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The Digital Board Appointing non-executive directors for the internet economy

The Korn/Ferry Institute

The D

igital Board

The Digital Board

i THE Korn/FErry InST ITUTE

Contents

Page

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Defining ‘digital’ for the board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

When to seek a digital NED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The value of digital NEDs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Integrating digital NEDs and maximising contribution . . . . . . . 23

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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Foreword

The digital transformation of the global economy is happening at a breathtaking pace . It is a transformation that is revolutionising products and services whilst also fundamentally changing mindsets and behaviours . As Managing Director of Amazon, UK between 2006 and 2011, I saw the business radically transform shopping habits – disrupting business models and challenging the status quo .

In developed economies, businesses are experiencing unprecedented change in the way that customers consume their products and services . The digital revolution has created a paradigm shift and the winners will be the boards that recognise it and react accordingly .

Having witnessed the digital revolution’s impact from a number of perspectives – as Chairman of ASOS, NED of the BBC, NED of Monitise and Computacenter and as part of the UK Government’s Digital Advisory Board – my view is that nobody, be that individuals, businesses or governments can afford to ignore this seismic change . If a board is not bothered about digital, I would sell your shares in that company!

I have been the ‘digital NED appointee’ and believe that, in a modern business, it is imperative to ensure that the majority of the board have at least some knowledge of digital . The digital talent pool, however, is small . Talented candidates can come from a variety of sectors and I suggest that chairmen look broadly for suitable candidates to ensure that appropriate digital capability is present on their boards .

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Korn/Ferry has researched the thoughts and perspectives of NEDs with digital expertise who are being appointed onto boards and the chairmen doing the hiring .

I recommend this report, which provides practical advice for chairmen and boards on when and how to recruit digital NEDs and, critically, thoughts on how to ensure that these appointments are successful .

Brian McBrideChairman ASOS

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Executive summary

In less than a decade, technology has restructured our lives, from the way we get the news in the morning, to how we buy our groceries, to how we communicate with friends and colleagues . ‘Digital revolution’ seems the only term expansive enough for this social and economic paradigm shift — streaming videos, social networks, new touch-screen devices, e-commerce, real-time data analytics, and mobile everything .

These changes have been slower, however, to infiltrate the workings of corporate boards in the UK and the rest of Europe . Among the FTSE 100, for example, just 1 .7 percent of non-executive directors (NEDs) would qualify as ‘digital’ — that is, executives who have spent the bulk of their careers either in companies where the Internet is central to the business model, or in strategic roles focused on leveraging the Internet .1

Most chairmen would characterise digital issues as important to the board . Undeniably, these changes are altering business models, giving rise to new competitors and creating new risks and opportunities . Navigation of this shifting landscape cannot be left to the executive team alone .

This report explores the motives for adding a digital NED to the board, the benefits such expertise brings, and how to avoid missteps that can undermine the effectiveness of such an appointment . In addition to our own insight based on conducting board searches, we gathered the perspectives of chairmen and senior executives from multiple countries and sectors, and NEDs who are fulfilling the digital role on boards .

1 boardex data January 2013.

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Among our conclusions:

The digital NED need is great. One frequently cited estimate puts the ‘Internet economy’ at $4 .2 trillion by 2016, and yet there were only eight digital NEDs added to FTSE 350 boards in 2012 . There is a shortage of individuals who combine digital expertise with deep executive experience in general, and not everyone in that small group is looking to join boards . Boards must search more broadly, looking beyond pure-play Internet and e-commerce companies into platform providers, consultancies, mobile, hardware, software, or general retailers with strong e-commerce platforms . Talent may also reside in utilities, new media, and academia . Boards should also look deeper into functional executive ranks than is typical .

The pressure seems greatest on the sectors that have already experienced the most disruption, particularly consumer-facing industries such as retail . But the scope of the transformation and pace of competitors can also up the ante for boards in any industry . Likewise, companies that are depending on digital trends to drive growth, not just create efficiency, are keen to add digital NEDs .

Digital NEDs’ value comes from more than their work. The pace and breadth of technological change is such that boards need digital NEDs who haven’t just had a digital job, but thoroughly live in the digital culture . It is that personal immersion that helps the digital NED see ahead in the consumer demand-new technology cycle .

A digital NED provides not only business expertise, but also a user’s view assessment of opportunities and risks, and a clear picture of where the company sits relative to its market . He or she can probe the most essential aspects of a company’s strategy, and examine it from multiple technology angles . Where others might see efficiency gains, the digital NED sees data security risk .

That advantage multiplies when digital NEDs have company . The solo digital NED can get pigeonholed as a subject specialist, but having two leads to more rigorous debate and pushes the digital literacy of the whole board forward .


Boards need to understand what motivates digital NEDs. These executives — who are generally younger and often from fast-growth companies — want to know that they are having an impact and getting specific things accomplished . They also seek to gain professional breadth through their NED work, whether related to governance, finance, regulation, new markets, or mergers and acquisitions .

Most can afford to be choosy . They will want to make sure that they have good chemistry with the board and chairman, but more specifically that the whole board takes digital issues seriously so that their contributions will make a difference . The right fit is important: a successful appointment can be a step towards a plural career or securing a CEO or other senior executive role .

Integrating digital talent can require focused effort. Inductions for digital NEDs are too often geared to connecting them to technical executives . That can wait . First educate them on the other board agenda items: finance, risk, strategy .

Chairmen may have to be particularly cognisant of integrating the new NEDs and setting agendas that complement their contributions and learning . When this is a first board role for a digital NED, it is also useful to be overly clear about expectations, including how to keep discussions and questioning at a strategic level .


Methodology

Korn/Ferry International interviewed 40 chairmen and NEDs with digital expertise from the UK, Europe and North America to gather their attitudes and insights about how boards should respond to the digital revolution . We asked them about the importance of digital opportunities to their company, where a board looks for digital expertise, what motivates a board to appoint a digital expert as a NED, and what attracts digital NEDs to particular boards .

In addition, we analysed board appointments to FTSE 350 companies between 2007 and 2012, as well as the overall makeup of FTSE 100 boards to gauge whether board composition reflects the scale of the digital opportunity . We also drew on a number of published studies, by Korn/Ferry and others, to provide the context, define the possibilities, and offer some practical advice in relation to tackling the opportunities and risks facing boards as a result of rapid technological advancements .


Defining ‘digital’ for the board

A technological or cultural phenomenon?

What exactly is ‘digital’? We at once know — and yet don’t . Is it technological infrastructure, e-commerce, mobile apps? “It’s difficult to define because it’s something that is constantly evolving,” says Peter Williams, NED at online retailer ASOS, Sportech and Cineworld Group .

The US government has defined the digital economy (Mesenbourg 2001) as the sum of contributions to GDP made by e-business infrastructure (e .g ., computer manufacturing, software programming), e-business (e .g ., use of processes such as e-mail, online auctions, vendor-managed inventory) and e-commerce (i .e ., sale of goods and services via computer-mediated networks) .

But boards of directors view digital through a different lens — or perhaps multiple lenses, suggests Andrew Allner, Chairman of Go-Ahead and Marshalls . There are the potential impacts of digital technology on the business, and then there are the ways to use digital technology to achieve competitive advantage . In other words, risks and opportunities .

At the same time, digital is undeniably a cultural phenomena . It is changing the nature of relationships within companies, between lines of business and, most especially, between brands and consumers . “It’s

“It’s not just technology ... It’s about understanding people’s behaviours and how they are changing — particularly in their consumption of goods and services.”

- lorraine Twohill, VP global Marketing, google


not just technology,” explains Lorraine Twohill, VP of Global Marketing at Google, who serves on the boards of Williams-Sonoma and Telegraph Media Group . “It’s about understanding people’s behaviours and how they are changing — particularly in their consumption of goods and services .”

Digital is also reshaping the culture of business, increasing the pace of innovation and need to try the new and different . Digital, summarises TelecityGroup NED Nancy Cruickshank, is “multi-platform, customer-focused, highly collaborative, and creating new business models .” It has made the commercial world simultaneously more collaborative and more competitive .

In other words, digital is a game changer . For the purpose of this report, we are using ‘digital’ to broadly encompass the cultural and technological phenomenon driving disruptive change in the way companies operate and interact with the world .

In terms of its impact on society and the economy, the digital revolution is a transformation on the scale of the introduction of railways, invention of the internal combustion engine, and transmission of electricity . This digital revolution is shrinking space and time — every business is ‘local’ no matter its location; just in time is now, now, now .

The size of the digital opportunity

According to a forecast by Boston Consulting Group last year, if the Internet were a nation, by 2016 it would have a GDP of $4 .2 trillion and be the world’s fifth-largest economy . Nearly half of the global population, three billion people, will be Internet users within the next three years (Dean et al . 2012) . Their report says, “It demonstrates that no one — individual, business or government — can afford to ignore the ability of the Internet to deliver more value and wealth to more consumers and citizens more broadly than any economic development since the Industrial Revolution .”

The World Bank reported in 2012 that three-quarters of the global population had access to mobile phones, pointing to the booming future of m-commerce as well .


Many Continental European and UK companies have been world leaders in embracing these revolutionary opportunities, but that also makes the climate more punishing for late adopters . As Gareth Davis, Chairman at William Hill, Wolseley, and DS Smith, summarised, “If you are slow to recognise [the importance of digital], then you are starting to play catch up .”

The UK, for instance, now has the largest digital economy in the G-20 by proportion of GDP (Dean et al . 2012); by 2010, its Internet economy accounted for 8 .3 percent of GDP . Venture capitalist Saul Klein projects that by 2016 that could grow to 12 .4 percent of GDP, or £225 billion (Schofield 2013) . But he also asserts that UK investors aren’t backing digital industries sufficiently and that revenue generated from digital remains terribly uneven across sectors .

Likewise, corporate boards of directors appear to be inadequately tapping into the potential of digital to drive growth . In a 2013 Korn/Ferry survey of FTSE 100 chairmen, almost half of respondents said their company was not currently doing enough to take advantage of the Internet (“The Boardroom Pulse” 2013) .

The paucity of digital expertise on boards might be a contributing factor . Among the FTSE 100, for example, just 1 .7 percent of board members qualify as what could be called ‘digital NEDs’ — that is, executives that have spent the bulk of their careers either in companies where the Internet is central to the business model, or in strategic roles focused on leveraging the Internet . Indeed, other Korn/Ferry board research (“The Class of 2012”, 2013) which profiled all those indivdiduals who got their first FTSE 350 board position in 2012, found that only eight of these directors were digital NEDs — a pace that hasn’t picked up in five years . These companies have added executives with marketing, human resources, and legal backgrounds to their boards at a much faster rate than they have appointed those with digital expertise .

“If you are slow to recognise [the importance of digital], then you are starting to play catch up.”

- gareth davis, Chairman William Hill, Wolseley, and dS Smith


So how many digital NEDs should be joining boards? To make a crude calculation, if digital comprises 8 percent of GDP, perhaps digital expertise should have a similar footprint on boards . If so, today, FTSE 100 boards are short by 100 NEDs . To catch up to the scale of the digital opportunity, boards need to be appointing four times as many digital NEDs as they are now .


When to seek a ‘digital NED’

So although business leaders are near unanimous in recognising the huge implications of digital technology, there are still wide differences of opinion as to whether digital issues belong on the board agenda, and if so, how high up . Of the NEDs, chairmen, and other senior executives interviewed by Korn/Ferry for this report, more than a quarter of them (28 percent) do not see digital as a key board issue . So when should companies appoint a digital NED?

Figure 1

How important are digital issues to the board?

Of central importance

Very important

Important

Not a key board issue

20%

24%

28%

28%


A question of sector?

Many (but by no means all) of our interviewees suggested that the customer base determines the need for digital NEDs, with greater pressure on consumer-facing enterprises than those in the business-to-business arena . “Digital media understanding on boards should be mandatory in all consumer-facing businesses,” comments Brian McBride, Chairman at ASOS, Computacenter and NED at the BBC .

The level of disruption also appears to affect the sense of urgency . Retail, for instance, was destabilised early by online shopping; chairmen Korn/Ferry surveyed in that sector put the move to digital second on their list of concerns, right behind the faltering economy (“Retail: An Economic National Treasure” 2013) .

“Some sectors, however, have been slow to respond,” observes David Kelly, a NED with the e-commerce company CDON Group . “The insurance sector,

for example, has witnessed poor levels of multi-channel innovation, outside of motor and home . Their perception of regulatory roadblocks together with significant technical debt and strong historical mental models contributes to this slow progress .”

Even companies that haven’t been upended by the digital revolution should be assessing digital’s strategic implications and its capacity to disrupt their business model in the near future . To what extent is a board truly able to question the opportunities and risks if it has no digital experience around the table?

A question of executive strength?

At the same time, all aspects of digital expertise need not come from NEDs . “Capability in the executive team is what’s important,” says Chris Gibson-Smith, Chairman of the London Stock Exchange and Partnership Assurance . Nick Salmon, a NED at United Utilities, also considers

“Some sectors, however, have been slow to respond.”

- david Kelly, nEd, Cdon group


executive appointments more essential . “As I look around the board, we are mature, most around sixty, but we’ve recognised the need for digital expertise on the executive team and brought it in .”

For some, it’s not a given that every board needs a digital NED . What seems key is to make a conscious assessment of what insight is available to the board and from whom . “It’s terribly important for the board to think about what they need from their NEDs rather than just their executives,” explains Sir Ian Gibson, Chairman at WM Morrison Supermarkets . “There are lots of boards which think they want a digital expert but don’t think this through .”

David Chance, Chairman at Modern Times Group and Top Up TV, believes more strongly that boards need digital expertise to properly exercise governance . “The repercussions of not having digital talent on the board is that the active check and balance of the board and executive will be weakened . The board needs to have the competence to challenge the executive, which includes having digital know-how .”

“The repercussions of not having digital talent on the board is that the active check and balance of the board and executive will be weakened. The board needs to have the competence to challenge the executive, which includes having digital know-how.”

- david Chance, Chairman, Modern Times group and Top Up TV


A question of scale?

The size and stage of development of a company also may be good metrics for how “digital” the board needs to be . Start-up companies — the ones creating all this disruption — are most likely to have a depth of digital talent among their executive and non-executive board members . “The midcap have become fast learners as they come under immediate competitive pressure,” elaborates David Kelly . “The more traditional companies are generally not as responsive .”

The Korn/Ferry analysis of FTSE 100 boards bears out his observation: those largest companies appointed just one digital NED in all of 2012 .

Granted, these larger companies, with their greater resources, might address their digital needs through executive appointments rather than non-executive . But that approach carries its own risks, according to

Lorraine Twohill . “Companies these days should be talking about business models and strategy” with digital in mind, she says . “They should not be referring to digital as a separate issue because it has become intrinsic to doing business .”

James Bilefield, Head of Digital for Condé Nast International concurs . “The rise of digital technology has all sorts of implications — for tax systems, education, local incumbents, etc . If I were a traditional business without a digital strategy, I would be very worried .”

“Companies these days should be talking about business models and strategy. They should not be referring to digital as a separate issue because it has become intrinsic to doing business.”

- lorraine Twohill, VP global Marketing, google


Conclusion: To appoint or not to appoint?

With digital disruptions so all-pervasive, it seems only the rare company that wouldn’t benefit from a digital NED — if not immediately, then in the near future . Certainly chairmen who’ve already made digital appointments encourage others to do the same . “Don’t be afraid to go outside the traditional candidate pool” to find digital NEDs, says Henning Boysen, Chairman of Kuoni and Transcom . It hasn’t “solved our issues but has highlighted what they should be .”

An additional advantage is the message such appointments send to investors, the business media, analysts, and other stakeholders . “My appointment was a confirmation of the company’s commitment to digital,” says Ashley Highfield, Chief Executive Officer at Johnston Press .

“If a company’s chairman is not bothered about the Internet,” concludes Brian McBride, “sell your shares .”

“If a company’s chairman is not bothered about the Internet, sell your shares.”

- brian Mcbride, Chairman, aSoS and Computacenter and nEd, bbC


The value of digital NEDs

Boards seek certain characteristics in every NED appointment: the ability to be independent, strong communication skills, passion for the aims and mission of the company, and the ability to think strategically (“What Makes an Exceptional Independent Non Executive Director?” 2012) . But what, precisely, is the added value that a digital NED brings?

In most cases, the new digital NED will arrive with less board experience than ‘traditional’ NEDs . Our analysis of FTSE 350 appointments, for instance, found that digital NEDs were,

on average, 46 years old compared with 56 for the rest of the NEDs .

However, they add significant value in three broad categories: spotting opportunities, identifying threats, and increasing diversity .

Digital NEDs add significant value in three broad categories: spotting opportunities, identifying threats, and increasing diversity.


Understanding opportunities

Digital NEDs play a crucial role in helping boards as a whole appreciate the opportunities posed by technology — especially where they might be missing the boat . “Appointing a digital NED brought greater objectivity to the board: how far ahead or behind were we relative to the market in the areas we needed to focus on?” recounts John Allan, Chairman at Dixons Retail and WorldPay .

There’s something to be said for not only understanding the technology, but also for having it central to one’s own lifestyle . It is that personal immersion that helps the digital NED see ahead in the consumer-technology cycle: technologies created to meet need A lead to a change behaviour B that leads to new consumer demand C .

“A NED should be a consumer of the product in both environments [traditional and digital],” says Fru Hazlitt, NED at Betfair . The digital customer “wants to do similar things, but faster . For example, do you do the supermarket dash on the way home or do your shopping on your phone in the back of the cab?”

That’s true in sectors beyond retail . Leaner business processes and the emergence of competitors unencumbered by legacy systems and infrastructures, mean all businesses face rapidly changing markets . Carolyn Fairbairn, NED on the Lloyds Banking Group and Vitec Group boards, believes that digital NEDs, with their understanding of state-of-the-art technologies and the cultural shifts resulting from the digital revolution, can raise the crucial questions that highlight where the business should be going .

“A NED should be a consumer of the product in both environments [traditional and digital].”

- Fru Hazlitt, nEd, betfair


Identifying threats

Expert challenge and scrutiny on the digital front also help to protect existing business . Recent instances of customer data losses due to hacking demonstrate just how damaging a failure to manage digital security can be to a brand . As Jacques Aigrain, Chairman at LCH Clearnet Group, points out, “The security issue for us is vital, critical . We appointed someone who brought this expertise, which was important to the company and in satisfying our regulators .”

A digital NED also can help to spot the flaws in a company’s digital strategy or scan the horizon for other risks or disruption to the business created by technology . For instance, what are the security implications of the widespread business use of personal IT products such as smart phones and tablets? “What’s the impact on cyber protection?” asks Leo Quinn, CEO at QinetiQ . “Beware of the dark side .”

With hardware, software, and platforms constantly evolving, even the most seemingly benign technology decision can have long-term ramifications . Adopting the ‘wrong’ technology or platform could lead

to wasted capital expenditures and require subsequent data migration, with all the attendant risks . It can also put the very relationships you’re trying to strengthen in jeopardy .

“In digital a lot is being made up as we go along — no one knows where it will end . So the

key is to find someone who can explain how what’s happening in the wider digital environment will affect your business, e .g ., which formats and channels will survive, and which won’t,” advises Peter Williams .

“In digital a lot is being made up as we go along — no one knows where it will end. So the key is to find someone who can explain how what’s happening in the wider digital environment will affect your business, e.g., which formats and channels will survive, and which won’t.”

- Peter Williams, nEd, aSoS, Sportech and Cineworld group


Improving diversity

The desire for ‘new’ digital skills is just one component of a wider drive to build boards with more diversity in the broadest sense of the word . “You need variety,” comments Laura Wade-Gery, Executive Director, Multi-Channel E-Commerce at Marks & Spencer . “You need an international and functional mix . And you need a diverse board to support a digital NED joining .” “Digital NEDs will also bring an expectation of a fast pace to match the speed of market changes,” she adds .

Digital NED appointees, at least in the FTSE 350 between 2007 and 2012, also contribute to these diversity goals . More of these digital NEDs are women (25 percent) as opposed to non-digital NEDs, of whom only 15 percent are women . “One of the good things about digital media is that there are a lot of women, which enables you to address [the gender] diversity issue also,” notes Peter Williams . More digital NEDs were also born outside the UK (33 percent, as opposed to only 26 percent of other NEDs), increasing global perspective .

Chairmen who added digital NEDs also report getting more than just technology insights . They round out the diversity of opinion on the board as well .

“We sought depth of experience working within the digital space,” says Henning Boysen of two appointments he was involved with . “Both NEDs bring substantial commercial understanding together with their digital savvy . Both have multinational business experience . They have introduced a new dynamic to the board .”

“You need variety ... You need an international and functional mix. And you need a diverse board to support a digital NED joining.”

- laura Wade-gery, Executive director, Multi-Channel E-Commerce, Marks & Spencer


Where do you find digital NEDs?

Having decided that a digital NED would be a valuable contributor, how then does a board find the right person?

David Grigson, Chairman at Trinity Mirror, neatly describes the candidate pool . “There’s a great shortage [of digital NEDs] . This is a moment in time when there is a scarcity of qualified people . The big successful pure-plays [are major sources] — Amazon, ASOS, Google, etc . But only this morning I was looking at a CV of someone from [a large retailer] with very established digital credentials .” Sometimes the challenge is to find people who are ‘good enough’ in some respects, but priceless in terms of their relevant digital expertise .

With the most qualified candidates in high demand, chairmen need to think broadly to ensure their search covers all possible sources: mobile, hardware, software, some retailers with strong e-commerce platforms . Talent also resides in certain public services, utilities and academia . Searches need to be broader than usual, looking at non-traditional functions for NEDs, exploring internationally, and investigating executives a level or two lower down the organisation than would usually be the norm .

Figure 2

Digital NED talent sources

boards seeking digital nEds typically begin a search by looking at four distinct talent pools.

E-commerce• Multi-channel retailers (e.g., Tesco.com, Carrefour.com, Pixmania.com)

• Internet e-commerce (e.g., Amazon, eBay)

Pure-play Internet companies• Search and information content (e.g., Google, Yahoo, AOL)

• Social media (e.g., Facebook, Zynga, Twitter)

Agencies• Digital agencies

• Consultants and advisory services

• Venture Capital / Private Equity (e.g., Accel Partners, Seedcamp)

Platform providers and intermediaries• Payment (e.g., PayPal)

• Hosting (e.g., Rackspace, Telecity)

• Security


Profile of a digital NED

As noted above, digital NEDs are frequently younger and less likely to have experience on the board of a listed company . “They also come with a fresher, untarnished, unpolluted view of the corporate board world that is really helpful,” observes David Grigson .

Still, the addition of digital NEDs can require some adjustment in the boardroom . “They tend to be more edgy, wet behind the ears,” says Gareth Davis . John Barton, Chairman of Next, Catlin Group and easyJet, notes that “they have lots of energy and don’t like to sit through a long board meeting .”

Fru Hazlitt, NED at Betfair, cautions that youth and digital experience alone don’t add up to the strategic thinking required at board level . If appointees “don’t understand the complexities of running a business in a public environment, it can be very difficult and frustrating for the board — but more importantly, for them . The public company environment can take a bit of getting used to and most certainly will not suit everyone .”

Insight, however, isn’t age dependent, points out Nancy Cruickshank . “It is about mindset — do they live by the code? Do they use Facebook, Twitter etc .? Is it part of their core? You need to be experiencing it to have true insight . The difference is that digital NEDs genuinely embrace technology .”

Over time, more of these youthful digital company executives will gain board experience with their own companies prior to joining outside public boards . This is already true to some extent: although chairmen are appointing some younger NEDs, the most sought-after group remains the digital executives who‘ve operated at very senior levels within their own companies .

“The public company environment can take a bit of getting used to and most certainly will not suit everyone.”

- Fru Hazlitt, nEd, betfair


Motivations and working style

This emerging group of talent also has a different culture and set of motivations . Their working style is usually distinctly collaborative, creative, and entrepreneurial, which can work well in a board setting . Claudia Arney, NED at Halfords and TelecityGroup, points out that “they are usually confident and used to working with diverse skill sets and virtual teams to get things done .”

One concern is that their perspective can be too narrow and operational . “They typically are only interested in digital . On every topic the digital NED asks ‘What does it mean for digital?’”

That might shift over time as whole boards become more conversant with digital aspects of business . But for now, notes Lorraine Twohill, it makes sense that a board draws on the individual strengths of each NED so that, collectively, it arrives at the right decisions . Digital NEDs know where their input will be most valuable . “I tend to contribute on the strategic issues rather than financial and governance ones,” she says .

Still, digital NEDs are rarely passive; they want to feel that they are making a real difference . “A feeling of forward momentum is important, a feeling that you are having an impact,” says James Bilefield . Digital NEDs, for their part, say they would need to ‘be passionate’ about a company and have first-hand experience of its products and services before considering joining its board .


Why become a digital NED?

Digital experts who have taken NED appointments say they are motivated by the opportunity to learn about board dynamics, gain insight into governance, and expand their knowledge . “I haven’t consciously joined boards to bring digital experience, but because of the challenge, the breadth of stretch,” says Carolyn Fairbairn . ”It’s about being more than a single-trick pony .”

Blake Chandlee, Vice President of Global Partnerships at Facebook and a NED at Modern Times Group, had similar motivations . “I was interested in understanding the kind of decision-making taken at board level, including M&A decisions, and generally how a board sets strategy,” he explains . For executives whose experience is only in the technology realm, a board appointment can provide a new perspective . “I want to develop my understanding and expertise outside of my strengths,” says Andrew Fisher, Executive Chairman of Shazam Entertainment . “I’m particularly interested in understanding how digital supports a different company’s strategy and complements existing channels .”

Several digital NEDs noted that, coming from start-ups and rapidly growing businesses, they had little or no background in capital markets, businesses in decline, or in company turnaround — things they might be exposed to on a board . A NED role can also facilitate learning about new geographic markets, adjacent industries, unfamiliar sectors, and rules and regulations for listed companies .

New digital NEDs frequently point out the respect they hold for more experienced board members . They recognise that cultural differences may exist, and are willing to adapt their behaviour as needed to make a positive contribution to boards, including those of more traditional companies .

“I’m particularly interested in understanding how digital supports a different company’s strategy and complements existing channels.”

- andrew Fisher, Executive Chairman, Shazam Entertainment


But they are also highly selective, and weigh NED opportunities carefully . Nikesh Arora, Senior Vice President and Chief Business Officer of Google, who is also a NED at Colgate-Palmolive and Bharti Airtel, takes into account the reputation of the company and its general health; its industry sector; the composition of the board and personal fit in that group; the relationship between the chairman and the CEO; and the board and CEO’s seriousness in seeking Internet skills .

The payoff for landing the right board seat can be significant . NED experience is almost never a negative . It can lead to a plural career, or aid in securing CEO or senior executive roles .


Integrating digital NEDs and maximising contribution

Digital NEDs are appointed precisely for their distinctive experiences and point of view . And yet those very differences potentially can create misunderstandings and miscommunication or, in extreme cases, such a mismatch of expectations and personal styles that the appointment fails .

We asked both chairmen and digital NEDs about the issues they had faced and how they dealt with them . Many of their observations and conclusions apply equally to any appointment through which boards seek to diversify their composition .

“It’s harder to integrate younger NEDs,” acknowledges Chris Gibson-Smith, but he sees a significant upside . “The closer they are to being a serving executive — that is, sufficiently recently ‘out of the swim’ — the more current their knowledge and the better their challenge .”

Culture

Every board has its own culture that is handed down and then shaped by the current chairman . But underpinning it is a shared expectation of what boards do and how they go about their business . For most boards, sound financial management and good governance are uppermost on the agenda . Corporate boards must balance the need to move rapidly to exploit commercial opportunity with prudent, considered strategies protecting corporate balance sheets and reputations .


“For entrepreneurial young digital NEDs, traditional business cultures may contrast even more markedly with their business experience to date,” says Nikesh Arora . “In every case you encounter a different culture

and you have to fit in — orientation and familiarisation programmes for new NEDs are essential . Companies who appoint NEDs for their digital and Internet skills also look for their overall understanding of business .”

Cultural assimilation can be equally difficult for

experienced NEDs transitioning into smaller, entrepreneurial companies . One veteran NED, reflecting on his initiation to such a board, comments that culture can cut both ways . “When I joined the board they made me go through hell . It was all about cultural fit,” he remembers .

Those immersed in digital culture, which is so largely defined by instantaneous communication, have an expectation of continuous involvement and a faster pace overall than generally reigns in corporate boardrooms . And although that may not be the norm now, it may be the wave of the future . “In today’s world, board directors need to be online and contactable twenty-four hours a day,” says Jim Leng, European Chairman at AEA Investors . “There is no room for those unwilling to embrace new communications tools and methods, and the vast efficiencies they can bring .”

Ironically, for these always-online NEDs, specific time demands can also be a significant hurdle . “Digital experience on boards is utterly vital but the problem with bringing people from California is that they are not used to as many board meetings as most UK companies hold,” observes Robert Swannell, Chairman at Marks & Spencer .

“In every case you encounter a different culture and you have to fit in — orientation and familiarisation programmes for new NEDs are essential. Companies who appoint NEDs for their digital and Internet skills also look for their overall understanding of business.”

- nikesh arora, Senior Vice President and Chief business officer, google


It’s the highly structured nature of interaction that strikes Alex Mahon, CEO of Shine Group and a NED at Ocado, as the greatest difference . Digital executives often operate in very flat and informal structures in their day job . “The absence of contact between meetings and lack of feedback seems odd,” Mahon says . “Normally at work you chat to colleagues about how things are going . Generally you don’t get this as a NED .”

This does not imply there can be no change to minds . One interviewee explains how his fellow director took a proactive approach . “She has integrated very smartly,” he says . “She has even started taking board members to (and hosting a board meeting) in Silicon Valley to ‘see it from the inside’ .”

So what are the key steps in bridging this cultural divide?

Defining the role and expectations

There is an inevitable tension between providing that special expertise for which the digital NED has been recruited, and contributing to the work of the board more broadly . It is up to the chairman to set the ground rules and explain expectations in a constructive manner .

“The chairman needs to ensure that the digital NED communicates in an appropriate manner and that they are not so deep in their subject that other board members cannot understand them,” advises Andrew Fisher . “The digital NED needs to recognise that digital is not the only subject where they can contribute .”

Since many digital NEDs will be full-time executives, with relatively little exposure to plc Boards, the strategic, ‘hands off’ nature of board involvement can be difficult to grasp at first . “The biggest thing is understanding that you are non-executive rather than executive . You are not running the business . You have to ask the questions so that the


big issues are addressed, but understand the boundaries .” says Lorraine Twohill . In other words, the digital NED will be expected to probe on technology-related issues as they relate to strategy, but without descending into detail . Once any technical jargon enters the conversation, the board switches off, warns Claudia Arney . It is a fine balance .

More challenging for new digital NEDs may be participating in discussions of issues outside their sphere of expertise . Jonathan Flint, Chief Executive of Oxford Instruments, advises digital NEDs to have confidence, engage, and ask the key questions . ”People are shy about showing their ignorance, but the basic questions like ‘Is this going to work?’ ‘What’s the track record of the team?’ can be the most pertinent .” Sometimes over familiarity with a topic is a weakness; a fresh perspective can reveal flaws, particularly when the business environment is changing and old assumptions no longer hold .

Giving voice to digital issues

Several respondents raised the challenge of being a lone voice on digital issues . “It’s unfair only to bring one digital NED onto a board,” says one veteran executive and NED . “It’s like being the token woman . You can’t change the culture alone .”

The risks of a single appointment go beyond simply not being heard . The solo digital NED is also more likely to be pigeonholed as a subject specialist . “In not-so-modern businesses, the scale of the challenge is

even greater so one superhero will not be enough to fix it,” observes Brian McBride .

Digital covers so many aspects, cultural and technological, that one individual cannot be

expert in them all . For a company in the midst of a digital transformation, Carolyn Fairbairn suggests that three distinct areas of expertise may be needed: the impact of technology on customer behaviour; impact on the business model; and organisational change required to instil a ‘digital’ corporate culture .

“In not-so-modern businesses, the scale of the challenge is even greater so one superhero will not be enough to fix it.”

- brian Mcbride, Chairman, aSoS and Computacenter and nEd, bbC


Nancy Cruickshank has seen a board go from one digital voice (hers) to two, and says that the change has enabled a deeper understanding of digital issues at board level and has ensured that ideas are debated more fully and examined more rigorously .

David Grigson is a dissenting voice, however, perhaps reflecting the greater confidence of a board veteran . “One person is often sufficient to ask the right questions . Keeping executive management’s feet to the right fire is extremely helpful, but you can’t lose sight of the other important issues that the business faces .”

The digital dependence of the business strategy will determine a company’s appropriate board makeup . But one answer may be to raise the level of understanding of other board members, so that the digital NED’s voice is heard more clearly . “Where is the training that could exist for boards on this digital point?” bemoans one digital NED .


Effective induction

A good introduction to the company increases the effectiveness of any new board member, and digital NEDs are no exception . Korn/Ferry’s Class of 2012 study of new FTSE 350 NEDs found widespread support for more extensive inductions for appointees, particularly for those taking on their first NED role . They asked for greater interaction with other directors and senior managers throughout the induction process; improved documentation and briefing packs; and simply more time dedicated to induction .

For those digital NEDs with no board experience, let alone on listed companies, a thorough process is key to ensuring they are up to speed on the business and ready to engage .

“Make sure they spend time with the company through a proper induction programme,” advises James Bilefield . “Encourage them to get more involved in the broader business, visit plants, locations, offices, and countries . Train them . They have strengths in some areas but will need help in others . If you put the effort in at the beginning you will get more out at the end .”

Claudia Arney, though, has seen inductions take an unfortunate turn . “Inductions for digital NEDs tend to be geared to connecting us to

technical people, but it is not helpful to be pigeonholed too early,” she says . “We need to understand the broader strategy, the whole business and its pressures and constraints . Then we can plug into the digital issues .”

Training for digital NEDs should instead fill in their

gaps . For those without previous financial or governance experience, formal NED training on statutory duties under company law is particularly valuable, adding to both competence and confidence in the boardroom .

“Inductions for digital NEDs tend to be geared to connecting us to technical people, but it is not helpful to be pigeonholed too early. We need to understand the broader strategy, the whole business and its pressures and constraints. Then we can plug into the digital issues.”

- Claudia arney, nEd, Halfords and Telecitygroup


Once a digital NED is briefed and engaged on the full range of board activities, that’s the time to extend an ear to the executives overseeing digital aspects of the business . “You need to be proactive,” says Nikesh Arora . “At least show them you are willing and approachable . Spend time with them as appropriate so that they feel listened to .”

Orchestration

Even if suitably briefed on the role, the company, and their responsibilities, digital NEDs need the continuing support of their chairmen during their first board meetings, or even longer . By setting the agenda, controlling time, and establishing the tone, the chairman can ensure that the digital NED is integrated into the full range of board discussions .

The digital NED may also need help understanding board dynamics and guidance on the best approaches for taking the lead on critical digital issues . He or she may also benefit from advice on navigating the reading material . In addition to providing help from the chairman, assign another NED to serve as a mentor, suggests David Chance .

Just as digital technology can revolutionise businesses, the appointment of a digital NED presents an opportunity to modernise boards and their operation . This puts even greater emphasis on the need to get the appointment and induction right . A bad fit, an unready board, a patchy induction, ill preparation for any cultural differences — any of these can jeopardise both the board’s effectiveness and the business’ ability to realise its potential share of the $4 .2 trillion Internet economy .


Conclusions

Boards are steadily drawing a broader range of skills and professional backgrounds around the table . Much of this diversity is being achieved by appointing younger NEDs, many of whom are still active in an executive role and may not have experience on listed company boards . The appointment of digital NEDs specifically, however, is progressing at a pace much slower than the commercial challenges and opportunities of the digital revolution might necessitate .

The size and sector of a company appear to have significant influence on how aggressively those boards pursue digital expertise . Smaller, more entrepreneurial businesses as well as those with direct exposure to consumers — retail, media, food, and FMCG manufacturers — are embracing these new market opportunities . But large traditional companies, at least if gauged by their representation in the FTSE 100, have been slower to add digital NEDs to their board .

On the basis of you don’t know what you don’t know, there needs to be a rapid upswing in the number of digital NEDs so that the strategic issues posed by the digital revolution are exposed and examined . Navigation of this paradigm-shifting change, affecting the way we do everything, cannot be left to the executive alone .

Granted, the talent pool is small at present and it can be more difficult to source candidates because many remain outside traditional listed company networks . First-time NEDs, no matter what their background, often need a more thorough introduction to the company, initial attention from the chairman, and mentoring from other board members


to become fully effective at an early date . The cultural differences with some Internet executives are not to be underestimated, either . Chairmen who have seen the effort through, however, report clear benefits . The board in general becomes more digitally literate, and can assess frankly where the company stands in relation to competitors . Such boards can more properly assess technology-related risks to their strategy and opportunities that might have been dismissed .

Technology-enabled changes are sweeping through workplaces, disrupting business models, and shifting consumer behaviours . In a stagnating economy, identifying the right digital opportunities in fact may be the biggest prospect for growth . Adding a digital NED may be the first step in bringing that transformational change to the boardroom .


ReferencesDean, David, Sebastian DiGrande, Dominic Field, Andreas Lundmark, James O’Day, John Pineda, and Paul Zwillenberg . 2012 . “The Connected World: The $4 .2 trillion growth opportunity — The Internet economy in the G-20 .” Boston Consulting Group . https://www .bcgperspectives .com/content/articles/media_entertainment_strategic_planning_4_2_trillion_opportunity_internet_economy_g20/

Korn/Ferry International . 2013 . “The Boardroom Pulse .” Issue IV . Newsletter to clients, available by request . April 2013 .

Korn/Ferry International . 2013 . The Class of 2012: New NEDs in the FTSE 350. The Korn/Ferry Institute . http://www .kornferryinstitute .com/reports-insights/class-2012-new-neds-ftse-350

Korn/Ferry International . 2013 . “Retail: A National Economic Treasure — The 2013 Survey of Retail Chairmen .” The Korn/Ferry Institute . http://www .kornferryinstitute .com/reports-insights/retail-economic-national-treasure

Korn/Ferry International . 2012 . What makes an exceptional independent non-executive director? The Korn/Ferry Institute . http://www .kornferryinstitute .com/reports-insights/what-makes-exceptional-independent-non-executive-director

Mesenbourg, Thomas L . 2001 . “Measuring the Digital Economy .” US Bureau of the Census . http://www .census .gov/econ/estats/papers/umdigital .pdf

Schofield, Jack . 2013 . “‘We are the 8 percent’ but the city isn’t backing the internet economy, says Saul Klein .” ZDnet . http://www .zdnet .com/we-are-the-8-percent-but-the-city-isnt-backing-the-internet-economy-says-saul-klein-7000012033/

About Korn/Ferry’s Digital Practice

Korn/Ferry completed 230 digital searches last year for both established and high-growth companies . An international team of 40 consultants work together across countries, sectors and functions to develop our understanding, knowledge of and access to the global digital executive and non-executive candidate pool . Korn/Ferry’s leading assessment tools and intellectual property, which are built into our search processes, enable us to provide clients with objective reports of prospective candidates’ strengths and development needs in the competencies required to be successful in their roles .

© 2013 The Korn/Ferry Institute

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