It Pays to Have a Digitally Savvy Board
Having board members with experience in digital business is the new financial performance differentiator.
Boards of directors have many issues competing for their attention, but being digitally conversant in an era of digital transformation is quickly rising to the top of the list. Nearly all companies are looking for ways that technology can be used to improve their business models, customer experience, operational efficiency, and more — and boards must help them move forward at a sufficient pace, advocating for change by supporting and sometimes nudging their CEOs. Those that do are likely to see better financial results than those that don’t.
That’s what we discovered when we did a machine learning analysis of the digital know-how of all the boards of U.S.-listed businesses. (See “About the Research.”) Our research shows that companies whose boards of directors have digital savvy outperform companies whose boards lack it. We define 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 measured it by analyzing data from surveys, interviews, company communications, and the bios of 40,000 directors, extracting key words that signal exposure to digital ways of thinking and working.
Our discoveries are striking: We found that among companies with over $1 billion in revenues, 24% had digitally savvy boards, and those businesses significantly outperformed others on key metrics — such as revenue growth, return on assets, and market cap growth.
Doing business in the digital era entails risks ranging from cybersecurity breaches and privacy issues to business model disruptions and missed competitive opportunities. When a board lacks digital savvy, 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. But companies can fix that by understanding what characteristics to look for in existing and new board members, managing board agendas differently, and cultivating new learning opportunities.
1. Several female directors commented that three was also a magic number when it came to reaping benefits of gender diversity on boards. This perspective is highlighted in the research of V.W. Kramer, A.M. Konrad, and S. Erkut, “Critical Mass on Corporate Boards: Why Three or More Women Enhance Governance” (Wellesley, Massachusetts: Wellesley Centers for Women, 2006).
2. D.F. Larcker and B. Tayan, “Netflix Approach to Governance: Genuine Transparency With the Board,” working paper 3668, Stanford Graduate School of Business, Stanford, California, May 1, 2018.