Digital savvy is becoming more than a desirable attribute that directors and senior executives aspire to embrace. Compelling research asserts that companies could be falling behind if their boards lack 21st century know-how. It is intuitive that the same applies to business leaders.
Boards and business leaders are well aware of the digital revolution taking place across the globe. And they know that creative deployment of digital technologies made a difference during the COVID-19 pandemic in sustaining connectivity with customers. But what’s being done to advance their organizations’ digital capabilities? Specifically, does the board possess the digital savvy needed to support the CEO’s efforts to improve continuously the company’s business model, customer experience, decision-making processes and operational efficiency and effectiveness? Does the executive team? Let’s start with the board.
A Perspective on Digital Savvy and the Board of Directors
Research indicates there is a financial performance payback from leveraging digital savvy on the board. MIT Sloan School of Management researchers Peter Weill and Stephanie Woerner define digital savvy as “an understanding, developed through experience and education, of the impact that emerging technologies will have on businesses’ success over the next decade.” Their analysis linked above of the boards of U.S.-listed companies determined that those with boards of directors that have at least three digitally savvy members outperform other companies. These outperforming companies reported 17 percent higher profit margins, 38 percent higher revenue growth, 34 percent higher return on assets and 34 percent higher market capitalization.
Based on a machine analysis of the various boards’ digital know-how, the researchers analyzed data from surveys, interviews, company communications and the bios of 40,000 directors, extracting keywords indicating ability to think and act digitally. According to the research, digitally savvy directors possess such attributes as:
- An understanding, tested by experience, of how technologies will impact the way companies will succeed in the next decade;
- An enterprise-level understanding of current technologies such as digital platforms, artificial intelligence, big data, the internet of things and mobile and digital processes that enable new business models, improve the customer experience and create more efficient operations;
- An understanding of when to commit, experiment and partner, and of the early indicators of both successes and challenges with new initiatives operating at enterprise scale; and
- Instincts to consider technology early in the strategy-setting process.
Every industry has digitally savvy boards, though some industries have more than others. For example, according to the research, the top three industries are information technology, professional services and manufacturing, reporting that the percentage of digitally savvy boards is 57 percent, 39 percent and 29 percent, respectively. The bottom three are mining, transportation and construction, all of which have a representation of less than 10 percent. Interestingly, the research noted that, of companies with over $1 billion in annual revenues, only 24 percent had digitally savvy boards.
The takeaway: To be successful in the digital age, companies need leadership from their boards to help them advance their digital capabilities and support their CEOs in thinking and acting digitally. Digital savvy is about much more than leadership; it is also about ensuring that the business has a relevant vision and that necessary changes are, in fact, happening as it pushes forward. So, the question arises: How does a board become digitally savvy? The observations below offer suggestions.
Three may be the magic number. In the aforementioned research, there was little difference in financial performance between companies with one or two digitally savvy directors. However, when there were three or more such directors, the performance improvement was statistically significant. This finding suggests that boards should look at the extent to which digital savvy is present in their current composition and consider it in their nominating process. This means looking at the pool of seasoned executives who have served in a senior role in a fast-paced industry where business models change rapidly (such as executives with both a digital and an operational background who helped their companies innovate and/or undertake a major change initiative) or in a role requiring strong technology acumen (such as chief information officer or chief technology officer).
Merge institutional knowledge and digital perspectives. Though directors who grew up in the analog age may be dwindling in numbers as time goes on, they have experienced business downturns and possess an understanding of cultural and operational aspects of a business that merit consideration going forward. To remain relevant, they can elevate their digital savvy through engaging external experts as advisers, participating in self-directed digital training and visiting born-digital companies or companies that have consummated significant transformation activities. Combined, directors with institutional knowledge and those who are technologically savvy can pool their expertise and experience to understand how digital trends and disruption can affect the organization’s business model, value proposition and industry, and they can advise executive management as they transform the company to seize market opportunities.
Technology is a strategic driver, not a strategic enabler. The research noted through interviews with directors that non-digitally savvy boards are likely to start with the question “What is our strategy?” Then they ask, “What resources, including technology, do we need to execute that strategy?” But boards possessing digital savvy focus strategically on enhancing the customer experience, improving operations and securing the company’s positioning within the value chain. For example, they might inquire how technology can be used to improve customer satisfaction and operations and are likely to encourage a test-and-learn approach to strategy to conduct experiments and scale successes. They are more apt to ask the tough questions about what is really happening in the company and industry. In effect, they think differently – in approaching strategy, allocating board agenda time, organizing director education and viewing the role of technology in the business.
Resist falling back on the CIO. If the board does not have the financial means to either add a board seat or attract top talent, it can consider hiring advisers with the requisite “been there, done that” experience. If the focus is on individuals with a strong technical acumen, some boards might be tempted to leverage the CIO currently functioning within the company. We do not recommend that approach. Even solid CIOs need to be challenged, and the board must be capable of assessing the CIO’s capabilities.
It’s all about disruptive innovation. It is important to understand whether the company desires to be a digital leader, an agile digital follower or someplace in between. This provides the board with the context for focusing its oversight on the company’s innovation strategy and culture and encourages open discussion on direction and progress. The digitally savvy board insists on appropriate innovation-specific metrics that tell the full story of how the innovation and growth strategy is performing relative to competitors, the customer experience and the targeted return on investment. The digitally savvy board also considers the effectiveness of the company’s innovation culture and capabilities in empowering and rewarding employees to test new ideas and take appropriate risks to make those ideas a reality.
CEOs and Their Teams Must Also Be Digitally Capable
The digitally savvy board seeks a CEO with a compelling vision on how the company can use technology to sustain competitiveness in the digital economy in the years ahead. The board must be confident that the CEO is able to think and act digitally in managing the business and exploiting the business environment. The CEO need not be an expert but should be digitally savvy enough to form and build a team with the requisite knowledge of and expertise in digital business concepts, building digital ecosystems and, when applicable, the potential of digital hyperscaling platforms that can facilitate rapid growth consistent with a clear, coherent strategy. With the right CEO and team in place, along with a culture that is conducive to innovation and organizational change, the board’s role, then, is to support the CEO in setting strategy, monitoring strategic execution, aligning the corporate culture and managing risk.
The executive team should set the tone for continuous learning, improvement of the customer experience and the pursuit of operational excellence in a digital world. Executives should support a culture that embraces change and agility to sustain relevance in the marketplace. Connecting with and learning from people who are closest to the customer and new, emerging technologies facilitates alignment of the tone at the top with the tone in the middle, and vice versa, around change readiness.
Digital transformation efforts cannot be allowed to fail due to managerial and employee resistance. Both the CEO and executive team members may have to shake things up in the event of resistance to change when such change is so essential to execution of the strategy. For many companies, this means reassigning executives who cannot accept change, upskilling and reskilling workers to address shifting job responsibilities and pursuing needed talent to execute digital strategies, necessitating major changes to talent strategy to keep processes and product and service offerings relevant and competitive.
No company is immune from digital disruption. That is why boards should appraise their digital savvy in supporting the CEO in the new normal of a rapidly changing digital economy. It is why CEOs should take stock of their people to ensure that an effective team is in place that combines the requisite digital savvy with needed institutional knowledge. Gaps noted should be addressed sooner rather than later so that the board and the executive team are positioned to ask the right questions as they assess the wider capabilities of the business, identify changes that need to happen and use data-driven approaches to monitor whether those changes are taking place.
Questions for Executive Teams and Boards
Following are some suggested questions executive teams and their boards may consider, based on the risks inherent in the entity’s operations:
- Have we assessed our digital savvy in both the boardroom and the C-suite? If there are gaps, is there a plan in place to close them over time? Do we have enough digitally savvy directors serving on the board? Supporting the CEO in the C-suite? If not, should we plan to onboard more talent to better recognize the opportunities and risks in the digital space, when to experiment and when to partner, as well as warning signs of trouble?
- Do we have an eye on the technological trends affecting the opportunities and risks expected to disrupt our industry over the foreseeable future? Wherever we are on the digital maturity continuum (e.g., beginner, follower, advanced or leader), are we capable of thinking and acting digitally in advising and supporting the CEO in advancing the company’s digital capabilities consistent with the company’s strategy?
- Is the organization’s culture enabling its advancement in digital capability, or is it a barrier? As a board, would we know the difference? As an executive team, would we? Are we confident we have the talent to remain on the opportunistic side of the digital change curve, as opposed to being swept aside or becoming captive to events?