For more than a decade, companies have been urged to “digitalise” or risk being left behind. While many corporate leaders accept this as a reality, we argue that the impact of digitalisation is at best underestimated by board members, and by many of them even misunderstood.
Digitalisation is a challenging reality for boards, which are about to navigate what may be the most challenging weathers faced to date.
In our recent report, Directing Digitalisation: 11 Guidelines for Boards and Executives, we address the impact of digitalisation and the understanding boards and corporate leaders will need to have to successfully direct and govern firms in a digital economy.
We conclude that “we stand on the verge of the greatest disruption to both leadership and governance in the entire history of business”, and that “the combined result of the increased challenge and scrutiny caused by digitalisation will undoubtedly force boards and senior executives to attain unprecedented levels of innovation, competence, effectiveness, leadership and responsibility—with a fundamentally positive impact on the commercial success of firms and the contribution of business to society.”
This article aims to shed light on what is expected of board members in the digital age, in order to help them prepare for the new economy and increase their chances of governing effectively.
The specific technology innovations introduced by the digital revolution are earth-shaking in their cumulative impact on business and on organisations. We have passed a frontier where no border any longer separates the pre and post-digital worlds.
As a result of these technological developments, organisations are facing new business realities such as unpredictable and fragmented competition, empowered customers, democratisation of value creation, and automation. Combined, these changes result in major disruptions of corporate value creation, strategies, and business models.
In the 21st century, digital is business, and business has become digital. Yet the shift in understanding and in capabilities required to successfully address digitalisation exceeds the mere technological domain. This shift requires most aspects of the organisation to be challenged, including the functioning of boards.
We believe this to be a daunting task, unprecedented—from both the perspectives of scope and speed—in the history of business, and perhaps foremost in the governance of organisations. Boards, if not transforming themselves, risk becoming irrelevant at a time when they are most needed.
For one, board members will need to accept the increased ambiguity brought about by digitalisation. This will be uncomfortable. Boards must also understand the impact of digitalisation on the business environment, industry, consumers, the firm itself, business models and its implications on strategy.
To navigate the “digital storm”, boards will need to learn to engage continually with experts, employees and stakeholders as well as customers, with a focus on learning, challenging and adapting according to market and consumer needs. Keeping a finger on the pulse will require directors to be passionate about business, technology and society in general, showing a curiosity and hunger to identify threats and opportunities, and a willingness to embrace change.
Most importantly, directors must bring knowledge, understanding, insights, direction and plenty of energy into the boardroom—or the ship risks becoming rudderless when navigating the digital seas.
Higher levels of scrutiny
Corporate transparency, meaning the extent to which a corporation’s actions are observable by outsiders, is often defined as “the perceived quality of intentionally shared information from the corporation”. But digitalisation is rendering this definition obsolete. The democratisation of communications is empowering the collection, dissemination, and analysis of information by the public, who enjoy playing a more active role in the governance of businesses, bringing unprecedented transparency to corporate behaviour.
A senior employee at AOL leaked an audio recording of CEO Tim Armstrong firing him “in front of” 1,000 colleagues. The incident resulted not only in negative press, but also a public backlash on social media, leading to a negative impression of the management of AOL. Armstrong was left with no option but to issue a public apology to the entire staff for the unintentionally public manner of the dismissal.
Transparency is a necessary goal for businesses to enjoy trust amongst shareholders, employees, and the public in a digital age. The board must support this drive through integrity in both intent and action. Boards will be held accountable if they set unattainable goals, or put undue pressure on executives and employees, that lead to decisions putting the business at unnecessary risk.
Volkswagen was known for a ruthless culture that mandated success at all costs, with goals often described as audacious. The company has been quoted to label regulators, especially in California, as enemies of the company and even of society. The decisions that led to the VW emissions scandal—which cost the company at least $20bn by the end of 2016, as well as denting its brand—may not have been made in a transparent environment where “doing good” was celebrated to the same extent as “doing financially well”, or as “becoming Number One”.
Openness and trust
Winning companies in the digital age are open with employees, shareholders and the general public, while holding themselves accountable, focused on building the necessary currency in this new era—trust.
Zappos, the online shoe and clothing shop, has created an extranet that gives vendors complete visibility into their business. The designer of outdoor clothing, Patagonia, has embarked on “The Footprint Chronicles” project. The initiative examines the company’s life and habits with the goal of using transparency about its supply chain to help Patagonia reduce its adverse impact, both socially and environmentally.
The role of the board is to ensure the firm and its management can sustain the levels of transparency required by the public, and soon by more democratised financial markets.
Increased scrutiny will eventually be extended to boards. Success will be measured on the quality of their behaviour and contribution, as they cannot demand results and transparency from others while not following the same standards.
Passive attendance of quarterly meetings for a big fee will no longer do. Instead, remuneration will depend on commitment to the business, and the role the board plays in the success of the firm. In this new world, society is a key player in providing the transparency with regards to how boards discharge their fiduciary duties.
21st-century board member
Successful organisations prioritise value-creation for customers, employees, shareholders and relevant stakeholders, as well as for society as a whole. In a digital economy the concept of value is more diffuse and constantly changing, impacting the competitive landscape. What value is, who creates and delivers it, where and by whom it is captured, are topics that must constantly be on the board’s agenda.
Digitalisation demands that boards add value through unprecedented levels of innovation, competence, effectiveness, leadership and responsibility. The focus of a 21st-century board will be on ensuring that the firm creates value, while achieving its goals under conditions of great uncertainty and unpredictable competition.
Being a board member will no longer be a crowning reward for an executive’s career well served, or a role a businessperson is invited to do prior to retiring. Being a board member will be part of a professional career, or a new chapter in a person’s professional development, akin to becoming a coach after a career as an athlete.
How will this change the realities of a board mandate? We believe that a successful board member in the digital age displays the following ten attitudes, behaviours, and competences:
1. Brings relevant experience and adds value, based on past and present business and governance work.
2. Is fully committed to the role—practically and intellectually, as well as emotionally.
3. Ensures all thinking and action is focused on the best interests of the firm, employees, consumers, and its contribution to society.
4. Engages in collaborative and team leadership, forging interactive, close relationships with other board members and with the firm’s executives who are considered an integral part of the governance team.
5. Is forward-looking with regards to future commercial and industry contexts, seeking to understand the driving forces that are impacting on the business.
6. Contributes incessantly to the framing of new business challenges, identifies changes in the field, and ensures effective strategy discussions that lead to continual adaptations of strategies.
7. Encourages and supports the development of new solutions, frameworks and business models through experimentation and innovation.
8. Is accountable and takes responsibility for organisational outcomes, including errors and failures.
9. Shows commitment and ensures continuous learning and improvement.
10. Advocates that business should be a force for a better world.
An age of disruption
As commercial, technological, and industry challenges intensify, and the accountability of board members increases, a disruption of board approaches and practices is necessary and unavoidable.
A board position is now a professional position, rather than an appendix to a successful executive career; therefore, electing such a role should be seen as a senior career choice. There must be a strong match between the board and your areas of interest, your skills and capabilities, the value you can bring, the likelihood of success of the firm, and who else sits on the board.
The digital revolution, like every revolution, can be viewed either as a catastrophe, or as a world of opportunity. How boards perceive it depends on whether allegiances lie with the old order or the new.
One thing is certain—the digital revolution is happening. Like with any revolution, it is as cultural as it is technological. Successful digitalisation depends on large-scale and sustainable organisational change, which will not happen within businesses unless it is driven by boards.
The future success of firms in a digital economy lies firmly in the hands of boards. With this reality comes great responsibility. Talented and committed board members, like successful organisations, will welcome the new changes in expectation, embracing the opportunity as an exciting and challenging professional venture.
Liri Andersson is founder of business consultancy This Fluid World and guest lecturer at INSEAD. Ludo Van der Heyden is chaired professor of corporate governance, and professor of technology and operations management at INSEAD.