A board of directors that understands the impact of technology on the business leads companies to perform better with higher revenues, according to a recent study from the MIT Sloan Center for Information Systems Research.
The study identified all public US firms with more than $1 billion in revenue and at least six board members. Of the initial sample of 3,228, the study examined the 1,122 for which it had data on four performance measures. Researchers also surveyed 81 board members.
Only 24% of boards overall were digitally-savvy, the researchers found. However, those 24% performed consistently better, and had 38% higher revenue growth, 34% higher ROA, and 34% higher market cap growth.
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“The companies that were digitally-savvy outperformed on just about every metric we looked at than those that didn’t have digitally-savvy directors,” Peter Weill, chairman of the MIT Sloan Center for Information Systems Research and one of the study authors, said during a session at the recent 2019 MIT CIO Symposium in Cambridge, MA.
The number of digitally-savvy directors also makes a difference, the research found. Having one or two did not make a difference in performance. However, when there were three digitally-savvy directors on the board, the financial performance of the company spiked. When there were more than three, there was no statistically significant difference, the research found.
“Digitally-savvy boards do things differently—these directors change the risk conversation from evaluating the project risk of a particular initiative, to the business model risk of not doing something new,” Weill said.
4 components to digitally-savvy board members
Digitally-savvy board members have the following, according to the research:
1. An understanding, tested by experience, of how technologies will impact the way companies will succeed in the next decade
2. Enterprise-level understanding of current technologies such as digital platforms, artificial intelligence (AI), big data, the Internet of Things (IoT), and mobile and digital processes that enable new business models, improve the customer experience, and create more efficient operations
3. An understanding of when to commit, experiment, and partner, and of the early indicators of both success and challenges with new initiatives operating at the enterprise scale
4. Consider technology early in the strategy process
It is possible to make your existing board more digitally savvy, through education and examining the activities of digital native companies, and well as by adding new board members, Weill said.
In examining your board of directors and developing a digitally-savvy strategy, companies should ask the following questions, Weill said:
Do we have a good understanding of the threats and opportunities from digital technologies on our company in the next five to 10 years?
Do we have at least three digitally-savvy board members, and a working understanding of digital issues amongst all the directors?
Do we have a plan to increase the digital savviness of our board over the next few years? If so, how is it going?
Are we striking the right balance between weighing the risk of a current proposal vs. the risk of not taking more aggressive action?
For more, check out How tech savvy does the CEO need to be? on TechRepublic.