Supervising Digital Transformation

No Support For a ‘Digital Supervisory Board member’
The four-member group is characterized by a high “digital level”; the average regulator has much less experience of digitization and disruptive innovation. Not surprisingly, when the Corporate Governance Code Monitoring Committee revised the code in 2016, they proposed that all Supervisory Boards should include at least one member with an understanding of new business models. In the consultation round, however, this turned out to be considered a responsibility associated with the entire Supervisory Board. The committee scrapped the proposal, although “awareness and anticipation of developments in new technologies and changes in business models” was mentioned in the notes on the term “long-term value creation”, which, according to the code, executive directors and Supervisory Board members should focus on. So is a separate “digital Supervisory Board member” not a good idea, or could such an expert sometimes meet a need? And which expertise and experience do boards actually need in order to help accelerate companies’ digital transformation?

How is digital expertise covered in your Supervisory Boards?
Aris: ‘You first need to define what you mean by digital expertise. Digital transformation involves three different challenges. The first challenge is strategic: In companies facing disruption, the business model is turned upside down. This results in fundamental questions such as: Are we going to acquire digital companies, are we going to set up our own start-ups, and how much are we going to invest in digitizing our core business activity when its profitability is uncertain? The second challenge is to transform the organization. The company has to be more centrally managed, you have to introduce end-to-end processes where, for example, marketing and production are more integrated through central data management, and you have to start working in a more agile way. The third challenge is to manage the change process, for example by reskilling people. So before you start looking for digital expertise within the Supervisory Board, you need to ask yourself which challenge you are facing: Do you need a strategist, someone who has experience an organization’s IT transformation, or a more general seasoned Change Manager? You will often need all three. On my own boards, I see a mix of those experiences and skills. Risk acceptance also plays a key role in companies in a disruptive environment. To create the right balance, you need to have both conservative-minded people on the Board and people who can encourage risk acceptance.’
Vigreux: ‘The digital expertise needed on the Board also depends on the sector. For example, Just Eat Takeaway is a rapidly growing company in an extremely fast-changing environment. The Board has to make far-reaching decisions at high speed, for example about the acquisition policy. Such a company needs Supervisory Board members with a sense of entrepreneurship, who oversee the external environment and the competitive landscape and can empathize with the decisions and risks that the Board has to take. As a Supervisory Board, you have to trust and support the executive directors, while monitoring compliance.
Van Kemenade: ‘Most importantly, leaders and regulators need to be able to deal with change. That requires skills such as curiosity, being able to deal with ambiguity, uncertainty and unpredictability, and being open to innovation. Within boards, there is often a kind of tension between the sector in which the company operates and the digital paradigm shift that is forcing change. On one hand, you have the curious people who believe in the need for change and embrace the inevitable uncertainty in the search for a future-proof business model. On the other hand, you have the people who say that we can digitize, but our role in the value chain and in society simply stays the same. A digitally operational bank is still a bank, and Tesla is still a car manufacturer.’
Tannemaat: ‘I am a member of very different boards, from established companies with a lot of legacy in the field of information technology to new companies that are growing rapidly. In those fast-growing companies, maintaining the founder's culture is important, while established companies need to work on a learning culture and adaptability. The stage of the life cycle in which the company finds itself also partly determines the skills that the Board has to possess. Digital expertise and experience just form the basis – it is mainly about behavior. Are those on the Board open to what is happening in the world? Are they willing to continue learning?’

How important is having sufficient knowledge of new digital developments in the Supervisory Board for feeding and challenging the Board?
Vigreux: ‘You have to keep feeding the executive Board and yourself as a Supervisory Board member with knowledge. There are so many blind spots. For Just Eat Takeaway, the Supervisory Board set up a WhatsApp group for the executive Board in which we share trends we have read about or been told about. You should not bombard the Board with information about the external environment, but it can certainly help with decision-making in healthy doses.’
Aris: ‘As a member of the Supervisory Board, you can create the context for serendipity to flourish by sharing relevant information, which can boost the Board's strategic discussions. For my role at INSEAD, I take a professional view of new developments. As a member of the Supervisory Board, I use that information to feed executive directors. You can also do this more systematically as a Supervisory Board, for example through continuous education or by bringing in people from outside on a regular basis.’
Tannemaat: ‘Organizations often focus primarily on the here and now or the medium term. As a member of the Supervisory Board, it is your role to have a long-term vision and explain developments, allowing the organization to promptly respond to those developments. You can institutionalize this external focus during learning sessions, but it all starts by asking yourself and your fellow Supervisory Board members what you are doing to stay up to date with current events across the world.’
Van Kemenade: ‘But a bit of basic training in digitization would not hurt. As a member of the Supervisory Board, you cannot rely on your curiosity alone. I can think up clever questions about space travel, but that does not make me a good Supervisory Board member for NASA. You really need to have some knowledge of astronomy. The same applies to digitization. People are quick to coin terms like artificial intelligence and machine learning, but they often do not understand how it works. So even as part of the Supervisory Board you need a decent basic knowledge, which you update through continuous education. Supervisory Board members also need to be bold enough to admit when they do not know something and ask for an explanation.’

How do you feel about appointing somebody to the Supervisory Board with specific digital expertise, such as machine learning or artificial intelligence?
Van Kemenade: ‘If the digital transformation still needs to be set in motion, it might help to appoint someone with specialist knowledge to the Supervisory Board to cause disruption from within, as it were. But appointing a specialist does carry the risk that they will have quite an isolated position on the Board as nobody understands that in-depth knowledge. As the transformation process progresses, the collective role of the Supervisory Board as a countervailing power becomes more important, that is to say, to offer a contrary position in arguments. You have to be able to ask whether you are still flying in the right direction, mid-flight. If executive directors are going too quickly, you ask them to stop and reflect. If they are going too slowly, push them forward. The role and composition of the Supervisory Board during a digital transformation are therefore strongly contextualized – you cannot address them in isolation. With the increase in regulations for digital applications, the emphasis is also shifting from tech to the social impact of those applications. That issue ideally belongs to the entire Supervisory Board.’
Aris: ‘What you need on the Supervisory Board is not so much relevant expertise on cybersecurity, for example, but relevant experience. In the event of a drastic IT transformation, it can be valuable to have a Supervisory Board member with a holistic view of IT, business and society. Someone who has been through that process before and made all the mistakes. It can also be helpful to get people on board from industries that are one or two steps further ahead in terms of digital transformation, such as the media industry. Often, executive directors do not know what they do not know. Members of the Supervisory Board who have already been through the transformation process can share their learnings.’
Vigreux: ‘Artificial intelligence or cybersecurity – they are just tools. You do not need expertise in that area in the Supervisory Board; it is better to hire that expertise from outside. It is much more important that you have Supervisory Board members who understand the ecosystem in which the company operates: Which new developments are we noticing, and what are competitors doing? The Supervisory Board is there to oversee the whole picture and to protect stakeholders' interests.’

Does digital transformation require more regular, close involvement from the Supervisory Board than four or five meetings per year?
Vigreux: ‘That again depends on the stage that the company is in. When Just Eat Takeaway made a major acquisition, we met almost every single week.’
Van Kemenade: ‘Funnily enough, we think it is quite normal for the Supervisory Board to be closely involved in an acquisition, but when large sums are invested in the digital transformation throughout the year, we often think it is perfectly normal for the Supervisory Board to review it only four times a year.’
Tannemaat: ‘Your involvement as a member of the Supervisory Board goes beyond those five or six meetings per year. In the meantime, you talk to all sorts of people. The formation of an IT committee within the Supervisory Board also helps closely monitor the transformation process. The digital strategy hinges on the execution. Which hiccups is the organization struggling with?’
Aris: ‘In some of my Supervisory Boards, we work with a topic team for digital transformation. Two or three members of the Supervisory Board with an affinity for that meet with the directors responsible for the digital transformation between meetings and have open discussions with them and those in layers below them. It is very much two-way traffic. A topic team is less formal than an official committee – it is a relaxed environment that allows members to get a feel for how the digital transformation is progressing and contribute their learnings and experiences. In this way, you can intelligently identify the topics that are worth putting on the agenda for discussion by the entire Board.’

How important are diversity and inclusiveness within Boards so that they can effectively supervise digital transformation?
Vigreux: ‘In ten years’ time, the world will look very different. The most companies’ activities will be tech-related, and with that, the pool from which you select directors and Supervisory Board members also needs to become broader. We need people with a different profile, and headhunters can play a key role in that. We also need to start training younger Supervisory Board members right now.’
Van Kemenade: ‘The average age of a member of a Supervisory Board is around 60. So many regulators are drawing on their own experiences, which are rapidly becoming outdated. Rather than asking questions, they sometimes just give their opinion, using exclamation marks instead of question marks. As a Supervisory Board member, I like to be challenged with questions I cannot answer straight away. It is only through dialogue that you can discover the unknowns and uncertainties of the digital transformation – or how to solve dilemmas, such as investing large amounts of money for the long term while remaining agile in the short term, learning from mistakes and responding to competition. Supervisory Board members who help you explore the field take you further than regulators who tell you what to do.’
Aris: ‘Many Boards are primarily focused on managerial experience, whereas for effective supervision you need both former directors and a few Supervisory Board members who have seen lots of different examples of digital transformation. Their input contributes breadth, and not so much depth. The major challenge here is to avoid not-invented-here syndrome among directors and fellow Supervisory Board members. They need to be open and willing to investigate an unusual observation or an issue that initially seems strange. It only works if you really try to understand each other.’
Tannemaat: ‘That requires openness and mutual respect, so that people dare to ask the right questions. Digital transformation really benefits from a safe atmosphere in the boardroom.’

Interview by Myrthe Nuninga and Heiko Mijnarends, consultants at Spencer Stuart. This article was published in Management Scope 03 2022.