Saturday November 29, 2014

7 Rules for Corporate Governance Success in the Social Age

In addition to all their existing roles, boards now have the added responsibility of shepherding their leaders and organizations into today’s digital world.

We live in a connected world in which more than one billion people use social media and another five billion use mobile devices to communicate, collaborate and do commerce. In business, social, mobile, and cloud technologies are enabling emerging leaders and investors to re-imagine entire industries, companies, products, and services, according to the Kleiner Perkins 2012 Internet Trends Report. This emerging reality is creating unprecedented risks and rewards for corporate directors and shareholders of existing enterprises.

Barry Libert

Barry Libert

The result: It is time for directors to think anew about the meaning of corporate governance in the social age.  In addition to all their existing roles, boards now have the added responsibility of shepherding their leaders and organizations into today’s digital world. Boards that avoid this obligation risk having their organizations fall prey to the speed and might of today’s social networks as they seek corporate reform and accountability. The boards and executives of Best Buy, Kodak, Blockbuster, Hewlett Packard, and Susan G. Komen have all learned this reality the hard way.  So did the 12 nations of the Arab Spring.

So how does a corporate director think anew about his or her role?  First, start with the facts.

  • Social Technologies Change Performance:  Enterprises that fully deploy social and mobile technologies to engage their crowds (customers, prospects, and alumni) in the cloud produce 9 percent more revenues, 26 percent more profits, and a 12 percent higher market valuation than their peers, according to research by MIT and Cap Gemini.
  • Social Technologies Change Engagement:  Less than 30 percent of CEOs use social media according to recent research, despite the fact that more than one billion of their customers, employees and investors do.  Furthermore, The Conference Board and the Rock Center for Corporate Governance at Stanford University report that 93 percent of boards do not use social intelligence to make informed decisions about their networks’ sentiments or engagement.
  • Social Technologies Change Investor Relations:  Finally, research at University of California at Berkeley and MIT reveals that social media is a leading indicator of stock price movement.  As such, directors of publicly traded companies need to be receiving this information in real time or risk not knowing what their institutional investors know and how they will act based on insights derived from social and cloud networks.

Given the above, there are seven rules for corporate governance in today’s connected age:

1. Rethink Strategy
Boards need to align their strategy with where value is found today.  In the industrial age, value was based on the amount of an organization’s physical assets and manufacturing capabilities. In the services age, it was based on how many people the firm employed and its billable hours. In the information age, it was software code and data.  In the social age, value is a function of the size and vitality of an organization’s network and how well it is connected both inside and outside the company.

Corporate strategists are thinking anew about how to use technologies and people with common interests and passions to improve their performance.  For example, Unisys created  “mission-critical” computing environments.  It did this by leveraging social technologies to significantly improve productivity, collaboration, and knowledge-sharing among its 20,000 global employees. The result: Unisys launched 10 social circles based on “communities of excellence.” Over, time more than 16,000 employees joined to solve technical challenges, answer questions, and share relevant content and company best practices.

2. Rethink People
As corporate directors, board members need to fully understand that an organization’s next big idea may come from anywhere and anyone. As such, corporate directors need to ask their management teams and HR directors how they are leveraging the collective wisdom of not just their own employees, but also the organization’s crowds.  From them, companies cannot only find solutions to their most difficult problems and, with them; companies can create new products and services.

HR departments are developing new thinking in a growing number of companies.  For example, original programs at Starbucks and Dell look beyond their own people for innovative ideas.  In addition, Red Hat has shaken-up the software industry by partnering “with the world” (and not just their internal R&D department) to create new solutions. It even crowd-sourced its own corporate strategy. Another great example is Apple. Apple inspired 345,000 members of its crowd outside the organization to develop apps that deliver billions of dollars of revenues and market value to the company.

3. Rethink Processes
Yesterday, companies focused on their internal processes to maximize execution and improve efficiency. That “inside-out” focus worked in a supply-constrained world in which customers had few choices.  But today, consumers can buy from anyone and everyone, both online and off. As such, boards need to ask management how they are shifting their focus from inside-out to outside-in to drive growth and innovation.  And for good reason, social networks are most often outside the company, and to tap into their wisdom, an organization needs to shift its focus from inside to outside. Without helping management teams think anew about their business processes, the future may be at risk.

Based on the increasing size and power of social networks, Nike reinvented its marketing processes to outside-in in order to capture the capabilities and insights of their fans and followers.  To do this, Nike built Nike Digital Sport in order to develop products that allow the firm to be with and where its customers are 24/7/365. This became the focal point of transforming Nike into a social company that has dramatically increased its revenues, while cutting expensive television advertising costs. The result has been a large increase in earnings before interest, taxes, depreciation and amortization, according to Fortune Magazine.

4. Rethink Technology
Technology is not just about IT policies; it is also a strategic asset that can be leveraged for success. Boards need to play a prodding, if not active, role in ensuring that management think anew about its technology strategy and how it can add value and minimize risks by actively integrating today’s social, mobile, cloud, and big-data technologies into everything it does.  Research from Cap Gemini shows that social enterprises (versus traditional businesses) shift market and operating risk to other less-tech savvy companies that still think the connected and web world will not affect their business models.

For example, on Jan. 10,  Kenneth I. Chenault, CEO of AmEx, announced that the company would change its travel service business strategy and investment in technologies, cutting 5,400 people as it reallocates its capital to online initiatives. In making this announcement, Chenault said that the travel industry had been “fundamentally reinvented” by technology.   In support of this change, AmEx noted that more than half of its corporate customers book trips using online e-commerce sites and their mobile phones rather than call an Amex Agent. “Because customers are using tools directly online [using mobile, social and web technologies], we need less customer-facing people, such as travel counselors who take reservations and bookings,” said Kim Goodman, president of AmEx’s global business travel unit.

5. Rethink Leadership
The concept of traditional, top-down management is quickly losing steam in a world in which everyone has a voice—including customers, employees, partners and investors. Social technologies allow people to say and publicly share whatever they want about an organization, its leadership, and culture.  In the context of increasing demand for accountability, transparency and open approaches involving all stakeholders, corporate directors need to think anew about their board composition and competencies.  Although many have done a good job diversifying their board, most still lack members with today’s technology and strategy skills according to research by Spencer Stuart.

To make sure that his board contained an expert in social and mobile technologies, Harold Schultz, Starbucks chairman, announced on Dec. 14, 2011, that Clara Shih, CEO of Hearsay Social, was elected to the Starbucks board of directors.  “Clara is a true technology leader….We could not be more thrilled about the social-media expertise and ideas Clara will bring to our business as we continue to amplify the online experience and interactions Starbucks has with our customers, partners and communities.”

6. Rethink Finance
Boards and leaders hold a number of historical and framing biases that make it a challenge for them to see and invest in today’s “intangible” and unmeasured sources of value, such as social network membership and intelligence. This is especially critical given that less than 25 years ago, physical and financial assets constituted about 80 percent of corporate market value. Today, that amount is less than 20 percent, according to research by Ocean Tomo.  As such, leaders need to think anew about their capital reallocation strategies, especially given research by McKinsey that indicates that most companies continue to invest in the same things that they invested in last year.

As corporate directors, it is critical to ask CFOs to go beyond traditional accounting treatments of such valuable intangible “assets” as employees and customers. To ensure that the latent and real value of an organization’s social network is properly presented, directors need better and more complete reporting.  Infosys and others are already creating new measurement and reporting systems that more fully capture the value of their organization and capital allocations to intangible assets.

7. Rethink Governance
The future for boards is less about traditional governance and regulatory compliance, and more about network alignment, capital reallocation to new sources of value and technology, and business model strategies. Looking backward through the lens of financial reporting will only go so far. Today, boards and CFOs require social intelligence about the future desires and needs of their stakeholders. Leveraging real-time data from social technologies and mobile networks offers a more complete view on what is coming next.

Directors and management teams who are questioning whether social media is relevant to their companies should ask Netflix CEO Reed Hastings for his thoughts on the matter. “A 43-word Facebook post Hastings penned in July noting that subscribers had watched one billion hours of video in June made Netflix the subject of a Securities and Exchange Commission probe. The commission is concerned the Internet subscription giant may be violating the Regulation Fair Disclosure rule, or Reg FD, which requires all investors to receive information that could affect company stock at the same time.”  While the debate on this issue is just beginning, boards must be proactive in understanding the critical impact of social media.

Questions to Ask
Corporate directors who are in the process of reviewing their company’s 2013 business plan with their management teams should take a moment and ask the following questions of themselves and their leaders:

  • Social Technology:  How do we view social, mobile and cloud technologies?  Do we see them as simply Facebook, Twitter, and LinkedIn, or do these technologies play an integral role in every aspect of our business?
  • Business Performance:  Are we viewing our next year’s business plan and financial forecasts through the lens of last year’s finances or, more importantly, in the context of todays research by companies like Cap Gemini, Deloitte, and McKinsey?
  • Technology Skills:  Do we have the right board members with the right skills including social, mobile, and cloud experience, to insure our company’s future? In addition, does our management team members have the skills they need to insure success?

The bottom line: Boards need to think anew about their role in the social and mobile world. For corporate directors, there is no time to waste.  Directors must join the social and mobile ranks. New board members must be recruited, and new business models must be fashioned based on these technology realities.  Social enterprises are here to stay and they are faster, better, and more competitive than traditional businesses.

Barry Libert, CEO of OpenMatters, is a technology investor, corporate director, and strategic advisor to boards and their leaders seeking to become great social enterprises. Sally Ourieff is a partner at OpenMatters.

Comments on “7 Rules for Corporate Governance Success in the Social Age”

  • The pervasive influence of technology in modern time cannot be over-emphasised. Directors are not exempted from this influence. In fact, directors must be abreast of technological developments if their companies are to remain competitive. The biggest challenge remains the diversity and frequency of technological changes. Interestingly, that constitute a major distinguishing element between a successful company today and a successful and sustainable company that will be around tomorrow.

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