Corporate Governance

Effective digital board principles

02 August 2016

Human Capital Alliance senior advisor, K I Woo looks at how a board’s digital knowledge can be successfully augmented.

Companies must ensure their boards of directors digital knowledge is continuously augmented and upgraded if they are to successfully compete in today’s highly disruptive digital environment.

A recent McKinsey study suggests that four key principles should be considered.

1. Closing the insights gap

According to McKinsey, few boards today have enough combined digital expertise to have meaningful digital conversations with senior management.

“Only 116 directors on the boards of the Global 300 are “digital directors.”

The solution isn’t simply to recruit one or two directors from an influential technology company because there aren’t enough of them to go around.

Digital is also very far-reaching – including e-commerce, mobile, security, the Internet of Things (IoT), and big data—that the knowledge and experience needed goes beyond one or two tech-savvy people.

To address these challenges, McKinsey said one board’s nominating committee created a matrix of the customer, market, and digital skills required to guide its key businesses over the next five to ten years.

“This process prompted the committee to look beyond well-fished pools of talent like Internet pure plays and known digital leaders and instead to consider adjacent sectors and businesses that had undergone significant digital transformation.” As a result, strong new potential board members were identified.

“….the process of reflecting quite specifically on the digital skills that were most relevant to individual business lines helped the board engage at a deeper level, raising its collective understanding of technology and generating more productive conversations with management.” Special subcommittees and advisory councils can also narrow the insights gap. “…. some boards have begun convening several subject-specific advisory councils on technology topics.”

At one consumer-products company, the board created an advisory “ecosystem”—with councils focused on technology, finance, and customer categories—that provided powerful, contextual learning for members.

2. Understand how digital can upend business models

Many boards don’t fully understand the sources of upheaval pressuring their business models.

Designing satisfying, human-centered experiences is fundamental to digital competition. However, few board members spend enough time exploring how their companies are reshaping and monitoring those experiences, or reviewing management plans to improve them.

One company board put beta versions of new digital products and apps through the paces to gauge whether their features are compelling and the interface is smooth. “Those board members gain hands-on insights and management gets well-informed feedback.”

Digitization is changing business models by removing cost and waste and by stepping up the organization’s pace.

Cheap, scalable automation and new, lightweight IT architectures McKinsey said provide digital attackers the means to strip overhead expenses and operate at a fraction of incumbents’ costs.

“Boards must challenge executives to respond since traditional players’ high costs and low levels of agility encourage players from adjacent sectors to set up online marketplaces, disrupt established distributor networks, and sell directly to their customers.”

3. Engage more frequently and deeply on strategy and risk

According to McKinsey, today’s executive strategic discussions require a different rhythm, one that matches the quickening pace of disruption. In this environment, meeting once or twice a year to review strategy no longer works.

Regular check-ins are necessary to help senior company leaders negotiate the tension between short-term pressures from the financial markets and the longer-term imperative to launch sometimes costly digital initiatives.

Boardroom dialogue shifts considerably when corporate boards start asking management questions such as, “What are the handful of signals that tell you that an innovation is catching on with customers?

For instance, one consumer-products company director engages with sales and marketing executives monthly to check their progress against detailed key performance indicators that measure how fast a key customer’s segments are shifting to the company’s digital channels.

4. Fine-tune the onboarding and fit of digital directors

In their push to enrich their ranks with tech talent, boards inevitably find that many digital directors are younger, have grown up in quite different organizational cultures, and may not have had much or even any board experience prior to their appointment.

“To ensure a good fit, searches must go beyond background and skills to encompass candidates’ temperament and ability to commit time. If a promising candidate can’t commit to a directorship or doesn’t meet all the board’s requirements, an advisory role can still provide the board with valuable access to specialized expertise.

Perhaps more importantly induction and onboarding processes need to bridge the digital–traditional gap, as well.

To accommodate a rising tech star who held senior-leadership positions at a number of prominent digital companies on to the board, one company created a special onboarding program for her that was slightly longer than the typical onboarding process and delved into some topics in greater depth, such as the legal and fiduciary requirements that come with serving on a public board.

“The welcoming, collaborative approach has made it possible for the new director to be an effective board participant from the start.”

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