Companies with enough digitally savvy board members make more money. That’s the key finding from a recent study by MIT Sloan, which also revealed that few organisations measure up.
The research found that only 24 per cent of the boards of companies listed in the US with over $1 billion in revenues were digitally savvy, and these companies outperformed the others in the research on key financial metrics.
In particular, companies with a digitally savvy board had 38 per cent higher revenue growth, 34 per cent higher return on assets (ROA), and 34 per cent higher market cap growth.
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“Without digitally savvy directors, a board can’t play its key role in helping guide the company to a successful future in this digital era,” the authors write.
Specifically, boards need at least three members with the digital wherewithal to identify cybersecurity and privacy risks as well as business model disruptions and missed competitive opportunities.
But Australian boards are still grappling with basic concepts of diversity, such as gender, race and age. Experts Which-50 spoke to believe digital is the next dimension of diversity that boards need to address to ensure the long-term survival of the business.
“In Australia we suffer from this really basic lack of diversity of not having more women and more young people [on boards]. We still have, primarily, older men. Now digital is the next dimension of diversity,” says Gerd Schenkel.
“It’s getting a little bit better, especially in respect to women on boards, but very, very slowly.”
Schenkel is the Chairman of fintech Credit Clear and the Leader of the Digital Practice at consultancy Partners in Performance. His experience in digital executive roles includes founding UBank, NAB’s digital bank, and Telstra Digital.
“Boards in Australia tend to suffer from a legacy mindset where they think that becoming a digital company is a special thing as opposed to it being a matter of survival,” he said.
He argued incumbents will face increasing margin pressure and more competition from overseas companies and digital natives as generational changes accelerate and consumers become more digitally demanding. A digitally aware board needs to have a good grasp on this looming threat and ascribe it the right level of urgency.
“They will think it is one of many things to worry about as opposed to, say, this is the number one thing to worry about in terms of the long-term survival of the company,” he said.
“Boards are meant to ensure the long-term survival and prosperity of the company, and in that sense digital should be front and centre for pretty much every board in Australia. And I don’t think you can do that if you are not a diverse board.”
The MIT Sloan research suggests digital-savvy boards are required to identify opportunities and threats from digital technologies over the next decade, and strike the right balance in weighing the risks of a project under consideration on versus the risk of not doing something new.
One of the directors interviewed for the report said, “Digitally savvy directors change the risk conversation from evaluating the project risk of particular initiatives to the business model risk of not doing something new.”
According to Schenkel, that mindset is hard to teach.
“If you have a board of people that are in their 70s and were in executive positions 20 years ago, it’s very difficult for them to have that mindset — no matter how intelligent and experienced they are and no matter how much they read,” he said.
Schenkel estimates around one in five boards in Australia have members with a digital skill set. The rest sit on a spectrum of quite ignorant (“that’s the exception now”) to digital savvy. Most sit somewhere in the middle — aware of digital but still taking an overly superficial view of transformation.
The risk with that approach is that having a digital agenda becomes a box ticking exercise, which could be a technology purchase driven by a vendor. Schenkel says the benefit of a technology purchase doesn’t come from the deployment of a platform, but by changing the way the organisation works.
“The digitisation of a company is an ongoing, difficult process that is much more than technology. And it is not enough to sign off $1 billion investment for the CIO. Because the CIO on his or her own can’t drive the changes you need to drive in the operations of the company. This is far more holistic than a typical investment case.”
Marcelo Silva, digital transformation consultant and founder of DTS, argues leadership is the most important element in digital transformation success.
“Having three or more digital-savvy directors sit on a board is a very positive step in the right direction, especially when shaping the culture of ‘legacy’ organisations going through complex change,” he said.
Silva noted that, historically, boards are there to hire a good CEO and fire a bad one, and having digital savvy board members helps put pressure on the C-suite to execute transformational strategies.
“It’s the responsibility of the board to keep the CEO honest and ensure that his or her remuneration package is tied to successful projects that underpin transformation,” he said.
But attempting to change culture of an incumbent business tied down with legacy technology and ways of working is a long-term process, and revenue contributions don’t tell the whole story behind a transformation, Silva argues.
“Within the context of digital transformation, revenue and the number of directors is not a sufficient standard or proxy for success as the majority of companies transforming tend to differ with their respective digital maturity along with revenue contributions. Therefore, revenue and digitally savvy directors in most cases are correlation — not direct causation — from specific digital transformation efforts.”
The research examined boards with between six to 15 members. Having one or two digitally savvy board members didn’t make a difference to company performance. Boards require three or more members to outperform the market. Beyond three digitally savvy directors, the incremental differences in performance were small.
The researchers drew on a survey of board members and analyses of Chair and CEO letters in annual reports to identify keywords indicative of a digitally savvy director.
They then used machine learning to analyse more than 40,000 directors’ bios, after which the model scored them savvy or not savvy. The output was then measured against the financial performance of their companies.
“We could not have done this research without machine learning,” report co-author Stephanie Woerner told Which-50.
“We were able to code 40,000 bios using machine learning — a scale that would either take years to do manually or would require a lot of manpower. It was complicated to set up the training — we had to iterate on coding schemes and it takes time to do it well.”
The results varied between sectors. Unsurprisingly on average 57 per cent of company boards in the information industries were digitally savvy, but digitally savvy boards were found in only 24 per cent of retail companies and in less than ten per cent of transportation, construction, and mining companies.
“This research opens up avenues for different kinds of questions, using different kinds of data. We’d like to use the same methodology on senior executives — again, something we couldn’t have done before,” Woerner said.
No shortage of candidates
Bridget Gray, Managing Director of executive recruiter Harvey Nash, argues there is no shortage of digital savvy board candidates in Australia — but the challenge is getting them on boards.
“I believe that there is an abundance of highly qualified, capable and digital-savvy board-level talent here in Australia,” Gray said.
“The challenge is more that we need organisations to ensure they have fully scoped their skills requirements for the board, are prepared to make brave changes to enable an impact by ensuring the board member of now is given the voice they need at the table.”
Gray noted that it is difficult to assess the current level of digital experience across Australian boards due to the lack of independent board evaluations conducted in Australia, and the high percentage of board members that are directly appointed through an informal network process.
“It is true that it is becoming more and more expected that board members are digitally aware, although unfortunately this is not the consistent reality as yet in 2019. We have quite a lot of work to do, especially to get the digital board composition at its most effective. And like any upskilling process, it often means significant change and at times tough choices — but that is really what the board is there to do.”
Gray noted that traditional skills such as risk, finance, governance and M&A are also highly in demand, to guide a company to the right balance of innovation without the reputational risk. But the two sides need to work together.
“Traditional board members must be open to changing the way they view risk and how they can learn to speak a more common language with digitally savvy board members.”
A Way forward
A key takeaway from the research is organisations need to look beyond traditional roles when recruiting directors.
“CIOs — especially those in more digital industries — have skills and insights that would be useful on boards,” Woener told Which-50.
“Companies also need to look at what kinds of training board members have undergone to identify savvy board members. In our research, some board members didn’t come from a digital background but had the curiosity and drive to learn about digital.”
Gray also highlighted reverse mentoring and curiosity around digital concepts and capabilities as a way to educate board members on this topic, as well as recruiting new talent.
“Given that we now have evidence that having three or more board members that are digitally savvy makes a substantial, measurable and positive impact, it is perhaps unrealistic to believe that a board would not need to be complimented with new board talent to achieve optimal compilation and business results,” she said.
Silva, meanwhile, says digitally savvy board members require a combination of technical competency and cultural competency — for example, evidence that they have helped other businesses navigate some challenging periods.
He recommends boards consider, “Has this perspective director had experience or been involved in a digital business or investing in digital businesses? That exposure is priceless.”
If the answer is ‘no’ to the first question, then organisations should consider if the candidate is a cultural fit.
“Can they influence change at a very senior level to steer the business in the right direction and help them navigate the challenges and complexity of digital disruption?”
Schenkel argued that more Australian CEOs should sit on the boards of non-competing businesses while they are still in the top job, rather than sitting out for a few years before re-joining the corporate world.
“In the US there are a lot of current CEOs who serve on the boards of other companies and therefore they are far more current in their knowledge — including their digital knowledge,” he said.
For example, the CEO of ServiceNow, John Donahoe, is also the Chairman of PayPal and on the board of Nike. While Microsoft CEO Satya Nadella is also on the board of Starbucks.
“There are lots of experienced CEOs in Australia, and that knowledge should be sought out by other companies. But it doesn’t seem to be the case, so you get a bunch of people who were CEOs 20 years ago on boards.”
Schenkel also raised the notion of introducing a digital advisory board, which can advise and expose directors to digital challenges and opportunities, but does not have the typical governance role of a board.