Technology

Five Questions Boards Need to Ask Before Appointing a [Fill in Your Favorite Technology Buzzword] Director

 



In an examination of the current board composition of the 300 largest companies in the world, we take a look at the 62 percent that have a least one non-executive director with technology experience, and discuss the questions boards need to consider before adding their next (or first) tech-savvy member.

Corporate boards are increasingly recognizing the need to bolster their understanding of technology and related forces behind digital disruption. That's because they must face the very real possibility that, regardless of industry, technological advances are making their companies' current business models partially or completely obsolete. Retail companies must figure out how to optimize e-commerce and in-store mobile offers, financial services companies are racing to implement new blockchain and security features, and automotive companies are tasked with mastering artificial intelligence and connected cars. Not even technology companies can afford to be complacent: The traditional lines between hardware and software have blurred and telecommunications providers are facing competition from a new breed of cloud service providers. And this is just the beginning.

While executives are on the front lines of these shifts, corporate boards also have an important role to play in helping a company reach its potential. Fifty-three percent of executives who responded to Russell Reynolds Associates’ 2018 Digital Pulse survey said the board was critical to the success of their organization’s digital initiatives and transformation efforts. As with so many important issues, board members can significantly improve results by asking the right questions of management and providing outside perspective on complex issues. Many investors seem to feel the same way, as 51 percent of respondents reported that their boards have fielded questions about digital strategy from shareholders.

To fulfill their roles in overseeing successful transitions to the digital era, boards are increasingly appointing people with expertise in various areas of technology. In the past, we’ve published papers on digital directors and qualified technology executives. As technology buzzwords continue to proliferate, though, each company must move beyond generic labels to define its own precise requirements. In this paper, we offer an analysis of the status quo among 300 global boards as well as a 5-point framework for boards to assess their needs now and in the future.

Current state of board technology expertise

We recently took a close look at the board composition of the 300 largest companies around the globe based on the S&P Global 1200 list, categorizing their non-executive board members by past experience as a technology executive, with a technology company, and/ or involvement with a corporate digital transformation effort. That analysis revealed that the majority – 62 percent – have at least one non-executive director with technology experience, and a sizeable number – 28 percent – have more than one.

These technology experts comprise 12 percent of all directors for these 300 companies, about double the rate we found in our 2016 analysis of digital directors. However, their prevalence varies greatly by region, with US and Europe leading the way.

 

To fuel this growth, boards have primarily tapped CEOs who either led technology companies or have technology expertise in their past. Forty-three percent of these technology experts are or have been CEOs, far outpacing any other title. Technology executives – CIOs and CTOs – are relatively rare, and chief digital officers even rarer, in part due to the newness of the title.

 

The push for technology expertise on boards has enabled diversity in more than one sense. Across the entire population of directors, women comprise 29 percent; when it comes to directors with technology expertise, that climbs to 34 percent.

Insight: When to choose which option

Companies often see technology as one big amorphous category of expertise rather than a discrete set of experiences and capabilities. Here, we draw out the five questions that boards need to ask before appointing a board member who can help guide a technology transformation.

1. Do we have the right expectations of the board when it comes to technology expertise?

This is a basic question, but an essential one. The role of the board is to have sufficiently broad and deep expertise as a team to know when to bring in which experts, and to make sure the right questions are getting the right answers. Conversely, it is not the role of the board to assess particular technologies or to oversee details such as network architecture, or to operate in a quasi-managerial role in any other way. That means that any board member who is appointed to provide technology expertise must also be able to contribute to a wide variety of strategic topics beyond technology. As a result, many companies would favor a technology company CEO, who knows both technology and business, over a deep subject matter expert, such as a chief technology officer or a chief information security officer, when it comes to choosing new board members.

2. What are the specific areas where we need strategic guidance and expertise?

Answering this question requires the board to take stock of where the company is in its technology journey and where it hopes to go.

Is the company in need of a sweeping overhaul of enterprise technology to become more efficient, or is it facing pressure to better engage with customers through digital tools – or both? Is it a traditional company – say, insurance or chemicals – that is increasingly looking for acquisitions or joint ventures to jumpstart innovation efforts? Or a technology company looking to move into new verticals? Or is there a specific issue, like cybersecurity, e-commerce, or monetizing digital services, that dominates all else?

The answers can often help a board choose between a technology expert, such as a CIO, and someone who has overseen digital initiatives in another executive capacity. And as our data shows, a substantial number of boards are choosing both; incorporating multiple directors with technology expertise to gain critical mass around the topic and a range of viewpoints.

3. Are we looking at candidates with the right roles for what we need?

In the rush to infuse technology expertise into the board, some boards are willing to take nearly any executive from a company like Apple, Facebook, or Google. However, it’s important to look beneath the surface to ensure the candidate has the right experience and skills to contribute to board-level discussions on a range of topics.

Conversely, boards often overlook candidates who have exceptionally relevant experience in overseeing a transformation at a company in a more traditional industry, such as the insurance or automotive sectors. While people with this kind of experience may not look like a technology expert on the surface – for example, they may be CFOs or HR heads rather than CIOs - their guidance on when and where to invest or pull back can be invaluable. The key questions: Has this executive experienced multiple cycles of technology investments at another company that successfully shifted business models? Can he or she translate that experience into useful questions or guidelines for our board to ensure management is making the right bets?

4. Are we (really) open to a new director profile?

The reality is that the board candidates with the deepest experience in digital business models tend to have less overall business experience than the average board member, and often come from organizations with different cultures from those that are considering them as a board member.

Our research shows that the average director with technology experience is about four years younger than his or her traditional counterpart. While in some cases this difference is barely discernible, in others it can mean a distinct difference in seniority within directors’ primary organizations, or journeys to their current roles.

 

Combined, that means directors must discuss whether or not they are prepared to integrate a member who may not have stereotypical board-level credentials, or be comfortable with the standard pace of discussion and change. Not all boards are ready. We’ve witnessed some boards reject digital superstars because their title or education levels did not match those of other board members. And if a board chooses to include a director with a less-traditional background, it will be important to build in targeted resources, such as coaching for the new board member and existing ones, to address the cultural gaps.

5. Do we expect this person to be the main source of expertise to the board?

The right answer here is no. Appointing a director with tech expertise is generally just one part of a board’s role in strengthening the company’s technology strategy. That’s in part because one person typically cannot cover every area of interest. It’s also for liability reasons: Few directors want to feel they are dependent on the views of a single peer to make major decisions.

No matter who is on the board, formal technology education sessions and frequent management updates are essential elements in any board’s strategy to stay on top of the digital revolution. Some boards employ a reverse mentoring program, in which more junior employees are paired with board members to help bring them up to speed on technology issues and bridge generational gaps. Bank of New York Mellon chairman Gerald Hassell recently discussed the benefits of having a millennial mentor in a New York Times article.1 Often, the programs include a commitment for the board member to use his or her new knowledge to sponsor specific programs. They also have the side benefit of fostering retention among the high-potential younger employees who are involved.

What is reasonable to expect from a director who is designated as a technology expert is that he or she will be an effective voice for change, particularly if that person is tasked with convincing a reticent CEO that big changes are necessary, or educating a less-savvy group of incumbent directors. In these cases, subject-matter expertise needs to be balanced with a propensity to persuade and even disrupt; qualities that careful behavioral interviewing can unearth.

Looking Ahead

While boards are appointing more technology-oriented directors to help them stay ahead of important issues, it’s essential that they crisply define their needs before selecting a director for what is ideally a long-term appointment. This process requires looking beyond current board composition and taking a holistic view of where the company is in its technology transformation journey, assessing efforts to upgrade systems as well as executive talent.

Going the extra mile

To sharpen their focus on technology issues, some boards are setting up their own technology committees (alongside the more-common nominating and governance committee and audit committees). While such committees are rare outside the US, a recent Russell Reynolds Associates analysis shows that 31 companies on the S&P 250, or about 12 percent, have a technology-related committee. They are most common among financial services firms, including American Express, State Street Corp and Bank of New York Mellon Corp., and healthcare firms such as Pfizer and Biogen. Among smaller companies, some are creating even more specific groups within their boards, such as the cybersecurity and data privacy committee that Hasbro Inc formed in February 2018 "to provide board oversight to the increasingly complex and important challenge of managing and protecting data and privacy across the organization," according to the company’s most recent proxy.2

Other companies are considering technology advisory boards, groups which exist in parallel to the board and typically include highly specialized industry experts who serve for relatively short terms of one to three years. While these advisory boards primarily exist for the benefit of management, they provide the board with an indirect means of ensuring the company is on the right track and also offer a source of expertise for directors to tap from time to time.

Relative to the corporate board, these advisory boards have the advantage of few legal or reputational constraints, as standard governance regulations do not apply to them.

Dedicating a specific board-related group to the evolving challenges of technology is a compelling option for many companies, but remains just one piece of the puzzle. As is the case for nearly all board decisions, directors will want to look at the big picture of where the company stands in relation to its technology goals, and what it needs to move successfully into the future.

METHODOLOGY:

For our board composition analysis, we looked at the 300 largest publicly-traded companies around the world based on the S&P Global 1200 list. This list included 113 companies from the US and Canada, seven from Latin America (considered as part of North America for this analysis), 112 companies from Europe and 68 companies from Asia. We considered only non-executive directors, excluding employee representatives and other current executives from the count. The criteria for technology directors included: 1) Past or current experience as an executive at a technology company, 2) past or current experience as a technology executive, and 3) past or current experience overseeing digital transformation efforts.

 

AUTHORS

WOLFGANG BAURIEDEL is a member of Russell Reynolds Associates’ global Technology practice. He is based in Boston.

DAVID FINKE leads the firm’s global Technology practice and is a founder of its Digital Transformation practice. He is based in Palo Alto.

STUART GUTHRIE is a member of the firm’s Board and CEO Advisory Group, focusing on industrial clients. He is based in Dallas.

MARGOT MCSHANE is a leader in the firm’s Retail and Digital Transformation practices, and a member of its Diversity & Inclusion practice. She is based in San Francisco.

JUSTUS O’BRIEN co-leads the firm’s Board and CEO Advisory Group. He is based in New York.

JENS-THOMAS PIETRALLA leads the firm’s Board and CEO practice in Europe, as well as its global Industrial & Natural Resources practice. He is based in Munich.

TUCK RICKARDS is a member of the firm’s Board and CEO Advisory Group and Technology practice, and co-leads its Digital Transformation practice. He splits his time between Boston and San Francisco.

PAUL STOHR is a member of the Industrial & Natural Resources practice, focused on the automotive, equipment and energy sectors. He is based in Minneapolis.

CHARLES A. TRIBBETT III co-leads the firm’s Board and CEO Advisory Group. He is based in Chicago.

NADA USINA co-leads the firm’s global Technology practice and is a member of its Board & CEO Advisory Group. She splits her time between New York and Miami.

RHYS GROSSMAN leads the firm's global Consumer practice and was a co-founder of its Digital Transformation practice. He is based in London.

 

FOOTNOTES:

1 https://www.nytimes.com/2017/10/15/technology/millennial-mentors-executives.html

2 https://www.sec.gov/Archives/edgar/data/46080/000119312518104068/d499055ddef14a.htm

 

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