Topics: Corporate Governance,Technology
Topics: Corporate Governance,Technology
August 4, 2021
August 4, 2021
Finding time to engage on corporate strategy is a regular concern of directors. One aspect of strategy oversight in particular—the emerging and urgent topic of digital transformation—distinguishes itself from traditional operational considerations because of its critical impact on a company’s business model, investments, leadership, and culture. The companies that lead in the digital economy win big, while companies that fall behind face significant threats—competitive, security, and even existential. (For more board-level insights on this, join me at the foundation program of the NACD Digital Transformation Continuous Learning Cohort on Aug. 24 and 25.)
Many organizations and leadership teams, however, continue to struggle with digital transformation despite attempts at new strategies and investments amid urgent competitive and market pressures. Boards looking to enhance governance of digital transformation, or other highly transformative topics (such as sustainability and environmental, social, and governance matters), regularly establish new committees that can improve board oversight and engagement.
For example, 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.
Looking at the Fortune 500 more generally, my colleague, Amanda Maggiore, and I analyzed the structures of its boards to see how many had more than the three required committees, the nature of those extra committees, and associated market share performance.
We found that over 63 percent of the Fortune 500 have committees beyond audit, governance, and compensation. While the specific names of these additional committees differ, they fall into logical groupings. It comes as no surprise that the top three additional committees are in the realms of finance and investment; executive; and risk, regulatory, and compliance.
Meanwhile, 56, or 11.2 percent of, Fortune 500 companies have committees dedicated to science, technology, and innovation.
Establishing a science, technology, and innovation committee at the board level can deliver many benefits, including time on the agenda for digital transformation at board meetings, increased visibility into this important topic at the full-board level, enhanced management collaboration to generate ideas and achieve results, and enterprise-wide appreciation of technology-driven growth opportunities and risks. When successful and integrated with company strategy, forming this committee may also allow companies to develop new intellectual property portfolios as well as new commercial, product and service, and ecosystem opportunities. Standing up such a committee clearly signals the particular focus of the board on the topic.
Properly executed, the resulting enhanced oversight also builds confidence in management teams and boards in the development of strategic capabilities and associated investments. Growth outcomes should be a primary focus of science, technology, and innovation committees, and the market cap performance of companies with such a committee provide a directional indication of these benefits.
As 52 of the 56 companies with a science, technology, and innovation committee are publicly traded, we can also analyze their share price performance. While there are many factors that contribute to a company’s share price performance, 50 of these companies (two outliers were removed from the 52) saw average one- and five-year share price increases of 43.2 percent and 72.2 percent, respectfully. Forty-seven of the 50 companies saw market cap growth in the past year, while 41 of the 50 experienced market cap growth over the last five years.
These 50 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.
Whether or not a board establishes a specific science, innovation, and technology committee will depend on how well integrated these topics are into existing governance structures. Notably, some of the Fortune 500 companies that do not have science, technology, and innovation committees are the world’s leading technology organizations, given that technology has always been core to their business models and they will likely have integrated science, technology, and innovation topics into their existing committee structures. But for companies just starting out on their digital transformation journeys, a new committee could be the key to success.
Ryan McManus is founder and CEO at Techtonic.io, managing director at Inflexhn Partners, and a director at Nortech Systems and of the NACD New York Chapter. He will be a speaker at the foundation program of the NACD Digital Transformation Continuous Learning Cohort on Aug. 24 and 25. Amanda Maggiore contributed to this article.
NACD: Tools and resources to help guide you in unpredictable times.
Interesting analysis Ryan. Did you see any correlation between the 11 percent with science and tech committees and sectors?