How effective boards approach technology governance

As technology becomes increasingly critical to business success, management requires stronger guidance from the board.

December 9, 2022
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Sidhartha Meka

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As technology becomes increasingly critical to business success, management requires stronger guidance from the board. Four engagement models have been shown to be effective.

 It is evident in various industries and areas that technology plays a crucial role in the business strategies of all organizations. Despite this, boards often find it challenging to effectively involve themselves in technology matters and there remains a disconnect between the board and management when it comes to significant technology projects.

A management team presented a proposal to the board to purchase a high-tech system they believed would give them an edge over their competitors. However, due to the board's lack of expertise in technology, they were unable to evaluate the proposal critically and ask important questions about the system's potential impact on the business. This resulted in a lack of oversight and guidance during implementation, leading to costly mistakes and ultimately, a lack of significant value delivered by the vendor. In retrospect, the team and board realized that a more basic and affordable solution would have been just as effective in achieving the project's goals.

As technology plays an increasingly crucial role in business strategies, stories of boards struggling to effectively manage these initiatives are becoming more prevalent. From digital transformations to cloud adoption, these technological advancements are crucial for driving growth and sustainability within a company. While boards are aware of the importance of technology, our analysis shows that only 33% of board directors have experience in technical leadership roles. Additionally, boards tend to approach technology as a peripheral issue or within the context of risk and audit committees. Through interviews with board members and executives, it was found that there is a general consensus that boards need to prioritize and structure their engagement with technology, but there is a lack of clarity on how to accomplish this.

The most common engagement model: The technology committee

One of the most effective ways for a board to engage with technology is through the formation of a dedicated committee. This committee's role is to understand and support the organization's technology strategy, investments, and risk profile, as well as to share their insights with the full board. According to research, industries such as finance, consumer, and industrials have a higher number of tech committees among the Global Fortune 500. In 2020 and 2021, companies in these industries that had a tech committee had operating margins that were 100-600 basis points higher than their peers that did not have a tech committee. Some common reasons for not having a tech committee include difficulty in finding suitable members, concern that the board would become too operational, fear of creating too many committees, or the belief that a committee would take away from technology discussions within the broader boardroom.

Models for involving boards in technology adoption and implementation.

According to research, there are four models that have been proven to be effective in the way boards engage with management on technology issues. These include: regularly incorporating technology as a recurring agenda item for full-board engagement, establishing formal standing technology committees, creating temporary or advisory tech committees, and engaging informally on specific technology-related topics.

In industries where technology plays a major role in driving business or affects many aspects of the company, it is typical for boards of directors to be fully engaged in understanding and addressing technology-related issues. This is especially true for businesses in the software, internet, and telecommunications sectors. Full-board engagement ensures that all directors have the knowledge and expertise to address various technology-related topics, including corporate strategy, operating models, and governance. However, even with full-board engagement, a separate technology committee can be beneficial for focused discussions on specific topics such as talent strategy or for assisting management teams in identifying important issues that require board-level attention.

To gain further insight on how technology aligns with other key strategic considerations, boards and management teams may establish committees focused specifically on technology. This approach has proven effective for organizations such as financial institutions that heavily rely on digital infrastructure, retailers that have a significant presence in e-commerce, and pharmaceutical companies that utilize digital systems to enhance their research and development efforts.

Temporary committees and third-party expertise

Some organizations have recently invested heavily in technology, often through major transitions or digital investments. These can include moving to the cloud, creating new digital businesses, analyzing major cyber incidents, and merging with companies with significant IT concerns. These changes can have a significant impact on the way the organization operates, its overall strategy, and the risks it faces. In these situations, temporary committees and external validation can provide valuable oversight, expertise, and transparency. These committees may be composed of experienced professionals who have previously worked in similar roles, such as a former Chief Technology Officer or Chief Information Security Officer during a cloud transition.

This engagement model allows a specific group within the management team to receive regular and specific guidance, including mentoring and coaching, from an experienced board director on crucial topics. Our research with directors revealed that this model can take various forms such as offline mentorship for technical executives, targeted engagement on technical but commercially significant subjects such as computer vision and blockchain, or occasional input on how to present technical progress updates to the entire board. This informal engagement works best for boards where one or two directors, instead of a majority, possess extensive knowledge in broader technology or specialized technical areas, and management requires additional technical guidance and support. In this model, it's crucial for board members to avoid becoming too involved in management's operational decisions, while ensuring that there is enough full-board visibility to highlight the strategic significance of technology discussions.

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