Secrets From Born-Digital Boardrooms

A look behind the veil of private, born-digital companies reveals four common pitfalls that boards at those companies are particularly vulnerable to.

Many of the companies born in the digital age are private, which makes it hard to gain insights into how their boards of directors operate and learn of their boardroom best practices. Given born-digital companies’ unique blend of strengths and challenges, AlixPartners set out to research these enterprises’ most pressing needs and areas they should focus on to sustain their success. In-depth interviews with executives and online surveys explored a rich array of topics, including what respondents saw as their company’s top strengths and challenges; where their enterprise focused its resources and efforts; how they approached partnerships with other companies; and how they managed crucial activities such as talent development, operations, and alignment of top executives with the company’s strategy.

What could be higher priority for boards than increasing company value? Because the board members of born-digital companies are typically private-equity or venture capital investors, developing the right exit strategy is also an important consideration for those stakeholders. Although taking a company public is not the predominant exit strategy for investors, recent highly visible IPO misses are influencing not only public offerings but also private valuations. Complex tech unicorns are notoriously hard to value, so the business world is starved for examples to follow. We now have enough variety in public offerings to give boards additional insights and comparisons.

Of course, there are always exceptions, but recent tech unicorn IPO results show that a trendy buzz and a coolness factor are not enough to outweigh business fundamentals. A higher gross margin is not a guarantee of a top valuation, but a lower gross margin can be a major sign of trouble, causing born-digital boards to rethink valuations. Those companies need to be evaluated and valued based on the industry in which they reside versus valuing them compared with other tech or software companies.

We heard from born-digital boards that they spend a large portion of their time seeking to build the right management team—even well after the launch of the company. Understandable, and given the start-up nature of born-digital companies, it’s not surprising to find gaps in the top team’s expertise. But boards must close those gaps early on—not keep fiddling with the issue when they should be focused on growth and scaling. Otherwise, shortfalls in the team’s expertise can haunt—and hurt—the company long after it has ramped up operations.

Boards of born-digital companies should also tread lightly when it comes to making management changes, because every management change raises the risk of disrupting the company’s culture and its growth trajectory. Inserting leaders with extensive management experience in traditional corporate operations into a start-up is a tricky balancing act—one that usually triggers resistance from both founders and employees. Indeed, boards may have such strong fears of disruption that they’re willing to live with deficits in the management team in order to stay in good favor with the founders. Moreover, the current members of a born-digital company’s management team may bristle at the notion that ‘corporate types’ brought in by the board from outside will destroy the entrepreneurial culture that they value so much. “These people take pride in their individualistic environment,” said one CMO of a born-digital company, “and they react against those new organizational constraints. They tend to characterize them as ‘Big Corporate’ has arrived, and that’s precisely what they didn’t want to be in.”

Findings from our study show that the boards of born-digital companies get much too involved in the day-to-day running of the business—for example, financial planning and analysis processes, marketing approaches, or helping negotiate supplier relationships. What’s more, the younger the company, the more pronounced the problem.

However, born-digital companies of any age still have boards that are heavily involved in operations, suggesting that they don’t have much time left over for assessing the company’s overall direction.

Born-digital boards’ desire to involve themselves in their companies’ operations is perhaps understandable. After all, many born-digital companies do have real gaps in their management teams’ levels of expertise. But that over-involvement sometimes occurs even though the directors themselves may not have the right operations expertise. Instead, the directors tend to know much more about the area of investment—which calls for a decidedly different skill set. According to one CEO of a born-digital company: “We had a board of investment specialists… I had six people with exactly the same skill sets and exactly the same backgrounds. For venture capital boards, you need real operators; and private-equity boards need the same thing.”

When directors who lack expertise in operations nevertheless consistently have their hands in their companies’ everyday goings-on, it can exacerbate the problem rather than solve it.

If born-digital boards are spending too much time involving themselves in their companies’ daily operations and in installing a winning management team, what responsibilities are they shirking? The answer is risk oversight. Today’s digital waters are fraught with complex threats that can destroy unwary companies overnight—from cyberbreaches to artificial-intelligence ethical gray areas, to data privacy scandals. Born-digital companies need more help from their boards when it comes to risk management than born-traditional companies do because born-digital companies operate in a space characterized by immature or even nonexistent laws and regulations.

But there’s cause for hope. Even though born-digital boards spend less time on risk oversight than their born-traditional counterparts do, our study shows that born-digital boards see the value of actively managing risks to their company’s reputation.

Such a long-term perspective is important, but born-digital boards have to follow that up with action—specifically, by allocating sufficient time to oversight, governance, and the development of policies that will enable the company to thrive in the face of daunting and diverse risks. Boards that set up for their companies—early on—the right management teams that include members with operational expertise can free up the time needed to devote to risk management.

Just because a company is born digital and has a highly technical management team doesn’t mean it automatically has a digitally savvy board. In fact, born-digital boards can be at a distinct disadvantage when there’s a deep divide between the executive team’s understanding of technology and the board’s. According to MIT, being digitally savvy means knowing what the impact of emerging technologies on the business will be during the next 10 years—a tall order unless one has gained such knowledge through a career’s worth of education and experience. The recruitment of board members with extensive knowledge and expertise in the use of digital strategies and tools in business can be difficult. But tackling that challenge pays big dividends.

Despite the compelling benefits of having a digitally savvy board, only 24% of companies actually do today.1 As a result, those companies are missing out on important advantages because adding digitally savvy board members is one of the most proactive and measurable actions a board can take to improve its impact.

In addition to adding technologist board members, it’s critical to educate the entire board and executive committee in the area of digital in a nonthreatening, inclusive way so that everyone has at least a foundational level of knowledge about how to best apply emerging technologies to the business.

LEADERS’ TAKEAWAYS

1. Reality-check your private valuations with lessons learned from recent tech unicorn IPOs.

2. Close experience gaps in the management team early on, and guide board members’ attention away from overinvolvement in operations. Expand the horizon for regularly assessing the company’s direction.

3. Examine your company’s inflight and planned strategies and risks, including cyberbreaches, the use of artificial intelligence, and data ethics and privacy. Take a proactive approach to your digital strategy, oversight, and defense.

4. Assess your board’s digital savvy, adding expert directors and educating existing directors and executive team members as needed to strengthen that savvy.

Avatar
Angela Zutavern is Managing Director, AlixPartners. Angela pioneered the application of machine intelligence to business leadership and strategy. She is a highly regarded leader with more than 25 years of experience in artificial intelligence (AI) and other areas of digital consulting, including machine learning, data solutions, and related tools. Fred Crawford is the former CEO of AlixPartners and currently Managing Director, Senior Vice Chair and member of the firm's Board of Directors. Fred is an internationally recognized strategist and operations restructuring specialist who has been involved in many of AlixPartners' most-high-profile situations. He is the architect, board sponsor, and senior mentor of AlixPartners’ global leadership program.