Governance & Innovation Disruptive Thinking – What is it doing to Us

Rami Wadie December 7, 2015

Profile Rami Wadie Email: [email protected]

Partner and Country Leader of Enterprise Risk Services (ERS) in Kuwait. Corporate Governance and Middle East CG Center and Sustainability Leader for Deloitte & Touche (M.E), with over 20 years of experience.

Eminence Regular speaker and contributor to Deloitte thought-leadership, e.g.: •

IIA Conference in Qatar – 2014 - Integration of Governance, Risk Management and Internal Controls to achieve corporate success.

•

Director’s alert 2015 by Deloitte in 2015, Key governance issues for 2015 – Subsidiary Governance.

Education and Certifications • Governance Risk and Compliance Professional (GRCP) • Certified Public Accountant (CPA), AICPA, USA • Certified Management Accountant (CMA), Institute of Certified Management Accountants, USA • B. Sc. (Accounting Major), Helwan University, Egypt

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Governance & Innovation Profiles – Moderation Session Fadi Sidani

Fadi Mutlak

Partner-In-Charge Enterprise Risk Services (DTME)

Partner Cyber Security Enterprise Risk Services (DTME)

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Background Deloitte’s Middle East Center for Corporate Governance The Center brings together the knowledge and experience of Deloitte member firms around the world in the critical area of corporate governance. Its mission is to promote dialogue in the critical areas of corporate governance. It coordinates thought leadership on governance issues developed by member firms to advance thinking on corporate governance issues.

Rami Wadie Middle East Partner and Corporate Governance Leader Industries Public Sector, Financial Services Languages: English, Arabic Tel: +97149503201

Corporate Governance Maturity Assessment

Regional Governance Roundtables Coordinates series of roundtables in a number of regions that brings together board leaders, executives, investors, and academics to seek consensus on how governance practices and approaches should change, given the current environment and particularities of the region. Access and Deep Knowledge of CG Codes

Corporate Governance Credentials

It offers a web-based resource for boards, board committees, executives, and others interested in governance for free. © Deloitte & Touche (Middle East). All Rights Reserved

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AGENDA • What is Corporate Governance? • How is Strategy and Innovation Changing the market dynamics? • What are leading practices in Governance to Push the Innovation Agenda?

Governance & Innovation Corporate Governance Defined Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

G20/OECD Principles of Corporate Governance – Sep 2015 Corporate governance is, “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.” It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Effective corporate governance structures encourage companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved.

ASX Corporate Governance Council © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation

Governance & Innovation Change is Eminent

He who does not expect will not find out the unexpected, for it is trackless and unexplored – Herakleitos; c. 535 BC – 475 BC

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Governance & Innovation The Rise & Fall!!

Governance & Innovation The Rise & Fall!! “Kodak management’s inability to see digital photography as a disruptive technology, even as its researchers extended the boundaries of the technology, would continue for decades”. Steve Sasson.

Founded by George Eastman in 1888. Photographic film sales declined causing financial struggle in the late 1990s, and slowness in transitioning to digital photography, despite having invented the core technology used in current digital cameras.

• 1975 — Kodak engineer invented the first digital camera • 1981 — Sony introduced the first electronic camera. • Research results were remarkably accurate. • The “bad” news was that digital photography had the potential capability to replace Kodak’s established film based business. • The “good” news was that it would take some time for that to occur and that Kodak had roughly ten years to prepare for the transition. • Kodak did little to prepare for the later disruption and filed for Bankruptcy 2012. © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation The Rise & Fall!! Atari boasts both the first video game anyone has ever heard of (Pong) and the first video game console anyone ever bought (Atari 2600). The 2600 remains one of the best-selling consoles of all time. • Console came out six years before the next console.

• Despite new games and updated console, games weren’t getting better, and new console wasn't much of an upgrade. • Atari simply sat back and reaped the profits of what it had already accomplished over a period of 20 years.

• The Nintendo Entertainment System was the first to grab the crown, but rather than killing the competition, Atari committed suicide.

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Governance & Innovation The Rise & Fall!! At one time the most successful movie rental company in the marketplace, filed for bankruptcy in 2010. Rising popularity of streaming movies outpace Blockbuster, which remained primarily a DVD rental company despite data indicating consumer trends were driving growth in another direction.

• 1985 — opens the first Blockbuster store in Dallas. • 2004 — at the peak of its powers, with about 9,000 stores globally. • 2010 — files for bankruptcy, moving to wipe out around $1 billion in debt. Blockbuster at the time was valued at around $24 million, while Netflix’s worth rose to around $13 billion. • It will go down as one of the biggest missed opportunities in the boardroom: Blockbuster deciding not to buy Netflix. © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation The Deloitte Innovation Survey

Governance & Innovation The Deloitte Innovation Survey - Key Findings 1/3 of the companies involve customers at the conception phase of the innovation process but organizations also consult customer at the testing or prototyping phase as well as the precommercial launch

Only 1/3 of companies cooperate or consider to collaborate with start-ups or spin-offs for innovation or growth

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The main reasons for innovation are company growth and differentiation from the competition

96% of respondents consider that innovation is part of the top five strategic priorities. Over 1/5 of companies classify innovation as a top priority

Less than 50% of the companies have a well defined action plan to execute and implement their innovation strategy, however 50% of the companies have a process in place for collecting innovative ideas One out of three companies do create interactions between staff and senior management for generating innovative ideas

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Governance & Innovation The Deloitte Innovation Survey A vast majority of respondents define innovation as the development of new products, services or processes.

What can be considered as innovation?

91%

Development of new products/prcesses/services

51%

Important innovation/breakhtrough for the markets 21%

Routine changes/adjustments of existing products/prcoesses/services Joint realisation of scientific projects with non-profit entities (University/Institute, foundations.etc) Joint realisation of scientific projects aiming at improvement of products/processes/services with the other group entities

15% 14% 9%

Cooperation with scientific entities

9%

Purchase of external R&D services/IP developed externally

6%

Other 0

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In parallel, the improvement of existing products, services or processes and important breakthroughs for the markets is seen as innovation by half of the respondents

55%

Improvements to existing products/prcesses/services

20

40

60

80

A minority of respondents see innovation as cooperation with research or scientific institutions

100

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Governance & Innovation The Deloitte Innovation Survey Main reasons to innovate

To grow

68%

Differniate between competitors

66%

Two thirds of the respondents innovate in order to grow or differentiate themselves from the competition. For service firms however, differentiating themselves from their competition is the main reason to innovate

57%

Customer needs 48%

Enter emerging markets / Attract new customers 38%

Margin increase due to process optimisation 28%

Price reduction due to process optimisation 19%

Environmental impacts

17%

Traditional management culture

15%

Financial advantages (e.g. government subsidies) 0

20

40

60

80

Only a minority of respondents innovate for pure economical reasons, apart from growth © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation The Deloitte Innovation Survey A well defined innovation strategy exists

Strongly Agree

Agree

9%

More than half (54%) agree to have a well defined innovation strategy of which 9% strongly agree

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Neutral

45%

Disagree

Strongly Disagree

35%

NA

5% 2% 4%

Over two-thirds of those who have a well defined innovation strategy confirm that it is in line with the overall strategy for growth 17

Governance & Innovation The Deloitte Innovation Survey Is there a well defined plan to execute and implement innovation strategy?

Strongly Agree

7%

Agree

Neutral

35%

Disagree

43%

Strongly Disagree

NA

7% 2% 6%

Over 40% of respondents agree to having a well defined action plan to execute and implement their innovation strategy (of which 7% strongly agree) © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation The Deloitte Innovation Survey The main obstacles for innovation The main obstacles to innovation are the difficulty to fee up time and resources and the uncertainty what innovation will result it

60

One third of the respondents consider funding as a large obstacle to proposed innovation

54%

50 40

35%

33%

30

30%

23% 16%

20

15%

10% 10

4%

0 Difficulty to Lack of Funding Uncertainity Lack of Human Lack of good Legal Don’t know free up time resources of what it infrastructure resources ideas framework how to within brings measure running the success business In Consumer Business, the lack of infrastructure constitutes an important obstacle to proposed innovation (38% versus 23% in overall results). However, the lack of resources is not so much an obstacle to proposed innovation (13% versus overall 35%) within the sector. © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation The Deloitte Innovation Survey At what stage on the innovation process do companies involve their customers 6% 10%

Concept

32%

Testing 10%

Half of the respondents involve their customers during concept and testing phase

Pre-commercial lunch Customers collaborate at every stage Prototype No customer collaboration

11%

12%

18%

Others

12% of the respondents confirm that customers are usually involved in the precommercial launch whereas 11% of the interviewed companies state that they involve customers at every stage

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Governance & Innovation The Deloitte Innovation Survey Companies have a well-defined process for informing submitters of ideas of the results/actions/status of their ideas

50%

Idea-generating process supported by senior management and a communication tool allow users to enter ideas and interact with them

60%

46%

53%

45% 50%

40% 35%

40%

30% 24%

25%

30%

21%

24%

20% 20%

15%

10%

10% 5%

10%

10% 3%

3%

3%

0%

3%

0% Strongly Agree Agree

Neutral

Disagree Strongly NA Disagree

Almost one in three companies have a well-defined feedback process in place on the ideas generated by their employees © Deloitte & Touche (Middle East). All Rights Reserved

Strongly Agree

Agree

Neutral

Disagree

NA

Almost two out of three companies agree that generating ideas for innovation is supported by senior management and a tool for interacting on those ideas, however mainly in the services sector 21

Governance & Innovation Deloitte CG Framework The board has responsibilities as follows: Governance: structures and processes to fulfill board responsibilities that consider stakeholders. Strategy: advise management in the development of strategic priorities to the best interests of stakeholders.

Performance: monitors management execution against established budgets and KPI’s. Integrity: sets the ethical tenor for the organization. Talent: attract, develop and grow talent with specific focus on CEO and executive management. Risk governance: understands and appropriately monitors the organization’s risk exposures. © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation Exploring Strategic Risk

Governance & Innovation Exploring Strategic Risk – The Good • Strategic risks – those that either affect or are created by business strategy decisions – can strike more quickly than ever before. • Companies that fall behind on the innovation curve may quickly fall prey to innovation’s evil twin – disruption. • Strategic risks are the ones that threaten to disrupt the assumptions at the core of a company’s strategy. • Spotted early and handled well, they can be the basis for game-changing moves that reorder the field.

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Governance & Innovation Exploring Strategic Risk • Uber is a San Francisco-based technology company.

• Uber connects passengers with drivers via mobile apps, and it currently operates in 67 countries. • The five-year old company carries a valuation of over $18 billion, which makes it worth more than rental car giants Hertz and Avis combined. • Does not carry any tangible inventory, and it is also in the process of expanding its business to logistics (i.e., transporting cargo or freight through a network of independent drivers).

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Governance & Innovation Exploring Strategic Risk

Phil Maxwell, Director Enterprise Risk Management, The Coca-Cola Company.

“It used to be that if certain risks were to happen, a company could have up to a news cycle to respond.” “The speed of risks is so much greater now, and as a result you have to be more prepared – faster to respond than you were in the past. That’s one of the biggest differences today versus even three or four years ago.” Jennifer Evans, Chief Risk Officer Australia, ANZ,

Strategic risk management is “not about doing it the way we’ve always done it, but to have creative and innovative thinking around defining what the strategic risks are.” © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation Exploring Strategic Risk Q: Does your organization have an explicit focus on managing strategic risks? No, 19%

Yes, 81%

83% - Yes 10% - No

79% - Yes 21% - No

81% - Yes 19% - No

Source: Exploring Strategic Risk Survey

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Governance & Innovation Exploring Strategic Risk Q: Which of the following risk areas have the most impact on your business strategy?

2010 41% - Brand 28% - Economic Trends 26% - Reputation

Today 40% - Reputation 32% - Business Model 27% - Economic Trends /Competition

2016 29% - Economic Trends 26% - Business Model 24% Reputation/Competition

Source: Exploring Strategic Risk Survey © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation Exploring Strategic Risk Q: Do you see technology enables or disrupters on the horizon that may threaten your business model? 10%

53%

37%

Yes No I don’t know

56% - Yes 33% - No 11% - I don’t know

43% - Yes 44% - No 13% - I don’t know

59% - Yes 34% - No 7% - I don’t know

Source: Exploring Strategic Risk Survey

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Governance & Innovation Exploring Strategic Risk Q: Which assets have and will have the most strategic value to your organization? Today

2016

47% Human Capital

31% Human Capital

32% Reputation

24% Innovation

26% Customer Capital

23% Customer Capital

Source: Exploring Strategic Risk Survey © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation What Should The Board Do

Governance & Innovation What Should The Board Do How can we spot trends and disruptors more quickly?

Is it really what we think?

Accelerate Discovery Confront Bases Scan Ruthlessly

Prepare for surprise What is happening outside our field of vision? How do we prepare for the unexpected? Source: Deloitte on Disruption © Deloitte & Touche (Middle East). All Rights Reserved

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Governance & Innovation Questions for the Board and Directors

What will our customers value most in 3-5 years time? Are we investing today to deliver on our customers’ future expectations? What future scenarios has management considered? Does our culture encourage and support innovation, idea generation, sharing of ideas and innovative action? Are we enabling good ideas to thrive?

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Governance & Innovation Questions the Board should Ask Management

1 2 3 4 5

How are we as board and management governing the innovation process? Do you as management have a process for generating, testing, implementing and capturing the value of ideas?

Are we looking at our investment portfolio from various angles and dimensions? Are we open to creative or radical ideas, even if they do not at first seem to be aligned with our 3-5 year strategy? How will we manage the risk of innovation failure?

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Governance & Innovation Questions The Board to ask About Stakeholder Engagement

1

How do we consider suggestions from our management) shareholders, govern customers, How will we (board and and suppliers, manage partners? the risk of innovationand failure? Do you (management) have a process for generating, testing, implementing and capturing the value of ideas?

2 3

Are wehas actively seeking ideas from our What future scenarios management stakeholders? considered? Does our culture encourage and support innovation, idea generation, sharing of ideas and innovative action?

Are stakeholder engagement, Are we enabling good ideas to thrive? collaboration and knowledge-sharing actively encouraged and facilitated?

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Governance & Innovation Leading Practices To Adopt

01

set an innovation agenda in many, if not most, of Board meetings

02

Companies appoint a dedicated innovation manager or chief innovation officer

03

regularly review and discuss the company’s innovation strategy and risks

04

Request management to conduct innovation audits

05

management to report on innovation performance

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Governance & Innovation Thank You

All is flux, nothing is stationary – Herakleitos; c. 535 BC – 475 BC

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