- Michael Hilb
Mission Accomplished? The State of Digital Governance
Five years ago, I invited a number of thought leaders to reflect with me on the role of the board of directors in the face of digitalization. The result was a collection of twelve perspectives on the governance of digitalization (Hilb 2017). Where are we now, five years, one pandemic, and perceived thousands of articles on digital governance later?
Mission Accomplished ...
On the surface, the topic seems to be done. As usual with management fads (Abrahamson 1996) - digital transformation can well be seen as the fashion of the 2010s, currently being superseded by sustainability - it takes some time for the topic to be noticed until the tipping point is passed and inflationary use of the term can be observed. Since management or, in this case, governance ideas can also be seen as a means for organizations to differentiate themselves and signal their future orientation to their shareholders and stakeholders, such concepts are evolving over time.
The signs of this shift cannot be ignored: While companies have highlighted their digital initiatives or even appointed chief digital officers to underscore their leadership, digital activities have become mainstream and increasingly no longer deserve special designations. Those companies that still emphasize digital leadership tend to be laggards, following pioneering companies in every field. Some companies are even experiencing digital fatigue, as employees are sick of hearing about the inflationary rollout of digital initiatives, some of which have failed to meet their expectations.
... Not So Fast
Behind the curtain, however, the mission is far from complete. Too many companies are still failing to realize the full potential of digitalization, others are struggling to overcome the obstacles of digital transformation, and still others have abandoned their original aspiration and are settling for less than ambitious targets. What are the reasons for this, what still needs to be done, and how can the board address the challenges so that companies become fit for the future?
We see five main reasons why boards have struggled to fully embrace the opportunities of digital transformation:
1. Insufficient framework for digitalization: Too many boards still view digital transformation primarily as a technological challenge. The appointment of people from technology companies as board members is evidence of this assumption. While technology can provide useful means to solve a problem or exploit an opportunity, the problem or opportunity is economic or organizational in nature and should be framed accordingly.
2. Underestimating the technical complexity of legacy systems: Because most board members rightly have a user-centric view of digitalization based on their own experience or professional background, they often tend to underestimate the complexity of back-end system integration, especially when new digital solutions depend on full integration with legacy systems and databases.
3. Underestimating organizational and cultural barriers: While companies and boards are well aware of the complexity of business transformation and have learned how to deal with it, these insights do not always seem to be at the forefront of boards' minds when addressing digital transformation. All too often, they focus on digitalization rather than transformation when setting priorities.
4. Overconfidence of digital skills: As digitalization has become a pervasive concept that no board member can ignore, board members have read, learned and discussed a lot about it. This has led to a significant level of confidence in understanding and grasping the topic with all its implications. The sometimes costly failures of many companies' digitalization efforts can be read as overconfidence in the board's abilities, as surveys also show (Huber and Hilb 2019).
5. Herd behavior and lack of critical reflection: As with any topic that is in vogue, decision-makers can easily fall into the herd behavior trap, i.e., try to imitate the behavior of other players without fully reflecting on the appropriateness of the underlying assumptions and implications. Especially in times when companies are expected to be ahead of the curve, to act progressively and to innovate, it is not easy not to fall for the buzz of digital transformation.
The Journey Ahead
What are the digitalization opportunities that the board should be driving in the coming years? We see five key digital opportunities:
1. Innovate the digital business models: Digital technologies can enable a variety of new business models, giving business leaders an expanded option space from which to choose. Board members play a central role in helping business leaders identify the option space and make the right decisions.
2. Datafy the business: Although everyone talks about data, few companies take a strategic perspective and view and manage it as a strategic asset. It is up to the board to ask management to take this perspective and act accordingly. This requires a sound understanding of the possibilities and limitations of data and algorithms.
3. Drive digital venturing: Many incumbents are turning their attention to startups and scale-ups, which are often more agile and sometimes outperform incumbents. At the same time, many established companies struggle to operate and grow their own digital ventures. Venturing requires a very different mindset, which must also be represented on the board.
4. Shape digital ecosystems: As industry boundaries shift and new ecosystems emerge based on user needs, company boards must not only understand these shifts, but also be able to discuss and decide their company's future positioning in future ecosystems.
5. Collaborate with others: Whether in ecosystems or more traditional strategic alliances, partnerships are becoming increasingly important and a key strategic capability. This is often not only a management challenge, but also a corporate governance challenge, as the focus shifts from control to influence.
What can boards of directors learn from the past as they intend to champion digital value creation in the future? We see five key lessons:
1. Focus on the end, not the means: Digital technologies can be a great enabler, but should not be viewed as the end of a business transformation. This should be a key guiding principle for board members deciding on digital initiatives.
2. Focus on transformation ... and less on digital: Digital transformation is mainly about convincing employees, customers or business partners of the benefits of change. Therefore, the board should ensure that the digital initiative focuses on people and not on technology.
3. Acknowledge the power of power: Upheavals and transformations always lead to a change in power structures, with some gaining influence and others losing it. Board members are well-advised to recognize this and take it into account when creating plans.
4. Be humble and learn about the unknowns: No one is perfect. This also applies to board members, who should be honest with themselves and their fellow board members about what they know about digitalization and what they may still need to learn.
5. Think yourself and not just go along: Finally, board members should never stop questioning and challenging the benefits and limitations of digital transformation. What works perfectly for some organizations may not produce the same result for others. Finding the optimal solution for each organization is one of the core responsibilities of an effective board member.
Digitalization is one of many opportunities and challenges that organizations and their leaders face these days. As with all opportunities and challenges, it usually takes time to fully grasp the relevance, but most importantly, it takes a disciplined approach to set a strategy and implement change over time. In this type of business transformation, the board plays a central role, not only in helping to shape the transformation, but also in ensuring proper execution, especially once the caravan has moved on and the next governance fad has taken hold.
Abrahamson, E. (1996). Management fashion. The Academy of Management Review, 21(1), 254–285.
Hilb, M. (ed.) (2017). Governance of digitalization: The role of boards of directors and top management teams in digital value creation. Haupt, Bern, CH.
Huber, R. and Hilb, M. (2019): Digital governance. Expert group roundtable and reflection of the executive panel. Hitchman and Digityzer, Zurich, CH.
This article was published as a chapter in The Corporate Governance Dialogue in October 2022.