Joan Conley, Senior Advisor on Corporate Governance and ESG Programs, and Karen Snow, Senior Vice-President and the Global Head of Listings, Nasdaq, look at key issues boards should consider in the course of their company’s digital transformation.
Almost every company today has undergone some sort of digital transformation to improve its operational efficiency, enhance its competitive position and/or safeguard its business. Given the pace of the digital evolution and advancement in artificial intelligence (AI), company boards and management teams are challenged to really lean into technology innovation and education – both offensively and defensively – and ensure they incorporate digital transformation in the company strategy, while also ensuring proper oversight and governance.
Stanford’s 2023 Artificial Intelligence Index Report found that the amount of private investment in AI in 2022 was 18 times greater than it was in 2013. The report also found that the proportion of companies adopting AI has more than doubled since 2017, showing us that AI is taking the centre stage for companies looking to cut costs and increase revenue.
Advancements in the digital space have redefined how businesses and consumers interact. Gartner describes digital transformation as ‘anything from IT modernisation (for example, cloud computing), to digital optimisation, to the invention of new digital business models’. With each advancement, whether that be the creation of the internet, e-commerce, mobile phone, cloud computing or AI, companies are leveraging technology to improve how they do business, from their company strategy to how they target, connect with and cater to their current customers, clients, employees and communities.
Whether for a public or private company, it is clear technology is unlocking a new set of opportunities and risks. Boards and management teams are responsible for ensuring that there is a digital strategy in place that allows the company to stay competitive in a rapidly changing environment, while also preventing the company from potentially making a catastrophic misstep.
Below, we propose key questions that boards should consider asking themselves about their company’s digital transformation, regardless of whether the company is public or private.
Does the company have a clear digital strategy and data governance framework and internal controls in place?
A well-designed framework enables companies to define policies and rules, standardise the most important data terms, document decision-making processes, identify data-owners, disseminate roles and responsibilities, and construct a solid roadmap based on the company strategy and use cases. While the board’s role is primarily to provide oversight, it should ensure that management has created a clear digital strategy and data governance framework with controls in place. The board is also responsible for ensuring the company’s internal audit team is testing those controls and confirming they are working properly via scenario analysis and tabletop exercises. The board should receive reports and briefings on the findings of these exercises and, in some cases, may even consider participating in them.
Is there a board member education programme in place and/or strong technological expertise?
While it is not a requirement to have a technical expert on the board, it is crucial that board members are willing to learn through ongoing education and training. Do they have the right mindset and desire to embrace technology? In addition, given that technology is ever-evolving, boards are getting creative in who they look to for insights. For example, some companies may rely on internal leadership, such as the CIO, CTO or CSO, while others may source external experts to provide advisory to the board of directors or turn to third-party consulting firms to provide a more holistic view of the general digital landscape and competitor analysis.
Does the company’s digital strategy follow relevant rules and regulations?
If a company is public or thinking about going public, boards should conduct the due diligence necessary to abide by investment stewardship guidelines that pertain to their digital strategies. An effective digital strategy and data governance framework are important components of a company’s corporate governance and risk management oversight program. Investors are seeking answers to the who?, what?, when? and where? questions pertaining to a company’s digital strategy and data governance framework. For example, when looking at investment stewardship guidelines regarding AI, little has been published thus far, but more information will likely be available in the coming months about how institutional investors expect companies to incorporate AI and large language model (LLM) into their digital strategies.
Are proper risk management procedures in place?
The rise of digital transformation brings with it new risk factors for boards to consider. It is important that board members are well-versed on risks associated with the company’s digital strategy and data governance framework. For example, if a company allows for online payments, are strategies in place to ensure customer information isn’t exploited? If a company utilises ChatGPT, are tools in place to ensure all information is accurate? Again, boards may consider scenario planning tactics should risks come to fruition.
Is the company allocating enough capital to its digital transformation strategy and data governance?
It is the board’s role to understand how capital is being allocated. When it comes to digital transformation, companies have to prioritise their technological investments. The CIO may present his/her technology investment recommendations to the board. For companies nearing the public markets, they should consider investing in board management software and financial reporting systems. Companies should also think about operational efficiencies, driving margins and investing in technologies that will enhance their ability to compete and/or break even faster.
Can the board and management team keep up with the changing times?
With the right talent, companies can keep pace with the changing landscape. It is the board’s responsibility to make sure that the right CEO is in place and that he/she has strong talent on the management team to execute the company’s strategy. For companies nearing the public markets, they should consider implementing an annual succession planning exercise, conducting a board evaluation every few years, and digitising their directors’ and officers’ questionnaires.
In addition, taking a closer look at board composition, a study published by Harvard Law School Forum on Corporate Governance found that the average age of S&P 500 board members was 62.4 years old. However, with the rapidly evolving digital climate, we suspect the average age of board members may decrease over time.
The board should ultimately view its role as a protector of the company’s moat, looking at how the company can utilise technology to keep its competitive edge and protect against risk. And as technology evolves, boardrooms must too. The answer is not to stray away from the potential risks of digitisation, but instead see it as an opportunity to provide oversight to companies that have room to grow.
The companies that are the most prepared for their digital transformation are going to be able to ensure their strategy is implemented more effectively and efficiently than their competitors – and that responsibility starts with the board. Boards that are well-versed in their company’s strategy and tuned in with the rapidly changing digital environment will likely see the most success.
Copyright: Nasdaq Governance Solutions
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