July 1, 2020
July 1, 2020
As global markets continue to address the COVID-19 pandemic, practical digital know-how is becoming more than an attribute that directors aspire to possess. A compelling study from the MIT Sloan Center for Information Systems Research asserts that companies could be falling behind if they lack a digitally savvy board, defined here as “[a board with] an understanding, developed through experience and education, of the impact that emerging technologies will have on businesses’ success over the next decade.” The researchers used machine analysis of the boards of US public companies—including data from surveys, interviews, company communications, and the bios of 40,000 directors—and determined that organizations with boards that have at least three digitally savvy members outperform other enterprises in their respective industries. These companies reported 17 percent higher profit margins, 38 percent higher revenue growth, 34 percent higher return on assets, and 34 percent higher market capitalization.
According to the research, digitally savvy directors possess the following attributes:
The researchers found that every industry studied had digitally savvy boards, though the concentration of these boards was higher in some industries compared to others. For example, the top three industries with digitally savvy boards were information (57%), professional services (39%), and manufacturing (29%). Interestingly, across all industries, only 24 percent of companies with more than $1 billion in revenues had digitally savvy boards.
So, the question arises: How does a board gain that next-generation knowledge? Here are some suggestions.
Three may be the magic number. There was little difference in financial performance between companies with one or two digitally adept directors. However, companies with three or more such directors saw statistically meaningful improvements in performance. Boards should look at the extent to which digital savviness is present in their oversight processes and, when screening new director candidates, consider a pool of seasoned executives who have served in senior roles in fast-paced industries where business models change rapidly.
Merge institutional knowledge and digital perspectives. Directors who possess an understanding of cultural and operational aspects of a business have valuable institutional knowledge and can elevate their digital savviness through engaging external experts as advisers, participating in self-directed training, and visiting companies that had always been or transformed themselves to be digital. Combined, these directors and directors who are technologically savvy can pool their expertise to understand how digital trends and disruption can affect an organization’s business model, value proposition, and industry, and advise executive management as they transform the company.
Technology is a strategic driver rather than a strategic enabler. The researchers noted that boards lacking digital savviness are likely to ask, “What is our strategy?” and “What resources, including technology, do we need to execute that strategy?” But boards possessing that quality first focus strategically on enhancing the customer experience, improving operations, and securing the company’s positioning within the value chain. For example, they ask the questions, “How do we use technology to improve customer satisfaction and operations?” and “Should we apply a test-and-learn approach to strategy to conduct experiments and scale successes?” In effect, they approach strategy and view the role of technology within the business differently.
Resist falling back on the chief information officer (CIO). If the board does not have the financial means to either add a board seat or attract top talent, it can consider hiring advisers with the requisite depth of experience. In such cases, some boards might be tempted to leverage the company’s own CIO. This approach is not recommended. Effective board oversight needs an independent view. Even solid CIOs need to be challenged on occasion, and the board must be capable of assessing the CIO’s capabilities and performance in light of changing markets.
CEOs must be digitally capable, too. Expert boards seek CEOs who can think and act digitally in managing the business, leverage evolving markets, and build digital ecosystems centered around teams with the requisite knowledge of digital business concepts and the ability to scale platforms that can facilitate rapid growth. With the right CEO and team in place, the board’s role then is to support the CEO in setting strategy, monitoring strategic execution, aligning corporate culture, and managing risk.
It’s all about disruptive innovation. Understanding whether a company desires to be a digital leader or an agile digital follower, or something in between, is important as it provides context for the board’s oversight of the company’s innovation strategy and encourages open discussion around direction and progress. The digitally savvy board insists on appropriate innovation-specific metrics that tell the full story. Directors can help to tell the full story by asking management, for example: How is the innovation and growth strategy performing relative to competitors and the targeted return on investment? Is management getting feedback on the customer experience? How effective are the company’s innovation culture and capabilities in empowering and rewarding employees to test new ideas and take appropriate risks to make those ideas a reality? No company is immune to digital disruption. That is why boards should appraise their digital savviness with regards to supporting the CEO in a rapidly changing digital economy, particularly as companies emerge from COVID-19 lockdowns.
NACD: Tools and resources to help guide you in unpredictable times.