Corporate leaders worldwide, how many of you and your fellow executives are experts in today's digital technologies – cloud, analytics (big data), social, the Internet of Everything (IoE) and mobile – known by the much simpler acronym CASIM? Further, how many of you have digital experts on your leadership team that can help the company set strategy, give advice to management, and monitor organisational progress through the digital pivot that most businesses require today?

Our research and analysis, based on financial data and annual reports from the Standard and Poor's (S&P) 500 companies, indicates that most executives and board members do not have these skills. In fact, despite Forrester's recent research indicating that 93 per cent of corporate executives believe that digital technologies will disrupt their existing business model in the next year, only 15 per cent of executives believe their companies have the requisite digital skills to succeed. In short, most companies don't have a tweet's worth of digital experience and knowledge where they need it.

Since leaders globally realize that they are ill prepared for the digital age in which they find themselves, many companies are scrambling to add digital talent to their leadership ranks. The result is frequently the appointment of a Chief Digital Officer (CDO). Unfortunately, this is often a 'Band-Aid' solution: a quick fix arrived at without proper consideration.

For example, the CDO can end up reporting to a variety of department heads including the Chief Marketing Officer, Chief Technology Officer and Chief Information Officer but not always the CEO. As such, the appointment of a CDO is only a nod to the digital revolution. It does not, however, ensure that pervasive digital capabilities are created throughout the organisation, especially if the new hire doesn't report to the CEO and have a clear transformation requirement. As such, our recommendation is to also recruit a Digital Corporate Director (DCD) to sit as an independent director on the board, as an ally to the CDO, so ensuring that the digital mandate is supported. In short, two heads are better than one.

Why add a digital board member to your senior ranks?

As a corporate leader, your primary objective, as you know, is to create value for your shareholders. Our in-depth research of the Standard & Poor 500 companies put some real urgency behind the now ubiquitous exhortation to ‘go digital' or else.

We found that companies that ‘go digital' are two to four times more valuable to investors than those that don't. And that differential is increasing. Put differently, companies that have or are building digital assets (social, mobile, cloud, big data and Internet of Everything) can watch their stock prices rise above the rest. The result: the digitally rich are getting richer and the digitally poor are getting poorer.

For this reason, we believe that any company that is trying to increase shareholder value – surely every company – needs to recruit a digital leader with the power and influence to help align the company's business and operating model more broadly – not just launch Facebook or Twitter campaigns. For most companies, this will require the expertise of a Digital Corporate Director (DCD).

The research behind our recommendation

To prove to leaders that going digital is critical to their company's development as well as its financial success, we investigated how investors reward companies that take these necessary steps to embrace the digital world – and deploy the right people to action it.

To prove to leaders that going digital is critical to their company's development as well as its financial success, we investigated how investors reward companies that take these necessary steps to embrace the digital world – and deploy the right people to action it.

We are witnessing a quantum leap forward in digital technologies and the business models they support. Today's technologies allow for rapid expansion of organisational scale and connectivity at a fraction of the previous cost. Our research indicates that there are four types of business, each associated with different waves, or levels, of technology:

Asset Builders: These companies use capital to make, market, distribute, and sell physical things. The business model for these companies is ‘make one, market on, sell one'. Examples include Ford, Wal-Mart and FedEx.

Service Providers: These companies use capital to hire employees who produce billable hours for which they charge. The business model for this type of company is 'offer one, service one'. This model is similar to the Asset Builder model, but it substitutes an individual's output for a machine's output. Examples include United Healthcare, Accenture and JP Morgan.

Technology Creators: These companies use capital to develop and sell intellectual property, such as software, analytics and intellectual property. Once created, these assets can be sold multiple times. The business model for these companies is ‘make one, sell many'. Examples include Microsoft, Oracle and Pfizer.

Network Facilitators: These companies use capital to create a network of peers in which every participant is able to interact or transact with the many other members of the network (ie, they may sell products, build relationships, share advice, give reviews, collaborate, and more). The business model for this type of company is ‘make many, sell many'. Examples include eBay,TripAdvisor.com and Visa.

The bottom line is this: new technologies enable more value creation with less capital investment. Investors reward Technology Creators and Network Facilitators with Price/Revenue ratios (P/R values) of five times and eight times, while Asset Builders and Service Providers are penalized with lower P/R ratios of two times and three times. This means that over time, more and more investor capital is being funneled into Technology Creators and Network Facilitators at the expense of Asset and Service organisations. This is critical information for any board trying to increase their company's shareholder value.

So what does that mean to your organization?

Creating a CDO position is a step in the right direction, but leaders need to be aware that a CDO normally does not have enough ownership or influence to lead a company-wide digital awakening and to reallocate sufficient organisational assets and capital to change the company's business model. To overcome these issues:

  1. Have the CDO report directly to the CEO
  2. Recruit a DCD to your board to create digital corporate director skills
  3. Recruit these two positions in tandem to ensure success

One note of caution: neither of these recruits will be successful if the CEO has not recognised the digital imperative.

Change is possible

If you're part of the 70 per cent of companies that still haven't crossed the digital divide with a digitally inspired business model take heart – change is possible! Many big companies are recruiting digital talent and creating the offerings they need to succeed:

Assess your board's and CEO's commitment to going digital.The first step is to determine whether or not your board and CEO are fully aware of the digital impact of today's technologies and are willing to commit themselves to the necessary ‘pivot' in their business plan.

To accomplish this task, you will need to look at your CEO first and see whether he or she really understands what is necessary to embrace and benefit from digital disruption and jump to digital hyperspace to avoid the pitfalls that befell Blockbuster, Kodak and Encyclopedia Britannica. If the CEO is not comfortable going digital, then it may be time to find a coach to mentor him or her or find another leader to take the organisation forward into the digital realm.

Hire a Chief Digital Officer (CDO) as a member of your executive team.We cannot imagine how a company in today's CASIM world would not benefit from real world digital know-how. Finding the right digital talent for this position may require widening your view to consider more youthful, non-CEO candidates. Many companies are finding digital talent in young, venture-backed firms where there is a larger pool of talented professionals. But make sure you give themthe power to lead change.

  • Starbucks promoted Adam Brotman to a CDO role, giving him free reign over all Starbucks core digital businesses, including mobile and mobile payments, web, card, loyalty, e-commerce, Wi-Fi, and the Starbucks Digital Network.
  • McDonalds recently brought in as CDO Atif Rafiq, who has worked at Amazon, Yahoo!, and AOL. In this new role, he is "responsible for McDonald's cohesive and holistic global digital strategy – bringing an entirely new level of convenience and fun to our customers through innovative digital experience and engagement".

Recruit a Digital Corporate Director (DCD) to your board.Recruiting an independent outside director with digital expertise is a requirement in today's hyper-connected world if you want to help your CDO succeed and prosper. Just look at what Starbucks, Nike and Wal-Mart are doing if you don't believe us. Most of the best companies have already begun recruiting digital directors, so if you haven't, start soon. Great DCDs are in short supply. And don't forget that they will need full board support to successfully influence the firm's strategy and capital allocations.

  • Disney recruited Sheryl Sandberg, of Facebook fame, to their board, noting: "Sheryl has been at the forefront of a technological revolution that's opened up a world of new possibilities for consumers and which has greatly affected the way we do business."
  • Coca-Cola brought in Bobby Kotick, CEO of Activision Blizzard (one of the world's largest gaming companies), stating: "Bobby brings an entrepreneurial mindset and a high level of financial literacy and digital knowledge to our Company."

The conclusion is simple: If you want better stakeholder value for your company, and the related influx of inexpensive capital and enthusiastic customers, start taking digital seriously. Recruit both a Digital Corporate Director and Chief Digital Officer to your organisation and build up your digital chops to secure your future. Time is of the essence.

Examples of asset builders and how they are moving in the digital space:

nike.com

Nike is serving its customers with an entire Nike+ ecosystem – hardware and software to track and analyse activity, and network integration so users can tout their long Sunday morning run via Facebook.

nest.com

The Nest brought sexy, and big data, to your home thermostat. Nest Labs is taking over where classic asset builders, like Honeywell, have stopped, bringing new, networked digital technology to home controls.

ge.com

GE is creating the 'industrial internet' (what they call the 'convergence of machine and intelligent data') and using big data to optimise things such as jet fuel use, electrical grids, and hospital operations.

Example of a Service Provider that is adding Digital to its core offering:

mckinsey.com

McKinsey is ‘hardening' its IP to offer software-based solutions that complement the standard people and billable hour-based offerings.

Integrating digital into your company's leadership ranks requires hiring the right talent and then allocating sufficient capital to their initiatives rather than building out new key performance indicators for the digital age (those age old manufacturing and services KPIs just won't cut it). So how and where do you get started?

 

* Research conducted in partnership with Deloitte LLP and the SEI Center at Wharton See: openmatters.com

Steve Potter

Steve Potter CEO of Odgers Berndtson US and sits on its Global Board. He has spent over two decades as a founder, CEO and senior executive of several financial services executive search firms. Stev...

Barry Libert

Digital Board Advisor at OpenMatters – USA

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