4.1 The Board and Technology: An Uncomfortable Pairing
I still recall my first time going in front of a board of directors. To say I was nervous would be an understatement. I was among a group of three IT vice-presidents given the “opportunity” to present our Y2K (Year 2000) plans to our board. We built our respective parts of the presentation and rehearsed multiple times before going into the board. We wanted to explain all the steps we were taking to ensure continuity in operations as we approached January 1, 2000. We specifically tried to eliminate technical jargon and focus on the business outcomes we were working to achieve.
We were the second group after an opening executive session to present to the board. We were given 15 min to explain what we were doing for Y2K. We broke the presentation down into applications, operations, and continuity (risk mitigation). I had the operations section. By the time I stepped in front of the board two members were beginning to nod off. By the time we had completed (in roughly 12 min), three board members were completely asleep. One board member even snored a bit. We replied to the one question we received and left the meeting.
I still laugh when I think about that meeting. At the time, no one knew what Y2K would mean in terms of business disruption. IT was center stage and was being tasked to keep all the company systems up and running. In other words, it was a pretty big deal. And we couldn’t keep 25% of the board members awake to gain an understanding of what we were doing.
That was more than 18 years ago. Things have changed, right? Well, paint me skeptical. I reviewed the board composition of the largest 50 companies (excluding technology and telecommunications) in the United States (US). Of those 50 companies, 25 of the boards have zero technology experience. The other 25 have roughly 29 board members with some technical background. I admittedly was generous in getting to this number as in some cases the board member may have simply been CEO of a technology-focused company.
Let’s think about this for a moment. Less than 5% of board members in the top 50 companies in the US have a background in technology.
How do we balance this statistic against quotes from recent CEO surveys? The KPMG CEO Outlook for 2016 stated: “CEOs believe technological change will be one of the biggest factors impacting growth over the next three years, second only to economic factors.” In the same survey, KPMG noted: “two-thirds of chief executive officers (CEOs) believe that the next three years will be more critical than the last 50 years. The forces creating this inflection point will be rapidly evolving technology and the speed of transformation it unleashes” (KPMG International, 2016).
OK, so it was just one survey, right? Hmm, how about the Gartner 2016 CEO and Senior Business Executive Survey that “shows half of CEOs expect their industries to be substantially or unrecognizably transformed by digital”? Or maybe we should look at the Blog.Datis top five CEO priorities for 2017 that states “Unfortunately, while 90% of business leaders expect their industries to be disrupted by digital trends, only 44% think their businesses are adequately prepared for the changes ahead” (Raskino, 2016).
There are many, many more examples of CEO surveys that put the crosshairs on technology and digital transformation. Nonetheless, the boards of most companies are ill-equipped to provide any semblance of guidance or advice on the topic of technology.
4.2 Board Composition in the US
In fact, let’s dig a bit deeper into the board composition of the top 50 largest companies for just a moment. There are no surprises that former CEOs and CFOs dominate the majority of board positions. However, there are more board members from academia than from technology in these large companies. Consider the pace of technology innovation has been rapidly escalating over the past decade. With this in mind, it is still amazing that the average board member in the top 50 companies in the US (excluding technology and telecommunications) is nearly 63 years old. In fact, there are more than 2½ times more board members over the age of 70 than there are board members under the age of 50 in these large companies.
I do not mean to infer the older board members are not providing value. Many of these board members are stalwarts of their respective industries and deliver tremendous value. However, most of these board members served in industry when technology was considered to only be support for back-office functions and transactional processing.
The role of technology in the modern enterprise has changed dramatically in the past five years alone. The rapid evolution of technology has resulted in a major void for most boards. A quick inspection of the boards of the Top 50 US-based companies reveals a dearth of members with relevant experience to help shape vision and direction regarding digital technologies and digital transformation. Suffice to say, the pace of adoption of digital technologies has caught many boards off guard.
Lack of technology leadership is not limited to the largest company boards. It is widespread across all publically traded companies. Survey respondents to the 2018 Retail Digital Adoption Survey indicated that only 6% of their board members had technical knowledge. However, the overall 6% is somewhat misleading. Ten percent of the board members of organizations categorized as Digital Leaders possessed technical knowledge. This contrasts sharply with the 3% of other survey respondents (Stone, 2018).
The boards of the Digital Leaders were much more active in establishing the digital direction for the enterprise. Eighty percent of the Digital Leader Boards had conducted special meetings on the topic of digital technologies compared to only 33% of the boards for peer organizations (Stone, 2018).
The board dilemma is not limited to the retail sector. In its excellent document, Bridging the technology gap in financial services boardrooms, Accenture highlights the challenges the board of directors faces in the financial services sector. In this document, Accenture notes the “financial services industry has long been the biggest spender on IT… spending more than $360 billion worldwide in 2016.” As Accenture later notes, less than 6% of the large bank boards have any technical knowledge. Accenture also notes: “Digital has changed that. Technology has become an intrinsic part of the business strategy at financial services firms. Digital not only means new banking channels, it also offers a unique opportunity for banks to drive growth and profitability.” The document goes on to quote Urs Rohner, the Chairman of the Board of Directors at Credit Suisse as “Technology competence on Board level is not only a necessity, it will soon become indispensable for financial institutions” (Lumb, 2016).
Deaf Diagnostic
Digital transformation represents a major organizational initiative. As such, the board of directors must provide active support and guidance. Providing active support requires the board to develop technical competencies. In short, technical knowledge on a board is no longer optional
Corporate Governance & Nomination—assist in the board composition, nomination, selection, and orientation of new board members
Compensation—approve compensation plans for corporate executives and directors
Audit—oversight of financial reporting, internal controls, risk management, and internal/external audit
4.3 Why the Board Is Important to Digital Transformation
Let’s apply a bit of logic to this equation. CEOs are saying one of their top priorities for the next few years is digital transformation. They are saying this transformation can “substantially” change their business. We also know cybersecurity is at or near the top of almost every board audit committee. Given this, wouldn’t it make sense for boards to have more than 5% representation of people knowledgeable of the subject matter?
In fact, many boards augment their lack of knowledge by using third parties to perform periodic audits and studies to determine the soundness of strategy or operational discipline (specifically in cybersecurity). Maybe we can live with that? But, if there isn’t a knowledgeable person on the board, how do they fully understand the relevance (and risk) of the information presented by the third-party consultants? In short, in most public companies, the board nominating and selection process isn’t working as it pertains to positioning the board to lead a digital agenda.
Let’s illustrate another problem with the operation of the board through a story. My IT organization had dealt with a difficult cybersecurity issue. While the company’s customers were not impacted, it was a scary moment for management and the board. Understandably, we were asked to discuss this with the audit committee. The issue was complex. The defenses the company had deployed to stop the attack were new, and many of the processes were in their infancy. We were pleased the new solutions and processes had, for the most part, operated as expected. However, some items didn’t work as desired and needed further explanation. We were given a 30-min time slot on the audit committee agenda to cover the issue. Fair enough we thought. We defined the threat, outlined our defenses that worked, ones that didn’t, what mitigating controls operated successfully, and what we believed we needed to do to improve our defenses for the future.
Two days before the Audit Committee meeting we were asked to reduce our time to 20 min. Once in the session, as we went through the slides, we were encouraged to go faster. We finished in roughly 15 min. By the end of the meeting, the head of the Audit committee essentially cut off the conversation to move to the next agenda item.
Absent an expert (which this particular audit committee did not possess) it is impossible to digest the complexity of such an incident and adequately assess the risk to the company in 15 min. From the IT side of the table, it felt very much like a “checked that off the list” agenda item.
We’ve established there are relatively few technology experts on boards today. The previous story illustrates most boards have packed agendas and don’t have time to spend to understand the nuisances and risks associated with digital technology.
Now, let’s compound the problem even further. According to the 2016 Harvey Nash/KPMG CIO survey, only 34% of CIOs report to the CEO. KPMG noted in the survey report that “CIOs are no longer focused solely on delivering the right technology to enable the enterprise, rather they are now the key agent of change for moving enterprise strategy forward” (Harvey Nash/KPMG, 2016).
We will discuss the CIO role in the next chapter. But consider that the 66% of CIOs not reporting to the CEO are often not included in regular board meetings.
So now we have a board with few or no technology experts, compressed time to cover technology issues, and the person responsible for technology in the company not present in board meetings. Given all of this, how does a board properly carry out its mission?
The answer is simple; they can’t. Either the surveys are wrong, and digital transformation is not a top priority for CEOs or the boards for most of these companies are not properly positioned to help.
I would like to think the surveys represent reality in the minds of the CEOs. They see the need to apply digital technologies to their businesses to drive new growth opportunities and better leverage costs. Given that, we would conclude, for the most part, boards are genuinely struggling with this topic.
Please note I did say “most.” Some boards are doing it right. Of the top 50 US companies, five boards had two technology experts in their membership (none had three or more). Not surprising, these boards had a lower average age (60 years versus 63), as their technology representatives were typically a bit younger. Technology comprised, on average, 15% of these boards. In talking with some members of the IT staff in these companies, it was not surprising to see increased direct dialog between the board and the IT leadership team. The annual reports from these companies are sprinkled with references to their transformation efforts such as “transforming personal mobility,” “interconnected experience,” “digital customer experience,” and “speed.”
Deloitte states in their 2017 article, Bridging the boardroom’s technology gap, “The percentage of public companies that have appointed technology-focused board members has grown over the last six years from 10 percent to 17 percent. However, this figure almost doubles (32 percent) for high performers—companies that outperformed the Standard & Poor’s 500 Index (S&P 500) by 10 percent or more for the past three years.” In other words, while having a technology-focused board leader may not be the only reason for this level of performance, it is obvious these high performing companies are in touch with their customers and are taking advantage of their opportunities. Despite overwhelming evidence that necessitates changes in board competencies, Deloitte noted only 3% of public companies appointed a technologist to newly opened board seats in 2016 (Kark, 2017).
Collectively, many organizations and industries are just beginning to start their journey through digital transformation. These organizations need to search for ways to emulate what the aforementioned high-performing companies are doing. It doesn’t necessarily have to be changing their board composition (though I would argue this is likely the best solution for the long-term viability of the board). The use of third parties to educate or inform the board could help jump-start digital initiatives and allow the board to take a more active role in helping shape the vision for their respective companies.
Of course, the board could completely delegate the responsibility for technology to company management. While plausible, it would put the board in a position where it is overly reliant on management’s opinion and has no real way to provide effective oversight.
Unfortunately, most boards have been slow to react to this new need for digital competencies. In a recent survey by Russell Reynolds Associates, 63% of business executives say that partnership with the board is critical to the success of their digital transformation efforts. However, the same survey shows that only 27% of boards are proving advocacy for transformation efforts (Rickards et al. 2017).
4.4 The Role of the Board in Establishing the Transformation Message
Annually, and sometimes more than annually, the board will review corporate strategy and provide recommendations and guidance on where the strategy could be improved. Having witnessed this process on many occasions, it can prove to be an uncomfortable time for any member of executive management that is not well prepared. The board can probe very deeply into assumptions, projections, plans, and assignments. The board’s goal is to ensure management considers all of the potential consequences of its planned actions. Sometimes this is an iterative process, as management needs to do further research to provide information requested by the board.
In the end, the board and management reach agreement on the strategy for the business and set the wheels in motion for execution.
When an organization undertakes a digital transformation effort, the board will play an important role in reviewing the impact of proposed digital technologies in driving business outcomes. As we discussed earlier, digital transformation requires cultural change. Organizations are placing large bets on the benefits of digital transformation. In some cases, the organization’s very existence may be at stake. These are clearly issues that require a board mandate.
Specifically, the board will be asked to review and advocate for the digital strategy, ensure the organization is providing the right level of resources to the effort, evaluate operational risks, and drive an innovative spirit within management.
Once the transformation journey begins, the board still has many important roles to play through its normal committee processes. For example, the Audit Committee will likely request periodic updates, specifically on the risk profiles of the transformation effort. An Audit Committee lacking an understanding of digital transformation (people, process, and technology) can potentially inhibit efforts and derail innovation in the organization.
The Compensation Committee will likely be asked to review new roles and salary structures resulting from digital transformation efforts. The Compensation Committee will need to develop a keen understanding of the impact digital is having on the talent marketplace to carry out its mission effectively.
Finally, the Corporate Governance and Nominating Committee will play a critical role in ensuring the appropriate level of technical knowledge exists on the board to allow it to carry out its mission.
4.5 Building Technology Knowledge on the Board
Ultimately, if the board decides to add technology representation, it is essential to find the right candidate(s). They need candidates who can bring the right mix of technical expertise and business to the table. In other words, they need to find people who can contribute to all aspects of the boardroom decision-making process, not just a “one trick pony.”
Board nominating committees would be wise to leverage knowledgeable third-party groups to help determine the right type of expertise needed to augment their existing board members. Boards typically look for one of three types of technology profiles when they seek to add digital/technology expertise.
Technology industry executives are those leaders who have held executive-level roles in the technology (hardware, software, services) sector and understand how a broad set of organizations use technology to solve problems.
Technology entrepreneurs and founders are those leaders who have successfully started one or more ventures. The status quo seldom encumbers these leaders as they look for innovative ways to leverage technology to solve business problems.
Former or active technology executives from industry (generally CIO or CTO) are usually well grounded in the challenges faced by organizations and can offer sage advice on how to best leverage existing organization technology resources.
Candidate board member profiles
Profile type | Strengths | Potential blind spots |
|---|---|---|
Technology industry executive | • Well-rounded understanding of opportunities provided by technology • Industry trends and contacts (who to talk to) • Strong business acumen | • Lack of knowledge of challenges facing internal IT • Breadth or depth of technical expertise |
Technology entrepreneur or founder | • Idea generator, innovative • Questions status quo • Assertive, not afraid to “push the envelope” | • Ability to contribute across all board topics • Lack of knowledge of challenges facing internal IT • Rules, processes, norms |
Former or active CIO, CTO | • Understands challenges of working from the inside • Awareness of industry regulations & compliance • Application of technology in a business setting | • Generally more conservative • Creativity • Ability to contribute across all board topics |
Through collaboration with management, the board nominating committee should select the best profile fit before starting the search process for prospective new members.
Regardless of the profile, the candidate should have at least some relevant experience in your organization’s industry. This experience allows them to easily participate in the broader board discussions and form a basis for recommendations for potential technological applications. It is also vital for the board to foster a relationship with the leading technology executive in the company. Audit committee meetings do not suffice. If a company is serious about digital transformation, it is imperative the board has a method to touch base with technology leadership on a regular basis.
Having discussed the board’s role we are ready for the next major step in ensuring digital transformation success: having the right leadership in the technology organization.