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Five Things Board of Directors Need to Know to Get Digital Transformation Right

Corporate Governance

Five Things Board of Directors Need to Know to Get Digital Transformation Right

  • Five Things Board of Directors Need to Know to Get Digital Transformation Right ASEAN companies have achieved some success by embracing digitalisation. But most have not fully benefited from the transformative potential of being a digitally mature organisation. And boards can fix that.
  • Date: Feb 09, 2022
  • Category: Corporate Governance
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ASEAN companies have achieved some success by embracing digitalisation. But most have not fully benefited from the transformative potential of being a digitally mature organisation. And boards can fix that.

The shift to digitalisation has helped many ASEAN companies cope with COVID-19. Moving forward beyond the pandemic, they are looking to level up in digital maturity to ensure they can compete effectively in an increasingly digital future. To do that, boards need to inspire a new organisation-wide commitment to keep pushing forward in three dimensions: the current maturity in digitalisation, the readiness to further digitalise (adaptability), and the effectiveness of its digitalisation strategy.

However, based on our observations, most boards and directors are still in search of an effective approach to support and guide management through the ongoing process of transformation. We believe boards that pay attention to these five areas are better placed to deliver the most impact.

1.  Having one digitally conversant director in the boardroom is not enough. Research shows that it takes three to tango.

In the ICDM 2022 ASEAN Board Trends Survey, we found that innovation and digitalisation dominates ASEAN directors’ top boardroom priorities. It, however, is also an area where they find the most challenging during boardroom deliberations. 71% of the directors surveyed said they would like to improve their board compositions with skill sets related to innovation, digital and technology. While this thinking is a step in the right direction, boards need to avoid falling into the trap of having just one single digitally-savvy director.

An MIT research suggests that it takes three members with deep digital experience to make an impact; companies with three or more digitally savvy directors had 17% higher profit margins than those with two or fewer, 38% higher revenue growth, 34% higher return on assets, and 34% higher market cap growth. They found little difference in financial performance between companies with one or two digitally savvy directors and those with none. As one director who participated in the research said, “A single tech savvy director in the boardroom risks feeling lonely and misunderstood. To effect change at the board level, there must be a critical mass of directors who truly understand.”

2.  Is your organisation merely embracing technology or adopting a digital mindset? The way the board approaches strategy sets the tone.

In the same MIT research, they found that non-digitally savvy companies and boards tend to adopt a linear approach to strategy development. They see it as a two-step process: set the strategy then turn to technology when they are ready to implement. In contrast, digitally sophisticated boards incorporate technology in strategy setting from the get-go, using digital trends and data to guide their thinking and decision-making. They encourage management to adopt a test-and-learn approach to fine-tune strategy over time.

Understanding the Differences Between Digitisation, Digitalisation and Digital Transformation
Digitisation is the process of converting information from a physical format to digital one. It means converting something non-digital into a digital representation to be used by computer systems and automate processes or workflows. Digitisation enables the creation of business value, which needs data. It helps to lay the foundation for business use cases that leverage the data.
Digitalisation is the process of leveraging digitisation to improve business processes. Digitalisation means making digitised information work for you. This term refers to the use of digital technologies and data to create revenue, improve business, and create a digital culture where digital information is at the core. It converts processes to be more efficient, productive, and profitable.
Digital transformation is the transformation of business activities, processes, products, and models to fully leverage the opportunities of digital technologies. The main goal is to improve efficiency, manage risk or discover new monetisation opportunities. Digital transformation is doing things in a new (digital) way.
Source: Netguru

Having said that, boards should be mindful not to treat digital transformation as the end goal. This is because it is but a means to improve or change the way the business creates value, be it about improving customer satisfaction, unlocking new revenue opportunities or responding to external disruption. It remains crucial to have a firm grasp of the problems the company is trying to solve. The differentiator is to reframe our mind from asking “Which technology can we use to implement this strategy?” to “How can we use technology to solve this problem?”

3.  Digital transformation cannot happen without the right culture shift. A people-centric digital culture is key.

A digital culture is the single factor that has the highest impact on a company's ability to execute digital transformation. Though enabled by technology, a digital culture is about people empowerment, creating an environment to harness the full transformative potential of the company’s talent.

Research shows that 90% of companies that focussed on digital culture achieved breakthrough performance, while only 17% of companies that neglected digital culture gained breakthrough results.

Did you know?
Corporate culture is a set of shared assumptions that guide behaviours within the corporate setting. And it is the pattern of such collective behaviours and assumptions that are taught to new organisational members as a way of perceiving, and even thinking and feeling. Thus, organisational culture affects the way employees and groups within a company perceive the world and interact with each other, with clients, and with stakeholders.

There are five digital culture markers, namely agility, attitude towards risk, decision making, leadership structure, passion to work and work style (see chart below). These markers correspond with a company’s digital maturity level.

Digitally mature companies outperform digitally immature companies on all markers. They have a less hierarchical organisational structure and hence are more agile in acting upon new opportunities and changes in the market. They are highly exploratory and the least risk averse. Data is at the core of their decision making process. It is also observed that employees in digitally mature companies prefer a more collaborative environment and are driven by passion.

Building a digital culture requires leaders to look beyond past successes to enable the formation of new ways of working. Boards play a key role in setting the tone for a digital culture; first by creating an urgency for change, then communicating that vision, to empowering management to adopt the test-and-learn approach.

4.  There is more than one way to innovate digitally. Where to play and how to win?

Understanding the different digital innovation archetypes and the purpose they serve will help boards form a clear line of sight of your company’s progress in digital transformation. There are three digital innovation archetypes: core innovation, adjacent innovation, and transformational innovation.

In core innovation, companies set up from within a digital centre of excellence to leverage best practices to better serve their existing markets and audiences. In adjacent innovation, companies create an innovation factory to look for business model enhancements to enter new markets and attract new audiences. In transformational innovation, companies engage external experts to do innovation outside of the company’s culture and ways of working to search for radically new business models to create new products and markets.

For a balanced innovation approach, a mix of 70% core innovation, 20% adjacent innovation, and 10% transformational innovation is suggested. This is particularly relevant for legacy companies that already have established markets and audiences. This mix helps build upon their existing success while not neglecting the potential for breakthrough innovations.

5.  You can prepare for the future while keeping your current business competitive. Being ambidextrous offers organisations a smoother digital transformation journey.

Most companies and boards understand the need to set their sight on long-term value creation, however, they are often overtaken by pressure to deliver short-term results. Developing ambidexterity capability allows companies to exploit the present and simultaneously explore the future.

A traditional automaker, for instance, may continue to enhance the competitiveness of their fossil-fuel cars, by digitalising the purchasing process or providing a more personalised and lifestyle linked customer experience through artificial intelligence, to maintain current market share and attract new customers. At the same time, it invests in research to develop expertise and capabilities in making electric, self-driving vehicles to meet the demands of a highly-digitalised future.

The ambidextrous organisational model can be particularly beneficial for legacy companies that wish to continually renew themselves without having to compromise the existing business.

A digitally savvy board is key to effective digital transformation. In a business environment completely interwoven with technology, the baseline skill set of a typical director should also expand to include an adequate level of digital literacy. Every board member should have a foundational understanding of the technology landscape and how it would impact or drive the business. Only then can boards be truly empowered to set bold but realisable transformational strategies and engage with management meaningfully on digital transformation.

About the Authors:

  1. Michele Kythe Lim is the President and CEO of the Institute of Corporate Directors Malaysia (ICDM). Under her leadership, ICDM has embarked on a series of director development programmes, board advisory services, as well as research and advocacy projects to build and strengthen the country’s corporate governance standards and culture. Michele works with a wide range of boards and directors, from both the government and the private sectors.
  2. Steffen Damborg is an ICDM Faculty and a digital transformation strategist based in Denmark. He has more than 10 years of experience in driving the digital agenda, building digital businesses, and helping companies succeed in digital transformation. Steffen has worked with clients in several cities, including Hong Kong, Abu Dhabi, Kuala Lumpur, Lagos, Dhaka, Mumbai, Amsterdam, London, and Copenhagen.
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