Podcast transcript: Board leadership at the center of the transformative journey (Agents of change)

Roger Park 

Welcome back to the Agents of Change podcast series. I’m Roger Park, EY Americas advisory and financial services innovation leader, and the series host. I’m joined today by Mark Watson. Mark is our Americas deputy board matters leader with EY’s financial services organization. Mark, why don’t you tell me a little bit about yourself?

Mark Watson

Roger, it’s great to be here. Well, as you said, I have one major role that’s relevant in this conversation. I’m the deputy leader of what we call our Center for Board Matters. 

As you know, we spend a lot of time in financial services and, actually, all sectors talking about what really matters to boards of directors. I spend a lot of time with them, briefing them on industry trends, on particular issues, whether it’s accounting, auditing. We sometimes work directly for boards. 

Oftentimes, we’re just supporting management as they engage boards. So, spend a lot of time with boards. Innovation, which we’re going to talk about today, is really one of the hottest topics. 

I also have the pleasure of working with our risk team in our consulting side, looking at mainly the chief risk officer agenda, the CRO, as well as issues around operational resiliency and cyber, which obviously are very much tied into the agenda around innovation. 

Before that, I worked at a lot of different things. I remember one of my colleagues calling me somewhat of an atypical hire. Before here, I worked for a small organization that brings together board members, mainly from financial services, large banks, large insurance companies, with outside stakeholders, sometimes regulators, talking about industry issues. In fact, I was at one yesterday talking about innovation. 

Prior to that I worked for a rating agency. It was a cool job, it was around governance as well. I got to interview probably 300+ directors, 50-60 CEOs, 7 billionaires, I mean, it was a cool job. 

Prior to that, as you can tell by my accent, I’m British, so I was working with a strategy consulting firm in our London office, transferred over to the New York office. Actually, my first working day here in Manhattan was 9-11, so somewhat of a memorable day. 

Prior to that, I was actually, and probably something that, I’m very passionate about what I do today, but I love politics, so I was lucky enough to do a number of different things in politics, worked for a think tank called the Adam Smith Institute, for those who are American listening in it’s like the Cato Institute, it’s about free markets. I worked for a couple of trade associations on governance matters, one representing non-executive directors, and one represented investors. That’s also how I met my wife. 

I mean, everybody is watching the news in the UK about Brexit. One of the architects of the Brexit was a politician who I actually met, worked with his wife, got introduced to his assistant, my wife, and we actually lived in the house for a couple of years. So, that’s the twist. 

Family, I have three children, a 14-year old, a 17-year old, and an 11-year old. We spend a lot of time together. That’s what I like doing in my spare time. 

Park

So, that’s a lot of hats you’ve got on, Mark. The listeners can’t see it, but there’s like three or four hats stacked on top of your head. 

So, let’s get right into it. Recent research suggests that innovation may not necessarily be on the top of most board agendas. I’m sure that’s changing. But for those of us actively engaged in driving innovation and transformation, both within our firms and for our clients, this may not come as a surprise. 

So, as companies focus more and more on their innovation and transformational journeys and on incorporating technology such as AI, RPA, cloud technologies, to facilitate those efforts, there’s an even greater need to ensure that firm management and executive leadership are on the same page when it comes to understanding the strategic importance of these initiatives. 

So, Mark, financial services firms are evolving at a rapid pace, industries are transforming, how are boards engaging in this transformation?

Watson

It’s a great point, Roger. I think that one of the killer questions at the moment is, if research is saying this isn’t a priority, are boards focused on it? I think I’d start with boards think their primary role is long-term strategy. 

If you talked to any board member about why are you on a board, it’s really to sustain the business over the long term. They’d list that first, and second picking the CEO. 

It’s not that they think everything else that they do isn’t important, but that’s actually why they’re there. They really want to focus on the competitive environment. They want to focus on the long-term strategy. They love talking about operating models. They love talking about competitive position. They love talking about regulation. 

These are just the kinds of issues that they think, they get to come into the organization 8, 9, 10 times a year. They’re not there every day and they want to make sure that the organization is focused on the long-term. So, I think that is the kind of conversation they want to focus on. 

They also can list off and they all know through their careers, you know, brand names that they can remember that company that seemed to be dominant in the marketplace that doesn’t exist anymore. So, they also get competitive position dies if you don’t keep on renewing yourself. It’s an area they’re deeply interested in. 

Park

It’s certainly a hot topic when I’m talking to executives and board members, as well. So, I was a bit surprised at the results of that survey. Did it surprise you that when surveyed directors don’t view innovation as a priority?

Watson

Not really. I think you’ve got to think about what surveys are trying to do. I think they are very useful. Obviously, we do a lot of them. But they do have some limitations. 

As you know, I lead our work on one of the surveys we do globally with chief risk officers, where every year, and we’ve been doing it for 8 or 9, 10 years. We ask about what are your priorities? 

I think if you ask them today what their priorities are, they’ll say cyber security, they’ll say operational risk, they’ll say conduct risk, but they know that credit risk and market risk, liquidity risk, are deeply important. Just because they don’t get to a list of what’s near and present doesn’t mean they don’t get the fundamental piece. 

So, back to the boards, I think if you look at financial service firms over the past 10 years, they’ve been forced to focus on regulation and regulatory matters. I think of all the conversations and work we do with our clients on capital, liquidity, risk management, compliance, deeply important topics, but what I think they’ve done is actually crowded out the dialog as it relates to strategy and innovation. 

So, I think they still recognize, notwithstanding that, you say to them is this strategy innovation, is it important? Yeah, it’s deeply important. They just know they’ve got to change the agenda around. 

In fact, I was just talking to a board member of a large European bank about this precise issue, and she said she probably spends, they probably spend 80% of their time talking about what you might call regulatory related, day to day related, things, 20% on all the other, and a small part of that other is actually strategy. It’s that once a year strategy session. 

The conversation we were having with her and another few board members was that 80%/20% has got to be spun around today, no longer, somehow, they’ve got to force their agenda to spend 80% of the time about how do we stay relevant, and 20% on really important things to do with compliance, risk and so forth, but it can’t dominate the conversation. 

Park

Sure. I think, especially in financial services these days, there are a lot of issues and challenges that are top of mind and innovation and strategy are certainly important to the board. 

So, Mark, in the dozens if not hundreds of conversations you’re having with boards these days, is the trend of that conversation towards more of a focus on strategy and innovation, especially when they’re talking with their management teams?

Watson

I think so, increasingly. I think if we looked at the list of topics we’re doing, sessions with boards, or risk committees or audit committees two or three years ago, I’d say no. 

We would have seen topics around cyber security, conduct, compliance, they’re still topics that we’re spending a lot of time with boards on, but we’re certainly getting much more demand for people like you or other colleagues in the innovation group, strategy team, being asked can you come to the boardroom and tell us really what’s going on. What is the pace of change? Where is change happening? 

The competitive dynamics that it’s creating, not just within financial services, and as you know very well, across sectors and that kind of interaction between sectors. 

So, it has become, when I am getting calls into XYZ client would like somebody in EY to go and talk to them about a particular topic, innovation or digital transformation or some piece of that is definitely becoming one of the kind of top topics we’ve got to engage our clients on. 

Park

It’s definitely a hot topic. I know I can certainly go on and on about it. But do you think at the board level there’s a full appreciation for the scale of the change in transformation that’s taking place these days?

Watson

To some extent. I think about this in the kind of day to day world. We all feel the change that’s taking place. 

I mentioned I have three children, I have a 17-year old, a 14-year old, and an 11-year old, and I think we used to talk about one generations got a different interaction with technology versus another generation. I watch my children. There is a difference between how my 11-year old interacts with her technology to my 14-year old to my 17-year old. 

Directors can see the same thing, they can see the same with their children or likely their grandchildren. So, I think in the kind of day to day we feel like it’s changing. 

I think boards are starting to realize that’s going to ripple through to exactly how customers want to consume what they want to consume, but I don’t think that true realization about the breadth and scale and pace of change is really going to happen by itself. 

I mean, this podcast is in your series of Agents of Change, and I think management, I think trusted advisers like EY, we’ve got to be part of the reason why boards start talking about not just, as I said, the once a year strategy conversation, but the fundamental breadth of change that’s taking place inside their firms and outside in the industry. 

And, again, I think there’s really incumbent on those in management at the senior management level and, you know, firms like ourselves, to really drive that conversation. Because when they get it and once they start realizing the depth of the change, really the penny drops and it’s just a fundamentally different conversation when you say, wait a minute, that means, and it means something entirely different. 

Park

So, these conversations that we’re having, they’re fascinating to me, the perspectives from the boards across different industries, I know, Mark, you’ve brought me into a number of these conversations. What do you think boards are taking away from these discussions after we have them?

Watson

I think there’s a couple of really important things they’re taking away. I mean, you use this language about, you know, innovation at scale, kind of the broad length of it, and, you know, every director is hearing from the management teams, in the media, things that they read, they’re all hearing all of the buzzwords, AI, machine learning, blockchain, automation, and in some way, I think they get that each one of those could be important. They could impact the industry. 

I think what they’re starting to realize is it’s not just any one of those could be transformative about what their role is in the marketplace, how they serve their clients, it’s that every single one of them could be like that. Your presentations and your dialogs out with clients around this kind of this sheer scale of change around innovation, I think they’re starting to realize that. 

I mean, I think of it as almost you say every one of these could be like the way the internet’s changed commerce and every one of them, there’s 8 or 10 of them that are happening at precisely the same time, and I think sort of that scale question, but then I think also there is the pace element to it. 

I mean, most business leaders, most board members who’ve had careers as executives, they’re more used to 20-year generational industry changes, things just take that much time, historically you hear those, the consulting folks talk about s-curves, there are, you know, 20 plus year s-curves. I think they’re starting to realize it could be 5 or 7 years. 

Again, not only is that really fast, a third of what you’re used to, as a board member you’re only normally there 8 to 10 years, so you’re normally, historically board members have only seen part of the transformation. They’re realizing the pace means your industry, your institution may transform while you are on the board, and that is a precisely different kind of conversation than I’m going to see a little bit of transformation, I’m going to oversee the transformation, and I think that scale question and that pace question is when the penny drops and, again, you get into just an entirely different conversation with boards. 

Park

Absolutely. I mean, disruption is happening a lot faster than ever before. I like that perspective, Mark, that it’s now within realistically in a board member’s turn that they’re going to see maybe one, maybe multiple transformations in a big organization. When you’re looking at it from that perspective, it’s really not about transformation cycles anymore, is it? It’s about continuous transformation. 

So, as boards are more aware of and sensitized to this topic, Mark, how much of that dialog is focused on the opportunities that come out of the change and the opportunities that can come from innovation versus the reactive or responsive defensive posture that it might also create?

Watson

That’s a great question. I think it’s a balance. As I mentioned at the beginning of the podcast, directors love talking about strategy and change. It’s where they get a lot of their energy. 

I think if you were in a boardroom and we had the privilege of kind of watching dialogs, I’m sure when there’s a conversation about compliance and risk management, there is less energy in the room. There’s more energy in the room when we’re talking about kind of upside potential growth, innovation, how business models are changing, who’s coming in with a different business model, what kind of new operating models are appearing. 

So, directors are really keen to know how other firms are succeeding, how they’re making change kind of across the entire organization. 

Roger, you have this phrase which is scale fast, efficiently and safely, and they really want to know, well, how do you do that really across an organization in a small part of the business, not just in a line of business, but across the whole organization. And, again, very energetic conversation; what they’d like to have every board meeting, frankly.

But there’s a word in there that’s really important, which is the balance, it’s the word safely. Board members know they have a responsibility to make sure innovation and change happens carefully, well-controlled, responsibly, so that’s why those topics that have come to the fore in the last 10 years, cyber security, risk, IT, conduct and so on, they don’t go away. They’re really important. 

Where they’re also getting the challenge is it’s not just the old ways to deal with those. If we’re in a really, truly transformative way, those same issues just need to be dealt with very differently. So, they’re looking for how do we do safely in a faster environment. 

And then they really, really are focused on trust. Board members always say it takes you years to build a reputation and you can lose it in a day, and they say that a lot. So, they appreciate trust is a really important part of this. So, they’re looking for their organizations to lead transformation responsibly with a purpose, with a mission, and almost have those as polestars and keep on coming back to them. 

So, it’s a balance. They’re super excited about the kind of conversations they can have about what opportunities that it offers to their organization, frankly to the whole industry. What they also want to make sure as their firm navigates through kind of unprecedented times that they do it in a safe manner. 

I think that really leads to what, to me, the conversations with boards, seen you and others have with boards as we bring folks together, particularly in places like our wave space innovation centers, is really this kind of profound element of the change we’re facing. You talk about we’re changing, we need to innovate every hour, every day, every week, every year, and that really brings to the forward board members, do we as firms actually have the capacity to deal with that level of change. 

I recently had a conversation with a board member of a large bank, one of the globally systemically important banks, and really asked him this question. Their organization is going through a huge transformation, fundamentally changing what they’re doing. They’re a massive intermediary in the marketplace. 

And I said to him, if we’re in a world where we have to change every day, it’s not one of those worlds that eventually we get to three to five years from now we can all breath in just like it used to be as a planning cycle, you kind of breath in a little bit, you kind of cruise for five years, and then we go through change again, if there’s no breath in space, how do you think about that as a board member? He was an audit committee chair, and he answered in two different ways. 

So, as an audit committee chair, interestingly he said, he’s not that worried about the scale of change. He thinks the organization has strong financial controls. Obviously, since Sarbanes-Oxley there’s been a big focus on that. They know we, as auditors, are doing a great job in making sure financial statements get out in a timely fashion and they’re trusted. But then he said, I have another hat, which is a board member, and a board member it scares the living daylights out of me. 

They’re really trying to figure out what’s the kind of conversation they should be having with their management team about is the management team, frankly, willing and able every day to come and drive and promote, sponsor innovation. Do we have a workforce who can do that? Build it into their DNA that, you know, innovation is how we’re going to operate. 

Interestingly, he gets there’s no choice to try and find the solution to that. It’s not like change is going to stop just because you can’t have the capacity, but that capacity for change is a really interesting conversation for boards about do we really know whether we can actually change every day and innovate every day?

Park

I think that capacity point is really important, Mark, and we’ve talked about this before on the podcast that companies that can manage risk better can take more risks, and the ability to take risks confidently and safely is going to be a differentiator in a world where you’re constantly trying new things and innovating. And then another key part of having the capacity to manage or absorb risk, or just to absorb change, is how do you allocate that capacity amongst your different strategic priorities? 

Watson

Yeah, and I think that actually may be, no pun intended, the next wave of conversations that take place in boardrooms. I think as we’ve been talking about the scale and pace of change, when it finally dawns on you and the word unprecedented is used probably too much, but we’re in unprecedented times. 

Constant change, it could be exhausting or exciting. So, I think it’s going to be really, really important that as we as agents of change help our management teams, help our boards of our clients really drive a different type of conversation, that they then think through the second order impacts about how we manage the business, how we take more risks, how we enable more risk taking, but at the same time do it in a safe and sound manner. 

So, I think that balance is really important. I’m not sure many boards have an answer. I’m not sure many management teams have an answer in the sense that there’s only a few of them that have ever been in that kind of situation so I think it’s almost innovation in the boardroom has got to take place about how or what is the different type of conversation, pace of conversation, type of conversation that’s got to happen in the boardroom. 

Again, you’ve got to remember boards turn up for one or two days a week, maybe every month, maybe every other month, most boards only meet 8 to 10 times a year. They’re part time outside board members, so how do they kind of get into a dialog in a respectful way across the course of a year. The management team is every day dealing with this.

Park

To pick up on your concept of innovation in the boardroom, I’d like to turn to board composition. In a prior Agents of Change podcast that we just did recently we talked about the need for diversity and inclusion in driving innovation across an enterprise. Does that hold at the board level?

Watson

I think so. I’d start, especially because today is International Women’s Day by saying I think it’s the right thing to do to get more diversity in the boardroom. I think we’ve been doing a lot of work in that space to drive the proportion of women minorities in the boardroom. I think you can take two different views of that. 

You could definitely take a half glass empty view if you look at the proportion of women and ethnic minorities on board, it’s still too low and there’s more we can do to make some change. We could turn it around and say, it’s much, much better than it was 5 or 10 years ago. 

I was recently at a session with mutual fund directors so we had about 40 in the room and roughly half were women, and it was really striking, it was really positive. But your point of your question wasn’t diversity for diversity’s sake, it was how does diversity in the boardroom fit into a conversation around what kind of different kind of conversation to take place about innovation in the boardroom. 

Almost by definition, if we’re in uncharted times and uncharted place in terms of what’s going to happen in the industry, we just need a different type of dialog, so the more you can bring in, be inclusive, and have different diverse discussions, the more likely you’re going to help as a board engaging a management team, just a different kind of conversation. We just need different ideas, we’ve got to figure out how do we bring different ideas in if nobody has the solution, nobody has been through this before, the more diversity, the much more likely your firm is going to be able to navigate through quite challenging times. 

Park

I’ve said it before, and I’ll say it again, diversity and inclusiveness is a winning strategy when it comes to innovation, and Mark, you’re telling us that that applies also at the board level. How can boards foster innovation and bridge knowledge gaps? Just to bring this all together.

Watson

I think there’s 5 things they can do. The first one is the one we talked about much earlier, change the conversation that’s taking place in the boardroom, get that 80/20 the other way, more 80% not strategy, 20% some strategy; 80% strategy and innovation, 20% the things you’ve got to do outside of that. 

I think the second piece is the conversations between boards and lines of business heads have got to change. Do you really understand what innovation is taking place in line of business? How are they innovating? How are they staying relevant? 

I think the third one is as a board bring in outside voices. Management teams all the time bring us in to talk about what’s going on in the industry and other voices, people from rating agencies, shareholders, analysts. As it relates to innovation and disruption, do exactly the same with the boardroom. Bring in other voices, expose them to diverse opinions.

Fourth, and I know we’ve been doing a lot of this across EY in financial services, bringing board members together in an industry context. Get to those events, go to industry events, not just director events where you have other board members talking about governance issues, go to events, go to meetings where you’re exposing yourself to what’s the conversation taking place about what’s going on in the industry in innovation, and preferably ones where you can expose, you’re exposed to conversations and points of view from other board members, other people in exactly the same role of yours. 

And I think the last area is really focusing still on that functional piece, asking and challenging the head of internal audit, the chief risk officer, the CFO, other functions, how are they innovating, what they’re doing, and how are they keeping pace with the innovation that’s taking place outside the functional area across the business? 

Park

Mark, that was great. That’s great advice, and I know our listeners are going to appreciate that very specific guidance. So, a bit of a personal perspective from you, what is the one thing that you challenge yourself to do every day?

Watson

Ask better questions. EY’s better questions, better answers, better working world is how I think our organization works, but it is how I’ve been working throughout my entire career. I do have strong opinions. My wife and my colleagues will tell you I’ll debate them with force, but really asking good questions is how you learn. You don’t appreciate how people see things, they may see things differently than you do. There may be insights that you didn’t know. So, I think every day pushing yourselves to, yes, have an opinion, yes, put it out there, but ask somebody, ask them what they’re doing, ask them how they’re thinking, why did they get to that conclusion? It only, it helps them think through why do they think the way they think, but it really helps you learn every day. 

Park

Love that, Mark. And it’s on brand, even better. A couple quick fire Q&A questions. Which book on innovation or effective leadership would you recommend to our listeners?

Watson

The 7 Harry Potter series. I think if you read them throughout the entire course of his time at school, he shows real leadership, he takes real calculated guesses, he empowers lots of his friends around him, he puts himself in an environment where he’s surrounded by people that he respects and learns from, he enables them, plus I read the other day that there’s been over 500 million Harry Potter books sold, so there must be something good about them. They’re a great read.

Park

Yeah, 7 of those books are ones that I bought. Which headline do you think we might be reading on this date in 10 years?

Watson

Mark Watson and his family landed on Mars today. I love space exploration. In fact, one of the first reports I ever published at the Adam Smith Institute, the think tank that I mentioned, was called A Space for Enterprise, which was talking about the commercialization of space. It was great. 

I actually wrote it with a friend of mine who works in the space industry and is actually married to a U.S. astronaut that went up in the shuttle three times. 

Park

That’s definitely one of the more interesting headlines we’ve gotten on the podcast. Which skill do you think our listeners should be teaching their kids?

Watson

How to be skeptically curious. The great thing that our children are exposed to is so much information at their fingertips. 

I think you have this great statistic, which is you quote sometimes, where 80 to 90% of the data in the world was created in the last 2 years. It is really energizing how much information our children can get their hands on. 

But I think we’ve got to teach them how to look at it critically so they can distinguish fact from fiction from opinion. So, I think being skeptically curious, not just curious, is really, really, really important going forward.

Park

Yeah, that’s always been important, but like you said, more important now than ever before. Big data is not necessarily good data. Mark, this has been fantastic. I appreciate your time today. I know a lot of our listeners are going to be reaching out to or would like to reach out to you and stay in touch with you. What’s the best way for them to connect?

Watson

I’m a big fan of LinkedIn, so just ping me through that and I’ll certainly get back to you.

Park

Excellent. Thanks, again, Mark. Alright, for our listeners who want to make suggestions on topics, guests, and questions, please follow us on Twitter using #agentsofchange. Thank you for your time today, and the next podcast will be in 4 to 6 weeks.