Governance in the Age of Digital Transformation: Fact and Friction

20 Oct 2022

The accelerated rate of change in markets, technology development and associated consumer behaviour – much of which was driven by the pandemic – has challenged businesses to reinvent how they originate, commercialise and scale ideas.

However, there is an inherent potential conflict between ‘going digital’ and ‘traditional board governance’.

The typical governance framework (& many board members) often view digital and digital technologies as conflicting with their foundations. Historically governance had desired certainty, risk aversion and visibility. Traditionally board members are older with years of experiences aligned to analogue corporate ways of working; they are not ready made (or ready to accept) for digital.

 In the Age of Digital Transformation, business leaders now have a set of new questions:

• What are the synergies between what digital can do and the role of governance in the boardroom?
• What are the board missing due to their lack of understanding of digital?
• Has the reliance on board members (in particular NED’s) whose experience is built on multiple historical board positions, become less relevant?

Digital thrives on fast-moving, test & learn and fail-fast methods. Often digital is combined with thoughts about new technology companies which thrive on disruption, change and innovation more broadly. These rub up against the traditionally perceived role of governance, the checks and balances mechanism, with leaders wanting control, predictability, assurances and known outcomes. Many boards are less well versed in digital approaches and parlance: they face what the former US Secretary of Defence, Donald Rumsfeld called ‘unknown unknowns’. In plain English, they don’t know what they don’t know.

The reality is the digital curve is evolving in months as opposed to decades, so today’s young digital natives are already ahead of experienced board members (even those who state they are ‘digital experts’). For this reason, any tension or conflict between digital and governance must be resolved quickly.

Synergies between Digital and Governance

• Increased efficiencies with more efficient processes and relevant data, enabling faster decision making and taking advantage of new opportunities
• Evolving business strategy to take advantages of new revenue streams in customer behaviour
• Driving operating leverage and scale driving increased profitability and shareholder return
• Digital can deliver on the more-for-less agenda that boards have – digital is a way to save money (customers self-serve so we need fewer staff, for example).

Frictions between Digital and Governance

• Perceived conflict with governance role
• Board willingness to understand and adopt technology / new ways of working / risk taking
• The ‘knowledge + experience + talent gap’. Many business leaders simply haven’t grown up with digital, and, therefore, do not have a frame of reference. Similarly, boards are unwilling to hire people without board experience even though they have digital experience
• Technology and digital in general are ‘abstractions’ and ‘soft’ assets compared to the world of balance sheets, P+Ls and audit committees.
• Data protection / security
• Too many board executives still believe digital = cheap. As a result governance, budget approval, project approval, becomes death by a thousand cuts until nothing of consequence is left.

Currently many boards are focused on the friction with digital rather than the positives it could bring their business. The fear of embracing digital often results in digital having no voice at the table.

Just about every board wants to be more agile and more innovative. The accelerated rate of change in markets, technology development and associated consumer behaviours is challenging every business to reinvent how they originate, commercialise and scale ideas. Boards need to accept digital as inevitable. Moreover, boards need to use their corporate governance tools not just to embrace digital, but to be a better business as a result of it.

Chapter 5 Takeaways:

• Businesses will have to adapt and embrace digital
• Many boards members struggle to accept or embrace digital because they do not understand it
• There is a perception that governance processes are in conflict with digital
• Many true digital experts do not have sufficient corporate experience to be accepted as board members; this results in digital not having a voice at the board table
• Digital and innovation companies are not going anywhere; to be successful, businesses must adapt their governance to incorporate digital

See you next week for Week 7 of topics from our Governance Whitepaper.

If you wish to catch up on Weeks 1, 2, 3, 4 and 5 from the Governance Whitepaper, click here.

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