Opinion | Finance

Without a digitally savvy board, your company is falling behind

The views expressed by contributors are their own and not the view of The Hill

In the digital era, it's not surprising that being digitally savvy is a desirable trait for business leaders. Just about every company is looking to use technology to improve customer experience and operational efficiency.

Businesses also need to manage risks like cybersecurity breaches and privacy issues. However, what is surprising is the degree to which this characteristic - particularly among board members - has become a financial performance differentiator. It literally pays to have digitally conversant directors.

In a recent study with Thomas Apel, chairman of the board at Stewart Information Services Corp., and Jennifer Banner, CEO of Schaad Cos. and immediate past lead director of BB&T Corp., we conducted a machine analysis of the digital know-how of all of the boards of U.S.-listed businesses.

We looked at data from surveys, interviews, company communications and the bios of 40,000 directors. We defined digital savvy as an understanding, developed through experience and education, of the impact that emerging technologies will have on businesses' success over the next decade.

We found that companies whose boards of directors have digital savvy outperform other companies. To be more specific, we found that it takes three members with digital savvy to have a statistically significant impact.

There was little difference in financial performance between companies with one or two digitally savvy directors. However, when there were three or more digitally savvy directors, the results were remarkable.

Companies with three or more digitally savvy directors had 17-percent higher profit margins, 38-percent higher revenue growth, 34-percent higher return on assets and 34-percent higher market cap.

This makes sense because digitally conversant directors understand how technology can be used to help move the business forward and push for change by supporting the CEO. Without that skill, directors can't help to guide the company's strategy or help to manage risk.

Our study showed that among companies with over $1 billion in revenues, only 24 percent had digitally savvy boards; every industry had digitally savvy boards, though some industries more than others.

A digitally savvy board has at least three members who have an enterprise-level understanding of current technology, like digital platforms, AI, big data and processes that enable new business models, improved customer experience and efficient operations.

This is often the result of time spent as a director or senior executive in a fast-paced industry where business models change rapidly or having an executive role with a strong technology aspect. These directors know when to experiment and when to partner as well as how to spot early signs of successes and challenges.

They also must use their insight about trends and transformation to help managers explore the bigger picture facing the business.

In our discussions with directors, some noted that non-savvy boards take a traditional approach to strategy. They start by asking: What is our strategy? Then, they consider how to use resources, including technology, to achieve it. Using technology is often the final step.

On the other hand, digitally savvy boards ask right away how technology can be used to improve customer satisfaction and efficiency. They take a test-and-learn approach to strategy to conduct experiments and scale successes. They also ask hard questions to ensure that they know what is really going on at a company.

For companies seeking to build a digitally savvy board, we suggest three steps. First, consider adding new directors since companies need at least three directors with digital savvy.

Second, change the board agenda by increasing the digital savvy of existing directors through activities. Bring in external experts as advisors and conduct some digital tourism. Visit born-digital companies as well as noncompeting companies that have digitally transformed in similar industries.

Third, encourage self-directed learning. Directors can take courses, read research reports, attend conferences and seek out mentorship.

Just about every company today is struggling with digital transformation. While we don't yet have a proven playbook, it is clear that digitally savvy boards can impact the bottom line. It's time for boards that lack digital savvy to make some changes.

Peter Weill is a senior research scientist and chair of the Center for Information Systems Research (CISR) at the MIT Sloan School of ManagementStephanie Woerner is a research scientist at the MIT CISR. They are co-authors of "It pays to have a digitally savvy board," which was published in the Spring 2019 issue of MIT Sloan Management Review.

Outbrain