In this series, we look at the role of corporate governance and boards of directors, senior management and shareholders in the new global context. This second installment reviews the keys to corporate governance and its role in the unstoppable process of digital transformation.
Talking about digital transformation, especially in a post-pandemic context, may mean placing ourselves in an outdated debate. Not because digitalization is a reality, but how can we talk about transformation when we refer to a continuous process – one that never ends? That is why Boards of Directors, and everyone involved in the process of proper corporate governance, are increasingly presenting the digital transformation and the role it must play in their agendas. Given that new times require new leaders and responses, what position should the new corporate governance take on digitalization?
The need to ensure the proper functioning of companies using the lever of digitalization is a reality, at the individual, corporate and regulatory levels. For example, in Europe, technology is fundamental for the different transpositions of the European Directive 2017/828 (which outlines the long-term involvement of shareholders, regulating aspects such as the identification of shareholders, the transmission of information and the function of proxy advisors). Digitization ensures Directive 2017/828 can be a reality, using digital communication tools with the shareholder or reporting in digital format. But the depth of this process goes much further.
Firstly, the process of digital transformation applied to corporate governance requires consideration on the concept of corporate governance itself. For example, Fenwick, McCahery and Vermeulen talk about the paradigm shift, moving from corporate governance to platform governance. This idea is based on the fact that, in today’s world, platforms dominate the business and social landscape and better represent the reality of companies (more interconnected, more agile and more horizontal). These authors propose a strategy based on three axes: creation of community-driven organizations; the implementation of a culture based on the principles of the platforms (allowing creativity, knowledge sharing and easy networking), and; to provide the organization with meaningful content in all its interactions with its many different stakeholders.
Here, the debate focuses on the scope of digitalization and on what aspects Boards should focus on when defining the roadmap. Should corporate governance follow a reactive position and respond to legislation and social changes as they occur and are fully implemented? Or should Boards opt for a more proactive stance and anticipate change? On paper, we would always bet on the second option, but part of correct governance is to review management of risk and cost of opportunity. We are, quite probably, at a moment in history where technology presents a greater capacity for exponential development – which also implies difficulty when it comes to glimpsing the future. Of course, it seems logical to bet on artificial intelligence, blockchain or machine learning, but where should the limit be placed? For example, should we transform companies to operate as organizations in DAO structures under the Web3 paradigm? Such an organization could be the solution to many of the problems that exist in the corporate landscape, and the necessary investments in culture, training, processes and technology would be acceptable for almost all companies. But, what if it DAOs are not the panacea we are promised?
Of course, this doesn’t mean that Boards of Directors and other profiles involved in good corporate governance should keep this process confined to operations. The debate and conversation about putting digitalization among the priorities is indispensable for the future survival of the company. With this in mind, here we share some keys to manage the digital transformation process from the perspective of corporate governance.
Giving digitalization purpose
The transformative capacity of technology is undeniable, as are its possibilities. Technology gives us so many options, it’s easy to get lost in the reeds. To avoid this, one of the directives a Board of Directors can impart is to give purpose to this digitalization. As logical as it may seem, to link technology to the purpose of the company (which implies the company itself as having a clearly verbalized purpose), and putting purpose at the center of digital transformation will turn technology into a true driver.
Implement ESG criteria in the digital transformation process
ESG (or ESG criteria) is no longer alien to the regulatory field, nor to the fields of management, investment, financial scrutiny or public debate, among many others. Nevertheless, ESG implementation is not the same when we talk about the digital transformation process. Sometimes motivated by false myths (such as ‘technology does not have bias’), or by not perceiving its direct effects (for example, the environmental impact of digital consumption, the energy required to mine cybercurrencies, etc.), it is important that the presence of ESG criteria are in both the roadmap and strategy of digitalization, as well as in the accountability and evaluations for success. And that happens when Boards of Directors also make ESG priorities their own.
Transform the structure, including compliance
No one doubts that the process of digital transformation is not so much a matter of resources or technology, but a matter of cultural scope. However, there is an aspect not always present – a culture of regulatory compliance. Perhaps motivated by the explosion of the Internet and new technologies being much faster than the responsiveness of regulators (given that there possibly hasn’t been a revolution like this in the last two centuries), the idea of a digital realm where anything goes has been predominant until now. However, the legislative development of the last decade, both at supranational and national levels, has made this idea an outdated myth; a risk for organizations. Though regulators and authorities often seem to scramble to catch up with developments in technology (with digital currency, for example), the consequence is a strong push for compliance and standardization. Whether it is information security, data processing, or privacy (within or without the firm), Boards of Directors must prioritize establishing a culture of regulatory compliance in the digital field.
Which brings us to the next point. Cybersecurity is undeniably present in the sphere of corporate governance. For example, the United States’ SEC has recently published regulations that oblige listed companies to report incidents related to cybersecurity and report on security measures taken by senior management. This trend has led organizations such as the World Economic Forum to publish recommendations on cybersecurity, citing aspects such as; incorporating cybersecurity expert profiles in the Councils; aligning the management of cyber risks with business objectives and providing a strategic nature for it; adapting the organization for this purpose, and more. Further, the increasing presence of specific points regulating the relationship between BPO providers and clients reflects the increasing internal cybersecurity compliance faced by companies, large and small.
The Coronavirus crisis has left important lessons, two of which stand out for corporate governance: that the future requires resilience and digitalization. We live in an era of rapid change, which means that we will definitely be exposed to new challenges and future crises. If we consider the impulse in digitalization that has taken place during this pandemic, what we find is the very survival of companies requires digital resilience, translating into the ability to adapt future digital strategies to respond to situations of change, complexities or crisis. The pandemic has been the basis of this process, but now is the time for organizations to reach a new level. Corporate governance and Boards of Directors are essential levers for this. Measurement, digital risk management, upskilling of internal talent, diversity, and redefinition of structures are basic steps that must be on corporate agendas.
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