The opportunities and risks of technology

A round-up of recent governance news.

Job-hopping “new norm” for younger generation

Two recent reports emphasise the need for boards to spend more time with human resources executives in 2016, to understand how their organisation is preparing for unprecedented technological-driven change in the next 10 years.

Boards need to know their organisation is ready for higher staff turnover and the opportunities and risks of technology displacing more jobs. Will the organisation have the right skills – or a culture that is sufficiently adaptable to get them – as machine-to-machine learning, artificial intelligence and automation takes over many white-collar jobs?

The first research report, by McKinsey & Co, considers how leaders must adapt in changing employer attitudes and behaviours. The report, Winning Hearts and Minds in the 21st Century, describes job-hopping as the “new normal” for young workers. Millennials expect to hold 15 to 20 jobs over their working life, research by US consultant, Jeanne Meister, shows.

McKinsey consultants, Tessa Basford and Bill Schaninger, wrote: “Millennials may seem challenging. Yet their search – for diverse role models, meaning beyond a paycheck; equitable treatment in an increasingly transparent and transient world; and leading-edge skill building – is one that many employees, regardless of age, industry or nationality, are undertaking today.”

They added: “Leaders who understand both the changing workforce and leading-edge digital tools, and have a well-tuned grasp of the building blocks of organisational change, should be well positioned to break through the noise and inspire these employees.”

The second report, The Future of Work by Chartered Accountants Australia and New Zealand, reinforces the need for boards to consider human resources risks. It was based on a survey of more than 1,400 Australian workers and conducted by Deloitte Access Economics.

The report found that two-thirds of respondents with less than five years’ experience expect their job will not exist or will fundamentally change within 15 years.

Young employees mostly expect an average tenure of five years or less with any given employer through their career, and about one in five surveyed expect to be workplace “generalists” with a broad skill set rather than deep skills in one or two areas.

Moreover, more than half of employees with less than five years’ experience already see their university qualifications as not being “very much” relevant to their work.

These reports suggest higher staff turnover among young employees and more roles being replaced or redefined by technology. Directors must ask whether the organisation’s future workforce is capable of supporting its long-term strategy, and assess the risk of a significant talent and skill gap as technology redefines traditional job functions over the next five to 10 years.

As boards grapple with the threat of digital disruption on business models, they would be wise to consider how technology will disrupt labour markets in the coming decade.

Can social status save a CEO’s job?

Two CEOs lead underperforming companies. Both have similar tenure and the market is equally disappointed in their results. The first CEO keeps their job, while the second is dismissed.

There are, of course, many reasons why a board chooses to retain one CEO and asks another to resign. Directors might argue the CEO deserves a second chance, that there is no obvious successor, or that factors beyond the CEO’s control hampered performance.

But could a CEO’s social status in business also explain their survival? In this hypothetical example, the first CEO who keeps their job is well known and connected in governance circles through directorships. The second CEO worked their way up into the job, has never been on other boards, and has a lower profile in the governance community. 

German academics have analysed the role social status plays in CEO dismissal – an intriguing topic for directors. No board task is more important that choosing the right CEO, incentivising them, monitoring performance, and asking them to resign if needed. 

Their paper, How CEOs protect themselves against dismissal: a social status perspective was published in the June 2016 edition of the Strategic Management Journal.

Researchers from the Munich School of Management and the School of Business and Economics at Freie Universität Berlin analysed CEO dismissals in large publicly listed German firms over 2002-11. They identified 45 CEO resignations from 119 CEO departures that appeared to be dismissals rather than planned CEO succession events. 

They determined CEO social status by capturing the number of outside directorships held by the firm’s CEO relative to board seats held by the organisation’s chairman. In doing so, the researchers could determine if the dismissed CEO was part of the “corporate elite”. 

The researchers found that an underperforming CEO with a high social status in business compared to the chairman was less likely to be dismissed. The authors wrote: “High-status chairmen of boards are an important factor for effective corporate governance decisions – and especially the dismissal of a poorly performing CEO.” 

In other words, organisations that are led by CEOs with high business status need chairmen who have similarly high status. A reputation imbalance between the board and CEO can make it harder to dismiss an underperforming CEO. 

The researchers acknowledge the limitations of their study; namely, the challenges in identifying CEO dismissals, measuring CEO social status in business, and the unique characteristics of two-tier German supervisory boards.

But their work is an important contribution to governance literature. Its main takeout is the need for boards to consider the CEO’s status in business when appointing directors and the chairman. “Generally speaking, high-status CEOs should face a high-status chairman to achieve a balance of power at the top,” the authors wrote.

Having genuine diversity of boards, with at least some directors who are not part of the corporate elite, and thus less influenced by the CEO’s social status in business, can also lead to more effective governance decisions around CEO dismissals.

Known circumstances: better safe than sorry

Most general liability insurance policies are occurrence-based. When a claim is made, it reverts to the policy that was in effect at the time the relevant event took place. However, as Directors and Officers (D&O) policies are claims-made, cover is provided by the policy in place on the date of the claim rather than the event, which triggered it.

“Most directors understand that they have to notify the insurance company as soon as a claim is made against them,” says John Kelly, senior partner at McDougall Kelly & Martinis. “However, a typical claims-made policy also requires you to tell your insurers about any circumstances that could give rise to a claim before you take out a policy.” 

These circumstances are hard to define. “This is a surprisingly complex area because it tends to be very subjective,” says Kelly. “Whether a director believes that he or she has been negligent is irrelevant. The assessment is based on whether a reasonable person in the insured’s professional position would have thought before taking out the policy that an event might result in someone making an allegation against them. Clearly this requires a judgement call that could vary from insurer to insurer.”

The consequences of failing to mention an event, which is later defined as a known circumstance can be severe. “You could prejudice your rights to cover for any associated claim,” says Kelly. 

However, as all notifications are lodged in the system, some directors are concerned that they might appear to be a poor risk and be penalised with higher premiums even if no claim eventuates.

“If there is no claim, it is likely that the notification will be removed from the records after a period of time,” says Kelly. “And, in any case, the risks of notifying too much are far outweighed by the risk of forgetting to notify. On a practical level, it makes sense to be conservative when considering these matters. If you are in any doubt, talk to your insurer.”

Backing for tech specialist directors

Current research is challenging the view that boards should resist recruiting too many technology specialists, and reinforcing how unprepared some boards are for the challenges of digital disruption. 

A study of more than 1,000 non-executive directors of 112 of the largest publicly traded companies in the US and Europe showed their boards lacked expertise in understanding how technology is informing strategy and affecting execution. 

The research, published in the latest edition of Strategy + Business, found 95 per cent of European companies assessed (excluding those in IT and telecommunications) had no non-executive directors with deep technology skills. Almost half of US companies assessed had similar problems, despite grappling with complex technology-driven strategic questions.

“Boards can no longer duck the responsibility for the company’s digital transformation,” wrote Chunka Mui, Toby Redshaw and Olof Pripp, in Your Next Board Member Should be a Geek. “They must take real ownership of ensuring that they are equipped to fully understand this part of the board agenda. Otherwise, how can they adequately oversee their company’s strategy, investment and expense base?” 

High-performing Australian boards are aware of the risks and opportunity of digital disruption to their organisation’s business model, and are taking steps to improve technology skills in board composition. Some are recruiting directors with technology management experience; others are forming technology advisory boards or committees, or sending their directors on study visits to Silicon Valley or other technology clusters. 

There is a view that boards should resist recruiting too many specialists, in technology or other areas, who can only govern in their area. Top directors are capable of governing across multiple areas and joining the dots between complex issues. The impact of technology on strategy should be the domain of every director, not only those with an IT background. 

Instead, the authors make three suggestions for boards to meet technology challenges.  

First, companies should open up multiple board seats for directors with deep technology expertise. Seek directors with fresh technology experience who are abreast of fast-moving trends. 

Second, develop formal board structures to address technology issues, through sub-committees or advisory committees. The authors say: “It is important for this group to address topics that go beyond technology strategy and IT governance. The most important priority may be enterprise strategy and the ways in which technology makes new value propositions possible.” 

Their third suggestion is developing the right context for technology discussions at board level. “Boards must have a clear view of their own company’s IT landscape. It falls to the board to ensure that the company has a multi-year plan to address technology needs while reducing costs and risk.”

The authors say technology governance is an opportunity. “Every board of directors has a once-in-a-generation chance to leapfrog the competition through technology competency. The opportunity is great because the task is difficult, and there is no large pool of talent waiting to be recruited. Those companies that meet this challenge successfully will capture the markets of the future.”

The big question

Question

We are amending our constitution and we are slowly moving into a system where we sign memorandums of understanding (MOUs) with partners that complement our services. As part of quality governance I would like to know: should we include a clause re the MOUs in the constitution?

Answer

My answer to this request is as follows:

If, as you say, your organisation is increasingly signing MOUs with partners, it appears that these are becoming a significant component of your business model. Therefore I believe it would be appropriate for the practice to be referred to in your constitution. 

It may be that only a fairly simple reference is required, stating that as part of its activities the organisation will enter into MOUs with partners on terms which are of benefit to the organisation, its members and its customers; and that such MOUs will allow the organisation to maintain appropriate financial controls and to ensure that goods or services are provided to an appropriate standard. I am speculating as to the terms which might be appropriate for your organisation.