Why is it important to have digital expertise on boards?
|Datum:||26 april 2019|
Several institutions, e.g., the Dutch national register, suggest that supervisory boards become more digital. Indeed, firms are exposed to the digitalization of their environment. That leads to increasing strategic relevance of ‘digital’. Assets, products, and markets become digital. This digitalization involves threats, such as new competitors from other industries. But it also offers opportunities, such as data-driven business models. However, does digitalization require changes in the board room? To answer this question, we need to look at the traditional board tasks and then assess whether these tasks change in times of digitalization.
Traditional board tasks
Giving strategic advice is one of the major tasks of board members. In line with previous research, a rich expertise (e.g., in the focal industry) enables board members to give better advice (see, e.g., Oehmichen, Schrapp, & Wolff, 2017). Furthermore, boards are responsible for monitoring their firms’ managers. This includes appointing, assessing, and dismissing managers as well as determining their compensation. In the past, boards typically leveraged financial expertise to handle these tasks successfully.
Board tasks in the digital era
How do board tasks change with digitalization? Strategic advice needed in the digital era changes since companies face new challenges: Platform firms from other industries can represent a new competitive threat. An example is Amazon’s acquisition of Wholefoods. At the same time, new opportunities can be realized through, e.g., data-driven business models. For many firms this requires a radical strategic transformation and an adjustment of organizational structures. As many disruptors’ organizations are still benefitting from the early years garage settings (compare, e.g., the beginning of Apple and HP), traditional companies may want to create organizational structures that are also able to produce technological disruptions. Firms need to learn how to build such “garages” internally and how to integrate them properly. Board members who experienced garage atmospheres during their previous positions may be more able to increase acceptance for the new digital organizational particularities. For example, agile processes and a higher failure tolerance can feel quite different than traditional management approaches. In addition, the traditional company car may not serve as a carrot anymore to attract and hold digital talents who instead may seek to be participating in the firms’ successes via employee stock ownership programs.
New challenges for boards will also arise with respect to their monitoring responsibilities. Firms increasingly appoint Chief Digital Officers (CDOs) (compare, e.g., René Steenvoorden who is CDO at Randstad since 2016) or are actively searching for CEOs with digital expertise nowadays. In consequence, the appointment committee of a board who is responsible for spotting new talents must be able to reach candidates with such a digital skillset. While filling the funnel may still work via traditional ways of using specialized headhunters, boards need to be able to win these digital natives. Having a common background (e.g., by already having managed a digital transformation or having ties to digital scale-ups) may become essential for board members to convince the job candidates that they can become successful in their new position. It also helps to monitor their activities later.
Furthermore, digital strategies require changes in executive compensation structures. Classical compensation contracts condition the compensation on established financial figures. Although these figures are increasingly future looking, for instance through vesting periods, they might not be future looking enough to incentivize a digital transformation of the entire business model. Turning a digital transformation into success can last longer than the typical CEO tenure and requires a certain tolerance for experimentation and failures. Therefore, additional strategic goals directing CEOs towards digital transformations could complete CEO compensation arrangements. Defining such goals requires the board to understand the uniqueness of digital transformations.
Do boards need to change?
In summary, the digital era brings several additional challenges for firms in which digital expertise on board becomes helpful. However, we should keep 2 things in mind.
- Digital expertise is a complement, not a substitute - Carrying out traditional board tasks still requires boards to have the many years of “old school expertise”. Firms should hence not trade digital board expertise for financial expertise needed to assess the financial situation or managerial board expertise needed to bargain compensation contracts efficiently.
- There is not the one kind of “digital expertise” - Depending on the firm-specific challenges, different types of digital expertise may be needed. On the one hand, understanding the implications of a shift towards a data-driven business model may require a more technological background, like a previous management position at one of the Tech giants. One example of such a board career is Claudia Zuiderwijk who is member of the supervisory board of KPN and APG after having spent her career among others on several positions at IBM and the Dutch Chamber of Commerce where she managed the successful digital transformation. On the other hand, fostering the garage culture of digital startups may require candidates who experienced such culture in several startups.
Hence, what can boards do? First, and not recommended, they can wait and hope that “digitalization” is only a hype that comes to an end, soon. Second, they can invest in increasing digital knowledge of existing board members. Executive teaching programs can help. Third, they can add digital experts to their boards. Each action has many pros and cons. What do you see as the best way forward for your organization? Happy to hear from you!