The trend of companies using technologies to improve their products, processes, and teams effectively is collectively described as a digital transformation. As digitization proliferates, companies are beginning to put more emphasis on their governance, risk, and compliance – but do investors understand their values and impacts?
Researchers from Singapore Management University surveyed non-professional investors on themes surrounding investment practices regarding GRC to find out the importance their placed on its role in digital transformation.
Read their original article: https://dx.doi.org/10.2139/ssrn.4276136
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The trend of companies using technologies to improve their products, processes, and teams effectively is collectively described as a digital transformation. As digitization proliferates, companies are beginning to put more emphasis on their governance, risk, and compliance or GRC practices to ensure effective digital transformations.
Companies are beginning to understand the importance of GRC in their digital transformation, but are investors? Are they seeing GRC in digital transformation as an essential metric in their investment decision-making process, and should companies manage their GRC of digitization better to attract investors? These are essential questions for companies to know if they should consider GRC in their digital transformations to attract investment and for investors to understand whether it is a significant value creator.
To help answer these questions, researchers Clarence Goh, Yuanto Kusnadi, Gary Pan, and Seow Poh Sun from the Singapore Management University conducted a survey of non-professional investors. The survey asked a series of questions to the 100 participants on themes surrounding investment practices regarding GRC in digital transformations. The researchers hoped the study would prove their hypothesis that “Investors are placing importance on the role of governance, risk, and compliance in digital transformation.”
Digital transformation has enabled companies to improve processes, revise business models, and gain a competitive edge. Although companies started their digital transformation activities with the advent of the internet in the late 90s, they have picked up speed in the last decade with the development of cloud computing, artificial intelligence, and the growing number of Software as a Service companies. The adoption of digital transformations increased rapidly during the COVID-19 pandemic as companies attempted to continue business as usual with an entirely remote workforce.
In increasingly dynamic and competitive markets, where companies constantly try to get the upper hand, digital transformations have allowed them to differentiate themselves from competitors. Research has suggested that digital transformation brings efficiencies and a competitive edge and makes companies more adaptable in a quickly changing business environment.
The benefits of digital transformations are clear. However, companies must ensure they balance the potential positives with potential losses due to poor governance, risk, and compliance practices, or GRC for short. With a constant stream of regulations and an increase in cyber and data privacy risks, companies need to ensure their software does not complexify compliance and their processes manage risks. Good governance is also essential to underpin and safeguard the effective procurement and adoption of the correct digital tools.
To effectively manage digitization safely, reliably, and legally and to build strategies to implement future digital transformations, good GRC practices are paramount. As a result, GRC processes, tools, and professionals have become increasingly important.
Previous literature has shown that digital transformations can strongly influence a company’s value creation and play a vital role in investment decisions. However, there needs to be more research surrounding the role of GRC in digital transformation and how it influences investment decisions.
Some investors may view digital transformation as a negative because companies invest in new technologies that take resources away from revenue-creating parts of the business. On the other hand, however, the team’s research was based on the hypothesis that investors would see good GRC practices in digital transformations positively, as it positively affects the companies’ digital transformation. Therefore, the research team aims to determine whether investors find the role of GRC in digital transformation significant to their investment decisions.
The team conducted their research by surveying 100 participants recruited from Amazon Mechanical Turk, an online research platform. These participants were from a diverse demographic group that was highly educated and investment literate and represent suitable proxies for non-professional investors. Participants were given a brief background of the study and that the questions in the survey would be based on whether investors consider GRC in digital transformations in their decision process.
The participants were asked to rate their agreement with 26 statements on a 15-point scale from minus seven strongly disagree to plus seven strongly agree. The survey’s 26 statement questions were broken down into five distinct themes:
- General questions about the importance of a good digital transformation
- Questions related to the governance of digital transformations
- Questions related to the different types of risk associated with digital transformations
- Questions related to compliance related to digital transformation initiatives, and
- Questions related to factors that influence the participant’s investment decisions in the digital era.
The results of the survey were broken down thematically. For the first theme, it was clear that investors see digital transformation as necessary for companies. Most strongly agree that companies should have a strong strategy in place, report on their digital transformation, and possess the skills and employees to enact it. 98% of the participants agreed that the COVID-19 pandemic accelerated digital transformation. Overall, the answers aligned with the researcher’s hypothesis that investors place importance on digital transformation in their decision-making process.
For the second theme, governance in digital transformations, the respondents overwhelmingly agreed that governance is integral to digital transformations. 96% of those surveyed agreed that companies should have a specifically designated formal committee to govern digital transformation initiatives. Furthermore, most strongly agreed that the committee should have adequate leadership from top management and that companies should embed their digital transformation strategy into the company’s broader business strategy plan. On the other hand, most respondents saw the governance of digital transformation activities as a risk, with 94% seeing it as a strategic risk and 87% seeing it as an operational risk. Overall the respondents’ answers agree with the researchers’ hypothesis that investors consider the governance of digital transformation initiatives important.
Responses to the third theme on risks associated with digital transformation initiatives found that 96% agreed that digital transformations carry cyber risks, data security risks, and third-party risks. Whereas 90% of respondents agreed that digital transformation initiatives carried operational risks, compliance, legal, and strategic risks. However, less than 90% of respondents thought that digital transformation initiatives brought technological risks. The answers to this theme’s questions align with anecdotal evidence of increased digital transformations attracting cyber crimes, which have had substantial financial implications for companies and their customers in recent years. The responses to this theme confirm the research hypothesis that investors consider the risks of digital transformation initiatives in their decision-making. Companies should ensure they have internal controls in place to mitigate the various risks they could be exposed to with a digital transformation to entice investments.
The fourth theme related to the legal and compliance ramifications of digital transformation initiatives. 93% of the participants agreed that compliance with legislation becomes more complex due to digital transformation initiatives. 94% of respondents agreed that to alleviate the new complexities of compliance, companies should invest in tools and tech. Again this confirms the researchers’ hypothesis that compliance factors when implementing a digital transformation matter to investors. Therefore, companies should ensure they have the right tools to adapt to the complexities of compliance and that the investments they make to adapt do not exceed the benefits of adopting digital transformation initiatives.
The final theme featured questions regarding the factors investors find important in the era of digital transformations. An overwhelming 98% of the respondents agreed that digital transformation plays a significant role in investment decisions. The participants said of the three aspects of GRC, risk management was the most important in their decision-making, followed by compliance. This should come as no surprise as investors are extremely risk averse. The responses to this theme indicate that investors consider GRC in digital transformation initiatives, and companies should consider all three of these to attract investors.
Previous research has proven the benefits of a digital transformation for companies, it can make processes more efficient, bring in new revenue streams, and differentiate businesses from competitors. There is also growing evidence that GRC is an essential component of ensuring digital transformations are effective, compliant, and safe. This critical research from the team built on previous knowledge in this field to look at GRC in digital transformations from an investor’s perspective instead of the typical company’s perspective.
The overall results of this study confirmed the team’s original hypothesis that investors are placing importance on GRC in digital transformation. Specifically, the respondents agreed that companies should have a formal committee to manage the governance of their digital transformation, digital transformations increase business risks, and digital transformations complicate regulatory compliance. This study shows that companies should take GRC into consideration when they are adopting digital transformation initiatives to attract investors.
While the team’s research will be a vital addition to the literature, it also opens up avenues for future research to deepen our understanding of the role that GRC in digital transformation plays in investors’ decision making. For example, the team’s research examines investors’ perceptions of GRC in digital transformation, but not their actual investment decisions. Future research could extend the study by examining how GRC in digital transformation, along with other related factors, impacts investors’ actual investment decisions and outcomes.
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