Companies need three core assets to succeed and compete: financial assets, human capital assets, software and technology assets. Southwest and other companies potentially need a board level committee to manage and create such technology assets.
The following portion of the Wall Street Journal story that reported the Southwest mess caught my eye:
“It’s been an open secret within Southwest for some time, and a shameful one, that the company desperately needed to modernize its scheduling systems. Software shortcomings had contributed to previous, smaller-scale meltdowns, and Southwest unions had repeatedly warned about it. “The company has had its head buried in the sand when it comes to its operational processes and IT (information technology),” Casey Murray, president of the Southwest Airlines Pilots Association labor union wrote in a message to members Monday.”
The New York Times’ take was related but added an interesting concept of technical debt, which they seem to define as overdue upgrades and maintenance of software and hardware systems:
“This is why we can’t just keep turning the operation of more and more of our infrastructure and our lives to antiquated software and self-interested executives. Technical debt is real debt. It will eventually be paid by someone. And unless we take steps to hold companies and executives accountable for preventable — and foreseeable — failures, it will be we the public that keep paying.”
Many solutions to this problem have been suggested, including my occasional rants about the terrible state of disclosure to the investing public about a company’s technology spending, both related to hardware and software. But let me suggest another governance fix that my colleagues, Anthony Bay, Doug Maine, Alex Salkever and I have been working on over the last year or so. In essence, we suggest that because every company has more or less become a technology company. Hence, every company needs a technology and innovation committee on its board of directors.
What would such a committee be tasked with? The standard board level committees are the audit committee, the compensation committee, the nominating and the governance committee. Technology and innovation related issues are usually tucked into the audit committee’s charter. In our collective experience as board members, researchers and teachers about corporate governance, we believe that audit committees are frankly not up to the task.
The audit committee is usually chaired by a retired audit partner or CFO (Chief Financial Officer) who is no doubt an expert on financial statements but is not necessarily “tech savvy” enough to appreciate and ask management about technical debt (defined next) or the essential software and hardware upgrades necessary to keep the business competitive and the technology threats that are being cooked in someone’s garage that will eventually “Amazon away” the business.
The concept of technical debt
The concept of “technical debt” is new for most board members and needs elaboration. As Anthony Bay, my co-author clarifies, “technical debt is like the part of the iceberg that’s underwater and unseen. It often absorbs a significant portion of a company’s tech resources – to the point that just keeping systems running becomes both mission critical and fragile, and it means adding new features and capabilities adds fragility.”
In many cases the skilled employees who built the original systems may no longer be with the company. On top of that, their code may not be well documented. Moreover, the state of the art in software development evolves quickly and most companies are limping along incapable of truly functioning at a high level of performance. Such deficit in software readiness or technical debt limits the technical readiness which in turn impacts customer experience, risk management and bloats costs. People inside the company know about these issues (as at Southwest) but it is quite likely the board may not be aware of these problems. Even the CEO may not be up to speed.
No technology leader on Southwest’s board
Consider Southwest’s board as a case study for the technical debt issue. Southwest’s board committees appear pretty standard and include the audit committee, the compensation committee, the executive committee, the nominating and governance committee and a safety and compliance committee.
Consider the following passage related to board orientation and continuing education appears on Southwest’s website:
“The Board shall receive an annual presentation by management of the Company’s long-term strategic plan. In addition, the Board shall receive periodic briefings from the Company’s independent auditors, its Finance executives, its Chief Legal Officer, and outside experts regarding, among other matters, changes in accounting regulations, other regulatory requirements, and the laws applicable to the responsibilities of the Board. Board members are encouraged to attend significant Company events. Board members are also encouraged to take advantage of materials and seminars provided by experts in the fields of accounting and the law, to the extent applicable to their responsibilities as Board members.”
Remarkably, there is nothing mentioned regarding the core operations of the company, especially its technology readiness.
I also looked through the proxy statement to assess the backgrounds of the 13 directors on Southwest’s board. Beigler has a background in energy, Biggins ran a search firm, Brooks has a background in casual dining, Cunningham was a chancellor or University of Texas, Denison was a Chief Financial Officer (CFO) and has a background in aero logistics, Gilligan has a public policy background, Hess has an aerospace background as the Chief Customer Officer at United Technologies aerospace division, Jordan is Southwest’s CEO, Kelly was the ex-CEO of Southwest, Loeffler has a background in non-profits and charities, Montford and Ricks have a lobbying background and Reynolds is a lawyer.
It is difficult to assess director expertise from these thumb nail CVs produced in proxy statements. Having said that, it is not clear whether any of these directors is a technology leader.
Our vision for technology and innovation committees
We believe that boards need subject matter experts in software and technology to be on the board.
Modern businesses need at least three core assets to be viable and competitive: financial assets, human assets, and software/technology assets. Boards have an audit/finance committee to provide oversight and governance on its financial assets and strategy. They have a compensation/HR (human resource) committee to provide oversight and governance on its human assets and strategy. Each committee works with and relies on third party advisors that serve both the company and its board and enables them to capably perform their duties.
With the exception of about 9% of the Fortune 500 who have technology committees, boards do not have any formal structure to provide oversight and governance on its technology and strategy. Many have very limited representation of subject matter expertise in software and technology.
Given this, what should boards/companies do? We suggest the follow steps:
· Ensure that boards add subject matter expertise from leaders in software and technology.
· Once a board has at least two people with subject matter expertise in software and technology, consider setting up a technology and innovation committee whose responsibilities in principle mirror those of audit/finance and compensation/HR. Without the subject matter experts on the board, the committee cannot be staffed or led.
· The board and technology committee should seek out and retain third party advisory services to help them assess the company’s technology systems, technical debt and technology leadership.
· The Chief Technology Officer (CTO) and the Chief Executive Officer (CEO), working with the Technology and Innovation Committee of the board, should provide a similar type of engagement and oversight as is done with the other two key committees. The company’s technology strategy, technical debt and operational performance should be one of the boards’ key agenda items.
· However, Douglas Maine, my co-author, reiterates the need for explicitly adding innovation to the committee’s agenda by pointing out, “we can’t have boards just look in the rearview mirror as is the case with Southwest. Software should be an enabler of product and service differentiation and lead to new insights and discovery. Let’s not forget the promise of AI (artificial intelligence) for instance. Technology is now less about simply automation and more about innovation. Innovation keeps customers in focus and is more externally focused and requires much more of a tech product style-oriented leadership and process.” Hence, the board needs strategic and innovation directors as well.
· For that reason, we believe that the board committee should be titled, “Technology and Innovation,” not simply the Technology committee. Such a committee should have directors who have demonstrated an ability to spot and nurture innovation in the enterprises they have worked with. CTOs (Chief Technology Officers) are potentially a better fit for this board role than CIOs.
These recommendations might have helped Southwest avoid unnecessary financial losses and damage to its brand equity and to potentially keep up its technological edge. More important, Southwest’s technology problems were made public and will hence get resolved, one way or the other. The bigger concern is the large number of companies, whose technical debt and absence of innovation, is unknown to the investors and hence constitutes a potential ticking financial time bomb. A Technology and Innovation committees at the board level will help mitigate such risk.