Remarks by the Supervisor of Banks at the annual Directors’ Conference
The Role of the Board of Directors in the fourth industrial revolution – the digital revolution
The digital and automation age has changed our lives and the lives of various companies in the economy. Companies from many industries—including retail, communications, tourism, manufacturing, and medicine—are being, and will continue to be, influenced by the digital-technological revolution. And this is also true in the financial and banking industry.
The large risk that has been created for companies due to the digital revolution is that anyone who doesn’t change simply won’t exist. In a slightly less serious scenario, anyone who doesn’t change will suffer a significant negative impact to his profitability. The question therefore arises: what is required and expected of the Board of Directors in such a world? In my view, the Board of Directors must lead the company’s adaptation to the new world from technological, business and organizational standpoints.
I would like to make a number of points to show how the digital revolution is reflected in the world of banking:
- The smartphone has become the main way that customers communicate with the bank, so that fewer and fewer people come to the branch. At the same time, customers’ satisfaction with digital services is very high (which we saw recently in a survey that we conducted and published).
- There are digital banks around the world that operate without branches.
- Automation is entering many business and operational processes, and replacing many workers at the service centers.
- And more than anything else, nonbank technology companies are entering the world of banking and becoming financial players that also offer various banking services. They are much more “lean” and efficient. In other words, competition in the banking field has grown tremendously due to the digital revolution.
- Alongside the technological changes in banking, there are also complementary aspects to the revolution that do not involve technology:
- It is difficult for some customers to adapt to the change, particularly parts of the elderly population and those who are less technologically savvy. The public is submitting complaints to the Banking Supervision Department about the closure of bank branches and of teller windows, and we are requiring the banks to provide a response for these customers through a variety of ways, including the provision of digital training for those customers. Alongside this, the Department also receives enquiries about automated machines that are occasionally broken down. The Department investigates the complaints, and deals with them where necessary.
- The change is also reflected in the many employees that are becoming redundant, as technology replaces their activity.
In other words, the change resulting from the technological-digital revolution is not just technological. It is holistic, and affects both the company’s employees and its customers.
Therefore, the Board of Directors has a central role in leading the companies’ adaptations to the new world. The Banking Supervision Department has made many changes to its directives in recent years in view of the digital revolution—changes that we expect the Board of Directors to lead. In my view, the changes are relevant for implementation in almost all companies in the economy that have directors:
We changed our directive on the Board of Directors (Proper Conduct of Banking Business Directive 301), to require:
- That the Board of Directors include at least one director with expertise and proven experience in technological fields
o In a world of changes, we need the proper mix of members on the Board of Directors. The Board must include directors with expertise in “old world” issues, as well as those from the “new world”. We cannot lead a revolution or organizational adaptation without having the necessary expertise within the Board of Directors.
- We recently required the Board of Directors to appoint a designated committee for information technology and technological innovation matters. We set out that the committee will need to discuss, at the very least:
o Information technology policy and strategy, including information security, the management and use of databases, and technological innovation to support business innovation;
o How to prepare the banking corporation for banking of the future and how to deal in business terms with the challenges of technological innovation in general and disruptive innovation in particular.
o Technological risk management, including information security and cyber risks.
In addition, during the annual meeting I led between the Banking Supervision Department staff with each of the Boards at the various banks, we called on the Board:
- To implement dedicated training programs for the Board in areas of technology and innovation, in order to learn in-depth about the changes. These programs should deal both with issues related to business opportunities and issues related to various risks. Such issues include automation, artificial intelligence, open banking, cloud technology, digitization and digital transformation. The programs should also deal with cyber and information security issues in the new world, integrating automated tools to identify anomalies and network fraud, and more. The Board of Directors also needs dedicated training in order to lead the organization’s strategy and in order to have the ability to challenge management.
- We required the Board of Directors to re-examine the suitability of the bank’s core systems for the new world. Today, it is clear to everyone that in order to respond rapidly to changes, organizations require IT systems that are flexible, and that make it possible to define a new product and rapidly integrate it in the field.
- We have encouraged the Board of Directors to discuss various scenarios in the world of banking that are possible due to technological changes, including changes that are already taking place. For instance, in China, we see how technology has enabled companies that started out in e-commerce, or even in gaming, to become new banks and compete with existing banks. The Boards of Directors of the Israeli banks must study the changes and ask themselves how prepared they are for a situation in which such companies, or similar ones, begin to operate here and compete with them.
- In addition, and because the revolution is not just technological, we issued a directive that encourages the banks to significantly streamline, in order to adapt their production functions, and transition them from people-oriented to technology-oriented. As a result, the banks have become far more efficient in recent years. This is a process that is not easy, but it is necessary, and it is being done in a way that respects the banks’ employees and is intended to ensure the banks’ future viability.
- Furthermore, we have called on the Boards of Directors to lead and support the management in making the big changes required in the organization. The changes are not easy—for managers, employees, and even some customers.
In summation, the Board of Directors, and each of the directors of various companies in the economy, have a very important role today, beyond the traditional roles of governance and supervision. They must ensure that the organization is prepared to adapt itself to the technological-digital revolution, and they must lead that preparedness.