The Korn/Ferry Institute The Digital Board Appointing non-executive directors for the internet economy The Digital Board The Digital Board i THE KORN/FERRY INSTITUTE Contents Page Foreword ................................................ iii Executive summary ....................................... 1 Defining ‘digital’ for the board ............................. 5 When to seek a digital NED ................................ 9 The value of digital NEDs ................................. 14 Integrating digital NEDs and maximising contribution ....... 23 Conclusions .............................................. 30 THE DIGITAL BOARD iii Foreword The digital transformation of the global economy is happening at a breathtaking pace. It is a transformation that is revolutionising products and services whilst also fundamentally changing mindsets and behaviours. As Managing Director of Amazon, UK between 2006 and 2011, I saw the business radically transform shopping habits – disrupting business models and challenging the status quo. In developed economies, businesses are experiencing unprecedented change in the way that customers consume their products and services. The digital revolution has created a paradigm shift and the winners will be the boards that recognise it and react accordingly. Having witnessed the digital revolution’s impact from a number of perspectives – as Chairman of ASOS, NED of the BBC, NED of Monitise and Computacenter and as part of the UK Government’s Digital Advisory Board – my view is that nobody, be that individuals, businesses or governments can afford to ignore this seismic change. If a board is not bothered about digital, I would sell your shares in that company! I have been the ‘digital NED appointee’ and believe that, in a modern business, it is imperative to ensure that the majority of the board have at least some knowledge of digital. The digital talent pool, however, is small. Talented candidates can come from a variety of sectors and I suggest that chairmen look broadly for suitable candidates to ensure that appropriate digital capability is present on their boards. iv THE KORN/FERRY INSTITUTE Korn/Ferry has researched the thoughts and perspectives of NEDs with digital expertise who are being appointed onto boards and the chairmen doing the hiring. I recommend this report, which provides practical advice for chairmen and boards on when and how to recruit digital NEDs and, critically, thoughts on how to ensure that these appointments are successful. Brian McBride Chairman ASOS THE DIGITAL BOARD 1 Executive summary In less than a decade, technology has restructured our lives, from the way we get the news in the morning, to how we buy our groceries, to how we communicate with friends and colleagues. ‘Digital revolution’ seems the only term expansive enough for this social and economic paradigm shift — streaming videos, social networks, new touch-screen devices, e-commerce, real-time data analytics, and mobile everything. These changes have been slower, however, to infiltrate the workings of corporate boards in the UK and the rest of Europe. Among the FTSE 100, for example, just 1.7 percent of non-executive directors (NEDs) would qualify as ‘digital’ — that is, executives who have spent the bulk of their careers either in companies where the Internet is central to the business model, or in strategic roles focused on leveraging the Internet.1 Most chairmen would characterise digital issues as important to the board. Undeniably, these changes are altering business models, giving rise to new competitors and creating new risks and opportunities. Navigation of this shifting landscape cannot be left to the executive team alone. This report explores the motives for adding a digital NED to the board, the benefits such expertise brings, and how to avoid missteps that can undermine the effectiveness of such an appointment. In addition to our own insight based on conducting board searches, we gathered the perspectives of chairmen and senior executives from multiple countries and sectors, and NEDs who are fulfilling the digital role on boards. 1 Boardex data January 2013. 2 THE KORN/FERRY INSTITUTE Among our conclusions: The digital NED need is great. One frequently cited estimate puts the ‘Internet economy’ at $4.2 trillion by 2016, and yet there were only eight digital NEDs added to FTSE 350 boards in 2012. There is a shortage of individuals who combine digital expertise with deep executive experience in general, and not everyone in that small group is looking to join boards. Boards must search more broadly, looking beyond pure-play Internet and e-commerce companies into platform providers, consultancies, mobile, hardware, software, or general retailers with strong e-commerce platforms. Talent may also reside in utilities, new media, and academia. Boards should also look deeper into functional executive ranks than is typical. The pressure seems greatest on the sectors that have already experienced the most disruption, particularly consumer-facing industries such as retail. But the scope of the transformation and pace of competitors can also up the ante for boards in any industry. Likewise, companies that are depending on digital trends to drive growth, not just create efficiency, are keen to add digital NEDs. Digital NEDs’ value comes from more than their work. The pace and breadth of technological change is such that boards need digital NEDs who haven’t just had a digital job, but thoroughly live in the digital culture. It is that personal immersion that helps the digital NED see ahead in the consumer demand-new technology cycle. A digital NED provides not only business expertise, but also a user’s view assessment of opportunities and risks, and a clear picture of where the company sits relative to its market. He or she can probe the most essential aspects of a company’s strategy, and examine it from multiple technology angles. Where others might see efficiency gains, the digital NED sees data security risk. That advantage multiplies when digital NEDs have company. The solo digital NED can get pigeonholed as a subject specialist, but having two leads to more rigorous debate and pushes the digital literacy of the whole board forward. THE DIGITAL BOARD 3 Boards need to understand what motivates digital NEDs. These executives — who are generally younger and often from fast-growth companies — want to know that they are having an impact and getting specific things accomplished. They also seek to gain professional breadth through their NED work, whether related to governance, finance, regulation, new markets, or mergers and acquisitions. Most can afford to be choosy. They will want to make sure that they have good chemistry with the board and chairman, but more specifically that the whole board takes digital issues seriously so that their contributions will make a difference. The right fit is important: a successful appointment can be a step towards a plural career or securing a CEO or other senior executive role. Integrating digital talent can require focused effort. Inductions for digital NEDs are too often geared to connecting them to technical executives. That can wait. First educate them on the other board agenda items: finance, risk, strategy. Chairmen may have to be particularly cognisant of integrating the new NEDs and setting agendas that complement their contributions and learning. When this is a first board role for a digital NED, it is also useful to be overly clear about expectations, including how to keep discussions and questioning at a strategic level. 4 THE KORN/FERRY INSTITUTE Methodology Korn/Ferry International interviewed 40 chairmen and NEDs with digital expertise from the UK, Europe and North America to gather their attitudes and insights about how boards should respond to the digital revolution. We asked them about the importance of digital opportunities to their company, where a board looks for digital expertise, what motivates a board to appoint a digital expert as a NED, and what attracts digital NEDs to particular boards. In addition, we analysed board appointments to FTSE 350 companies between 2007 and 2012, as well as the overall makeup of FTSE 100 boards to gauge whether board composition reflects the scale of the digital opportunity. We also drew on a number of published studies, by Korn/ Ferry and others, to provide the context, define the possibilities, and offer some practical advice in relation to tackling the opportunities and risks facing boards as a result of rapid technological advancements. THE DIGITAL BOARD 5 Defining ‘digital’ for the board A technological or cultural phenomenon? What exactly is ‘digital’? We at once know — and yet don’t. Is it technological infrastructure, e-commerce, mobile apps? “It’s difficult to define because it’s something that is constantly evolving,” says Peter Williams, NED at online retailer ASOS, Sportech and Cineworld Group. The US government has defined the digital economy (Mesenbourg 2001) as the sum of contributions to GDP made by e-business infrastructure (e.g., computer manufacturing, software programming), e-business (e.g., use of processes such as e-mail, online auctions, vendor-managed inventory) and e-commerce (i.e., sale of goods and services via computer- mediated networks). But boards of directors view digital through a different lens — or perhaps multiple lenses, suggests Andrew Allner, Chairman of Go-Ahead and Marshalls. There are the potential impacts of digital “It’s not just technology ... It’s about technology on the business, understanding people’s behaviours and then there are the ways to and how they are changing — use digital technology to particularly in their consumption of goods and services.” achieve competitive advantage. In other words, risks and - Lorraine Twohill, VP Global Marketing, Google opportunities. At the same time, digital is undeniably a cultural phenomena. It is changing the nature of relationships within companies, between lines of business and, most especially, between brands and consumers. “It’s 6 THE KORN/FERRY INSTITUTE not just technology,” explains Lorraine Twohill, VP of Global Marketing at Google, who serves on the boards of Williams-Sonoma and Telegraph Media Group.