Software is Eating the World. Technology is Eating Corporate Governance.

Julia Fleenor Avatar

Original post by Techquity Founder & CEO, Anthony Bay

Over my decades as a senior operating executive at companies including MicrosoftApple, and Amazon, my stints as a CEO of startups and having served on a number of public and private boards, it’s become crystal clear to me that a significant percentage of CEOs and Boards of Directors tend to underinvest in technology governance and oversight. 

I was privileged last week to present to a class of senior executive and board leaders at the Columbia Business School, Executive Education Program. My colleague Shiva Rajgopal organized and chaired the program sessions. 

The topic of this program is “Developing Exceptional Board Leaders” and our session was on technology governance and managing disruptive technologies. 

In today’s world, any successful company is also a technology company. 

That means learning to think and operate like a technology company. This imperative applies not only to senior executives and CEOs but also to boards and investors. 

The basic outlines of my talk are below. Not coincidentally, these are also the outlines of our thesis for why Techquity, the firm that I am now building, exists. 

Three Classes of Operating Assets: Financial, Human, Tech

Surprisingly, most CEOs and Boards of Directors only focus their energy and attention on two of these classes. Great attention and detail are invested in the proper management, governance, and oversight of financial and people assets. Audit committees work with CFOs, and rely on outside auditors; Comp Committees work with Heads of HR and rely on outside compensation experts to assist them. 

Technology governance is far more immature and often non-existent for many Boards. Only a small percentage also have technology subject matter expertise — the equivalent of a CIO, CPO, CTO, or a founder who has built a technology company Many companies are adding technology governance but they should make it a much higher priority – because technology is not only a critical success factor in business execution, it’s also the lever that can drive growth and innovation more than anything else in existence today.

Historically, technology assets have not received the same degree of focus from CEOs and Boards as financial and people assets. 

CTO along with technology strategy and management have very little governance and oversight by BODs. Far too frequently, even company CEOs give technology insufficient attention even though it is the most powerful and important financial and innovation lever for businesses. In truth, this is often because board members and CEOs don’t have the expertise to truly understand the technology landscape and in many cases their own company’s core technologies. Many are also unable to truly judge the expertise and fit of their own technology leaders.

Understanding technology has become critical to building smart strategies and understanding the true state of one’s business, customers, and metrics. Technology strategy should work backwards from the customer and business challenges and opportunities it is meant to address. Success metrics need to be determined, tested, and relentlessly measured. The priority of technology investments needs to be recognized and properly planned and managed.  Technology decisions need to be assessed and reviewed regularly, just as financial decisions are. Technology leaders and teams need to be evaluated based on their performance as are marketing, sales, and other functional organizations. Great CTOs are also great business leaders and their work should be elevated to the Board level, both because it’s so critical and because the Board can often learn critical lessons from technology leaders. 

Today, every company must be a great technology company

This has long been a cliche, right alongside the valid assertion that software is eating the world. But spending money on technology or having a digital transformation strategy is insufficient for becoming a great technology company. For BODs and CEOs, a deep understanding of how technology can be a force multiplier is essential in building lasting competitive advantage. This is not a matter of mere optimization, of improving margins through greater efficiency – although that’s also a critical aspect of any technology strategy and plan. Rather, it’s a wholesale shift in thinking in how businesses can and should operate and a major change of framing on how to build great companies and defensible advantages. Boards must be able to engage collaboratively and effectively with CTOs just as they do with CFOs. 

Technological disruption is one of the top issues facing companies today and it is an increasing threat.    

Examples are everywhere; Tesla and the auto industry, SpaceX and the space industry, Netflix and the media industry, Apple and the mobile phone industry, and numerous “unicorn” tech companies disrupting entire industries. It is happening in insurance, health care, transportation, financial services, and on and on and on. The technology innovation is exponential, driving valuations that seem indefensible but over time prove accurate.

Let’s take cars. Making electric cars is one thing. Building them at scale, cost-effectively, and iterating at speed is another. Tesla approached a car as a technology problem, not as a way to apply technology to a vehicle. Many of Tesla’s key product and engineering leaders came, not coincidentally, from software companies rather than automotive companies. Tesla’s market cap is more than all major car companies combined. This is the value of being technology-first and placing technology at the forefront of executive concerns.

We are seeing the same thing happening in the media business. Netflix has already emerged as the clear winner in streaming. Other services are now retrenching or struggling to hit growth and revenue targets. Everyone got in the game. But just having a direct-to-consumer video service is different from winning at streaming and at scale. Netflix is a technology business that happens to deliver video and content.  

Almost equally important are risks to mission-critical operations from technology failures. 

News reports on an almost weekly basis highlight the massive impact on companies from the failure of their technology to support mission-critical business operations. After crew scheduling systems collapsed, Southwest Airlines faced a nine-figure impact on its earnings. Applied Materials revealed that business disruptions caused by a ransomware attack on a key supplier might reduce sales by hundreds of millions. A key system for the Federal Aviation Administration failed when a contractor failed to properly back up a database, resulting in major travel disruptions. And on, and on and on. Technology failures impact almost all core aspects that matter; revenue, market value, brand value, customer experience, and employees.  

This should be a wake-up call for CEOs, boards, and investors. We must ask ourselves:

  • Why does this continue to happen?  
  • Why are companies often reactive rather than proactive?
  • What are the known and unknown technology risks the company faces? 
  • How do boards and investors understand, identify and work with management to mitigate these risks before a crisis hits? 
  • What best practices must be adopted to manage these risks and opportunities?
  • How do boards and CEOs truly assess the state of their own technologies and team?

It is ultimately the responsibility of the Board of Directors to work with management to ensure that technology is well managed to support the company’s business and financial objectives.  

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s involving publicly traded companies such as Enron Corporation, Tyco International plc, and WorldCom. High-profile frauds shook investor confidence in the trustworthiness of corporate financial statements and led many to demand an overhaul of decades-old regulatory standards. 

Similar issues now face companies with regard to technology. As an executive or corporate board member you have your financial statements and compensation independently reviewed and audited, but when was the last time you had your tech audited?

Every board member must be able to read and have a basic understanding of financial statements. How many can say the same for tech? As a board member, do you REALLY know how vulnerable the technology that runs your business is? How many boards or investors know the true situation at their company regarding mission-critical technology and tech teams?  

It is insufficient to rely on management as the sole source of information on technology, any more than a board would rely solely on management for the reliability of financial information. 

Most Boards lack sufficient subject matter expertise in technology.

Many boards have no members with deep subject matter expertise in technology. Boards do have members with the expertise to understand arcane financial accounting practices and decode intricate financial projections. 

In the same way that it became a critical priority for boards to add financial subject matter experts and to ensure that they had a properly functioning audit committee with properly skilled chairmen, it is now time for boards to do the same with technology. 

Without help, it’s unreasonable to expect most board members to look at a system architecture or technology strategy or engineering and product metrics and judge the health of a project or product.

Boards should make it a practice to obtain second opinions on technology and innovation from external, independent, subject matter experts. To be successful, Boards and Tech Committees must have deep knowledge of how technology initiatives succeed and fail, of what topics to prioritize, how technology works today and the driving forces of technological change.   

In addition to recruiting subject matter experts in technology, continuing education on technology governance for the broad range of board members should become part of the curriculum of leading universities such as Columbia. Just as board members need a basic understanding of key finance and accounting principles, the same applies to key tech principles.

A Growing Imperative For Technology Committees on Boards of Directors

There is no “one size fits all” approach to technology governance, but the issue must be prioritized by every company. Each company is unique, and the right focus depends on the nature of the business, the maturity of its technology, competitive and disruptive threats, global vs national operations, and many more factors.  

In order to really take the pulse of company innovation and to aid results, companies should consider creating a Board level Technology and Innovation Committee. These committees and the subject matter experts on them can work with management and deliver informed and constructive governance for technology initiatives. They must also have access to third-party advisors who can perform the more hands-on work required to support Tech Committees to do their job. This is conceptually similar to the role third-party advisors fulfill for Audit and Compensation Committees. 

A growing number of boards rely on dedicated Technology Committees staffed by subject matter experts. Approximately 9% of the Fortune 500 have such a committee, although some of these are focused on cybersecurity or, in the case of life sciences, technology for drug research and production. Increasingly we see public as well as private companies adding this committee to their board, and recruiting board members to staff them. 

I have formed and chaired Technology Committees for both public and private companies, and in each case, the impact has been rapid and material. Tech committees help raise the bar for the whole board. When things are measured and managed properly, they tend to improve. I believe that Technology Committees, adopted more broadly, could lead to measurable productivity gains across wide swatches of industries and the economy in general. Better governance of technology will increase efficiency that enables companies to grow faster with fewer resources. I look forward to testing this hypothesis in the upcoming years and I would love to hear your thoughts. 

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