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What digital transformation means for boards

Digital transformation is one of the most important priorities for boards today – with good reason. In this era of continual technological disruption, boards are constantly confronted with new inventions, new competitors, new business models and new expectations from customers.

In such a context, it is understandable that boards want to explore the possibilities associated with powerful emerging technologies such as artificial intelligence (AI), robotic process automation (RPA) and virtual reality. In fact, almost half (46%) of the global executives who responded to EY’s 18th Global Capital Confidence Barometer1 said that they were already using AI and RPA.

Transformation is important, but boards also have a host of other priorities competing for their attention in what is an increasingly volatile economic, political and social environment. So how can they achieve sufficient competency in digitalization to seize the opportunities associated with digital transformation while managing the risks and asking the right questions of management at board meetings?

Question for the board to consider

  • What does digital transformation mean for the organization and how will the board direct the organization to exploit the opportunities and manage the challenges that may result?

 

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In 2017–18, EY in cooperation with Brainloop, Philipps University of Marburg and the Center for Corporate Governance at HHL Leipzig Graduate School of Management surveyed board members and executives from around 2,800 organizations across seven countries in Europe to find out. Below is a summary of some of the most important findings from the study, entitled Insights on how boards approach digitalization. You can download the full report on the right-hand side.

Principal research findings

1. Boards are on a quest for innovation

Our research found that the most pressing topics on the board’s digitalization agenda, from an operational perspective, are the development of new products and innovations (58%) and securing access to digital skills (53%). Organizations understand that that they need to keep innovating if they are to retain and grow market share and stay ahead of the agile new competitors that are challenging their hegemony. Digital specialists on the board play a key role here by supporting the development of new products and services, enabling firms to face the disruptiveness of established business models successfully. As a result, boards see the existence of a skilled and competitive labor market as crucial to effecting a successful digital transformation.

Overall, two-thirds (67%) of organizations believe that creating their own solutions and investing in research and development are the most promising corporate strategies for extending their digital know-how. Almost the same number (63%) are attracted to the idea of outsourcing innovation to external service providers, although digital skills are considered a key asset for companies. A minority believes that undertaking joint ventures (40%) or acquisitions (23%) could at least be partially relevant to addressing the digital transformation challenge.

2. Boards oversee how cyber risks and data protection are managed

The World Economic Forum rates a large-scale breach of cybersecurity as one of the most serious risks facing the world today.2 It is clear from our research that boards appreciate the significance of the threats posed by cyber risks and data leaks, since the majority (55%) are already frequently handling these kinds of risks. The pressure on boards to oversee cyber risks effectively will only increase further as the pace of digital transformation intensifies and more legislation on cyber and data protection-related issues is passed. For example, the European General Data Protection Regulation, which came into effect on 25 May 2018, will force boards to pay closer attention to the procedures and technologies that their organizations are using to collect, store and process data.

3. Boards need to close their digital knowledge gap

Significantly, given the business-critical nature of digital transformation, our research highlighted that there is a notable gap between the importance of digitalization on the board agenda and the chair’s skills in this area. The chair’s level of experience of digitalization was ranked 15% lower than the importance of digitalization on the board agenda overall.

The chair’s digital expertise is not the only knowledge gap that boards need to close. Just 24% of boards have a non-executive director specifically dedicated to digitalization, while at least 38% have an executive director who specializes in the area. Notably, when digitalization is assigned to C-level executives, it’s mostly (56%) within the responsibility of the CEO.

Percentage of firms with directors specifically dedicated to digitalization

EY - Percentage of firms with directors specifically dedicated to digitalization

Meanwhile, only 10% of boards have set up their own committees specifically dedicated to digitalization. The majority still choose to address selected aspects of digitalization within other committees. For example, the audit committee might discuss cyber risk, while strategic threats and opportunities related to digitalization tend to be discussed in the plenary board meetings. A separate survey undertaken by EY3 revealed that 58% of CFOs and financial controllers believe that audit committee members need to build their understanding of the role of analytics in risk management.

Recommendations

The research highlights some key actions that boards can take if they want to play a more prominent role in driving and supporting the digital transformations of their organizations:

1. Draw on digitalization skills to ask the right questions

Non-executive directors should act as sparring partners to the executive management team. To do this effectively, they need to be able to question management on digitalization, which clearly requires them to have relevant skills.

2. Appoint a C-level executive to execute digital strategy

Every board should have an executive director who takes personal responsibility for digitalization. If the director delegates that responsibility to someone else, he or she exposes the organization to significant strategic risks. These include being overtaken by a competitor that has an executive director who is leading on digitalization from the front.

3. Review the composition of the board

Organizations are navigating a host of digital-related issues, from identifying new markets and developing new products, through to managing cyber risks and security issues, and responding to the evolving regulatory environment. As such, the board should ask itself whether its composition is still fit for purpose. If not, how can it be improved? Should it appoint a non-executive director who is specifically dedicated to digitalization, for example?

4. Make optimum use of technology in board meetings and beyond

While technology is already widely used to facilitate the board’s communication and information processes, there is scope to apply it more widely – for example, by making use of electronic voting and video conferencing.

5. Approach digitalization as a holistic issue

Differences between organizations and sectors mean that there can be no one-size-fits-all approach to digitalization. So boards should take a holistic and integrated approach instead. This could include reviewing the structure of the board and making changes to the competency profile of its members, as well as challenging management to make the necessary investments that will support the organization to thrive in the digital age.

Questions for boards to consider:

  • What does digital transformation mean for the organization and how will the board direct the organization to exploit the opportunities and manage the challenges that may result?
  • Which new technologies are emerging and how will these impact both the organization and its competitors?
  • Does the composition of the board include individuals with expertise in digitalization? If not, how is it planning to recruit new members who do have these skills?
  • Is a C-level executive taking personal responsibility for digitalization from a strategic perspective? If not, should the board consider appointing a leader?
  • Does the board need to set up a committee that is specifically dedicated to digitalization?
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Footnotes

  1. “Global M&A appetite remains healthy despite geopolitical uncertainty,” EY press release, http://www.ey.com/gl/en/newsroom/news-releases/news-ey-global-m-and-a-appetite-remains-healthy-despite-geopolitical-uncertainty, 16 April 2018.
  2. “The Global Risks Report 2018,” World Economic Forum website, http://www3.weforum.org/docs/WEF_GRR18_Report .pdf, January 2018.
  3. “Can innovative corporate reporting build trust in a volatile world?” EY website, https://www.ey.com/gl/en/services/assurance/ey-can-innovative-corporate-reporting-build-trust-in-a-volatile-world, 16 April 2018.