Under Pressure

Technology continues to dominate the global business landscape but is enough being done to safeguard organisations from the threat of attacks or even extinction?

Technology is rapidly becoming a top priority for listed-company boards. They are recruiting directors with tech backgrounds, visiting Silicon Valley, sourcing advice from external experts, and forming tech committees. But their efforts, while laudable, could be akin to holding an umbrella up to a tsunami.

Technology threats and opportunities are emerging from all angles. Cybersecurity is adding new layers of risk management to large organisations.

Social media is reshaping human communication and interaction, and industries. Technology is digitising, disrupting and destroying traditional business models, and challenging massive technology capital-investment allocations, because everything is moving so quickly.

“The digital tsunami has already struck the shorelines of global business,” says David Beatty, Conway Director of the Clarkson Centre for Business Ethics and Board Effectiveness at the University of Toronto.

“The water is rising but many directors still do not believe disruption to their organisation is happening or cannot understand the potential damage. The response, generally, from boards has been inadequate. The majority are not prepared.”

The change is so profound that boards might have to rethink structures and processes to govern through an era of digital disruption. Instead of focusing mostly on whether the board has sufficient tech skills, directors might ask: how can we ensure a digital mindset permeates through the organisation and that it can adapt quickly to the unknown?

That could involve boards testing whether the executive team has sufficient digital capacity; spending more time with chief information officers (CIOs); changing succession planning and reward structures to encourage a company-wide digital mindset; and working with human resources executives to understand if the organisation has the right people and capabilities to deal with the new machine age as more jobs are automated or blurred with technology.

It could also mean boards forming tech advisory panels or permanent committees, similar to audit and remuneration, and opening up strategic planning processes to a wider audience of confidential advisers, possibly even investors. The goal: to source external perspectives on how technology could enable or derail strategy over different time horizons.

Beatty says too many boards see industry disruption – think Airbnb in hotels or Uber in taxis – as a future threat, when it may be destroying value today without directors realising it. He cites capital allocation in banks.

“Do directors really know if their bank should spend US$6 billion overhauling IT systems, or US$4 billion?” he says. “Do they know if the billions are being spent on technology that could be quickly redundant due to disruption? I don’t believe any bank director in the world truly knows if their organisation is spending the right amount on technology right now. Most are flying blind because they don’t have skills in this area.”

Skills shortage?

About 5 per cent of directors of companies in the S&P 500 index in the US had operational experience in information technology according to research by the Clarkson Centre and Stanford University. Only 6 per cent of board directors and 3 per cent of CEOs of leading banks – an industry facing significant disruption in parts from fintech start-ups – have professional technology experience, according to an Accenture report last year.

Anecdotally, Australian boards are similar. Directors of the top 100 ASX-listed companies have an average age of 64 and the majority have executive management, legal or finance backgrounds. CIOs, executives who have run large tech groups, or start-up tech entrepreneurs are rare on most listed-company boards, although it is starting to change.

The response by boards to this skills gap has been to recruit younger, tech-savvy directors to improve skills diversity. Wal-Mart Stores Inc in the US, for example, recruited Kevin Systrom, the 31-year-old co-founder of photo-sharing service, Instagram, to its board in late 2014.

Beatty is worried by this trend. “You risk ending up with a board full of one-dimensional directors who bring a certain skill to the board but lack that general business experience, history and judgement,” he says. “The last thing you want is a bunch of kids on the board who have been given a hammer in a particular area and can only bang on about one thing.”

Launa Inman MAICD says it is incumbent on all directors to understand how technology is affecting the organisation and its industry. “For many organisations, it is not a question of whether they will be disrupted, but when. The challenge is you don’t know where that disruption could come from or how quickly. It must be something the entire board thinks about on an ongoing basis, not only one or two directors.”

Inman is a non-executive director of Commonwealth Bank of Australia, Bellamy’s Australia and Super Retail Group, as well as several not-for-profit organisations.

She says directors and executives must understand technology from the customer’s perspective and how it cuts across the company.

“Directors with specialist tech skills are valuable, but more important is the board being able to join the dots and see how technology is changing the customer experience and enabling organisational strategy.”

Inman, a former managing director of Target Australia and Billabong International, has a special interest in technology and the consumer. She recently presented at the prestigious Retail’s Big Show 2016, hosted by the National Retail Federation in New York, and closely follows retail technology trends, particularly in the US.

The Commonwealth Bank in 2014 sent Inman and fellow directors to Silicon Valley to meet with executives from several of the world’s largest tech companies, university experts and tech-focused venture capitalists. More boards of large Australian companies are expected to visit offshore technology clusters on fact-finding missions or source advice from technology CEOs or futurists this year.

Inman says of the visit: “It broadened my understanding of how technology can and will be used in the future and the big shifts that are occurring. As a director, you use this knowledge and ongoing scanning of relevant technology news to form a view of how technologies are evolving and how that could affect your industry.”

Directors, Inman says, should immerse themselves in technology. “I have made it a point to use Airbnb, Uber, Pinterest and Airtasker, for example. The best way to learn about technology and different social media is to follow and use it.”

Like Inman, many directors are upgrading their technology skills and knowledge. They are attending technology presentations from large professional service firms or management consultancies, following leading technology thinkers on LinkedIn or Twitter, doing courses and even attending software-coding boot camps. But is it enough?

A pragmatic approach

Anything directors can do to enhance their technology skills is, of course, valuable. However, a more important issue for the board is whether the executive team has sufficient technology skills, a digital mindset (depending on the industry) and capabilities to adapt to disruption.

Sir Ralph Norris FAICD, chairman of Fletcher Building and Contact Energy, says boards must be confident the organisation’s executive team is tech-savvy and that it has a first-class CIO who understands latest tech trends.

Norris, the former CEO of the Commonwealth Bank of Australia and Air New Zealand, is one of few directors who began their career in technology and worked as a CIO before leading corporations. He successfully oversaw a billion-dollar upgrade of the Commonwealth Bank’s IT systems that began in 2006, a project widely regarded as the genesis of CBA’s technology advantage over its Australian rivals.

“All these board trips overseas to learn about technology are interesting, but they won’t deliver a great deal in the end other than putting the fear of God into directors about technology,” Norris says. “The more important thing is the quality of the executive team and their capacity to understand technology and deliver large tech projects on time and budget.”

Norris says boards can take steps to understand the executive team’s tech capabilities. As chairman, he has joined the CEO on interviews of prospective CIO candidates. “The board should get more involved in the CIO appointment, make an effort to spend time with them, and listen to their views.”

Developing board processes to approve large technology projects and assess their implementation is critical, Norris says. He organised for the Commonwealth Bank board to receive independent external advice on the technology upgrade that he and the implementation committee, involving the bank’s most senior people, were expected to deliver.

“Many directors have had an unhappy experience with technology over the years,” Norris says. “We have all seen and heard stories of the legion of IT projects that went off the rails, costing twice as much or taking twice as long to implement. With large tech projects, directors typically do not have the skills to challenge what is being put before them, because so much of the project decision-making is based around price.

“Also, legacy tech systems being upgraded have often been poorly documented so directors may be making decisions based on incomplete information. It’s very important that boards source external, specialist advice on large tech projects and get a second opinion.”

Norris’ view about the executive team and technology makes sense. But in practice many boards struggle with recruiting executives with the right technology skills for the strategy, or fail to incorporate the organisation’s tech needs into succession planning.

Egon Zehnder managing partner, Neil Waters, says his firm is receiving more search mandates to find executives with strong tech experience.

“Too many recruitment briefs are poorly thought through when it comes to technology. It comes back to a lack of strategic clarity: if the board isn’t sure how technology will affect their organisation, and the commercial issues they want to resolve, they will struggle to find the right CEO.”

Waters says: “Searching for a CEO with an IT background is not enough. Large organisations need CEOs who understand how technology affects the entire organisation, and who are capable of building teams across a range of areas, can adapt quickly to technology-driven change and capitalise on it. That starts to sound like we are looking for a super hero, so the best thing a board can do is engage to develop real clarity on the two or three most important things they are looking for in a CEO and why. That takes time, but it is worth every minute.”

Barrington Consulting managing director, John Barrington FAICD, says boards must go further than ensuring the executive team is digital savvy.

He thinks of technology’s development within companies in three phases: first, as a service provided by the IT team; then an enabler of strategy; and now as a digital mindset across the organisation. “Most companies are still stuck in phases one or two. Few older organisations have developed a true digital mindset across their workforce,” he says.

Barrington, a prominent strategy consultant, spent 10 years in IT and started a big-data and predictive-modelling company before branching into consulting and governance. He chairs the Perth International Arts Festival and Anglicare WA.

Barrington has advised boards and executive teams to form digital task groups that deal with technology issues. “It ratchets up the board’s awareness and understanding of technology,” he says.

“All too often, boards do not form a tech task group or committee until the unexpected rise of a digital competitor. They need to get ahead of technology governance by creating structures with more formality and greater capacity to deal with digital issues.”

A technology culture

Boards must also consider whether the organisation’s culture embraces technology. “Directors have to think more holistically about technology,” Barrington says. “They cannot focus on it only as a skills issue. They need to understand how key performance indicators, remuneration incentives, succession planning, and training and development plans, support the organisation’s current and future technology needs.”

Beatty says boards should consider forming permanent technology sub-committees. “Before Sarbanes-Oxley (legislation in the US) came along, boards were full of what I call gifted amateurs who excelled individually in their field. The new rules required the audit committee to have an audit specialist,” he says.

“The Dodd-Frank Act (in the US) required risk committees on banks to have directors with specialist risk experience. It might be time for technology committees that have directors with deep line-experience in technology. It won’t be easy to treat technology as a separate area because it cuts across strategy. But the underlying need for boards to beef up their resources on technology risk-management is very real.”

As with other tsunamis, the digital version is unlikely to give boards much notice when it hits, or time to respond. Directors who should have watched technology ripples form into small trends, then larger ones, over many years – as is often the case with disruption – could end up governing an organisation that is washed away.

Top technology tips for boards

• Does the organisation have the right capabilities and people to deal with the new machine age?
• Forming a technology advisory panel or committee provides external perspectives on how technology could enable or derail strategy over time.
• Does the executive team have sufficient technology skills, a digital mindset and capabilities to adapt to disruption?
• The board should get more involved in the appointment of the chief information officer, spend time with them and listen to their views.
• Developing board processes to approve large technology projects and assess their implementation is critical.
• It is very important that boards source external, specialist advice on large technology projects.
• Searching for a CEO with an IT background is not enough, they must understand how technology affects the entire organisation.