Why a Rapidly Changing World Requires Boards to Innovate and Bring Corporate Governance into the Digital Age
Editor’s Note: This article was first published on LinkedIn here.
Imagine a time when the world’s largest companies were run by boards comprised primarily of white men. These gentlemen met on the same dates, sat in the same room, in exactly the same seats, with the same agendas and often alongside many of the same faces they’ve seen for years.
You’d be forgiven for thinking this description is perhaps a scene from Mad Men or governance practices of a bygone era. Unfortunately, it’s hardly an exaggeration of what continues to happen today. At a time when the world outside the oak-paneled boardroom is undergoing monumental change at unprecedented speeds, the incongruity is striking.
What does this mean for the companies they govern? The short answer: Nothing good.
In today’s competitive landscape, no industry is immune, nor is any company spared, from the prophetic forces of disruption. When board composition and practices remain largely static and fail to reflect the fast-moving digital era in which we live, the company is set up for failure.
Change is supposed to start at the top, and therein lies the irony. As directors, we’re charged with evaluating management on their ability to innovate and leverage emerging technology for competitive advantage, yet we rarely apply any of these standards to ourselves.
Ask yourself: When was the last time your board innovated around its processes and procedures? Or thought about how to leverage digital technology and new capabilities to better serve the shareholders we represent?
Isn’t it time you did?
Netflix’s Boardroom Innovation
Last year, Netflix made headlines for another one of its “disruptions.” Two academics at Stanford University published a paper describing the redesign of Netflix’s board meetings and the incorporation of two new practices, the first of which encourages board members to attend and observe senior management meetings.
While hardly an earth-shattering innovation, it nevertheless is a healthy alternative to the CEO acting as a de facto gatekeeper, filtering the information and messages that make it to the board. However, no matter how nice the idea, the notion of board directors observing meetings isn’t pragmatic or scalable for organizations with hundreds of thousands of employees located in countries all over the world.
The second and more novel idea involves restructuring communications to the board by providing a 30-page narrative memo with links to supporting analysis. In what some would consider a bold move, Netflix allows open access to all the data and information on the company’s internal shared systems, and the board can go directly to the authors with their questions.
While any innovation in the board world should be welcomed, the Netflix practices are unlikely to revolutionize corporate governance. Not all CEOs welcome their boards to have such close proximity to the business, and some might argue that it actually diminishes the objectivity of the board and its role in governance.
Nevertheless, Netflix’s board believes this direct exposure to employees and data gives them substantially deeper knowledge of the company. As a result, they have the confidence to back management when pursuing disruptive business moves that might leave other boards feeling uncomfortable.
More Transparency, More Trust
Of course, Netflix isn’t alone in its quest for disruption. CEOs in every industry are grappling with the urgent need to embrace innovation and undertake more radical transformations.
Navigating the choppy waters that transformation entails is particularly daunting for public companies under the spotlight of analysts and shareholders who care just as much about their quarterly expectations being met. For management teams, this oversight only cements the need for their board to be fully informed, aligned, and confident about the underlying causes of short-term turbulence when pursuing a longer-term (transformational) strategy.
The other advantage of Netflix’s “real-time” access to data is having a board that’s up-to-speed on what’s happening with the business. Contrast that to the traditional model of boards showing up four times a year to review last quarters results (the very definition of lagging information), and the advantage is obvious.
When you think about how much changes in the business environment in the course of a week, let alone a quarter, teams that provide their boards with current data and analysis will have a competitive edge through faster decision-cycles and more informed perspectives.
As we look ahead, improving board processes by removing decision-making latency will become an even greater advantage as businesses become truly digital and companies contend with the speed and heightened expectations it brings.
Game of Drones?
Another area ripe for disruption is the tsunami of data and information that overwhelmed directors are forced to digest. Enterprise data is doubling every two years, so it doesn’t take Einstein to figure out that your average director simply won’t be able to keep up.
Thankfully, the emergence of digital capabilities offers directors a meaningful opportunity to become more efficient and effective at our job. Advances in technology such as artificial intelligence (AI) and machine learning (ML) have the potential to provide us with richer insights and better predictions, identify patterns and correlations not possible in the past, and allow us to prepare for meetings in a fraction of the time.
Think about board materials with its hundreds of pages of content and imagine how effective a machine could be at identifying any mismatches in wording or catching inconsistencies in numbers. Textual analysis is now reaching par with human comprehension, which then raises the question as to where such technology might be applied to supplement and enhance the efforts of directors.
Instead of a bleary-eyed director working into the small hours of the morning, wading through red-lined versions of documents, what if ML technology was applied in advance? Better yet, how about letting the system cross-reference a company’s current regulatory filings, earnings call transcripts, and press releases against prior ones? Or against competitors? The incremental value is immediately evident.
Automating some of the more mundane tasks might not only result in a higher standard of governance but could also free up precious time for directors to spend on strategy, competitive analysis, and other timely issues facing the company. No doubt, this outcome would be welcomed by directors everywhere.
Worried about New Risks? #MeToo
Speaking of timely issues, the media has been littered with stories of companies blindsided by reputational issues that arise from unpredictable events. The emergence of social media is both an aspirin and a headache for boards when it comes to managing risk in the digital age. Knowing that you might be only one tweet or one viral video away from a significant erosion in stock price value should prompt every board to figure out how they might match their governance practices to the “needs, feeds, and speeds” of business today.
Aside from requiring more timely reactions, these trends put pressure on boards to do more with the information we have and be proactive in thinking through and in mitigating various scenarios for reputational risk.
One way to stay ahead of looming reputational risks is for directors to know how their company is genuinely perceived. Leveraging platforms like Glassdoor and Twitter and combining their data—along with other public data sources such as industry blogs or online user groups—would give boards a more holistic sense of what key stakeholders are saying about their organization and provide an interesting checkpoint relative to what they are hearing (or not) from management.
There’s no denying that the world around directors has moved on from the days of oak-paneled boardrooms and sleepy quarterly reviews. Yet board processes and practices have lagged behind, and the result is increasing levels of frustration on the part of shareholders, management teams and directors themselves.
Rather than ask the mundane questions of an under-informed board racing to catch up each quarter, we as directors need to step up and be active participants in continuous and forward-thinking discussions with management. One obvious way to increase our efficiency and effectiveness is to leverage the power of new technologies to do our jobs. We do it in our personal lives, so our board lives should be no different.
As George B. Shaw once said, “Those who can’t change their minds, can’t change anything.” Surely, we as directors cannot only change our minds but also demonstrate how much we too can embrace change and continuously improve.
And what better time than now? Boards are rife for disruption. Starting with ourselves, those that can embrace a mindset that adaptability to change is the killer app will set the right tone for governance in the digital age.