Published: February 09, 2012 in Knowledge@Wharton
With the February 1 announcement of its mammoth public offering, Facebook is basking in the limelight. The $1 billion (in annual revenue) Silicon Valley darling, along with LinkedIn, GroupOn and Twitter, is yet another reminder of the dramatic impact that the social, mobile and cloud revolutions are having on customer communications and shareholder interest. Is it time for boards, and their directors, to reinvent themselves to keep pace? Yes, according to this opinion piece by Barry Libert, CEO of OpenMatters, a company that invests in social technologies and advises boards of directors and executives on the impact of new technologies on corporate governance and enterprise risk management.
Let's start with today's reality. The world has changed but corporate boards haven't kept pace. How do you know? Ask most boards what they monitor and measure at their organizations. There's a big chance that most of them will say they are monitoring and measuring financial results, compliance and legal risks. Then ask them if they monitor and measure the impact of new technologies on their operations, including the social communications between their customers, employees and shareholders, and the answer will most likely be no. And finally, ask them if they know what the risks and costs are of not using these technologies to communicate and collaborate with stakeholders, or having the insight they provide. Once again, the answer will often be no.
What's surprising about such responses is that boards know that solid decision-making is essential to mitigating risks and ensuring the viability of their enterprises. How is it, then, that most of them don't have a grip on the operational value these technologies offer, or the critical "big data" -- about customer sentiment, employee engagement and investor insights -- that they produce? The answer: They're still using corporate governance tools and strategies that were developed in an age that was neither social nor mobile, or ever considered that the "cloud" would exist.
In short, today's corporate directors have the "necessary" skills in terms of compliance and financial performance, but not the "sufficient" skills in terms of strategic or technological know how. Why? Because for years, astute corporate directors believed the tools that companies like Facebook and Twitter offered weren't essential. In their view, these new means of communications were for kids, had little, if any, business value, and created minimal strategic, operational or financial risks. Wow, were they wrong.
Now maybe you are part of the majority of board members who don't use social media. Maybe you believe your board and organization don't need new skills taking new technologies into account because they don't apply to your industry. Or maybe you believe your customers, employees and shareholders aren't social or aren't mobile. Think again.
As you read this, there is a good chance your customers and employees are sharing their knowledge about your organization and its products, services, research and culture with customers and employees at other companies. If you don't believe me, check out employee feedback on Glassdoor.com or Amazon's online price comparison tool. And remember that the corporate directors of Kodak, Blockbuster and Borders also possessed the necessary, but insufficient, skills to compete in a social and connected world. Further, ask them how their lack of digital technologies expertise impacted them.
The good news is that if you are among the majority of corporate leaders and think you are ill equipped to deal with today's technology realities -- as various recent surveys suggests -- it's not too late to reinvent corporate governance and your board. If you don't want to go the way of Borders and the like, you and your fellow corporate directors have the chance to update your skills and build a high-performance board. But to accomplish this goal, corporate directors need to add deep technology and strategy knowledge to existing Sarbanes Oxley and financial reporting expertise. To get started, below are seven steps you and your board can follow to get a handle on today's enterprise risks.
Step 1: Strategy
Build and foster your employee and customer social networks. Good products and great service are no longer enough in a flat world in which new competitors emerge everyday from around the globe to steal your customers and prospects. Success today requires fans who sing your praises to their friends and to other fans, as well as employees who think your company, and its culture, are top-notch. Achieving that requires vibrant social networks that are aligned with your business.
Action: Have your management team put together a presentation for the board outlining their ideas for creating and fostering customer, employee and partner social networks that can help mitigate risks and generate returns in the near and long term. (Watch theCommoncrafts slide show on why social networks get things done better.)
Step 2: People
Recruit corporate directors who understand today's technologies. Because we are moving from an industrial and information age to a social age in which everyone uses smart, mobile devices to connect with others, directors need to embrace social technologies and the data and analytics they generate. According to Deloitte's 2011 Board Practices Report, 9% of boards say they have IT expertise and 1% or less have members who have CTO or CIO experience. Without more of that expertise and experience, a board will have skills that are behind the times, no matter how proficient in Sarbanes-Oxley they are.
Action: Rebalance your board's skills and recruit corporate directors that have the strategic competencies, technological know-how and big data expertise derived from operating in the social and mobile world. Directors need to understand more than just core technologies to help their enterprises reduce the risks related to customer churn, employee unhappiness and shareholder activism. (Read "The Digital Director" from Spencer Stuart on why new board recruitment strategies are critical.)
Step 3: Processes
Implement open, collaborative processes to innovate and grow. Every product and service ever created is the result of customer demand or employee creativity. But now, open innovation, enabled by social technologies, is a far more effective approach for capturing the knowledge of customers, employees and partners, whose expertise is everywhere. By building "crowd-sourcing" expertise as a board, development risks can be mitigated as your company learns to harness the energy of your empowered, connected ecosystem.
Action: Find out how your management team is harnessing the power of crowds and what collaborative technologies they are using to gain insights from the people the company serves and who serve you, including customers, employees and partners. (Read McKinsey Quarterly's "Wiring the Open-source Enterprise.")
Step 4: Technology
Require directors and executives to embrace today's technologies. Facebook used the Internet to assemble an enormous customer base at a low cost. Apple built one of the most valuable companies in the world by getting mobile and going to the cloud. Board members can't appreciate the value of these technologies unless they use them, otherwise they will unknowingly create risks. Ignorance in this case is not bliss.
Action: Equip the board and the executive team with social monitoring tools, smart devices and collaborative technologies so that they experience these technologies directly. (ReadMcKinsey's quantitative research on how leaders are benefitting from web 2.0 technologies.)
Step 5: Finance
Measure and manage what matters to insure success. More and more, financial metrics are not enough to help a board understand what is really happening in their businesses and where the value is created or risks reside. In today's Facebook world, enterprise value (E) increasingly equals the number of networks and size of each network (Mass) times the insights exchanged among network members (Content) and the speed of this exchange that is enabled by technology (squared). Einstein was right, even if he wasn't an economist: E =MC2.
Action: Boards need new key performance indicators, including customer sentiment, employee engagement, partner interaction, network size and investor emotion. Turning a blind eye to these metrics and insights is not an option since financial metrics don't paint the full picture of risks or potential rewards. (Find your social business index on Dachis Group's site.)
Step 6: Values
Make business personal. After all, it is the social age. Not long ago, employees were loyal to the core as long as the monthly paychecks kept coming. Customers were also loyal, especially when they had a limited choice of products and services. Not anymore. Today's employees are empowered and interconnected and consumers comment online on myriad products and services. Business is personal in today's social world, and peer advice carries more weight than corporate leadership does in our decision-making.
Action: Seek leaders who embrace today's new leadership skills involving emotional (EQ) and social competencies (SQ). The old skills of PQ (command and control) and IQ (intellectual power) are no longer sufficient. (View Dan Pink's video on what employees really want and need to achieve greatness.)
Step 7: Rewards
Implement recognition systems that motivate all your stakeholders. Apple has shown the power of creating a network of participants to help create, market and sell new products and services faster and better than if it worked alone. At its App Store, you'll find more than one billion applications being sold by independent developers, who share their revenue with Apple.
Action: Yoda of Star Wars said, "Do or do not. There is no try." If you want your board to serve investors by delivering good returns on the capital that they have provided, look at new compensation and reward systems for customers and employees. Ask executives to review Apple's approach and see if it makes sense for your company to consider. (Read Pew Research Center's report on the power of social media within enterprises.)
Having spent the last decade investing in social media and open-innovation companies that now manage 15,000 social networks for 350 brands, I understand why Facebook was able to build a company with nearly one billion customers in less than a decade. The simple and sad truth is that corporate directors didn't prize their relationships and as such they ignored or underinvested in their stakeholders' desires to connect, communicate and collaborate. It's also clear why Apple became such a valuable company: People the world over want their knowledge and relationships to be as mobile as they are.
Whether at a for-profit, not-for-profit or government organizations, all corporate directors need to understand the risks of not being social or mobile or operating in the cloud. More important, companies like Facebook and Apple are setting the foundation for great corporate governance and the skills your board needs to compete when 1.2 billion customers are connected. If your board wants to mitigate risks and deliver shareholder value, they need the skills that are both sufficient and necessary. There's no time to waste in today's social, mobile and cloud world.