Digital Governance

Corporate governance in a digital world

“Not moving fast enough, that’s the biggest threat!”

Digital transformation, also called the fourth industrial revolution, resembles a storm. Who saw it coming and who was ready to act?

Tom Johnstone, former CEO of SKF and now Chair of Husqvarna and Combient, has been there, in the eye of that storm. We are asking him – how did companies meet the digital wave? What can we learn?

“When the winds of change blow, some people build walls, others build windmills”. Chinese proverb

Early 2010-11 reports indicated that something big was happening which would impact industry. Internet of things (IoT) was the topic of the day. Companies and governments in a number of countries such as USA and Germany were taking on the digital challenge. How did Sweden respond? Did owners see what was coming? Did CEOs stand up and take the lead? Did Boards engage and follow what was happening?

Owner’s perspective

Tom Johnstone who is on the Board of Investor remembers a discussion he had with Marcus Wallenberg in March 2014. “Marcus has an ability to see major trends coming and act on them. He came up with the idea of finding a way to bring large Swedish companies together so they could share experiences and learn from each other. He was concerned we were not moving fast enough.  Marcus then introduced me to Mats Agervi, who shared this vision and who brought expertise from both the IT and telecom industries.” Combient was set up in 2015 to create a meeting place not only for sharing knowledge but for helping drive digital transformation. Combient is unique – it is established “by industry for industry”. Eleven companies including FAM, a Wallenberg owned trust, and Investor put up the capital. Mats Agervi headed the initiative as CEO and Tom Johnstone was appointed Chair. “Mats really has been the driver in this work and has built the business and a strong team. I’m not a digital expert, but I’m really interested in what technology does!”, he says.

The personal engagement of Marcus Wallenberg did resonate among CEOs within the group. Soon other companies joined and today more than thirty companies in Sweden and Finland are partners to Combient. “Combient facilitates an eco-system for knowledge sharing, co-innovation and co-creation of capabilities driving digitalization and business value for participating companies.”

“One other important point from an ownership perspective is the focus and importance which Investor puts on Digitalisation and its implementation within the companies, which are part of its portfolio of listed companies and wholly owned companies. It is a key part of their value creation plans for each of these companies”

How did CEOs react to digital change?

“For me personally it started in March 2011 when I was working as CEO at SKF. We did a big job analysing trends outside of SKF that could have major impact on our business. And one of these trends was digitalisation. We formed a small group of young individuals reporting to the management team to explore how we effectively could use these new digital tools”.

“SKF trialed using iPhones and iPads early on to provide data to senior operators in the factories giving them a live view of their production wherever they were and helping avoid using paper binders. We also experimented giving salespeople iPads and by making available the vast knowledge of SKF on line this instantly rose productivity with over ten percent! But to be quite honest at that time I was not really sure where our journey was going, but I saw it could be a competitive advantage”, he says

“Around 2015, at the time Combient was founded, there was not a sufficient sense of urgency. I felt that only a few CEOs took it really seriously and put themselves in the lead. However, most realised that they had to do something”. A number of companies hired a Chief Digital Officer, a CDO. Some of them reported directly to the CEO, while some CEO’s, content on having their CDO, turned their attention to other urgent matters. “But fairly rapidly it changed for the better”, says Tom Johnstone.

“The key to success was how CDOs interacted with the organisation. When CDOs supported the organisation, brought in expertise and knowledge to help to drive the digital journey it was successful. When CDOs were running their own agenda disconnected from the company it did not work. And I saw that on a number of occasions”.

The main lesson: “When it comes to digitalisation the engagement of the CEO is vital and really the key. If the CEO does not own it, transformation will not happen.”

Focus on data

Companies collect vast amounts of data. “Husqvarna for example has 1,2 million connected devices, from automowers, chain saws to fully connected gardens. A huge amount of data, but if it is not organised or structured in the right way then it is useless. Quite honestly many companies didn’t even know why they are collecting all that data”.

“Actually, I think we still have a long way to go before using all data to take advantage of artificial intelligence, AI”

“Depending on how the companies run their business, all companies need data to develop their products and to find out how they can serve their customers better. You have to own that element, data, but you also have to know how you utilize it. At Combient, in discussions between companies, we saw that there was a war for really good data scientists and for many going into one industrial company was not too exciting. Using the attractiveness of the breadth of our network Combient we recruited key Data Scientists to support the companies. This support has grown over time such that we have now formed a new separate company, Combient Mix, to bring this expertise to our companies”.

“Early on there was a lot of emphasis on efficiency and automation as being the key areas for digitalisation. The change we have seen over the last few years is a movement from a technology focus to a more business-owned approach. So, the next step of the digital journey is to use all this data to improve offers to customers, change business models and grow markets. For example, how can we create customer benefits out of data from connected devices? How can we improve uptime? How can we improve efficiency? How can we help them develop even better products and services?”

“I personally think there is a lot more work to do for salespeople at the front end and to develop new business models, helping our customers.”

What comes next?

“One key issue is how we use data to improve our competitive advantage. We still have a long way to go when it comes to using data for creating better products and new services. Those companies who manage this in the best way will be the future winners.”

“A second thing is development of new business models. The pandemic has made it obvious that not only consumer habits have changed but also industrial procurement and sales. The phrase ‘omnichannel’ has become much more relevant today! What we need to do in Combient is to help our partners to evolve in this new multi-channel world.”

“A third huge thing has to do with the sharing economy. Take Husqvarna, as an example. If you buy a hedge trimmer, how often do you use that in a year? We are piloting a service where you rent that trimmer for a couple of hours. When you start renting instead of buying, what does that mean for a company and future business models?”

“Then there is the important question how to use digitalisation to improve sustainability. We can develop better digital tools to achieve the goals we set up.”

Sweden’s position

“I don’t believe that we are losing competitiveness, but I do believe that we are not moving fast enough!” says Tom Johnstone. “When it comes to 5G we are definitely falling behind. We are a number of years behind USA, China or South Korea. This is amazing when you think that two of the world leading providers of 5G, Ericsson and Nokia, actually are from the Nordics. I think this is a real Achilles-heel for us, we need to accelerate the roll out of 5G!”

Husqvarna’s  Board agenda

According to Tom Johnstone digital transformation was discussed on the Board for the first time when Kai Wärn became CEO in 2013. He himself assumed Chair of Husqvarna in 2015.

“I think it really started with Kai. Before that we had other urgent matters to deal with. We had an open discussion around where to take Husqvarna in the coming years. Kai Wärn brought up digitalisation as one of the big challenges and opportunities”.

One of Kai Wärn’s early decisions in the Digital space was to put sensors on equipment. “At that time, it was far from clear what to do with all that data. But it was absolutely the right decision!”

Soon digitalisation became part of the Board’s annual plan. Anders Johanson, CTO at Husqvarna and professor at KTH in Stockholm, frequently visited the Board to share what he was working on.

Nomination committees at that time were on the hunt for digital expertise for Boards but they were in short supply. “If you can’t find relevant digitally savvy persons then you must raise digital level in your existing Board”. Tom Johnstone recalls that the Board visited their company in Switzerland to learn more about the Digital journey and the work they were doing in developing the Smart Garden. “We also invited people from the outside world to tap into their knowledge. We had external venture capitalists and different start-ups visiting to listen to their views on what was going on.”

In 2018 Husqvarna established an AI-lab to further investigate how to use digital technology and to develop solutions. In 2020 the Board decided to it was now time to decentralise this and put that knowledge directly into our business divisions to accelerate the implementation.

“During our Board meetings we make deep dives in each of the three divisions which helps us keep track of digital developments. It is part of a very detailed yearly plan and for the group in total.”

A recurrent issue on the agenda now is cyber security. “Hackers has really become a big, big business! The more we connect our devices, the more we need to protect our data. Every company has their ‘digital crown jewels’, and they have to be protected.”

Threats and opportunities

“Of course, there are many threats out there. Not moving fast enough, that’s absolutely the biggest threat! But at the same time threats are also opportunities, I like to use the phrase ‘opporthreat’.

“Climate change and sustainability, for example can become clear opportunities for Gardena – one of Husqvarna’s divisions.  For example, how can we find better and smarter ways of using water.”

After the pandemic

“The pandemic has made us change the future structure of Board meetings. We are going from eight physical Board meetings before the pandemic down to four physical and four digital meetings. Some of them will take place outside headquarters in other parts of the world where we have our business and our operations.”

Two of four physical meetings will be at least two-day meetings. “I think it’s a good idea to let some of the Board meetings run for a couple of days in a social setting, so that the Board members really get to know each other as a team.”

“Having fewer physical Board meetings saves travel which facilitates the recruitment of international Board members. And if some of the Board meetings are held in their own region, it makes the job even more attractive!”

“Another way to develop the work of the Board is to set up digital technology sessions so that Board members can acquire knowledge in specific areas. These digital sessions are not formal Board meetings, and they are optional to attend. It is an excellent way to raise the knowledge level of the Board. It saves discussion time, and it sets a better platform for decisions.”

Advice to other Boards

“It is important that management owns digitalisation and other key issues. It will never work if the Board tries to force something on them. It is important for the Board to ensure that management is addressing all the right issues. Make sure there is a clear focus in your business, not only regarding efficiency but also on innovation, on the front end and go-to-market. See to that necessary resources are committed to make it happen.”

“Remember that management are very good at presenting ‘smoking mirrors’ when telling what they are doing. In the boardroom you have to peel back a few layers to really make sure that you know what is going on and for example, if digitalisation is on the agenda.”

“Some Board members think that the job is done in the boardroom, but it’s not. It is important to get out and get “the smell” of the company and the business. It’s not an issue about not trusting the management, it’s a smart way of educating yourself and becoming a better speaking partner to management.”

“When visiting the operations don’t always take that planned route when visiting a factory, turn right instead of going left! Then you will really see what is happening in the factory!” Tom Johnstone concludes.

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