Advancing the Board’s Role in Digital Transformation
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 other members of the board.
Embracing digital capabilities is a mindset that emphasizes a commitment to adapt continuously in the face of change and respond to customers’ increased desire for products and services that meet their evolving needs. As markets continue to evolve, is the value contributed by the board keeping pace? Is board composition refreshed to reflect the times? Do the board’s experience, skill sets and capabilities enable it to engage meaningfully with the CEO and management team?
One of the top trends that will have the greatest effect on companies over the next 12 months — as noted in a recent survey of public company corporate directors issued by the National Association of Corporate Directors (NACD) — is the increasing pace of digital transformation. The digital era is fostering an environment in which each director should be knowledgeable about the enabling technologies that will impact the industry over the long term, resulting in new business models, transforming customer experiences, and driving operational efficiencies and innovation. A sufficient digital understanding enables directors to contribute to capital allocation and strategic conversations around digital initiatives and thinking.
There are several imperatives that boards should consider to advance their role in digital transformation:
Another NACD report notes three areas of board oversight requiring increased attention: human capital, cybersecurity and digital transformation. These topics are interrelated, as 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. Accordingly, boards should devote more time to discussing these matters as they impact capital allocation decisions.
Mere understanding of the importance of digital and the notion of altering the board’s culture to embrace it has become very “yesterday.” The nominating/governance committee’s mindset, criteria and expectations should reflect the board’s most immediate needs. 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/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. Also, it should not permit “fit” to function as a cover for unconscious bias or other barriers to the participation of otherwise qualified candidates, particularly on the digital front.
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 advisers to help bridge the gap.
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.
The Securities and Exchange Commission (SEC) in the United States has proposed a rule requiring annual reporting or certain proxy disclosures about the board of directors’ cybersecurity expertise, if any. The proposal doesn’t define what constitutes this area of expertise, only offering examples. It doesn’t include an “if not, why not” provision, making it unclear how investors might interpret a company’s lack of disclosure of a board-level “cybersecurity expert.” Parties commenting on this proposal have reported various concerns regarding its implementation.
Directors serving public companies listed in U.S. capital markets should appraise how the board organizes its oversight of cybersecurity risk. Given cyber threats are a moving target, this risk merits consideration on a periodic basis regardless of what the SEC does.
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. 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 (GDPR) legislation, adding yet another component to the compliance table stakes for doing business on a global basis. Accordingly, the board should expect management to monitor developments in this space.
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. They can streamline supply chains and facilitate problem-solving. Most important, digital technologies can enhance reputation and brand image, opening doors to customers valuing relationships built on sustainable business practices and trust.
With the increased frequency of shareholder environmental and safety proposals gaining traction in forcing votes at annual meetings, directors should focus on their company’s preparations. This 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.
While still high, support levels in director elections continued to decline in the U.S. through the 2021 proxy season. Communicating through traditional reporting protocols on an annual basis may be “too little, too late,” emboldening proxy access groups that 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.