Innovation Agenda

75% of members said their organisation had an innovative vision

57% said innovation had never been or was only an occasional agenda item

3% had science/technology expertise

35% said board had right skills/ experience to assess ethical and practical implications of modern technology

57% didn’t know how much their organisation spent on innovation/R&D

Source: Driving Innovation: The boardroom gap study 2019

Digital technology can transform the customer experience, drive supply chain and production efficiencies once only dreamed of, and break down internal barriers to unleash innovation.

The often quoted barriers to digital transformation — too hard, too risky, too slow — were shattered in 2020 as technology helped businesses overcome pandemic disruptions to healthcare, supply chains, education, work and home life. However, digital transformations can also fail in the most spectacular ways.

Digital transformations are not trivial. To get a lasting benefit — say, product optimisation or improvements in production lead times, supply chain efficiency, customer experience, talent acquisition or asset management — businesses need to rethink how the real world and the virtual world mesh together.

A recent McKinsey survey found while enterprise digital transformations are increasingly commonplace, companies’ risk-management capabilities are lagging behind their transformation efforts.

The board’s challenge is to ensure digital transformation is smartly executed, not just a smart idea. To do that, recent history tells us six principles need to be in place:

Mind the digital gap

Low digital literacy in Australian boardrooms was a key finding of the AICD’s 2019 Driving Innovation: the boardroom gap report. It found Australian directors don’t prioritise the disruptive risk of emerging technology to the same degree as their overseas counterparts. It recommended recruiting directors with science and technology backgrounds and resetting risk appetites to drive the innovation needed for growth. The report pointed out each director has a responsibility to know how technology will impact on their organisation.

This sentiment is echoed in Principle 7 of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, which states that the board should ensure that the risk management framework deals with “emerging risks such as… digital disruption, cybersecurity, privacy and data breaches”.

That doesn’t mean that every director needs to be a technical expert. But just as financial literacy is a core requirement for a director, so too is technology literacy. Directors need to be familiar with the opportunities digitalisation throws up, and to understand that not pursuing a digital strategy may also pose a substantial risk.

According to a 2019 MIT Sloan study, US listed companies with revenues of over US$1b had 17 per cent higher profit margins and 34 per cent higher market capitalisation growth, if they had “digitally savvy” boards. To count as digitally savvy, a board needed at least three directors “with enterprise-level understanding of current technology such as digital platforms, AI, big data, and mobile and digital processes”.

The study noted that when a board lacks this awareness, it can’t get a handle on important elements of strategy and oversight and thus can’t play its critical role of helping guide the company to a successful future.

Top Three Barriers To Innovation

31%

said access to talent

28%

financial resources

19%

short-term financial performance focus

There will be risk

The board needs to be digitally literate to manage the risks and opportunities.

Directors need to understand the strategic, operational and compliance risks that accompany technology. What are the ethical issues associated with having rich analytical insights into the motivations of your customers and the behaviour of staff? What are the operational risks if the data driving digital is dirty, out-of-date, or incomplete? And what questions do you ask to find out? Are breaches of cybersecurity listed as a key risk on your risk register? If not, why not?

(See COVID-19 brings new cybersecurity threats, https://bit.ly/3urVMDL).

Directors need to insist that experts reporting into the board use plain language. There is nothing inherently mysterious about digital technology. But often there is a communication gap between tech professionals and the board.

Eyes wide open

It should go without saying that digital transformations should drive measurable business value — more revenue, faster to market, improved productivity, and so on. But introducing technology for technology’s sake is not unheard of. Take Procter & Gamble’s 2012 goal to become “the most digital company on the planet.” With the “why?” unanswered, P&G faced performance issues and CEO Bob McDonald resigned.

Don’t be distracted by the technology and be sure your board is very clear of its commercial purpose. Is it to outpace the competition? Or to build a sustainable, resilient business? Zara’s digital strategy around customer experience, which includes radio-frequency identification (RFID) to track inventory, helped it lead the pack in the competitive world of high volume fashion, and remain remarkably intact through COVID-19.

Rigorous investment

Investment decisions need to be rigorous and based on evidence.

Tech costs money — sometimes eye-watering amounts. So investment strategies must be rigorous, and for larger transformations, long-term with multiple horizons. Understand the risk, including non-financial, and set your risk tolerance. Boards need to understand what could go wrong. They also need to see the right information to understand the overall cost to the business — not just dollars, but opportunity loss, disruption and distraction.

The customer needs to be at the heart of the investment decision. Will it enhance customer value, build a more meaningful relationship, break down internal silos and rapidly solve customer problems?

Active stewardship

The board must actively steward the transition.

Technology transformation is always uncertain, fast paced and, because of the speed of innovation, needs to be agile. Directors need to ensure plans are adaptive with room for fast failures and recovery — and a test-and-learn mindset. They need to focus on the strategic bullseye and tight, non-negotiable deliverables. The board can’t set and forget. It will need to ensure that accountability for digital programs is clearly defined. It needs to set metrics and gates for when management must escalate to the board. A budget overspend of 10 per cent? A three-month blowout of timelines? The likelihood of achieving an objective dropping from the green zone to amber?

The board will need to consider whether the organisation is set up for success with the right skills and experience. The presence of digital in the C-Suite — according to PwC, 21 per cent of the world’s 2500 largest publicly listed companies had a chief digital officer in 2018 — shatters the idea that transformation is a one-off exercise that needs to be endured and then forgotten. PwC predicts that as digital transformation becomes ever more part of core business, who is responsible will evolve again, this time to every member of the executive team. Digital decision-making will increasingly be elevated to the board because of its strategic importance.

Humans at the heart

The impact on people in and outside of the business must be at the heart of every decision. Digital transformation needs to have humans — the customers, staff and suppliers — at its centre. Winning the hearts and minds of employees can make or break the strategy, and that requires long-term commitment to building an innovative and open culture.

Significant reputational — and hence, financial — risk faces organisations whose digital transformations are poorly executed or benefit one group of stakeholders at the expense of another. Witness the robodebt scandal. Replacing a manual system of calculating Centrelink overpayments with automated data-matching and the issuing of debt notices led to thousands of incorrect debt notices being sent to vulnerable welfare recipients. And a proposed $1.2b settlement.

Customer expectations that interactions will be digitally enabled are here to stay. At the same time, COVID-19-induced digital transformations have opened up a world of opportunity and risk — cutting carbon costs, rethinking team building and skills acquisition, workforce relocations, online health and education. It’s a world that only heightens the need for tech-savvy boards

Lil Bianchi GAICD is a non-executive director and chair of the audit and risk committee at 4DMedical. Dr Rachel Nowak GAICD is a scientist, journalist and director.

What Could Go Wrong?

No common purpose

Business plans, risk frameworks, tech roadmap and budgets are not aligned. Priorities shift and programs are cancelled.

Underestimate impact

Culture doesn’t support change digital transformation is often seen as synonymous with job losses. Change programs need to harness internal insights, build skills and train future workforce.

Legacy mindset

Company sticks with what it knows. Tech foundations are shaky and expertise is siloed. Data is dirty, out-of-date or incomplete. Organisation lacks capacity to work across functions to integrate tech.

Inflexible

Plan A doesn’t work and there’s no Plan B, C or D.

Overly ambitious

But unable to execute.

Overly cautious

Investment is wasted on baby steps while competition is out in front. Nobody on the board asks the obvious questions.