails of Best Buy, Nokia and Sony point to what can happen when star performers fail to identify and pursue value-creating opportunities beyond the existing competitive mind-sets. In each case, the result was a dramatic erosion of shareholder value. We can only speculate how different these stories might be if board oversight had brought more attention to the opportunity-generating capabilities of these companies.

Some companies confuse the weakness of opportunity-generating capability with a lack of opportunities. However, in our experience, value-creating opportunities are available to enterprises that have developed the capacity to imagine them and act on them. Opportunity-generating capability shapes the kinds of opportunities enterprises create.

Yet, as long as the oversight imbalance persists, enterprises can drift toward being more risk averse than desirable. Finding the right balance between opportunity and risk is one of the most critical challenges that managements and boards face. To be sure, risk awareness is a necessary organizational counterweight to excessive risk-taking and opportunism. Knowing how and when to apply risk-based thinking to opportunities is crucial. But too much emphasis on risk management can lead to inertia, delays in decisions and opportunity blindness.

What Boards Can Do

Given the differences among enterprises, there are no simple models for effective opportunity oversight. Most boards will find that the available tools to help them improve opportunity oversight are woefully lacking compared with what’s available for overseeing risk management. But there are several things boards can do to improve how they oversee opportunity generation, beginning with conducting an honest appraisal of what’s currently in place. (See “Opportunity Knocks.”) Does the enterprise have a value-creating opportunity game plan? Is the board able to evaluate the company’s current opportunity-generating capabilities?

Nutreco, a global leader in animal nutrition and fish feed based in the Netherlands, is a company that has taken an important opportunity governance step. The company’s board created an innovation and sustainability committee, with the responsibility to “provide supervisory oversight of Nutreco’s innovation agenda.”12 In 2012, as part of this oversight, the committee issued the Nutreco “Sustainability Vision 2020” to serve as an opportunity-generating guide for the company.

To move forward, boards will have to develop their own tools and practices, just as companies like Nutreco are doing. Strengthening the opportunity oversight capabilities of boards will take time. Minimum prerequisites for moving forward are an opportunity-motivated CEO, enthusiastic board members and a board and senior executives willing and able to work in partnership.

The protection of value is, and will always be, an important responsibility of the board. But even world-class risk oversight cannot build an enterprise’s future. The creation of value is equally important. Boards should seriously address this question: “What could world-class opportunity oversight look like for our company?” The enterprise’s ability to create the future is too important not to be addressed head-on at the board level. It is extremely difficult, if not impossible, to risk-manage one’s way to competitive growth.