Point of view: Corporate Governance in the Age of Digital Transformation

Our INNOCOM  Partner  Jurgen van de Sompel engaged in a panel discussion at the yearly GUBERNA meeting to talk about Agile Corporate Governance.

Here is what he had to say about digitalisation and the associated opportunities and risks.

What is GUBERNA?

GUBERNA, the Institute for Directors, has the objective of promoting good governance in all its dimensions, for all types of companies and organizations. GUBERNA does this by raising awareness, informing and training. To achieve this objective, GUBERNA and its members (Directors, CEOs and top Managers) have formed a dynamic platform for the exchange of experiences and the transfer of knowledge about governance.

 

Corporate Governance in the Age of Digital Transformation

Boards of Directors have many issues competing for their attention, butbeing digitally conversant in an era of (accelerated) digital transformation” is quickly rising to the top of the list. Nearly all companies are looking for ways so that technology can be used to improve their business models, customer experience, operational efficiency and more. Boards must help them to move forward at a sufficient pace.

Good governance, shifting from compliancy to competitive advantage, means a good functioning tripod and equilibrium of shareholders, Board of Directors and Executive Management. It is the interaction of the 3 that makes good governance. Doing business in the digital era entails risks ranging from business model disruptions and missed competitive opportunities to cybersecurity breaches like a recent ransomware incident keeping a company hostage for weeks. The digital savviness should be reflected at all levels.

The value protection part is covered extensively in all corporate governance standards with risk committees, audit committees etc but this does not handle at all the more explorative character of the innovation part of the business. This has a tremendous impact on the operating model, more “co-creation” oriented and skills needed. In innovative companies there is a need to define an important role for insiders, such as company management and major shareholders.

In a highly innovative company, “proximate” monitoring by a Board dominated by insiders closer to the innovation process is likely to be a more effective approach than the “objective” outside monitoring recommended by mainstream corporate governance. Directors that are closer to the innovation process are more likely to understand its risks and opportunities.

For certain innovative companies, insider shareholders may have a crucial role to play given their intrinsic business insight and the longer term perspective they may foster. None of the above should imply that independent Directors and independent Chairmen are an unimportant component of innovative company Boards. However, their role needs to be reformulated relative to that of peers at more conventional enterprises.

 

The 3 critical factors in a governance for competitive advantage are:

 

  • Differentiating group dynamics. The right balance of people, having a Chairman guiding to smart decisions, creating a “fearless” environment where deviating opinions can play their role.
  • Information symmetry. If Directors cannot get the right information efficiently and in the right form, even the best board dynamics in the world won’t help the board get its job done.
  • Focus discussions on substantive topics beyond watching the ‘dog and pony’ shows put on by operating people and listening to last quarter’s results, dissected in unnecessarily minute detail with very little focus on the future. More substantive subject examples would be: do you have the right CEO and succession planning? How well is the CEO’s compensation linked to actual performance? Do you have a precise understanding of the money-making recipe in the chosen strategy? Is the management team looking sufficiently at external trends and diagnosing the opportunities and threats presented? How rigorous is the process for developing the leadership gene pool? Do you get bad news from management in time and unvarnished? Are you examining measures that capture the root causes of performance?

 

It takes three to tango

Many companies are or will be forced to quickly change their way of working, adapting to a digital world. Preparing for such a change should begin with assembling a team that can ask the hard questions about technology and strategy and initiate the much-needed shift from analogue to digital. It might seem like a lot of work, but MIT research also confirmed that this team only needs three enthusiastic digital-savvy members. It pays to have a digitally savvy Board. Having Board Members with experience in digital business seems to be the new financial performance indicator. Digital savvy Boards outperform significantly the others on key metrics such as revenue growth, return on assets and market cap growth.

 

What makes a Board digitally savvy:

 

  • The backgrounds of individual members. For instance: a Director also acting as Executive acting on a daily base in an information technology-intensive environment.
  • The number of members with deep digital experience. There seems to exist an optimum of 3 digital-savvy Directors representing a critical mass sufficient to induce the deeper discussions needed.
  • The way the Board interacts with Management on the strategic role of technology. In contrast to more traditional approaches, one should adopt more test-and-learn approaches to strategic planning, experimenting to see what works  and then scaling the successes. Rather than speculate, how can we quickly test whether customers really like this offer, learn, adjust etc

 

 

Do you want to know more on how INNOCOM can help YOU with your digital transformations?