Terms such as digitalization, transformation or the Fourth Industrial Revolution are buzzwords everybody is familiar with and often used as synonyms for a dramatically changing work and social world. They also have a real background. Companies are actively searching for new talents on all hierarchy levels, to take on tasks and responsibilities in the field of digitalization and transformation. hkp.com speaks to the hkp///group experts Regine Siepmann and Hannes Klingenberg about their experiences in this field of topics on executive and supervisory board level.
Mrs. Siepmann, Mr. Klingenberg, digital transformation impacts companies on various levels. What changes are you noticing in corporate management?
Regine Siepmann: Contrary to potential public perception, German top managers have increasingly been opening up to digitalization in recent years, and are making at least the handling, a management issue. The fact that DAX CEO's are regularly visiting Silicon Valley - the supposed Mecca of digitalization - to obtain information or to drive forward partnerships - bears witness to this.
Hannes Klingenberg: It can also be observed that the position of CDO, the Chief Digital Officer, is becoming established in more and more companies, even if this is not yet a mass phenomenon at board level. Typically, Chief Digital Officers can be found at second of third management levels and they report directly to the CEO.
What tasks fall into the remit of a Chief Digital Officer? Or is CDO just another term for Chief Innovation or Chief Technology Officer?
Regine Siepmann: We have not seen a specific job description yet. Many companies are still in the process of defining the position. However, it can be said that CDOs are less technically positioned compared to CIOs or CTOs. Currently, CDOs - in addition to their own role definition - are more tasked with the formulation of appropriate digital strategies or identities for companies and with distributing these both internally and externally.
Hannes Klingenberg: A CDO should identify current trends as a result of new technologies, the increasing networking and societal change, and derive the implications for the company, due to an increasing volatility, changed or new business models or significantly reduced product life cycles. Therefore, the spectrum can range from identification and recruiting of suitable talents, the entering of strategic partnerships with startups, to the implementation of change management and the establishment of a new culture.
Are the quantitative performance indicators currently used in executive boards compensation systems still sufficient to motivate executives in these new fields of work?
Regine Siepmann: Large DAX or MDAX listed companies will not change their business models overnight or turn their long-term strategic planning completely upside down. However, the challenges of digitalization should be recognized and taken into account.
Can you elaborate on this?
Regine Siepmann: Take, for example, the automotive industry: In order to assert oneself in the fields of electromobility or autonomous driving, German car manufacturers will soon have to make large investments. Record sales and profits as in recent years may fail to materialize. In future, this needs to be considered on a company-specific and individual level in the incentive setting for executive boards and top management.
Derived from this – what could the compensation system of the future look like?
Hannes Klingenberg: There is no silver-bullet solution. In future, as already today, compensation systems will be as varied as companies themselves are. However, especially on executive board level, companies will have to continue to comply with the German Stock Corporation Act and the German Corporate Governance Codex. Also, investors will continue to expect positive returns in the future. It can be expected that digitalization will, more than ever, result in an entanglement of corporate steering and setting incentives for management.
Regine Siepmann: In close collaboration with the digital strategy, it must be regularly checked whether quantitative financial indicators remain useful as targets in the sense of steering. Especially in case of expected investments, it must be considered whether bottom-line profit indicators such as net profit or EBT, meet the expectations of all stakeholders and shareholders, or whether a combination of growth and profitability would be more suitable indicators.
You rightly mentioned that the world is spinning faster and change cycles are much shorter. Is a classic multi-year variable compensation still relevant here?
Regine Siepmann: A sustainable compensation approach should always be guaranteed, especially as the German Stock Corporation Act calls for this. But you are right: Due to the increasing volatility of the markets, the design of long-term variable compensation, as we know it – with performance periods of four or more years – is faced with the challenge of setting the right incentives through respective key indicators and compensation philosophies.
Hannes Klingenberg: Multi-year variable compensation must reward a future-oriented company development. This is what justifies it in line with the compensation instruments. In addition to financial indicators, a stronger usage of qualitative criteria is conceivable, which e.g. are aimed at dealing with the new challenges, achieving strategic milestones or sustainability aspects.
In executive board compensation, we are dealing with the significant area of responsibility of supervisory boards. What changes are supervisory boards in German likely to face?
Regine Siepmann: Determining executive board compensation is the task of the supervisory board. For this reason alone, it will not be able to avoid dealing with disruptive changes, transformation and digitalization. Therefore, supervisory boards are needed that are aware of the relevance of digitalization and the associated implications for their companies.
According to the GCGC (German Corporate Governance Code), supervisory boards are required to have the necessary skills and expertise for the proper performance of their duties...
Hannes Klingenberg: ... in addition, in terms of the Stock Corporation Act, every supervisory board member is personally liable for the fulfillment or non-fulfillment of due diligence responsibilities with regard to monitoring and advising the executive board. A legal basis and regulatory framework for these necessary changes already exists. Many supervisory boards still need to catch up.
Regine Siepmann: But not only for regulatory or legal framework reasons should supervisory boards be able to assess the effects of digitalization or technical development, as it can be expected that the impact on existing business models is steadily increasing. In order to take part in the development of strategies and their implementation, one needs at least basic digital and transformation expertise.
When considering the current composition of German supervisory boards, "digital natives" are still in short supply, would you agree?
Hannes Klingenberg: We are currently seeing many experienced industry insiders and former executive board members in the supervisory bodies, but also indeed: Supervisory board members with broad digital expertise or transformation know-how are still hard to find.
Regine Siepmann: But we also see executive board members who are already feeling the influence of digitalization on operative and strategic level, and who will form the new generation of professional and competent supervisory boards in this regard. However, already today, supervisory board chairpersons in particular, are required to critically examine whether their bodies have sufficient digital competencies, and if in doubt, must follow up with relevant experts. This is the only way to operate responsibly and long-term for the good of the company.
What advice to you give supervisory boards and executive boards for adequately dealing with the challenges of digitalization?
Regine Siepmann: I have the impression that companies in Germany are on the right path and are either dealing with digitalization in concrete terms or preparing the corresponding transformation processes. Nonetheless, large listed companies do not have the same agility as startups. Therefore, it is even more important to identify and define early on which digital strategy needs to be pursued.
Hannes Klingenberg: Based on this, the right incentives for a sustainable company development should be set for the executive boards and top management, even if this entails replacing previously established systems. In order to define realistic horizons of expectations, changed performance indicators and goals should be communicated early on and progressively with all stakeholders and shareholders.
Regine Siepmann: Especially here, using relevant digital competencies, supervisory boards are required to support a changed corporate world in its strategy and control function.
Mrs. Siepmann, Mr. Klingenberg, thank you very much!