Leadership Skills in the Digital Transformation Wave of Central Banks

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In an era of unprecedented change, many companies are faced with the challenges of digital transformation. Becoming a digital business means using technology to create new value in business models, customer experiences, and the internal capabilities that support core operations, whilst also generating efficiencies. The successful adoption of new technologies, digital ways of working and managing teams is supported by a culture of curiosity, which helps to rethink any process or product within the framework of the respective industry. Digital transformation not only fosters the creation of new knowledge but also lays the foundation for cultivating cultural change within organizations. Under such circumstances, people must be digitally competent. Digital competence is a combination of knowledge, skills and attitudes with regards to the use of technology to perform tasks, solve problems, communicate, manage information, collaborate, as well as to create and share content effectively, appropriately, securely, critically, creatively, independently and ethically^[1]. To succeed in any digital transformation project leaders must play a key role in enabling their teams to apply digital competencies, establishing resilience to change, and building new digital sovereignty.

What leadership skills are required within complex organizations and teams to transform, adapt, and lead through the digital era?  

Central banks have been characterized by various complex business models resulting from the different functions and responsibilities within and outside of the bank, where teams work according to procedures, standards, and clear instructions. To manage the growing complexity of their future tasks, such as supervising banks and financial markets and approving new financial market products such as tokens, central banks must adapt to modern technologies. This adaptation will enable them to respond more effectively to changes in the financial sector and strengthen their role as regulatory and supervisory authorities in an increasingly digitalized world. While ECB^[2] quotes strong governance and steering as requirements for the digital transformation, various scholars have researched and found evidence on the destructiveness and inefficiency of authoritarian and hierarchical leadership. Nevertheless, in recent years, central banks have undertaken projects and structural changes to become more agile and flexible, implementing new leadership styles and frameworks to transform. In its Strategic Planning statement 2024, the Banco de Espana^[3] identified technological change as a primary trend and an opportunity to improve efficiency. In the same statement, the bank also explicitly expressed its strategic objective to modernize and become more efficient, flexible, and innovative. In line with this, Deutsche Bundesbank^[4] has introduced an unprecedented plan for the bank’s digital innovation. While central banks face more stringent requirements and regulations than other industries, they are aware that rigid structures harm their efficiency. Under the new working conditions imposed by, inter alia, the Russian-Ukrainian conflict and Covid-19, banks have realized that also in flexible environments, teams can be efficient and drive change. 

Rich research supports the idea that flexible teams under the correct leadership will have various benefits to companies, ranging from innovation all the way to employee satisfaction (Bruch et al., 2018)^[5]. Leaders and their styles are required to build the correct teams and keep employee satisfaction and drive high. This once again demonstrates that adopting new IT solutions alone is not sufficient for a successful transition. To truly speak of a transformation, a cultural shift is also necessary. Digital sovereignty refers to the ability of a nation, organization, or individual to control and manage their digital assets, data, and technology infrastructure independently and securely. Research shows that the major differences between hierarchical organizations and organizations at the forefront of innovation are the soft skills their leaders / management have, namely revolving around 3 factors: how they manage the energy in their teams, how they lead their teams, and how they incentivize teamwork. This does not mean that all teams require solely these leadership soft-skills, but rather an appropriate mix between goal-oriented and inspirational leadership, leading to digital sovereignty of the team. 

The Modern 360° Leadership framework (Bruch et al., 2018)^[5] introduces three dimensions that, when addressed, may help leaders achieve the desired mindset change in their teams. The first dimension of the framework is vertical inspiration, where leaders focus on the peoples’ emotions, by giving them meaning and inspiration in the tasks they are doing (a clear mission statement). The second dimension is horizontal sharing, where the leaders assign tasks and share responsibility with the team to achieve the goals and mission set in the first dimension. Like in the agile framework, the idea is for the team lead to share her/his responsibility with the team and make them feel “owners” of their topics. This leads to more motivated team members as they are given a sense of belonging, purpose, and the motivation to bring things forward (being part of the change). Through these mechanisms, leaders not only delegate responsibility to employees but also allow them to partake in the success. By actively engaging team members in the process, digital transformation becomes ingrained in the team spirit, fostering a collective drive to advance change initiatives. This inspirational leadership approach proves to be more effective than merely dictating tasks and providing an exhaustive list of instructions.

With a clear notion of what leadership style is the most appropriate for digital transformation, it is just as important to find the perfect partner for the journey. Particularly a change partner that will be able to support, encourage and drive the new leadership culture. The ingredients of the digital transformational success are the organizational capabilities, the leader’s capabilities, and the people capabilities. In a Study conducted by the “Institut für Führungskultur im Digitalen Zeitalter (IFIDZ)” only 13% of surveyed employees recognize the creativity and innovation from their managers. 74% of all surveyed people responded that innovation is hindered by the organizational culture. However, innovation is key to succeed in a digital world. 

In conclusion, with increasing complexity in central banks, their business models, and products, it would be contradicting to draft an exhaustive list on what constitutes the ideal leadership culture. Just as organizations need to change and adapt, so do their leaders. Nevertheless, specific leadership traits will foster better teamwork and inspire teams to lead the way for digital innovation and transformation. Instead of thinking in hierarchical structures, senior managers should place leaders that focus on the 3 mentioned factors: team energy, team leadership through inspiration, and teamwork. The mix of goal-oriented management and inspirational leadership will enable banks to transform faster and perform better than their competitors. The key is to identify which leadership style is required during specific phases, and to find the perfect partner who can support the change process from both technical and cultural perspectives, as well as help identify improvement potential within the organization and teams.

The key components for successful digital transformation are: people and culture, coupled with a clear vision and leaders who combine trust, resiliency, vision with excellent innovation and change capabilities, and who are ready to embark on a journey filled with uncertainties. Only with a new digital sovereignty, a culture of innovation, and agile working methods that enable rapid development, testing, and learning, will the digital transformation of central banks become a success.

Authors

Sources:

^[1] Defined by a major EU research project:

https://digital-competence.eu/dc/front/what-is-digital-competence/ derived by the European Parliament’s inclusion of digital competence, as one of the eight core competence for lifelong learning.

^[2] https://www.bankingsupervision.europa.eu/press/publications/newsletter/2023/html/ssm.nl230517_3.en.html

^[3] https://www.bde.es/f/webbde/SSICOM/20200115/Plan_Estrategico_2024_en.pdf

^[4]  https://www.bundesbank.de/de/presse/reden/die-digitale-bundesbank-und-ihre-technische-plattform-901496

^[5] https://www.linkedin.com/pulse/leadership-40-360-inspiration-shared-responsibility-heike-bruch/