A board of directors assumes two responsibilities to represent the interests of shareholders. The first is as an advisor to company regarding its strategy, operations and plans. The second responsibility revolves around governance and oversight of operations and performance.
Boards have traditionally dealt with information technology (IT) within the oversight responsibility by assigning IT to the Audit Committee. That needs to change. Digital technology (DT) success rests not with how much you spend, but in its strategic and operational focus. Many things are possible with digital technology so the real question, the real issue is what is profitable. In other words, where IT was a board oversight concern digital technology is an advisory and innovation concern.
The Board of Directors can serve as one of the resources for companies formulating their digital edge. The following is an edited excerpt from the book The Digital Edge: exploiting information and technology for business advantage. It highlights this issue as well as provides a sample of the material in the book. The views expressed in this blog post are my own and do not represent legal advice or a formal position of Gartner.
Boards are increasingly interested in technology. However, Boards often assign their interest to the Audit Committee which translates technical issues into financial, operational and control frameworks that fit their responsibility profile and the abilities of audit committee membership. Boards take this decision as they see technology as an enabler and oversight as a matter of risk, budget and compliance. This was an appropriate approach for IT projects like a major ERP projects that represented significant operational and financial risk.
Placing technology in the Board’s Audit Committee reflects a view that technology is more of an operational expenditure than a creator of strategic opportunity. This may have been appropriate when the majority of technology issues were IT-related and concentrated on back-office operations. IT related investment risks company and board reputation if they failed.
Digital technologies, like analytics, social media, mobility and cloud are different. These technologies represent the company’s virtual brand and reputation and therefore directly connect technology with reputational risk, revenue and relevance. Digital technology requires a different Board -level focus.
Organizations who are serious about building a digital edge need to be serious about the role of technology and innovation across the enterprise. A technologically savvy Board provides plays a critical role in digitalizing the business. As one executive put it, “We have a technology-savvy board of directors. Several of them have direct experience working in e-commerce companies, using technology to disrupt the industry. Their experience and knowledge have been central to the big decisions we have made, like purchasing a software company. They have given us a different view of the company. Rather than seeing the company in a traditional lens competing in traditional ways, the Board and executives saw the latent value of our digital resources and capabilities that led to new strategic options.” That result will not come by placing digital technology in the Audit committee.
Below is a sample charter for an Innovation and Technology Advisory Board. It is based on a review of multiple charters accessed via the Internet. The charter outlines the responsibilities and mechanisms for Boards to increase their engagement on digital and technology issues. It is offered to provide some substance around the issue of how Board’s advise and oversee digital technology and innovation.
Technology Advisory Board of Directors Charter (GENERIC SAMPLE)
The purpose of the Technology and Innovation Oversight Committee is to:
- Provide oversight and counsel on matters of innovation and technology;
- Recommend on major strategies and subjects related to technical and commercial innovation;
- Appraise major innovation and technology related projects and architecture decisions;
- Recommend and advise on innovation and technology acquisition processes;
- Ensure that the Company’s innovation and technology programs effectively support the Company’s business objectives and strategies;
- Advise the Company’s senior IT management team; and advise the Board of Directors on innovation and technology related matters.
Membership and Subcommittees
- The Innovation and Technology Oversight Committee shall consist of such number of members of the Board of Directors as shall be appointed by the Board from time to time, but in no event shall the Committee consist of fewer than three members.
- The Board of Directors shall designate the Chairperson of the Committee. The Board of Directors may change the membership of the Committee at any time.
- Unless otherwise prohibited by the Company’s Certificate of Incorporation or Bylaws, the Innovation and Technology Oversight Committee may form and delegate authority to any subcommittee as it deems appropriate or advisable.
Functions, Powers and Responsibilities
The Innovation and Technology Oversight Committee shall:
- Appraise and critically review the financial, tactical and strategic benefits of proposed major projects and technology architecture alternatives.
- Appraise and critically review the progress of major technology related projects and technology architecture decisions.
- Make recommendations to the Board of Directors with respect to technology related projects and investments that require Board approval.
- Monitor the quality and effectiveness of the Company’s technology security.
- Periodically review and appraise the Company’s technology disaster recovery capabilities.
- Monitor the quality and effectiveness of technology systems and processes that relate to or affect the Company’s internal control systems.
- Periodically report to and consult with the Audit Committee of the Board of Directors regarding technology systems and processes that relate to or affect the Company’s internal control systems.
- Advise the Company’s senior management team on innovation and technology issues.
- Stay informed of, assess and advise the Company’s senior management team with respect to new technologies, applications and systems that relate to or affect the Company’s innovation and technology strategy or programs.
- Unless the Committee determines that fewer meetings are required, the Committee will meet at least two (2) times per year.
- Annually review the Committee’s own performance, and report the results of such review to the Board of Directors.
- Annually review and reassess the adequacy of this charter and recommend any proposed changes to the Board of Directors for approval.
- Report regularly to the Board of Directors on matters within the scope of the Committee, as well as any special issues that merit the attention of the Board.
- Perform such other duties as are necessary or appropriate to ensure that the Company’s innovation and technology programs effectively support the Company’s business objectives and strategies, or as the Board of Directors may from time to time assign to it.
On the surface, these responsibilities seem similar to those already assigned to other committees, most notably the audit committee. Digital technologies require a different type of oversight. The difference lies in the skills and focus required on an innovation and technology committee. IT solutions are often preplanned with a predetermined outcome that can be readily translated into financial frames of reference that is amenable to audit based oversight.
Digital solutions, on the other hand, are complex, combinatorial and creative; making it difficult to predefine, assess and mitigate risk. Digital solutions emerge as digital capabilities build on each other, and therefore cannot be readily preplanned.
Digital technology and digital innovation will play a fundamental role in a company’s performance profile and future. Technologies like mobile, analytics, social, cloud and sensors will transform the customer experience, operating model, products and services in ways that go beyond automation into radical innovation including their treatment at the Board level.