Boards Can’t Wait for CEOs to Prioritize Digital Change

Executive Summary

Boards need to take a proactive role in digitization of legacy businesses. If they don’t, activist investors and shareholders will. Starting with their own education of how digitization will affect the business, boards should make sure they have the right CEO and that the CEO has a bold vision for reimagining the business. They will have to be prepared to defend the CEO against backlash from the inside, outside, and investment community. And in some cases, boards may have to evaluate and refresh their composition – resisting the reality of digitization is a good reason to expedite a change.

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Is your board willing to be a driving force in the digitization of the company, or are you content to sit back and watch as born-digital companies transform one industry after another? Boards must recognize the unstoppable forces at play and drive their CEOs to reinvent the business while they still have the resources to do so – and before they come under pressure from activists to whom the necessity of digitization is obvious.

In July this year, P&G came under attack from activist shareholder Nelson Peltz, whose firm Trian Partners had a $3.3 billion stake. Noting the erosion of market share in 41 of 60 countries around the world and lackluster earnings growth compared with peers, Peltz asked for a seat on the board, arguing that he could help address the underlying problems. He explained to a CNBC interviewer on July 17 what he saw as the root causes, chief among them an insular corporate culture that was slow to respond to threats from traditional competitors, and now digital ones. P&G’s Gillette razor brand was a case in point; it had steadily lost market share and had to cut prices when online upstarts Dollar Shave Club and Harry’s arrived on the competitive scene.

P&G rebuffed Peltz’s board seat request, setting up a proxy fight. But the company did not sidestep the irrefutable fact that the digital world was affecting its business. And as Peltz summarily stated, “You have to change with the times.”

Here are five actions boards can take to help the CEO make the leap across the digital divide.

Get into high gear in understanding how digitization could affect the business. Boards members have to grasp the fundamentals of what it means to transform a legacy business to a digital one. Carve out time in the board agenda for a meaty discussions, where the CEO should be prepared to explain what players in or outside your industry could hurt the business, and how fast the core business could decline if it stays on the current trajectory. This should create a shared sense of urgency. If it doesn’t, bring outsiders in — people from other industries, academics, or security analysts — to explain what they see on the horizon.

When the directors of Singtel, the telecom giant based in Singapore, sensed that disruptive threats were challenging the services at the heart of the traditional telecom industry, they knew they had to learn more to form an educated view about how the company could adapt. The entire board spent a week in Silicon Valley learning the ins and outs of the tech landscape. They followed that with visits to other companies, MIT, and the New York City corridor for in-depth discussions with a cross-section of industry leaders. That education led to a “light bulb moment” when the board realized Singtel was no longer a traditional telecom company. It had to be redefined as a mobile internet player, which meant, among other things, reengineering their networks and shifting from a voice-and-messaging pricing model to a data-driven pricing model. The board didn’t just tolerate the CEO’s bold moves, it fully supported them and was prepared to press the CEO if he had been too slow to act.

Be sure you have the right CEO. Companies rise and fall largely because of their CEOs. Boards have to know that their chief executive is not missing the move to digitization. Those early discussions should reveal whether he or she is resisting change or relishing it. Remind yourself that some leaders see this critical juncture as a chance to shape the market space in a new way and rise to new heights. Do actions reveal the CEO’s conviction? The challenges of going through a digital transformation are big ones. The board has to distinguish between obstacles that are getting addressed and mere excuses.

CEOs complain that they don’t know where to get the talent, or they’re not finding a consulting firm that can walk them through the transformation end-to-end, or they have to satisfy Wall Street, or they don’t know how to incubate the change. These difficulties are real, but they must be overcome. If the CEO can’t resolve them, you have to pose the question: Is this still the right CEO? What made the leader successful in the past will not be the same as what makes him or her successful in the future.

Encourage the CEO to enlist whatever expertise he or she needs to reimagine how the company could be rebuilt around a digital platform. The clear trend is toward serving individual customer needs through the use of digital platforms that incorporate algorithms and AI and are connected with ecosystem partners. The CEO should be able to conceptualize and explain the specifics of how the platform model would work, and what new capabilities the company would need to build it, how soon, how the ecosystem would change, and what milestones will show that the transition plan is on track. Some chief executives have earned their posts by improving the existing business, and by cutting costs. They may struggle to imagine the exponential growth a digital platform can create. Boards should know the CEO well enough to recognize this limitation and suggest ways to open things up. It might take some changes among the top team, or a different mix of people working with the CEO, including some relatively junior ones and some from born digital companies, to lift the imagination.

Prepare to defend the CEO against backlash from inside, outside, and the investment community. Crossing the digital divide changes money making. Digital startups can convince investors to postpone earnings per share, but legacy companies have a tougher time selling that message to investors who are accustomed to earnings growth and dividends. Top notch talent in algorithms, platforms, and artificial intelligence is scarce and costly, so companies making the transition to digital can expect to see operating expenses rise due to the high salaries. The board should help the CEO prepare to get the story out front.

Some shareholders will be unhappy if earnings are down even temporarily. The board should communicate that the short-term milestones are being monitored and met, and that they support the plan. They may also have to rethink the compensation philosophy, because all CEOs and their teams respond to KPIs. This new game has risks, and the incentives should acknowledge them. Cost savings, for example, may create a disincentive for the CEO to hire the necessary expertise.

Beware of cold feet. Chances are that some board directors will be more forward thinking than others. When the pressure rises, as it will along the journey through the digital divide, some may get uneasy with the plan and/or with the CEO. The board should take up these concerns in executive session, and the chair or lead director should bring them to the surface. Boards should regularly evaluate and refresh their composition anyway. Resisting the reality of digitization is good reason to expedite a change.

Like it or not, digitization is here. Those who start sooner will take the lead. Boards should own up to their responsibility in getting their companies across the digital divide.

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