To drive growth, businesses must innovate and today, innovation is rooted in digitalization. Companies that have not yet embraced the transition to the digital world will soon face significant challenges, particularly in this Covid era. But while a great deal of companies had digital transformation on their agenda long before Covid-19, the crisis has forced many to pick up the pace. Some are making significant strategic plays using new technologies, while others are evolving their strategy to enhance existing products and services—and some are even launching entirely new products and services as a result of these innovative technologies.
Regardless of the approach, boards play a crucial role in the transformation. How boards understand and oversee management’s approach was the focal point of a recent study by Corporate Board Member and PwC, through which we surveyed more than 200 public company directors and compared their responses to those provided by their C-suite counterparts (the executive perspective was captured by PwC’s 2020 global digital IQ survey). When comparing the responses of the board to those of the leadership team on the issue of digital transformation, we discovered some significant misalignments, which, if left unchecked, could create obstacles on the path to digitization.
To discuss the disconnect, Corporate Board Member recently hosted a webinar where Paula Loop, leader of PwC’s Governance Insights Center, joined three seasoned public company directors: Jan Estep, former CEO at Nacho, chair of the nom/gov committee and member of the risk committee at ACI worldwide; Mitch Gordon, former CEO of Edition Capital Partners and director of Mesa Air Group, Adgile Media Group and Merchants Fleet; and Randall Crowder, CEO and board member at Phunware.
Below is a summary of the conversation. You can also listen to a replay of the webinar here.
In the early 2000s, issues of cybersecurity highlighted the importance of professional background and skillset diversity in the boardroom. The continued rise of innovative technology at the core of business put further pressure on boards to bring on directors with savviness in the area—or to at least get educated on the topic. Yet, only 58 percent of directors in our study said their board was informed enough to support the company’s digital efforts. In contrast, 82 percent of executives surveyed by PwC believe their board has the information it needs to provide oversight. That’s a vast overestimation of reality. So, why the disconnect?
PwC’s Paula Loop said that while five years ago, corporate directors and executives were aligned on why they were going through a digital transformation—i.e., to do what they always had done, faster and more efficiently—today, they have different ideas. Executives are more likely to say that their companies are focused on modernizing the brand with new capabilities. Directors, however, think the transformation is focused on changing the core business model and redefining the company. It’s difficult to measure the progress and success of transformation projects if executives and directors aren’t on the same page.
A big part of achieving alignment between management and the board entails having board members who understand the issue very well and know which questions to ask. According to Mitch Gordon, the Mesa Air Group director, this once again highlights the need for more diverse skillsets around the table, where the diversity discussion gets broadened to account for “not just underrepresented people but underrepresented mindsets and expertise” as well.
Finding younger directors who’ve had experiences that differ from the core of the existing board is a great way to diversify areas of expertise and viewpoints.
“There’s a whole generation of people who have 10, 15, 20 years of business experience who are dying to get on boards, who have a lot to say, but no one has asked them,” said Phunware’s Crowder.
ACI’s Estep, however, cautioned against looking into the obvious circles: “Diversity of experience and perspective is critical, so I think it would be wrong to simply look, for example, in Silicon Valley,” she said, noting that you can find the subtle experiences that fit the individual needs of your board or organization simply by networking and engaging with different organizations, particularly since digital savviness is a competency that has come to mean different things for different organizations and different sectors.
Crowder agreed: “It doesn’t mean I have five advanced degrees and I know how to code in my sleep. Digital savvy means I understand the complexity of an entire ecosystem and how to leverage technology in order to achieve a business goal.”
Given how many people don’t understand the full technical breadth of the issue, Crowder said it’s imperative for management to make it relatable and accessible to the people in the boardroom; a leadership team that assumes its board has a solid baseline of digital knowledge is disastrous and doesn’t foster a strong culture.
“We think about different ways to educate them in bite sizes and try to make it as easy for them to become as digitally savvy as possible,” he said, referring to how his management team works with the board on the issue. “You can’t just expect them to do all of this on their own.”
Digital Leadership: The Board’s Role
Starting a journey of digital transformation requires having the right leadership in place to execute the process. This can be challenging for traditional companies, where the CEO may be involved but not have sufficient time to “lead” the effort.
Gordon, who sits on the board of a specialty finance company in a very traditional niche, said his board one day recognized that the company was behind the technological curve and had wasted enormous amounts of money. They brought in a new CEO with previous experience running tech companies, who successfully transformed the entire company within a year. They attribute their success to attracting a CEO with the knowledge base and enthusiasm for digital transformation.
Finding the right leadership to implement what can often be a heavily debated growth strategy is no easy task. Crowder noted that, when it comes to digital transformation, leadership must demonstrate patience, vision and resilience, as well as the ability to build consensus and have credibility.
“It really helps having someone who can talk the talk, effectively, so you have an opportunity to walk the walk,” he said, warning that not having the right buy-in and being unable to justify the investment will result in a lag between the effort, time and bandwidth required to achieve digital transformation.
In addition to having the right leadership, having the right culture is equally crucial when it comes to change management. Resistance to change can stifle the sort of innovation, collaboration and new ways of working that propel digital transformation success. It is no surprise then that one of the most difficult parts of the transformation journey is laying the groundwork toward change. To undergo true transformation at scale, boards and management must nurture a healthy culture—or change it promptly if it shows signs of resistance.
In the PwC-CBM research, 34 percent of directors said “changing the leadership mindset and standard processes” was one of their top barriers to digital transformation.
While the barriers and success factors vary depending on the organization, Estep believes it’s important for companies to have the ability to collaborate or partner with other organizations.
“Transformation clearly may mean working outside of your traditional four walls and the traditional people that you’ve always worked with and collaborating with others from a different organization may allow you to move forward rapidly,” she said, adding that the greater the bureaucracy, the slower the change. “Some organizations can make technology changes fairly rapidly, but if they don’t change their internal processes at the same pace, there really is potential for failure.”
Crowder, who was a captain in the United States Army and deployed twice in support of Operation Iraqi Freedom, took a page out of his military background to explain why it’s important to remember that leaders don’t need to have all the answers. Rather, he said, leadership is about asking all the right questions and creating a culture that is agile and entrepreneurial.
“You have all this really unexpected entrepreneurial mindset if you have a culture of openness and transparency and communication,” he said. “Don’t make people feel uncomfortable or awkward for voicing their opinion. Even if sometimes it’s wrong. It’s how we get better.”
KPIs and ROI
The cost of any transformation—and whether it will produce the desired ROI—is, no doubt, always top of mind. With shareholders increasing their vigilance, it’s all the more important for the board and the executive team to be aligned from the start in order to obtain buy-in. But Estep said that even though cost and ROI are important, the digital transformation conversation shouldn’t start there.
Instead, companies should first ensure that the risk appetite of the board and the management team are aligned. Then they should conduct a fulsome competitive analysis to reach a consensus on how and where to take risks and to have a solid understanding of the full, wide-net spectrum of competitors against whom they’ll be benchmarking their progress. Estep added that if there is alignment and awareness, particularly with non-traditional competitors, it becomes much easier to invest in new areas that some would consider risky.
“Think about defining digital transformation as supporting key business goals,” she said, adding that by taking measurements that are supported by digital transformation, such as rate of product introduction, “you can come down to see an ROI pretty quickly: introducing products faster, getting customers on board—all of those things will help you if, in fact, you’re aligned with risk assessment and with who you are competing within our new economy.”
Gordon said boards should require management to add digital investments as part of the strategic plan that gets presented every year. “Every quarter, there should be at least a five-minute discussion at the board meetings as to whether the goals are being met, whether things have to change, what type of support they need from management and from a board and from a financial standpoint,” he says. “It’s an important process and discipline to go through, and it helps by imposing that on the different management teams.”
When asked what constitutes a good risk appetite statement, Crowder answered: “What is the risk of not doing something? What is the risk of not engaging in digital transformation? This world moves fast and if you’re not thinking about it, that’s the real danger here.”
Still, digital transformation still won’t happen overnight; the majority of surveyed directors agreed: it’s a journey and a process that will never end.
“My view of digital transformation is that it really needs to be a plan for permanent change,” said Estep. “It’s not a single product. It’s not a single project, but rather a new way of supporting key processes, key services delivery.”
“Don’t let inertia kill progress,” cautioned Gordon.
So, where to go from here?
“Foster a culture of openness and transparency,” said Crowder. “The worst leaders think that they have to have the best answers. The best leaders think they have to have the best people. If you’re the smartest person in the room, then you’re in the wrong room. If you can’t leave the room, level it up and then drive innovation and make it a team sport.”