Are tech experts on boards a necessity? New research suggests companies may fare better with high-level digital knowledge around the boardroom table.
Academics at the University of Westminster have examined the relationship between digital expertise on boards and its impact on companies. They conclude there are correlations between their presence on boards and several success factors. Indeed, company performance could improve by as much as 5% due to having a digital expert in the boardroom, they say.
“Our results show that digital expertise on boards is positively associated with firm performance, by the possible mechanisms of improved liquidity and growth as well as reducing business risk.
“Our study can inform firms of how, and by how much, board-level expertise can increase value.”
The academics—Sudha Mathew, Premkanth Puwanenthiren and Sheeja Sivaprasad—suggest that board-level digital expertise can be a boost in numerous ways: boards are more likely to embrace new tech in their business models; see their cultures change; have their tech “literacy” improved and help them “understand the immediacy of leveraging digital technologies”.
The study looked at a number of indicators in FTSE 350 firms from 2013 to 2018. These included statistical analysis of stock liquidity, business risk, growth and information asymmetry (the number of analysts following a stock is used as a proxy for asymmetry). All correlated positively with digital expertise in the boardroom.
The study is timely. After a vast swathe of the economy was shut down by coronavirus-induced lockdowns, home working and digital shopping has accelerated the need for companies to digitise their business models.
Research from global consultancy McKinsey shows the impact of the pandemic. “In just a few months time, the Covid-19 crisis has brought about years of change in the way companies in all sectors and regions do business,” it says.
Using customer interactions as a measure of digitisation, McKinsey finds the share of digital contact is up across the board. Globally the share rose to 58% in July 2020, compared with 36% in December last year. In Europe the share has risen to 55% from 32% and in North America it has rocketed from 41% to 65%.
McKinsey also looked at the share of “offerings” (products and services) that are digital. In Europe there has been a rise from 34% to 50%, and North America from 41% to 60%. The global figure is up 20 percentage points to 55%.
But the strategic use of digital can be about more than customer-facing services. Companies must also consider the use of AI, big data and machine learning. According to Andrew Kakabadse, professor of leadership and governance at Henley Business School, this raises questions about data integration, risk management and reputation concerns, all promoting further questions about knowledge.
“Without an intimate understanding of what the firm’s competitive edge is, investment in new technology can be misplaced,” says Kakabadse. “The immediacy of real-time data, sales, forecasting, customer preferences and logistic flows need to be understood in terms of what truly gives the organisation a cutting advantage.”
He adds: “The message is: ‘be information literate’, while at the same time being realistic with regards your competitive edge. The two in combination make that critical difference.”
Technology skills gap
In some quarters, opinion has been divided on whether a digital business approach requires the appropriate boardroom expertise. While many say it does, others argue boards still require all-rounders with broad-based high-grade leadership skills. That can be reflected in risk priorities. When Board Agenda published its own survey looking at risk factors, respondents ranked digital business only sixth out of nine, behind regulation and compliance, finance, and reputation in the top three slots.
In an article for Board Agenda, Cathy Kay, managing partner at Russum, an executive recruitment company, says there has indeed been a technology skills gap in boardrooms.
When speaking to senior managers at a special event, she found a concern that missing digital expertise could make it harder for executives to persuade boards of the need for major technology business models. “Many non-executives have seen great proposals fall over when presented at board level due to a lack of understanding and even when projects were passed, poor communication was blamed for the executive team losing the support of the board,” she writes.
This new research shows that digital boardroom expertise may provide an advantage. But as Andrew Kakabadse points out, tech knowledge may be most effective when combined with understanding a company’s core proposition. As the pandemic pushes companies to advance their digital strategies, boards will be anxious to get the formula right.