2020 directors alert digital disruption
Digital technologies continue to radically disrupt most industries and the COVID-19 crisis has only been a catalyst of this transformation.
Justin Griffiths - Partner - Audit - Deloitte
Yann Mérillou - Partner - Audit - Deloitte
Published on 10 September 2020
The advancement of digital technologies is becoming more pervasive, radically disrupting most industries. The question of how boards should embrace the opportunities and mitigate the risks associated with digital disruption has never been more relevant in a COVID-19 world. Crises have always spurred on major technology and business evolutions, and we expect to see digital transformation accelerate in many industries due to the COVID-19 crisis. Boards must not only oversee how their organizations are incorporating digitalization and transformation technologies, but also ensure that the right culture is cultivated to seize new business opportunities and address associated challenges and risks.
DISCUSS AND OVERSEE THE TRANSFORMATION STRATEGY
As the ultimate overseers of organizations, it is not enough for boards to understand how management intends to transform their operations with digital technologies. They must also ensure that the transformation plan is aligned with the company’s strategic goals, which may include cost reduction, developing new services and/or products, improving internal processes, and entering new markets. Boards must challenge management on the use of digital technologies to achieve these goals, including the scope and timing of development, the technical and human resources allocated, the appropriateness of the selected solution, and benchmarking with competitors.
All this means that board members must have a deep awareness of the digital disruption threats and opportunities in their industry, including a strong understanding of the potential competitive advantages/disadvantages and associated risks. Boards play a critical role in the digital transformation journey by bringing expertise, judgment, healthy skepticism, and concern for long-term value. And, beyond the strategy itself, boards should also ensure their companies have established the right culture to drive their digital transformation journey.
CULTIVATING THE RIGHT CULTURE
Many boards underestimate the importance of culture in their company’s digital transformation. The most common barriers to a successful transformation are not regulatory or even technology issues, but challenges related to governance and culture.
Digital transformation calls for a new mindset that is more innovative, flexible and tolerant to failure. A successful transformation requires a process of delivering, testing, failing and learning, adjusting, redelivering, and so on. It must be accompanied by an open communication and reporting process between management and the board.
Beyond the need for adequate processes, it is also the board’s responsibility to ensure that management dedicate the appropriate time and resources to explore new ideas, markets and opportunities, as a culture of innovation can either significantly advance or inhibit the company’s digital transformation. Therefore, the board is responsible for gauging the cultural impacts of the digital transformation on their companies and how these effects will be addressed.
First, boards must ensure that any digital initiatives are aligned with the organization’s principles and culture. As all digitally transformed organizations produce a large volume of data, boards are duty-bound to ensure their companies have the right culture in place to use this data lake responsibly and ethically.
Second, boards must oversee the change management policy implemented by management that accompanies the organization in its digital transformation journey. For example, the digitalization of operations implies significant changes for the employee in their operational model, so boards must understand how the executive teams are managing these cultural changes. It is part of the board’s duty to review and monitor the change management plan, comprising a combination of messaging strategy from the top, a learning plan to address any knowledge gaps, and new key performance indicators (KPIs) to assess the adherence to these changes.
IDENTIFY AND MONITOR THE RISKS ASSOCIATED WITH DIGITAL TRANSFORMATION
Digital transformation may expose an organization to new risks. Any organization that begins a digital transformation journey must ensure that all technology or business continuity risks are duly considered by the organization’s control environment and integrated into the internal audit plan. Boards must also obtain adequate assurance on culture and conduct risks, and, more generally, on the adoption of the digital changes by stakeholders.
More specifically, the digitalization of an organization requires the production of large volumes of data, and the confidentiality and ethical use of this data can significantly impact any digitized organization. Boards must give specific attention to the reputational risks associated with this process and accumulation of data. And, as boards tend to be more sensitive to reputational impact than management, they are in a strong position to lead discussions on how to improve the organization’s oversight of reputational risk.
The pace of many organizations’ digital transformation is highly likely to accelerate in a post-COVID-19 crisis environment. The role of governance will be critical in any organization that wants to embrace the opportunities that digital transformation offers. To oversee this transformation journey, each Board must set a concrete action plan that would cover the governance of key strategic decisions, the identification of new risks and their related mitigation plans, the cultural impact of the transformation…
Before starting this digital transformation journey, the board must also self-assess its level of readiness for the digital age. Many directors lack expertise and knowledge of digitalization and cognitive technology, which can put the board at a disadvantage when overseeing digital transformation. Boards are obliged to stay informed, seek external advice when needed, and be diligent in identifying and addressing gaps in their knowledge of technology. This also reinforces the importance of diversity in boards, as innovation can be driven by enhancing board members’ digital expertise and/or recruiting a digital-savvy director to the board.
2020 Directors' Alert
Reimagining governance and oversight amid digital disruption