How Corning's Board Stays on Top of Technology
from
March/April 2007
by John R. Engen
More than most companies, Corning Inc. has a history of constantly re-creating itself through innovation. Founded in 1851, it made its first big splash by inventing the glass envelope that Thomas Edison turned into a light bulb. The product line evolved over time to include consumer ceramics (notably Pyrex and CorningWare cookware, both of which have since been sold), the glass containers for cathode-ray color TV tubes, heat-resistant windows for NASA spacecraft, fiber optics, and most recently the ultra-thin, ultra-flat glass used in most of the liquid-crystal-display television sets on the market.
The common thread in all these products has been Corning’s core technical competencies in glass, light, and ceramics—or, in the words of CEO and director Wendell P. Weeks, 47, “inorganic materials and processes.” So when Weeks and his top management team went to the board in 2005 seeking approval for a multimillion-dollar investment in a new drug-testing technology that married those familiar abilities with biology and organic chemistry, the directors might have been expected to flinch. “Adding that kind of science to our mix requires us to significantly increase the scope of our capabilities, both technically and culturally,” says Deborah D. Rieman, 57, former CEO of the Internet-security firm Check Point Software Technologies Ltd. in Redwood City, California, and a Corning board member since 1999.
So it does. But the proposal was something the directors could get their arms around, debate and probe, and finally approve—thanks in large part to a bimonthly educational gathering that has become a cornerstone of how the Corning board does its job. Called simply “technology with the board,” the two-and-a-half-hour sessions, held the day before regular board meetings, provide directors with a detailed look at what Corning scientists are working on, along with updates on projects they’ve already approved—and enable them to push for information about just how various ideas might affect the company’s bottom line.
The directors aren’t expected to be experts on all the technical aspects of the 150 or so projects in Corning’s pipeline. “The board shouldn’t get so deep into the technology that you’re trying to tell people what to do with it,” says Gordon Gund, 67, chairman and CEO of Gund Investment Corp., a private investment firm in Princeton, New Jersey, and a Corning director since 1990. “We do, however, need a basic understanding of how the technologies work, the needs they might serve, and an understanding of the competitive dynamics a product might face.” That’s fine with Weeks. “The board members can’t help us figure out what the adoption rate will be for organic light-emitting diodes,” he says, referring to one of Corning’s promising new technologies. “But they can say, ‘Can you convince me that we have the right recipe in this area, and that it’s unique in a way that can create value for our shareholders?’”
More than a year before they approved the investment in Epic System, as the drug-testing technology is called, directors received an in-depth briefing on the proposal at one of their technology-with-the-board gatherings and got a chance to quiz researchers and senior management about its market potential. While there were still kinks to work out, they left the informal meeting convinced that Epic could speed the development of new drugs significantly, and eventually make Corning a big pile of money.
The board is committed to keeping the development pipeline full of new projects capable of generating substantial profits 10 or 15 years down the road. “We talked a lot about what did it entail in terms of expanding our own technology base? What new expertise did we need? How difficult would that be?” Rieman recalls. “But we didn’t just look at the technology. We considered what it could do for Corning’s business. The science always goes hand in hand with the more important question of what market opportunities exist.” The board’s familiarity with the labs and the people who work there helped it reach a decision on Epic, says lead director James J. O’Connor, 69, a 23-year member of the board and retired chairman and CEO of Unicom Corp., a predecessor of the Chicago power company Exelon Corp. “Without having seen what’s going on in our labs, the technologies that are being incubated, the people who are in charge, the decision would have been much more difficult.”
A lot is going on in Corning’s labs. The company’s business mix is constantly evolving, driven by a combination of technological innovation and market demand, and its revenue stream reflects that. During the first nine months of 2006, it got 40% of its $3.8 billion in sales (and almost all of its $1.2 billion in profits) from selling specialty glass for LCD televisions and computers, 35% from fiber optics and other gear sold to big telecommunications companies, and 12% from environmental technologies, mostly ceramics for catalytic converters or diesel-exhaust filters for trucks. The life-sciences division, of which Epic is considered a key building block, accounted for less than 6%. This revenue breakdown is markedly different from what it was five years ago.
The company devotes 10% of annual sales to research and development, and at any given time scientists are working on hundreds of projects at its research facilities in the upstate New York town of Corning and in Fontainebleau, France. The product-development timelines can be enormously long, with technologies sometimes needing to be tweaked over decades so a great product with no market appeal can be turned into something everybody wants. “When an idea fails, we take that capability set and say, ‘What else can we apply it to?’” says Weeks. “From failure comes knowledge. We aren’t usually successful with the first thing we try.”
Consider the LCD TV glass that is the big contributor to Corning’s profits today. Researchers first came up with the specialized process for manufacturing the glass in the 1960s, thinking it would work well for car windshields. Instead, automakers went with a competing type of glass made by other companies. But Corning kept trying, experimenting with various applications for the glass, including windows in wood-burning stoves. “Anything that was flat and used technical glass we tried,” Weeks says. In the 1980s the company found a market, successfully modifying the glass for use in computer monitors. A decade later it tweaked the product again for use as LCD TV screens. It controls more than half of that market, producing sheets of the specialty glass as big as six by nine feet at massive plants in Taiwan and Japan, and shipping them to panel manufacturers. Corning’s revenues from the glass, which are expected to exceed $2 billion in 2006, could go a lot higher. DisplaySearch, a market-research firm, estimates that annual sales of LCD TVs will quadruple between 2005 and 2008, to 88 million sets.
Overseeing such a technologically complex company, and one with such long and risky development timelines, requires a board that’s both patient and knowledgeable. To help the directors keep pace, Corning prepares them before each board meeting with stacks of material on its latest projects under development and other data. In addition to their informal technology-with-the-board get-togethers, Weeks and the other 15 board members devote one formal meeting per year specifically to technology concerns.
The directors also visit Corning’s overseas plants. In 2005 they took an eight-day field trip to Asia, traveling to Taiwan to see glass-manufacturing operations and China to check out ceramics production. “When you’re spending billions of dollars on plants, pictures just won’t do,” Weeks says. “You want to see it, touch it, and meet the people.” And once every two years the board members don smocks, protective glasses, and comfortable shoes and take a tour of the company’s sprawling Sullivan Park research facility in Corning, where most of the new ideas are hatched.
“We walk the entire facility,” says Joseph Miller, 65, the company’s chief technology officer. “We’ll see maybe eight or nine of our top growth programs. There’ll be lab demos and exhibits, and then we’ll have a dinner with some of the R&D presenters on the tour.” Last fall the directors got a look at a new technology that uses patented ceramics to reduce emissions from light-duty diesel engines for passenger vehicles, and a glimpse of so-called green lasers, which could be part of the next generation of display technologies.
Board members aren’t paid extra for attending the sessions. But the informal give-and-take with Corning’s managers and scientists makes the effort well worth it. Not only do the directors get a chance to watch up-and-comers in action, which helps in succession planning, they also develop more trust in management’s judgment. One good example centers on the $385 million that the company invested over the past several years in a new plant outside Corning, to produce that ceramic-based filter for removing soot from truck and car diesel emissions. The market for such a product hadn’t fully materialized when the board was first asked to spend the money, and Weeks was frank about both the upside and the risks. “We think this will be a winner,” he told the board at various gatherings, “but let me tell you what else could happen: Engine technology could improve. There are four alternative technologies running against us. We might be wrong.” He concedes that from a financial standpoint, “you’ve got to be nervous investing that much when you don’t know exactly where the market is headed.”
The directors chose to make the investment, and the factory is now up and running. And with new U.S. truck- and bus-emissions requirements set to go into effect this year, the filter technology looks poised to be one of Corning’s next big things. It could go international too. “The demand for cleaner air is soaring around the world, and we’ve got a system that takes 90% of the soot out of those emissions,” declares lead director James J. O’Connor happily. According to Weeks, in some polluted cities, including New York; Seoul, South Korea; and even the company’s hometown, where the technology is already in use, “the air is cleaner when it comes out of the truck than when it went in.”
To ensure that things are on the right financial track, directors watch key metrics, such as return on investment and what Gund calls “patents per $1 million” invested. Corning holds some 5,500 unexpired patents and has applied for half as many more. The board members also pay close attention to how individual businesses are managed: Are the R&D capabilities keeping pace with the market? Are the right people in key roles?
Corning’s board does not have a separate technology committee. Directors reckon that innovation is so vital to the company that the subject needs to be understood by everyone, not farmed out to a smaller group. They do, however, occasionally follow the lead of the directors with high-tech backgrounds. These include such luminaries as John Seely Brown, 66, retired chief scientist at Xerox Corp.; Jeremy R. Knowles, 71, dean of the faculty of arts and sciences at Harvard; and Padmasree Warrior, 46, executive vice president and CTO of Motorola Inc.
But directors point to the technology-with-the-board sessions as most crucial to their learning curve. Each meeting focuses on a different broad area, such as environmental products, display technologies, or life sciences, or provides an overview of technologies in the earliest stages of development. Project leaders and researchers give detailed PowerPoint presentations about what’s going on in their units’ development pipelines, and often close with product demonstrations.
During one recent session, board members heard about flexible glass and plastic surfaces that might lead to curved screens enabling you to watch a high-definition TV from anywhere in a room. They also got a tutorial on organic light-emitting diodes, an advanced technology that could eventually make LCD screens obsolete. “We always want to be several steps ahead of the market,” Deborah Rieman says.
The technology-education process has evolved over time. “Ten years ago we’d have a two-day off-site session to discuss the strategy. And then a year later we’d do the same thing,” James O’Connor recalls. In between, though, the operation was left pretty much to management. On the surface, that was fine. “Back then we were known as the Pyrex-products company,” says O’Connor. “That was pretty simple stuff compared to what we deal with now.” The board’s oversight processes didn’t keep pace with the way Corning was changing, however. As the company took a turn toward more complex, higher-tech applications in the 1990s, some directors found themselves feeling that they didn’t know enough to make key decisions. In 1999, for instance, Corning executives argued that the company could cash in on an anticipated explosion in the then-fledgling LCD TV market by spending more than $1 billion to build three large plants in Asia that would manufacture its patented glass substrate, which was already being used to make computer monitors.
The board ultimately approved the investment, emboldened by preorders from several big LCD TV makers for most of the new plants’ output. The decision proved right, of course, but even so directors say that they felt rushed and a bit pressured to make it. “I remember sitting there thinking, ‘This is an important decision. There’s a lot of money involved, and they’re giving me a lot of detail. But I don’t have time to ingest and reflect on all this,’” recalls Rieman. “I wound up feeling as if I was just going along with management’s recommendations. I didn’t feel like I was being an effective board member.”
Things began to change in 2001, when Joseph Miller, formerly of DuPont, was hired as CTO. Corning was (and remains) one of the biggest makers of so-called low-loss optical fiber, which it sells to large telecommunications companies. In the go-go ’90s, the telecom industry had been all hyped up about taking fiber optics “the last mile,” right into homes and businesses, rather than stopping outside. With that potential demand in mind, the Corning board in 1996 spun off a large medical-services business into two stand-alone companies—Quest Diagnostics, a blood-testing firm, and Covance Inc., a drug developer—and in 1998 sold most of its consumer operations; Pyrex and CorningWare went to Borden Inc. (now World Kitchen) for $600 million. Most of the proceeds were funneled into developing additional capacity to produce optical fiber. Investors liked this strategy, and some even urged the company to sell off everything but the fiber-optics business and become a one-trick pony.
By 2000, Corning was getting about 70% of its revenues from optical fiber and was spending a like percentage of its total R&D budget on the technology, Weeks says. The telecom industry soon began to collapse, and the company’s revenues and earnings plunged. Investors saw the share price drop from above $100 in 2000 to about $1 two years later.
Its future imperiled, Corning shuttered seven plants in 2001 and over the next three years slashed its workforce in half, to about 22,000. It also took $2.3 billion in restructuring charges. The board and management, meanwhile, embarked on an 18-month series of “lessons learned” discussions aimed at avoiding a repetition of the same kinds of mistakes. “We said, ‘What do we want this company to look like? What are our strengths and weaknesses, and where do we need to improve?’” recalls Gordon Gund. “When you come that close to the edge, it tends to focus you.”
What emerged from those discussions was a commitment to improve risk management and strategic balance. New financial disciplines were adopted, in the belief that Corning faces enough risk in its business lines and doesn’t need to overleverage its balance sheet too. Marketing groups were embedded in the research operations to gain a better understanding of the sales opportunities in emerging technologies.
Today a corporate technology council, headed by Joe Miller, the CTO, oversees early-stage development activities, while a growth and strategy council, run by Weeks, watches over projects that are further along. “When you deal with as many unknowns as we’re dealing with, you get the illusion of control by having a process for everything,” Weeks says with a laugh.
Perhaps most significant, directors resolved that no matter how promising a technology looked, they wouldn’t “double or triple down the bet,” as they had with telecommunications, says Weeks. “When our next big product happens,” he recalls the discussion going, “we need to invest more of the largesse into other areas to balance the risk.” Board members were determined to arrive at a deeper understanding of what was being developed so that they could make more informed investment decisions. To that end, a couple of the more tech-savvy directors, John Seely Brown and Jeremy Knowles, asked Joe Miller to help them achieve a better grasp of what the company was up to. Miller began to get together with them informally before the regular board sessions, inviting researchers to make presentations. Thus was born the technology-with-the-board meeting.
O’Connor caught wind of the gatherings, sat in on one, and was an instant convert. “They were very sophisticated presentations, made by key technology leaders in the organization,” he says. Soon he was lobbying other board members to attend as well. “‘Go if you have a chance. It’s not compulsory and you’re not going to get compensated for it, but you’ll learn a lot,’” he recalls saying. “All of a sudden everybody on the board was going.”
None of this occurs in a vacuum. Rieman says that perhaps the biggest item on the board’s agenda of late has been how to react to the growing assertiveness of investors and their conflicting agendas. “We’ve got shareholders who want a quick profit, and others who want to buy the stock and hold it for 20 years,” she explains—but after lengthy consideration, directors “have collectively concluded that Corning is a company that’s going to be committed to long-term growth.”
For the board of an outfit with the complexity and development timelines Corning is faced with, this doesn’t mean two or three years. “For us, it’s more like a decade,” says Rieman. The technology-with-the-board meetings help directors set that long-term course.
