More Boards Are Setting up Technology Committees
from
May/June 2006
by Julie Connelly
When wasn’t
information technology either a puzzle or a pain? Many of today’s
directors grew up in the era of isolated MIS departments tending
mysterious mainframes, when the need to know was nil. This
happy-to-be-ignorant attitude ended six years ago with Y2K and a wide
dread that computer programs would crash and burn with the arrival of
the new millennium. That particular New Year passed without incident,
of course, but then two years ago boards came up against something all
too real: the Sarbanes-Oxley Act and its sharp-fanged Section 404,
which demands complex information systems to help make sure that
company financial statements are reliable and materially accurate. Last
spring data security became the hot issue at various companies. Time
Warner, for example, discovered that backup tapes containing employee
names, Social Security numbers, and other confidential information had
literally fallen off a truck that was transporting the data to a
storage facility.
Directors surely recognize that IT is
as intricately entwined in their company’s life—by plan or otherwise—as
Spanish moss on a live oak. It’s what divides winners from losers in
the battle for survival, whatever the industry. And it doesn’t come
cheap. Harvard Business School emeritus professor Richard L. Nolan, a
director of Great Atlantic & Pacific Tea Co. (A&P) and Novell
Inc., estimates that technology spending consumes around 50% of all new
capital investment. And as reported in the previous story, IDC, a
Framingham, Massachusetts, firm that keeps tabs on such things,
estimates that U.S. companies invested $314 billion in technology last
year.
For all this, many directors have been rubber-stamping some of those IT
budgets without knowing what the money will buy, what the equipment and
software really do, what advantages the investment will yield, and to
what extent the spending will benefit shareholders. But that’s
beginning to change, and a growing number of boards are setting up
special committees to oversee technology. Tech companies themselves
seem to be leading the way, says Kathy Brittain White, 56, who serves
on such a committee at Novell. White, the founder and president of
Rural Sourcing Inc., a company in Durham, North Carolina, that provides
IT services, thinks other industries will follow suit.
Some already have. The Corporate Library, a shareholder watchdog and
research firm, looked at more than 2,100 corporations and found 47
whose boards have technology committees. (See these pages for a
sampling.) There may be many more, because the names boards give to
committees with responsibilities for IT are sometimes confusing. At
DuPont, for example, it’s the strategic direction committee that
reviews “significant trends in technology and their anticipated impact
on the company,” according to the 2005 proxy. The committee members
include Richard H. Brown, 58, a former chairman and CEO of Electronic
Data Systems, and Lois Juliber, 57, a retired vice chairman of
Colgate-Palmolive, where, among other things, she was responsible for
R&D, supply-chain operations, and information technology.
Not surprisingly, some companies take an opposite tack and argue that
special tech committees are a waste of board members’ time. Among them:
Sterling Bancshares in Houston, which actually launched such a
committee in 2003 to review IT budgets and the status of various
strategic projects. President Glen Rust says the bank’s IT staff
already had a good handle on those things, and the committee “wound up
being as boring as hell for directors.” It was disbanded last year.
“Unless you’ve got a technology-related problem, a committee like this
doesn’t add much to the discussion,” says Rust.
That view seems to run counter to the trend, however, even if companies
don’t always lay out a clear definition of the tech committee’s role.
Its biggest responsibility is to get a handle on spending and
prioritize the competing claims for IT investment. Do you spend on a
companywide systems upgrade to improve security? Do you spend on better
tools for the sales force to make it more efficient? Do you spend on
enhancing your relationships with customers? To sort out these demands,
directors who serve on tech committees must ask themselves three
questions, says Jim Shepherd, senior vice president of AMR Research, a
Boston firm that focuses on supply chains, enterprise applications, and
infrastructure. He ticks them off: “Strategy—am I doing the right
stuff? Security—am I at risk? Funding—am I spending the right amount?”
You’ll notice that these questions do not delve into such nitty-gritty
as weighing one database-management system against another or deciding
between iterations of the latest enterprise software. “The board
committee should focus on what the technology is used for. It is not
there to make operational decisions about which vendor or technology
should be used,” says Max Hopper, who has sat on both sides of the
governance-and-management table. From 1993 to 1995 he served as
chairman of Sabre Group, the largest computerized travel-reservations
system. He won a name for himself in the IT world for his ability to
wring competitive advantage out of technology. More recently he was an
outside director of United Stationers, a large wholesale
office-supplies company, and also chaired the board’s technology
committee. Hopper, who retired from that board last year when he hit
the mandatory retirement age of 70, says that when he led the tech
committee, “I tried hard to see that nothing more than appropriate
questions were asked. It was not our job to choose vendors or internal
architecture. We spent a lot of time with various management groups
trying to ensure that enough attention was being paid to industry
issues and making sure our questions got answers.”
Among the questions: What business outcomes will be realized from our
investments in IT, and who is going to be responsible for producing the
results? Says Vaughan Merlyn, vice president at Concours Group, a
consulting firm headquartered in Kingwood, Texas: “There should be some
kind of ongoing audit and measurement process, because if you measure
these outcomes you are inclined to get them.”
Accountability often falls, as it should, on the chief information or
chief technology officer who has been championing the spending. But
tech committees have to be careful about crowding too far into the
CIO’s domain. This is a governance role, not a management one, after
all. A director of a large Midwestern manufacturer recalls: “There were
two of us on the tech committee who knew more about technology than the
CIO. Neither of us would have chosen the path of implementation that he
chose, but we weren’t in his seat. There is far more to the successful
implementation of a technology than the tools you use. He was tying the
technology to the strategy, and it was not for us to suggest that his
choice was wrong. We address the strategic issues and leave the
operational ones to him.”
It’s a different story when things start to go sour, in which case the
committee may well yield to the temptation to ride herd on the CIO.
Spencer Feldman, an attorney with Greenberg Traurig in New York City,
has made a specialty of working with companies that want to set up tech
committees. He recalls an outfit where the IT spending went way over
budget and the CIO resisted taking direction from the committee. The
CIO ultimately resigned, and the committee found a successor with whom
it still seems to get along more than a year later. Part of the
explanation for the new CIO’s acceptability is undoubtedly his ability
to stay within his budget.
Technology committees often deal with highly specialized material in
which jargon can be the lingua franca. Sound familiar? “It used to be
that you could empty a room real fast talking about audit work too,”
says Max Hopper. Indeed, just as the audit committee has to have its
financial experts, so the tech committee requires independent directors
who are well versed in technology. “You don’t need a director who is a
highly technical CIO, but you do need businesspeople who have managed
in an environment with aggressive and effective information systems,”
says Richard Nolan. “That way you have directors who can work with the
company’s tech people and manage the business trade-offs.”
The composition of the tech committee at United Stationers is a good
example of this. In the late ’90s Frederick B. Hegi Jr., a founder of
Wingate Partners, a private equity firm that had a large stake in
United Stationers, was serving as its chairman and began recruiting
outside directors. Hopper was one of his finds. “I wanted someone who
had IT experience in a large company,” says Hegi. In 2000 he decided
the board should also have a younger director “who had his ear to the
ground and was familiar with new technologies.” He found this person in
Alex D. Zoghlin, then the chief technology officer of Orbitz and all of
30. A couple of years later the board formed an official technology
committee comprising Hopper and Zoghlin. When Hopper retired as a
director and committee member in 2005, he was replaced in both slots
and on the audit committee by Charles K. Crovitz, now 52, who had been
executive vice president and chief supply chain officer of Gap Inc. and
chief information officer at Safeway Inc. Hopper remains as a
consultant to the committee. “We didn’t want to lose Max,” Hegi says.
But he is losing Zoghlin, who plans to step down from the board in May.
Zoghlin has started a new company and says he no longer has “the
appropriate time to serve on United’s board.” Crovitz will take over as
chairman of the tech committee, but neither the company nor Hegi
returned phone calls about who might succeed Zoghlin on the board.
Although some boards may view their tech committee as permanent, ever
watching over changes in technology, others think the committee should
ultimately put itself out of business. Says Vaughan Merlyn of Concours
Group: “Down the road, a company will accomplish a blending of IT and
the business focus.” When that happens, the money invested in
information technology will be just another large capital expenditure,
to be evaluated by the same group of knowledgeable board members who
make the final calls on new plants or acquisitions.
