Hilb, Governance of Digitalization, 2. A.

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Michael Hilb (Editor)

Governance of Digitalization The Role of Boards of Directors and Top Management Teams in Digital Value Creation

2nd edition

Haupt Verlag

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2nd edition: 2018 1st edition: 2017 Bibliographic information published by the Deutsche Nationalbibliothek: The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available at: http://dnb.dnb.de ISBN 978-3-258-08096-3 All Rights reserved.

Copyright Š 2017 Haupt Berne Any kind of reproduction without permission of the owner of copyright is not allowed.

Cover design: Daniela Vacas, CH-Berne Cover illustration: spainter_vfx/Shutterstock.com Typesetting: Die Werkstatt Medien-Produktion GmbH, D-GĂśttingen Printed in Germany www.haupt.ch

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Introduction It has been less than a year since the first edition of the book was published. Within this short period of time, the topic has become even more relevant as many of the developments described in the book have accelerated and are increasingly shaping the agendas of both boards of directors and top management teams.

When we discussed and decided to declare “governance of digitalization� as the topic of the year of the International Center for Corporate Governance, we were aware of the timeliness of the topic, judging by the extensive feedback we received, but we did not know where the journey might take us. In that sense, our journey has been similar to the journey many boards of directors and top management teams take when they embrace the opportunities and challenges of digitalization: a high degree of uncertainty as to where it will take them, mixed with a high degree of expectation and hope that it may solve all of their problems.

We have been privileged to find many co-travelers on this journey to shed light on the multifaceted topic of governance of digitalization. While both topics, that is, corporate governance and digitalization, are highly complex on their own, combining them in a way that made sense was an even greater challenge, which a group of executives, scholars, and thought leaders embarked upon jointly. We had the opportunity to share our ideas at various occasions throughout 2016, e.g. at the Partner Network Meetings of the International Center for Corporate Governance on June 3 and November 11, at the EIASM Research Workshop on Governance of Digitalization at Bocconi University, Milano, Italy on October 28, and at the Board Seminar on Governance of Digitalization held in Zurich, Switzerland on November 28.

This book is the result of all of these interactions and individual research projects, containing 12 perspectives on the fascinating topic of governance of digitalization, bringing together viewpoints from different disciplines, including business, law, and information technology, and from business leaders (e.g., from digital companies like Evernote or Haufe-umantis), academics (i.e., from leading universities across Europe), and thought leaders (e.g., from the World Economic Forum).

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The 12 chapters are structured along four dimensions, providing a comprehensive view on governance of digitalization: 1. Providing strategic direction for digitalization (keep it strategic) 2. Controlling for outcomes of digitalization (keep it controlled) 3. Promoting the culture of digital transformation (keep it integrated) 4. Adapting the digital approach to the context (keep it situational) We hope you find this an interesting read, and we look forward to learning your views on this fascinating topic.

Prof. Dr. Michael Hilb

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Table of Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part A: Providing Strategic Direction for Digitalization (Keep it Strategic) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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A.1 Toward an Integrated Framework for Governance of Digitalization (Michael Hilb, University of Fribourg and DBP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

A.2 The Fourth Industrial Revolution as a Strategic Narrative for Board-Level Discussions on Digitalization (William Lee Howell, World Economic Forum) . . . . . . . . . . . .

A.3 Managing Digital Transformation at the Board Level (Beat BĂźhlmann, Evernote) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part B: Controlling for Outcomes of Digitalization (Keep it Controlled) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B.1 Digitized Companies and the Law (Florian Moeslein, University of Marburg) . . . . . . . . . . . . . . . .

B.2 Digitalization Decisions at the Board Level (Roland MĂźller, University of St. Gallen, University of Berne, and ME Advocat) . . . . . . . . . . . . . . . . . . .

B.3 Mastering Cyber-resilience (Laura Georg, Norwegian University of Science and Technology) . . . . . . . . . .

Part C: Promoting the Culture for Digital Transformation (Keep it Integrated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C.1 Digital Forms of Applying Traditional Leadership Styles: How Social Software Brings Transformational Leadership to Life (Andreas Hesse and Marjo-Riitta Diehl, EBS University) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 C.2 Employee Empowerment in the Digital Age (Hermann Arnold, Haufe-umantis) . . . . . . . . . . . . . . . . . . . . . 71 C.3 Digital Board Audits (Martin Hilb, International Center for Corporate Governance) . . . . . . . . . . . 77

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Table of Contents

Part D: Adapting the Digital Business Approach to the Context (Keep it Situational) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D.1 Governance of Open Government Data Ecosystems (Liselot Danneels, Stijn Viaene and Joachim Van den Bergh, Vlerick Business School) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 D.2 Paradoxes in Crowdsourcing: Balancing the Pressure to Adopt Amidst the Hurdles of Implementation (Gail Maunula and Titiana Ertiรถ, University of Tuku; Kirsimarja Blomqvist, Lappeenranta University of Technology) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 D.3 The Co-evolution of Digital Ecosystems: Who Wins the Battle for Global Dominance in the Digital Space?

(Michael Hilb, University of Fribourg and DBP) . . . . . . . . . . . 108

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Part A: Providing Strategic Direction for Digitalization (Keep it Strategic)

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A.1 Toward an Integrated Framework for Governance of Digitalization Author Prof. Dr. Michael Hilb is Founder and CEO of DBP Holding Ltd., a global business group with a focus on developing international digital businesses. He was previously Vice President, Group Strategy and Digital Business at DKSH, a USD 11 bn market expansion services provider with focus on Asia, overseeing its international digital business and platform operations. He is Titular Professor at the University of Fribourg, Switzerland, lecturing strategy, entrepreneurship, and digital business at universities in Europe and Asia. He is member of the Supervisory Board of IMP-HSG and the Board Foundation as well as the Digital Advisory Board of Lapp Group and Code_toGo.

Abstract Governance of digitalization is top on the agenda for many corporate decision makers. The inherent high level of uncertainty and the dynamic nature of digitalization call for a comprehensive framework that will help both boards of directors and top management teams to navigate the fascinating space of digital opportunities and challenges. The GEAR framework introduced in this article offers such guidance by spelling out the key dimensions of digitalization, that is, governing, enabling, amplifying and realizing digital value creation, and providing option spaces for corporate decision makers along each of these dimensions, allowing them to develop realistic expectations about the impact of digitalization on existing or new businesses.

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Part A: Providing Strategic Direction for Digitalization

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The Case for an Integrated Perspective on Governance of Digitalization

1.1 Introduction In the ongoing debate on the impact of digitalization on business, the history of this phenomenon is often overlooked. Digitization goes back to the 1950s, when the binary nature of coding started to change the approach to information storing, sharing, and computing. It was not until the 1990s that the first wave of the digital revolution arrived in the mainstream economy, leading up to the infamous dot-com bubble that burst in the early 2000s. Fifteen years later, we have observed what can be called the second phase of digitalization.

Its impact goes beyond the IT and communication industry, which was mainly affected in the first wave, with the emergence of many new companies disrupting entire industries.

To better understand the implications for corporate governance, the distinction between what we call Digitalization 1.0 and 2.0 is important for the following reasons: First, history always holds valuable lessons that should not be ignored. Second, deriving the appropriate lessons to be learned is pivotal to understanding the common and distinct aspects of a phenomenon. And third, the exuberance of the first wave should serve as a strong reminder to link expectations with reality.

This all calls for an integrated perspective on the governance of digitalization: a) Taking into account the impact of both Digitalization 1.0 and 2.0 b) Viewing governance as an inclusive process involving various decision and execution bodies both inside and outside the organization c) Linking the key business questions (i.e., why, what, and how) to address the expectation reality gap

1.2 This Time is Different ‌ Really?

At first glance, Digitalization 1.0 and 2.0 look very similar: a high degree of expectations for a new technology that is said to change everything, leading to skyrocketing valuations of new companies and hyped expectations of gains in productivity and economic value creation, which, in turn, led to an economic bubble that burst at the end of the first digitalization wave. At the same time,

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Digitalization 1.0 has profoundly changed how companies operate and how consumers behave, with version 2.0 likely to have an even more profound impact. So how do they differ?

Digitalization 1.0 was based on the simple assumption that analog content and ways of communication can be digitized (Negroponte, 1995). As a result, content-driven industries, such as media, entertainment, or communications, and transaction-heavy sectors, such as commerce or trading, have changed dramatically; digitized transactions and interactions led to gains in efficiency and effectiveness, resulting in optimized processes and product innovations. At the same time, data security and safety were the major risks companies were forced to deal with.

Digitalization 2.0, or as other frame it Industrialization 4.0 (Schwab, 2015), goes beyond simple digitization and entails the automation of many cognitive tasks (Brynjolfsson & McAfee, 2014). In that context, the business activities impacted by digitalization are not limited to transactions and interactions but extend to core management activities. For instance, coordination or steering business decisions are driven through machine learning and artificial intelligence, potentially leading to the substitution of human capital from lowskilled jobs to managerial professions. The result is likely to be a substantial transformation and disruptions of entire industries, leading to a new risk enviNEU ronment in which companies must push for cyber-resilience (see Figure A.1.1).

A.1.1 Digitalization 1.0 and 2.0beginning in Comparison Some even see in Digitalization 2.0 the of a new Renaissance (Golding & Kutarna, 2016).

Digitalization 1.0

Digitalization 2.0

Transactions Interactions

Activity focus

Co-ordination Steering

Efficiency Effectiveness

Value drivers

Artificial intelligence Augmented reality

Optimization Innovation

Opportunities

Transformation Disruption

Risks

Cyber-resilience

Data security and safety

Figure A.1.1: Digitalization 1.0 and 2.0 in Comparison

Hilb 2016

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Part A: Providing Strategic Direction for Digitalization

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The GEAR Framework for Governance of Digitalization

The proposed framework for governance of digitalization builds on the promises and risks offered by Digitalization 1.0 and 2.0 and integrates four key dimensions as seamlessly and interdependently as the function of gears: They can only deliver the desired result if all gears are in motion and optimally tuned to each other. The speed is determined by the slowest moving gear, and a significant level of experience in engineering is needed to construct the engine; oil and good care are also required to maintain it. In the end, all activities are geared toward one objective, i.e. digital value creation.

The four GEAR dimensions are as follows (see Figure A.1.2): Governing digital value creation: Who is involved (and in which capacity) in the direction setting, development, decision, deployment, and detection process when it comes to strategic moves related to digitalization?

Enabling digital value creation: Why do companies want to get involved in digital business activities? What do they expect from this move?

Amplifying digital value creation: What is the impact of such a move on the business and industry logic? Does it fundamentally change the underlying logic, or does digitalization simply add another opportunity?

Realizing digital value creation: How do companies execute on a defined NEU direction fromGEAR ideationFramework to implementation?

What are some A.1.2 The for Governance ofof the pitfalls to overcome along the way?

Digitalization Governing Digital Value Creation (DVC) Direction

Decision Development

Enabling DVC (Why)

Detection Deployment

Amplifying DVC (What)

Realizing DVC (How)

Digitalization 1.0

Interactions

Insights

Process optimization

Product innovation

Creativity

Community

Instructions

Intermediation

Platform disruption

Pipeline transformation

Continuity

Commerciality

Digitalization 2.0

Figure A.1.2: The GEAR Framework for Governance of Digitalization

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2.1 Governing Digital Value Creation Governance, the first gear, describes who is involved at what stage in the strategic move to embrace digitalization. In that context, we distinguish between four parties involved, that is, the board of directors, the executive team, the organization, and external business partners, in five key governance activities that can be seen as a continuous process (see Figure A.1.3): Direction: Provide strategic guidance for how the company should embrace the challenge and opportunity of digitalization.

Development: Design the digital strategy that fits the company requirements and is in tune with the directions given.

Decision: Formally approve a given strategy to allow for the allocation of the resources needed.

Deployment: Implement a formally approved digital strategy or decision.

NEU A.1.3 TheMonitor GEAR whether Framework: Governing Digital Value Detection: the implementation of a digital strategy adCreation vances as planned, and take corrective measures as needed, i.e. adjust the given direction, which takes us back to the first activity of direction setting.

Direction Provide guidance

Development Design strategy

Decision Approve strategy

Deployment Implement strategy

Detection Monitor implementation

22 Iterative strategizing

Board of Directors Top Management Team Organization

11 Bottom-up initiation

Business Partners

33 Externalizing innovation

Traditional governance model

Possible deviations in digital governance model

Figure A.1.3: The GEAR Framework: Governing Digital Value Creation

In any normal business setting, the board of directors sets the direction, decides on the strategy and monitors its implementation, while the executive board, supported by the organization, comes up with the strategy and manages its implementation. In the case of the digital strategizing and execution processes, we can identify three deviations to the usual w-shaped process, as depicted in Figure A.1.3.

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Part A: Providing Strategic Direction for Digitalization

1. Bottom-up initiation: In many cases, digital initiatives emerge from the periphery of an organization as compared to the headquarters, be it from a certain market or a business, which observes certain trends and developments and comes up with a digital solution. As the board of directors may be too far from the local business realities or technological trends, bottomup initiation often fill the void.

2. Iterative strategizing: Given the dynamic nature of technological developments related to digitalization and the inherent uncertainty as to how these will impact the business, digital strategies are often the result of an iterative process of trial and error in which the strength lies in the ability to act with agility and adaptability.

3. Externalizing innovation: Given the disruptive nature of digital strategies, many companies turn to external business partners for innovation, whether in form of corporate venture capital, strategic partnerships, or outsourcing of innovation activities. The company leadership hopes that the partners can act faster and with fewer restrictions to beat competitors, which often are start-ups.

A.1.4 The GEAR Framework: Enabling Dig Creation

2.2 Enabling Digital Value Creation

Interactions

Insights

Instructions

Intermediation

Figure A.1.4: The GEAR Framework: Governing Digital Value Creation

Digitalization can bring many benefits to a company. It is pivotal to be clear about the intention of a digital strategy before embarking on a long and often costly journey. Four major digital enablers can be distinguished:

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Interactions: Digitalization can bring great value in facilitating interactions between different economic players. Digital interaction channels may not only offer a cheaper method of communications, but also a richer avenue of engagement and experience. With the Internet of Things and wearable technology on the horizon, the notion of interaction will gain a whole new meaning.

Insights: A second rationale for defining a digital strategy is to gain data insights by becoming capable of collecting considerable data and of automating data analytics. As data has become the equivalent of oil (of the industrial age) in the digital age—highly valuable for understanding and steering consumer behavior as well as managing industrial activities—generating data insights is a common objective for many companies embarking on a digital journey (Rogers, 2016). Data are also at the core of more recent organizational models such as holacracy, which envisions organization as a self-managing organism.

Intermediation: Since the emergence of online commerce, one of the key enablers has consisted of the power of digital businesses to be an effective and efficient intermediary between parties who want to close a deal. Whereas earlier models focused on traditional trading platforms for exchanging goods and capital, the significant disrupters these days are creating a new sharing or gig economy, allowing the populace to take control and make everything tradable and sharable, be it information, physical assets, or services (Marchi & Parekh, 2015).

Instructions: Companies see increasing value in using digital technology based on artificial intelligence and machine learning to automate key decision processes that are needed to steer economic activities in a smart way (Porter & Heppelmann, 2015). Although there are legitimate questions on the true potential of these technologies against the background of unmet expectations in the past (Ford, 2015), we can observe an increasing number of managerial activities being automated, with more to come (Davenport & Kirby, 2016).

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Part A: Providing Strategic Direction for Digitalization

2.3 Amplifying Digital Value Creation

Process optimization

Product innovation

Platform disruption

Pipeline transformation

Figure A.1.5: The GEAR Framework: Amplifying Digital Value Creation

The next step in defining the appropriate digital strategy and related resource needs is to clarify the impact of digitalization on the organization or industry as this will help us determine how to approach digitalization. We can distinguish four levels of impact: Process optimization: The chosen approach may lead to more efficient processes through automatization and data insights. This approach will not affect the underlying logic of the business but, rather, will lead to efficiency gains within the current business logic.

Product innovation: A digital strategy may result in a new product or service that helps create a new market or improve the overall positioning of the company in a given market. The company will be able to capture a new opportunity that may eventually cannibalize an existing offering, but it is unlikely to change the underlying business logic.

Pipeline transformation: A strategic move may lead to a reconfiguration of the value chain (or the pipeline as defined by Evans & Schmalensee, 2016) and the position of the company within it. Hence, as the whole value chain is transforming due to digitalization, a manufacturer may suddenly become a service provider. In that case, the company will undergo a true transformation that will likely lead to a change in the underlying business model.

Platform disruption: Digitalization may lead to the true disruption of a company or even an industry (Raskind & Waller, 2016). In that case, a new digital business, which provides a novel platform connecting different economic players with much lower transaction costs than those offered by the existing

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market structure, may eventually disrupt existing market structures by offering a superior product or service, meeting basic needs in a more convenient and efficient way (Evans & Schmalensee, 2016).

2.4 Realizing Digital Value Creation

Creativity

Community

Continuity

Commerciality

Figure A.1.6: The GEAR Framework: Realizing Digital Value Creation

The best strategy is worthless without diligent execution. implemenHilb Successful 2015 tation of a digital strategy requires a specific set of capabilities (Westermann, Bonnet, & McAffe, 2016). Given the novelty aspects of digital strategies, they are prone to the following specific challenges that need to be overcome: Creativity: Often, the easiest challenge to overcome is the creativity challenge: that is, finding the right digital innovation idea. As many great ideas already exist in the market, the critical capability lies in selecting feasible and economically viable ideas.

Community: Since the success of many digital ideas depends on user acceptance, popularizing a digital business concept is a crucial step to business success (Rogers, 2016). Popularization also provides instant feedback on the feasibility of ideas as it indicates what needs to be improved to make a digital idea successful.

Commerciality: Even digitalization cannot change the basic economic concept of making a profit and generating cash to survive and grow, which is essential for every digital business. Becoming a profit generator in order to survive is often the biggest challenge faced by new digital companies.

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Part A: Providing Strategic Direction for Digitalization

Continuity: Any digital business must become sustainable as either a wellfunctioning independent company or a well-integrated part of an existing business organization. This transition involves additional pitfalls, such as establishing proper control and governance mechanisms, that every business needs to survive in the long run.

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Governance of Digitalization Geared Toward the Future: Robo-Boards and Robo-Managers?

Mastering governance is one of the most demanding tasks of modern management. Applying principles of good governance to highly-complex and fast-moving areas such as digitalization is even more challenging. The GEAR framework presented in this article offers some orientation and navigation in this endeavor. This framework can serve as a guide toward sensible outcomes in the fascinating world of digitalization.

At the same time, such a framework can substitute neither for inspiration nor for the intellectual rigidity and integrity of the board of directors and the top management team in anticipating trends, deriving the best conclusions, making the right decisions in times of uncertainty, and following through diligently in strategy execution. The day may come when robo-boards and robo-managers play a part in augmenting human governance boards in driving decisions and executing digital strategies. However, if there is anything to be learned from history, humankind has always found a way to make use of technology rather than the reverse (Hariri, 2017).

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Davenport, T. H., & Kirby, J. (2016). Only humans need to apply: Winners and losers in the age of smart machine. New York, NY: HarperCollins.

Evans, D. S., & Schmalensee, R. (2016). Matchmakers: The new economics of multisided platforms. Cambridge, MA: Harvard Business Review Press.

Ford, M. (2015). The rise of the robots: Technology and the threat of mass unemployment. New York, NY: Basic Books.

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Goldin, I., & Kutarna, C. (2016). Age of discovery: Navigating the risks and rewards of our new renaissance. New York, NY: St. Martin’s Press.

Hariri, Y. N. (2017). Home deus: A brief history of tomorrow. New York, NY: Harper.

Marchi, A., & Parekh, E. J. (2015, December). How the sharing economy can make its case. McKinsey Quarterly. Retrieved from http://www.mckinsey.com/businessfunctions/strategy-and-corporate-finance/our-insights/how-the-sharing-economycan-make-its-case Negroponte, N. (1995). Being digital. New York, NY: Alfred A. Knopf.

Porter, M. E., & Heppelmann, J. E. (2015). How smart, connected products are transforming companies. Harvard Business Review, 93(10), 96-114.

Raskind, M., & Waller, G. (2015). Digital to the core: Remastering leadership for your industry, your enterprise, and yourself. New York, NY: Bibliomotion.

Rogers, D. L. (2016). The digital transformation playbook: Rethink your business for the digital age. New York NY: Columbia Business School Publishing.

Schwab, K. (2015). The fourth industrial revolution – What it means and how to respond. Foreign Affairs. Retrieved from https://www.foreignaffairs.com/articles/2015-12-12/fourth-industrial-revolution Westermann, G., Bonnet, D., & McAfee, A. (2014). Leading digital: Turning technology into business transformation. Cambridge, MA: Harvard Business Review Press.

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