Working With Boards on Digital

Digital changes everything—and having board members with experience in digital business is a new financial performance differentiator.[foot]The financial impacts of having a digitally savvy board referenced throughout this research briefing draw from MIT CISR research described in P. Weill, T. Apel, S. L. Woerner, and J. S. Banner, “Assessing the Impact of a Digitally Savvy Board on Company Performance,” MIT Sloan CISR Working Paper No. 433, January 2019, and in “It Pays to Have a Digitally Savvy Board,” MIT Sloan Management Review, March 12, 2019. We studied the boards of all US-listed companies with more than $1 billion in revenues and six or more directors.[/foot] We found that only 24 percent of boards of companies listed in the US were digitally savvy, and that companies with digitally savvy boards had at least 34 percent higher performance on market cap growth, revenue growth, and ROA. But how can executives and board chairs help their board increase its digital savviness? In this briefing we summarize the results of our digitally savvy board study and describe how Principal Financial Group’s board has prepared for and made key digital decisions.

What Makes a Board Digitally Savvy

We define digital savvy as an understanding, developed through experience and education, of the impact that emerging technologies will have on businesses’ success over the next decade. Key skills are understanding when to commit, experiment, and partner, and knowing the early indications of both success and challenges with new initiatives operating at enterprise scale. It takes more than one digitally savvy board member to impact performance—we found that only companies with three or more digitally savvy board members had superior performance. And digital savviness of boards varied significantly by industry: the information industries had the highest percentage of digitally savvy boards at 57 percent, while mining, transportation, and construction companies combined had the lowest percentage at less than 10 percent. Surprisingly, only 13 percent of boards in financial services companies were digitally savvy.

To help boards manage discussion and agendas around digital, we developed a framework on the key areas a board must address—strategy, oversight, and defense:

• Strategy—articulating and acting on the opportunities and threats to the company’s business model from digital and how the company will succeed in the future
• Oversight—ensuring that the major digital projects and technology spending are on track
• Defense—protecting the company from cyber risk and system outages, and ensuring data privacy and compliance

We asked 176 senior executives to assess their board on these areas on a scale of 1 to 9. The resulting averages—strategy, 4.8; oversight, 5.5; and defense, 6.4—show there is significant opportunity for improvement.[foot]Source: Combined responses (N=176) from attendees at four MIT CISR research events. Events included the 2016 MIT CISR Annual Sponsors Research Forums in Boston (N=78); Melbourne, Australia (N=49); and Warsaw, Poland (N=27); and the 2015 MIT CISR CIO Summit (N=22).[/foot] To effectively address each of the areas, digitally savvy boards, or more typically their chairs, must design board agendas and board member engagement to provide the time and resources needed.

Given the improvement opportunities available to financial services companies, as demonstrated by their low degree of board digital savviness, we highlight how Principal has successfully addressed these issues.

Principal Financial Group: Creating a Digital Focus

Principal Financial Group helps people, businesses, and institutions around the world “have enough, save enough, and protect enough” for their financial future through retirement, insurance, and asset management solutions. It has more than 24 million customers and $700 billion in assets under management.

Digital business strategies became a routine topic for the Principal board almost a decade ago. During a presentation at an annual board strategic retreat, one of the MIT authors of this briefing challenged the board to be more aggressive in pursuing such strategies. One result of the talk was that the CEO and board tasked the CIO to lead corporate strategy to drive technology enablement further into the company’s business strategy.

A Board Agenda Focused on Digital

Since the Principal board began pursuing digital business strategies, its board agendas have included topics on technology, featuring presentations and discussions on strategy, oversight, and defense. Principal’s CIO estimates that just over 50 percent of the technology-related topics map to the area of strategy, with around 15 percent mapping to oversight and 35 percent to defense.

Strategy-oriented topics have covered things like business strategy implications of technology and technology-focused demos, education of board members, and funding. Oversight topics have included
reviewing budget allocations and the progress of transformation projects. Defense topics have incorporated cybersecurity updates, including metrics, monitoring, and trends.

The Process of Engaging the Board

Helping a board to become increasingly digitally savvy requires a combination of agenda setting, common language, education, working the problem, and formal structures; a digitally savvy board is equipped to get to decisions and follow them with oversight.[foot]"Assessing the Impact of a Digitally Savvy Board on Company Performance" and “It Pays to Have a Digitally Savvy Board.”[/foot] Here’s how Principal has pursued these activities.

Agenda setting and common language: With more than 50 percent of its technology-related agenda time spent on strategic issues, the focus of the Principal board has been clear—how digital can help Principal perform even better in the next decade. Digital can be used to change companies in at least four different ways, including to improve the customer experience, reduce the cost of operations though automation, develop new sources of revenue, and improve employee experience. Aligning on a common framework and language for discussing and prioritizing digital strategies is critical in preventing board members from talking past each other.

Principal has adopted, used, and reused a handful of key frameworks that make discussions much more productive and efficient. The framework used is less important than picking one that makes sense to the company, and that will be reused, becoming the basis for decision making and follow-up. For example, in many companies we see words like “ecosystems” and “platforms” used regularly, but often meaning different things from each speaker.

Education and working the problem: Educating board and executive committee members on digital in a way that is engaging and non-threatening is key. In addition to bringing those with less digital experience up to a foundational level, education helps to shift the members toward more common mental models on how to apply digital capabilities to the business.

Principal has leveraged external experts, FinTech entrepreneurs, and internal technology and data experts in educational sessions. The CEO and CIO have organized executive committee “digital immersion” trips to help facilitate a common understanding of how digitally native companies, including those in financial services, approach competing. This has included meetings with large digitally native companies (e.g., Google, Salesforce, Apple) and many FinTech start-ups. In addition to the value that has been created as the executive committee debated its digital strategies, subsequent debriefings with the board have resulted in it gaining confidence that the executive team is better prepared to deal with the dramatic changes coming to their industry from digital transformation.

Formal structures and decision making: In 2015 Principal formed a Digital Strategy committee comprised of business executives, their corresponding divisional CIOs, and the CMO, and chaired by the enterprise CIO. This committee was responsible for creating a common framework to develop digital business strategies, and it determines where to focus the application of strategies to business divisions versus the enterprise. In 2016, Principal inventoried its dozens of existing divisional- and enterprise-level digital business strategies and categorized them as offensive or defensive. A handful of these strategies stood out as particularly transformational.

Principal determined that it would be in the best interest of shareholders and customers to accelerate six transformational digital strategies, among them extending business-to-business relationships to the employees of customers and a direct-to-consumer model for retirement solutions in emerging markets. Principal modeled the impact of investments to accelerate the strategies using models that they leverage for M&A opportunities. The result was a package of investments with an IRR over 20 percent that had two-thirds of the benefits coming from increased revenue growth. The board approved the significant investment to accelerate the transformative digital business strategies. Principal then signaled the investment in the annual financial outlook call with analysts and others, and the digital business strategies were a significant focus of the company’s next Investor Day. These digital investments are largely aimed at reaching different customers and producing more customized financial solutions. Two years into Principal’s three-year accelerated investment, the company is well on track to achieve its revenue growth and expense improvement goals. These include digital retirement enrollment tools that are helping employees save at a higher rate, robo-advice embedded into life events, and AI-based investment research tools that have positioned Principal to develop customized investment products.

Lessons for Building Board Digital Savvy

These lessons draw from the combined work of the authors with more than thirty boards globally around digital issues:

1. Create a common language. Most people have strong mental models related to digital. Board members come from different industries and have varying degrees of digital experience, so it is easy to believe you have understanding or consensus when that may not be true. Using frameworks with a common language helps the company make and then oversee key digital decisions—particularly related to the company’s ability to implement the decisions. We have observed boards and management teams that lack a common language get frustrated, point fingers, support multiple projects that conflict, and take too long to make decisions or intervene.
2. Digital strategies are business strategies. A company’s early board discussions on digital are typically led by the CIO or someone similar, often with external expert speakers. At Principal those were fruitful discussions that significantly shaped the company’s future business strategies. A few years ago Principal moved to board discussions on digital issues being led by a line-of-business executive paired with an IT leader. Now almost all of the digital discussions are led by line-of-business leaders. This is the natural progression that digitally savvy companies go through—not only at the board level, but enterprise wide.
3. Use real-time dashboards for oversight. There was a lack of measurable value from the time boards spend on oversight in our statistical analysis. However, it is important that boards fulfill their fiduciary and moral responsibilities for overseeing the company. To do this, we suggest that companies create a real-time dashboard that measures spend and project progress but also impacts on performance such as the percent of orders made digitally or real-time measures of customer experience. The specific measures are less important than getting started on this process; you can iterate toward a useful dashboard for both boards and executive teams. The dashboard not only frees up time for discussion at board meetings—with less time spent on reporting—but also makes the company more digital in its operation.
4. Use board discussions to showcase your digital talent. One role of board members is to assess a company’s ability to execute on its strategies—including digital strategies. Therefore, it’s important for the executive committee and board to interact with a broad range of digitally savvy executives. Demos of recent implementations or projects under investigation are typically more effective than slide presentations.
5. Don’t surprise executive committee members. Impactful digital business strategies cannot be successful without full engagement of the executive committee. Very little undermines executive committee digital engagement more than introducing new or different approaches with the board before executive committee members have weighed in.

As we move rapidly into the digital era, boards have to adapt their important contribution to the company. Many existing board members do not come from a digital background, but most we’ve met are very motivated to learn and want to become more digitally savvy. Helping these board members is the responsibility not only of the chair and CEO but of every member of the company—and it pays off.