Abstract
The digital revolution transforms business models and presents new privacy issues and ethical dilemmas. Research by MIT Sloan CISR reports that U.S. listed companies that have a digitally savvy board show substantially better financial performance. What is a digitally savvy board? What are the differences between the old and the new world? What are the new ethical dilemmas and how do you prevent making the same mistakes as big tech? Why does innovation fail so often within the existing structures of established companies? Why does the three lines of defense model for risk management have an inhibitory effect on innovation in practice? The author discusses these questions and provides suggestions for improvement of corporate governance of established companies. In the next chapter, the author provides rules of the road for how established companies can monetize their data including some pitfalls for established companies and discusses a number of ethical dilemmas that companies encounter in practice when implementing new digital technologies and services.
TopIntroduction
Friend and foe agree that our society is undergoing a digital revolution that will lead to a transformation of our society as we know it (Moerel, 2014, p. 4). In addition to all economic and social progress and prosperity, every technological revolution also brings along disruption and friction (Brynjolfsson & McAfee, 2014). It is now clear that new digital technologies (and, in particular, artificial intelligence, AI) enable many new services that can substantially disrupt existing business models. These new business models, in turn present new privacy issues and ethical dilemmas (Moerel & Prins, 2016, pp. 9-13) (van den Hoven, Miller, & Pegge, 2017, p. 5), and social resistance to the excesses of the new data economy is becoming increasingly visible and urgent. It is a challenge for established companies, to say the least, to both drastically innovate in order to remain future-proof and, at the same time, take social responsibility.1
The question that now arises is whether our current corporate governance regulation requires adjustment in order to be able to navigate these times of transformation. This is not a strange question, as corporate governance is now transcending the boundaries of the roles and interaction between the traditional decision-making bodies of the company (board of directors and general meeting of shareholders) and is increasingly spilling over into compliance, risk management and responsible entrepreneurship (Raaijmakers & Buma, 2019). Note that in this chapter, I do not distinguish between the one-tier and two-tier board models, but refer to the board as the interaction between non-executive directors and executive directors, whether they formally form one board (one-tier system, such as in the UK) or two separate boards (two-tier system, such as in The Netherlands), whereby next to the board of directors there is a seperate supervisory board.
Relevant here is that under both Dutch and UK corporate governance rules, the board is expected to lead a process of change where it is necessary to bring about a change in corporate culture for long-term value creation (Raaijmakers & Buma, 2019, p. 69) (van de Loo & Winter, 2016). Part of the culture of a company is the increasing attention to ethics and to why people act the way they do. To that end, the board must identify good and bad practices and dilemmas that employees encounter in the company, so that they can be trained to strengthen the corporate culture (Raaijmakers & Buma, 2019, p. 69).
In concrete terms, I see that digitisation leads to the following practical questions: Why does innovation at established companies often better succeed if placed outside existing structures? What needs to change in governance to enable innovation within the existing structure? If innovation is better achieved in small and agile teams, how does this fit into the command and control structure of compliance-driven organisations, in particular in regulated sectors, such as our financial institutions? How do we find time and attention in the company for innovation if we already have enough trouble in upgrading or replacing existing IT systems (legacy systems)? How do we balance the ever-greater investments in digitisation and developing digital services, potentially undermining our own business model, with our short-term (financial) KPIs and reporting? How do we recognise new privacy issues and ethical dilemmas that new digital products and services present, and how do we safeguard an open culture for discussing and addressing these? How do we ensure that the board has have sufficient knowledge and experience with new technologies and disruption through new business models? Is it sufficient that one of the directors has this expertise, or do more or even all directors have to re- en upskill, as it is called today? Does the board need to set up a technology committee? In these times of rapid transformation, shouldn’t the board have much more frequent and in-depth discussions about strategy? And ultimately, is a one-tier board model better equipped to deal with digital disruption that a two-tier board model?
Companies with digital savvy boards show 34% higher ROA, 38% higher revenue growth, 34% higher three-year market cap growth and 17% higher profit margin. (MIT Sloan CISR 2019)
Key Terms in this Chapter
Paradigm Shift: A revolution in science that leads to a dramatically different image of reality, through a fundamental change in the basic concepts of a scientific discipline. It is usually only in retrospect when the supporters of the old scientific worldview have lost their influence and power that a real conceptual revolution can be achieved. The concept paradigm shift was first coined and described by the U.S. physicist and philosopher T. Kuhn, The Structure of Scientific Revolutions , Chicago: UCP 1962.
Status Quo Bias: The phenomenon where people tend to stick to their current situation.
Net Promotor Score: An index measuring the loyalty of a customer to a company through the question: How likely are you to recommend the service or product to a friend or colleague? The NPS is also a good indicator of profitability. Banks that lead in Net Promoter Score®, which measures the likelihood that a consumer would recommend the bank to others, outperform laggards in net interest income growth (see Bain & Company, 2018b , p. 2).
Digital Savvy: ‘An understanding, tested by experience, of how digital technologies such as social, mobile, analytics, cloud, and the Internet of Things will impact how companies will succeed in the next decade’. Digital savviness is based on an inventory of actual education and work experience as reported in the CVs of board members ( Weill et al. 2019b , p. 3).
Confirmation Bias: An attempt to fit a new insight into what is already known. Confirmation bias is part of the field of bias and hereustics that guide our mental processes to arrive at quick interpretations and conclusions. For information about the confirmation bias in decision-making, see ( Kahneman, 2011 ).
PSD2: The Revised Payment Services Directive , which allows consumers to give fintechs permission to use their payment details for new financial services (also known as open banking ). Google was one of the first to be licensed under PSD2 (see www.irishtimes.com/business/technology/google-gets-go-ahead-from-central-bank-for-payments-1.3747901 ).