Reflections on the Impact of the Digital Revolution on Corporate Governance of Listed Companies

Abstract

The new digital technologies (and in particular artificial intelligence, AI) enable many new services that disrupt existing business models. The new business models in turn present new privacy issues and ethical dilemmas, and societal resistance to the excesses of the new data economy is becoming increasingly visible and urgent. It is a challenge for established companies to both drastically innovate in order to remain future-proof and at the same time take social responsibility. The question that now arises is whether our current corporate governance regulation requires adjustment in order to be able to navigate these times of transformation. This is not a strange question, as corporate governance is now transcending the boundaries of strict interaction between the traditional organs of the company (board of directors and shareholders) and is increasingly spilling over into compliance, risk management and responsible entrepreneurship. Under European corporate governance rules, boards are expected to lead a process of change where it is necessary to bring about a change in corporate culture for long-term value creation. Part of the culture of a company is the increasing attention to ethics and to why people act the way they do. To that end, boards must identify good and bad practices and dilemmas that employees encounter in the company, so that they can be trained to strengthen the corporate culture. Research by MIT Sloan CISR (2019) reports that U.S. listed companies that have a digital savvy board show substantially better financial performance. What is a digital savvy board? What are the differences between the old and the new world? What are the new ethical dilemmas and how do you prevent making the same mistakes as Big Tech? Why does innovation fail so often within the existing structures of established companies? If innovation is better achieved in small and agile teams, how does this fit into the command and control structure of compliance-driven organizations, such as financial institutions? Why does the three lines of defence model for risk management insisted on by supervisory authorities has an inhibitory effect on innovation in practice? Is it sufficient that one of the board members has digital this expertise, or do more or even all board members directors have to re- and upskill, as it is called today? How do we ensure a more balanced discussion of the risks of implementing new technologies, which include risks if the company does not innovate? How do we find time and attention in the company for innovation if we already have enough trouble to upgrading or replacing existing IT systems (legacy systems)? How do we balance the ever-greater investments in digitization and developing digital services, potentially undermining our own business model, with our short-term (financial) KPIs and reporting? Do 1-tier boards perform better than 2-tier boards? The author discusses these questions as well as provides solutions how boards can better navigate the digital transformation.