Two topics here – how to get Boards focused on science and technology for the long term, and how good ideas can get … um … discovered?
The difference a special Board committee can make
Innovation, transformation, and anything that requires a long-term investment with no guarantee of when it will pay off can be easy for management teams to ignore. After all, if I have a five-year timeframe until success can be reached and my personal tenure is, say, three years, what’s the point (for me personally). This is one of the core problems of managing organizations for the long term – personal incentives are often not aligned with what the organization requires for those time horizons.
But this should be where Boards of Directors come in. Boards are intended to represent the long-term best interest of the organization, with their role being to ensure the “long term sustainability” of the company.
In other words, the Board is supposed to look after the long-term viability of the enterprise, not just to rubber stamp whatever management wants to do. Unfortunately, most Boards are not set up to provide meaningful long-term direction. The three required standing committees – audit, governance and compensation – are not particularly strategic. Where, for instance, does strategy fall? Or transformation? Or paying attention to new digital technologies? Without any ill will, a typical Board member just won’t have the vantage point to question what management is doing (or often not doing) in these critical areas.
This is where my co-author and colleague Ryan McManus has made a significant discovery. By creating a special committee on the board to focus on science and technology, the topics of digital transformation, investment in the future and what the firm is doing about the key technological transformations of our time get focus. That focus on the future is now embedded in its governance structure. He uses the example of Nortech, a full service electronic manufacturing services provider, whose board he serves on.
As he says in a 2021 article, “…with an eye toward new growth, in 2018 Nortech Systems established a science and technology committee accompanied by the unanimous approval and support of the CEO, board chair, and full board. The impact on the organization has been nothing short of extraordinary. Directors interested in reviewing the committee charter can find it on the Nortech website.”
The broader impact of long-term Board focus on science and technology
Given this success, Ryan and his colleague Amanda Maggiore set out to see if the Nortech example was a one-off, or if a pattern could be established of a relationship between firm performance and the existence of a special committee at the Board level to make sure the future had a seat at the table.
They found that 56, or 11.2 percent of Fortune 500 companies, have committees dedicated to science, technology and innovation. Further, that “These companies outperformed the Nasdaq Composite, S&P 500, and NYSE Composite over the past year, and outperformed the NYSE Composite over the previous five years. The tech-heavy S&P 500 and Nasdaq Composite outperformed these 50 companies over the longer time horizon, which serves to further illustrate the ability of science, technology, and innovation to act as a growth engine.”
There are several reasons why a special Board committee on future oriented topics would contribute to better performance. The most obvious is that it literally puts the topics on the agenda – as I’ve long said, if you want to know where to start with a desire to innovate, get it on your agenda. Secondly, it provides a regular venue to build comfort and familiarity with looking at new developments. Thirdly, staffing such a committee provides the incentive to recruit Board members with relevant skills, likely bringing greater diversity of backgrounds into the conversation. In any case, making it clear that the board is paying attention to the long-term creates a focus beyond what management might be dealing with in the day-to-day.
Ryan’s original research was also reprinted by Harvard Law School’s Forum on Corporate Governance Research.
Meanwhile, four years later, a McKinsey study …
Whether this is a coincidence or not I will leave to you, dear readers. But a 2022 McKinsey study reports that “The most clearly defined form of board engagement with technology is a board committee dedicated to understanding and supporting the organization’s technology strategy, investments, and risk profile and to sharing its insights with the full board.” Further, “Our research shows that, in 2020 and 2021, companies in these industries that had a board tech committee had operating margins 100–600 basis points higher than their peers that did not have tech committees.”
There is certainly nothing wrong with building on other people’s ideas, and the McKinsey article has a slightly different twist – looking at the broad scope of technology governance models in general.
At the same time, if they were researching such a very specific topic, it’s hard to believe they wouldn’t have run across Ryan’s original work.
And would a footnote of acknowledgement be such a burden?
This week at Valize
Super exciting for us – we’re bringing our first customers on board with our SparcHub software, which was designed to make implement discovery driven growth practices easier for your organization. Reach out if you’d like a demo – we’re getting good feedback on its usefulness.
Ron has been super busy with coaching and this fall Rita is teaching like a mad thing at Columbia’s gorgeous new buildings. We’ve had some good take up for our team effectiveness diagnostic and are going to start building the rest of the Accelerating Competitive Effectiveness (ACE) tools.