September 7, 2022
September 7, 2022
Boards and their companies operate in an increasingly digital world. Every director should have sufficient digital understanding to engage in strategic conversations with the CEO, other company leaders, and directors regarding digital initiatives and capital allocation.
As noted in the 2022 NACD Public Company Board Practices and Oversight Survey, one of the top trends that will have the greatest effect on companies over the next 12 months according to public company board members is the increasing pace of digital transformation. The digital era is fostering an environment in which each director should have a sufficient understanding of the enabling technologies that will impact their industry over the longer term. To that end, boards should consider several imperatives to advance their role in digital transformation:
Allocate more board agenda time to discuss digital matters. The Governance Challenges 2021–2022: Digital Transformation Oversight report notes three areas of board oversight requiring increased attention: human capital, cybersecurity, and digital transformation. These topics are interrelated. Managing the evolving digital landscape and implementing complex digital strategies require the best and brightest talent. Also, the CEO faces the challenge of aligning the executive team in formulating and executing the transformation road map. As digital transformation introduces new infrastructure and capabilities, fresh cyber threats are spawned, requiring new proactive and reactive countermeasures. These matters warrant sufficient time in the boardroom as they impact capital allocation decisions.
Transition the board to embrace more directors with experience in the digital evolution. Boards needing to elevate their game in recognizing the impact of disruptive technologies on business models and growth strategies as well as the security implications of implementing those technologies should make it a strategic imperative to evaluate board composition. To that end, the nominating and governance committee should seek the CEO’s input on the specific capabilities and skill sets that the board needs to add value to strategic conversations in the boardroom. Continuing director education should tap into digital experience with an objective to increase the digital savviness of all board members. Boards with deficiencies in this area should look to independent advisors to help bridge the gap.
Understand how artificial intelligence (AI) is a bridge connecting company offerings with the customer experience. AI is a key element to companies’ progress toward digital transformation, leading to more informed decisions, empowered employees, accelerated innovation, and improved compliance and third-party risk management. Board members should contribute to the integration of AI initiatives with capital allocation and strategic spending decisions as well as ethical discussions around such issues as transparency, fairness, trust, responsibility, and privacy.
Be aware of regulatory developments spotlighting boardroom composition. The US Securities and Exchange Commission (SEC) recently proposed a rule requiring annual reporting or certain proxy disclosures about the board of directors’ cybersecurity expertise, if any. Parties commenting on this proposal have reported various concerns regarding its implementation. Directors serving public companies listed in the US capital markets should appraise how the board organizes its oversight of cyber risk, regardless of what the SEC does.
Be mindful of legislative developments affecting digital business models. The European Union’s (EU’s) recent landmark legislative initiatives to upgrade digital services and digital markets rules will likely have ripple effects across the globe as digital borders are less defined than physical ones. With many digital platforms being global in nature and utilized by global companies, the impact of the EU’s initiatives on the digital landscape will likely be far-reaching—from large tech and platform providers to smaller digital software and marketplace start-ups—as their requirements around algorithmic transparency and restricted data-harvesting for profiling are put into practice. While the full effects may not be known for some time, the significant footprint of affected services includes not only very large online platforms but also online marketplaces, app stores, collaborative economy platforms, and social media platforms, not to mention intermediary services and hosting services such as cloud services. This latest EU legislation is likely to be a trendsetter for other countries to follow, as was the EU’s landmark General Data Protection Regulation legislation. It also may spawn legislation affecting other aspects pertaining to digital capabilities. Accordingly, boards should expect management to monitor developments in this space.
Recognize that technology is a key underpinning of both sustainability and profitability. Digital technologies are powerful enablers of increased productivity, innovative strategies, and cost savings. They’re also an integral part of solutions to reduce product waste and conserve scarce resources. They offer more powerful ways to analyze data and measure and track progress in minimizing environmental impacts. Most important, they can enhance reputation and brand image, opening doors to customers valuing relationships built on sustainable business practices and trust.
Last year, finance ministers and central bank governors from G7 countries agreed to mandate climate-related financial reporting aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures. The SEC’s recent climate disclosure proposals signaled that an explicit climate change rule in one form or another will soon become a reality for US capital markets. Shareholder environmental and safety proposals are gaining traction in forcing votes at annual meetings. These developments may entail elevating the boardroom conversation above discussions centered on the presumed dichotomy between sustainability and profit. If sustainability initiatives impact short-term profits, a compelling narrative to shareholders and different performance incentives may be necessary to balance the executive team’s focus. The board can set the tone in this conversation.
Consider reviewing reporting to the street. While still high, support levels in director elections continued to decline in the United States through the 2021 proxy season. Communicating through traditional reporting protocols on an annual basis may be “too little, too late,” emboldening proxy access groups who lack the full picture with respect to the company’s progress on the aforementioned topics. More frequent updates may prove useful as a preemptive measure. Accordingly, the board should consider the company’s strategic communications to the market and determine whether a conversation with the CEO and other management is warranted.
Advancing the board’s digital transformation requires smart, strategic, and engaged thinking and recognizing technology as a strategic driver rather than a mere enabler for fostering disruptive innovation. It’s about the board’s composition and processes for refreshment, as well as the board’s continuous education. It’s also about allocating sufficient time to discuss the digital agenda in the boardroom. It entails remaining abreast of relevant legislative and regulatory developments and viewing digital initiatives with a broad lens that considers sustainability matters. Finally, it raises the question of how best and frequently to communicate with investors about the company’s and board’s progress on the digital front.
Jim DeLoach is a managing director of Protiviti. DeLoach is the author of several books and a frequent contributor to NACD BoardTalk.
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