Corporate Governance 2.0: The Boardroom Collides with the Digital Age

Rapid advancements in technology continue to alter the foundations of business, redefining customer relationships, recalibrating business models and shifting strategic imperatives. According to the 2012 Global CEO Study, conducted by I.B.M., a majority of CEOs (71 percent) regard technology as the No. 1 factor influencing their organization’s future over the next three years. Technology is considered a bigger external change agent than shifting economic and market conditions.

Digital megatrends such as big data analytics, cloud computing, mobile commerce, smartphone penetration and social media are now embedded in the core of business. More importantly, these trends are critical to competitive advantage. As with any fundamental change of this kind, boards must play a central role in ensuring that companies are accurately evaluating risks and opportunities.

However, if you walked into a board meeting in any major city in the world, the chances are that few directors around the table would be well-versed in the digital world. The vast majority would be men in their 60’s, with experience in familiar topics such as risk, finance, accounting, marketing and operations. This raises the question: Is it time to reconsider boardroom composition in light of the digital economy?

Capturing value from the digital economy can be difficult, and it remains uncertain how these platforms will evolve. What is clear is that the rules of consumer engagement have been radically altered. To forge closer connections with customers, partners, stakeholders and employees, companies will need to remain highly agile, adapt quickly and ensure they are using technology to the best possible advantage. It stands to reason that a board’s core skills will need to mirror this change.

A cursory look at the numbers demonstrates the extent to which digital trends are now a global phenomenon. More than 200 million iPhone and Android smartphones now are in consumers’ hands, and demand shows no sign of slowing. Some 41 million software applications are downloaded every day, and social networking has expanded exponentially. While these trends are not altogether new — but rather the culmination of over 50 years of disruptive technology — they have dramatically affected distribution channels, altered business models and placed the power firmly in the hands of the consumer.

While the board is not responsible for putting mechanisms into place to address these issues — that is the role of the executive team — they are responsible for taking a strategic view of how technology trends will shape their company’s future. Boards must understand that business strategies are now inextricably linked with digital strategies. They must be able to evaluate current trends while anticipating future innovations.

Are boards capable of fulfilling this task? Can the average board accurately assess the nuances of the digitization phenomenon? Is it time to inject “generation Y behaviors” into our boardrooms to understand the vast disruptions and opportunities associated with digitization? All companies must now ask: How can their boards get up to speed — quickly — about these new technologies?

Future-proofing the boardroom
It’s not surprising that many chairmen and senior executives think boards should play a more active role in discussing digital strategy. Many see an urgent need to infuse digitally knowledgeable talent into the boardroom. With the average age of directors in S&P 500 companies at an all-time high — up from 60.2 in 2001 to 62.4 in 2011 — there is a danger that older directors might be out of touch with issues surrounding new markets emerging from the digital age.

Many companies are acting fast to address this digital capabilities gap at the highest levels. In those sectors where digital technology matters most — either because it’s the core of the business or because it’s disrupting the core — digital boards are now the status quo. Technology companies such as Amazon, Dell, Hewlett-Packard, Google, I.B.M., Apple, Cisco, Intel, Microsoft and Oracle predictably have boards dominated by directors with digital expertise.

A shift is also palpable in sectors such as hospitality, consumer goods, retail, distribution and supply chain. A quick look at the boards of Pepsi, Sysco, Ingram Micro and FedEx reveals how these companies have jumped in with both feet to recalibrate the composition of their boards.

Many have recruited digital CEOs to their boards — the Holy Grail being those who possess both digital expertise and C-suite status. Coca-Cola recruited Bobby Kotick, the CEO of the world’s largest video game publisher, Activision Blizzard, while the New York Times appointed Joichi Ito, an entrepreneur and former CEO of Japan’s first commercial Internet provider. Even the notoriously traditional Berkshire Hathaway has board members with expertise in technology. Warren Buffet clearly understood the centrality of this knowledge, recruiting former Microsoft CEO Bill Gates to the Berkshire board in 2004.

Other firms have widened the talent search, recruiting younger, non-CEO candidates. Wal-Mart added 37-year-old Marissa Mayer, a Google vice president who has since been appointed the CEO of Yahoo. Disney nominated Facebook’s 40-year-old COO Sheryl Sandberg. eBay inducted Katie Mitic, then with Facebook, while Starbucks added the 29-year-old CEO of social media platform Hearsay Social, Clara Shih, to augment their social media expertise.

There is certainly recognition that what happens online is fast becoming central to the governance equation. Social networks have reached the point where their impact on corporate risk, reputation and operations cannot be ignored in the boardroom. Indeed, information gleaned from platforms such as Facebook, Twitter and LinkedIn can provide valuable insight into the success of corporate strategy. A new paper from the Stanford Business School — “Monitoring Risks Before They Go Viral” — suggests that this information should now supplement traditional key performance indicators that directors use to evaluate senior management.

The paper points to how Procter & Gamble developed a digital “dashboard” that uses Bayesian analysis to scan tweets, blog posts and other social media. This information is then used to summarize consumer sentiment and measure brand strength. P&G Chairman and CEO Robert McDonald reportedly uses the dashboard to review corporate brands. This combined use of social media and real-time data analytics is just one example of how digital technology is influencing a modern company’s decision making.

One size does not fit all
The challenge for most boards is that “digital talent” is an ambiguous term, encompassing a vast array of domains. Social media, e-commerce, mobile advertising and online publishing are just some of the segments, each possessing highly heterogeneous talent with divergent skills and com-petencies. How do boards choose the right digital talent?

The talent requirements will vary greatly across industries. There is a danger of companies reacting hastily without considering what experience and skills are needed. By assuming all “digital talent” is created equal, boards could misunderstand the complexity of the talent market and fail to zero in on what is needed.

The first step is for the board to articulate how technology is affecting the business. Once the company’s specific digital opportunities and risks have been identified, chairmen can assess what skills and expertise would add the most value at board level. By knowing how technology supports company strategy, board members and executives can make the search for talent more precise.

Corporate leaders must differentiate between the types of digital talent needed to sit on a board versus the digital experts joining the executive team. A mobile-commerce expert may be recruited to the executive team, but it is an informed board that initially recognizes the need to diversify their product offerings to alternative distribution channels. While the executive team needs talent able to shape and develop strategy — both in anticipation of and in reaction to new technologies — the board must be able to assess it.

Given that innovation and disruption increasingly drive senior executives’ growth agenda, boards with the ability to monitor these decisions could prove to be the crucial difference between companies that create superior shareholder value and those that don’t. To debate, test and approve new digital strategies, boards need members with the aptitude to help frame the discussion.

Short supply — High demand
The challenge for boards is to find candidates with technology acumen alongside the conventional behavioral traits associated with a director role. Ideally, candidates require digital knowledge layered on top of broad operational experience and a successful executive career. The best directors will be familiar with technology disruption and innovation but also possess wisdom, maturity and perspective.

This talent pool is in critically short supply. While the changing of the generational guard will mean this shortage will dissipate over time, boards still face the immediate challenge of ensuring growth and success through the transition.

Recruiting directors from the technology, digital and e-commerce industries could therefore mean hiring candidates with unconventional backgrounds. Many individuals with digital expertise have not achieved the same stature as traditional candidates, and for most it will be their first board appointment. In the search for digital talent, it may be necessary to rethink what an ideal director looks like.

Atypical candidates with experience in industries that have undergone technological innovation and disruption could prove to be the most valuable at board level. Even without having reached C-suite status, entrepreneurs in the “new economy” have tangible experience managing risk amid wide--scale technological change.

Ageism: an outdated prejudice or a necessary risk-management value?
Much is to be gained by broadening the candidate pool. It facilitates the creation of genuinely diverse boards; not just in terms of gender, which is the low-hanging fruit of diversity, but also in terms of age, background, skills and ethnicity. If companies need to be agile and diverse to capture the opportunities of a digital age, boards need to have sufficiently varied profiles to deliver the broad spectrum of experience and knowledge required.

Younger boardrooms undoubtedly help augment diversity. Their true value, however, comes from the undeniable fact that this demographic grew up in the digital age. They therefore intuitively understand the new economic landscape. After all, e-commerce is barely 20 years old. These “digital natives” — who have lived and breathed the new economy most of their professional lives — may be two or three decades younger than a typical board member. They are nonetheless causing ripples in the business world.

Examples include Mark Zuckerberg (age 28) of Facebook; Ben Silbermann (30) of Pinterest; Jack Dorsey (35) of Twitter; David Karp (26) of Tumblr; Jeremy Stoppelman (34) of Yelp; Daniel Ek (29) of Spotify; Salar Kamangar (35) of YouTube and Google; Dennis Crowley (36) of Foursquare; Andrew Mason (31) of Groupon; Sal Khan (35) of Khan Academy and Alison Pincus (37), co-founder of One Kings Lane.

Appointing “digital natives” to the board, however, raises the tricky issue of ageism. As companies grow more risk-averse in the current slow economic climate, they want experienced hands at the board level to deal with short-term risks and challenges, rather than adopting a more long-term approach.

In this context, how do companies integrate younger, fresh digital talent into their boards? Is it an acceptable trade-off to have talent who will push the boundaries but who may lack the maturity needed to function effectively at board level? How will younger, less-experienced directors mesh with seasoned directors in the boardroom? Will there be enough mutual respect and understanding to have effective boardroom conversations?

Often the biggest challenge is bridging a substantial generation gap. Experienced directors can be skeptical of unusually young candidates and often question their value at board level. Similarly, younger Silicon Valley-type executives often regard older members as overly conventional. Given that much of this talent thrives in small, nimble, entrepreneurial organizations, they may question the utility of joining larger corporations. These latent prejudices can prevent productive conversations, highlighting how managing a diverse board requires tremendous skill and sensitivity from the chairman.

Indeed, the chairman is instrumental in ensuring that each director fulfills their potential and delivers their best. This has always been the case, but it is magnified as diversity among board members increases. Less-experienced directors need subtle coaching, not only during the on-boarding process but on a continual basis.

The bigger picture

Recruiting digital talent at board level is certainly expedient in improving governance amid accelerating technological change. However, it is also wise to step back and understand that change is not new. The pace of current change is unprecedented, granted, but radical change itself is perennial.

Technological innovation has been disrupting businesses for decades. While trends such as social media and smartphone penetration are certainly unique, it is not the first time companies have adapted to game-changing innovations. The tenets of corporate governance remain largely the same.

“Digital transformation” is about a delicate changeover between the old and the new, a shift that involves managing risks, identifying opportunities and setting strategic goals. This is not a unique governance challenge: It has always been — and will remain — the raison d’être of any board. It is the duty of the board to see beyond the details of today and help frame the issues for the CEO in a holistic and forward-thinking fashion.

There is a tendency to overestimate change in the short term and underestimate it in the long term. “Miracles of communication” such as the Telex and fax are as redundant today as the telegraph before them. In the same way, current technology trends will undoubtedly evolve in ways unimaginable. Boards must therefore seek out digital talent with diverse experience and agile minds, who can help anticipate innovation and seek out the “signal” among the “noise.”

At the same time, it is the duty of the old guard on the boards to raise their game, re-educate themselves and become familiar with digital megatrends. All directors must realize that technology is not a stand-alone issue, but an integral part of successfully running a company. Since the introduction of regulation such as the Sarbanes-Oxley Act, directors are now accountable for the financial health of a business. Likewise, all directors could soon be responsible for the digital direction of a company.

Recruiting digital talent will certainly accelerate this broader re-education process. With the entire board regularly exposed to their skills, high-level knowledge will often be transferred by the simple process of osmosis. Chairmen could also consider “technology immersion” sessions, similar to standard risk or accounting training. There could come a time when technology-focused board committees are the status quo.

Diversity and Agility — the silver bullet?
Governance in the digital age will likely be a process of trial and error. Some firms will get it right; others will not. There is no manual for the future and no guarantee of a successful strategy. What is certain is that the contributions, value and objectivity that directors bring to the board are what count. Non-executive directors need to be assessed based on results, leadership and their delivery of shareholder value, none of which has any direct relation to age, gender or ethnicity.

We also know that a range of reinforcing strategies will ultimately encourage more frequent, focused and informed digital discussions at board level. Adding talent with a deep understanding of the digital landscape will be vital. Simultaneously, encouraging veteran directors to get smart about technology will help augment long-term success. Together, these approaches will create an environment where firms remain flexible enough to recognize important technological developments and incorporate them into business models.

The advent of the digital age reinforces the importance of ensuring true diversity at board level, reflecting the markets, global locations and customer demographics in which a business operates. This is true regardless of what technology lies around the corner or what new trends reshape customer behavior. Boards must be prepared for constant recalibration in order to lead in this ever-changing world.

Mina Gouran is a senior client partner in Korn/Ferry Whitehead Mann’s London office and a member of the firm’s CEO and Board Services team. Since 2001, she has focused on CEO and board member searches and board assessments on a national and international basis. Gouran has extensive management and board experience, including senior-level experience managing business information services.