Back in January I reported on some of the innovative trends that I saw on my trip to the Consumer Electronics Show (CES). Nine months on, the evidence of those technologies’ impact is everywhere. I expect these disruptive innovations to be front and center this January, when the National Association of Corporate Directors (NACD) will host a small group of our members for a directorship-centric tour of CES, along with an exploration of the implications for strategy development and risk oversight.
While January is still four months away, we have been talking about these changes across our education events all year, including at the forthcoming Global Board Leaders’ Summit.
Here are a few examples of the how these trends are manifesting.
Artificial intelligence (AI) technology continues its march into the mainstream. Autonomous vehicles give us one window into how AI is fueling disruption and industry change. Self-driving cars have the potential to save thousands of lives. That mission is part of what inspired Sebastian Thrun to found X, Google’s semi-secret moonshot laboratory, to focus on the technology. Self-driving cars’ potential to disintermediate is largely unanticipated by most business outside of the automotive manufacturing and services industry.
At our August Master Class, Travelocity.com founder Terry B. Jones laid out a landscape of compelling examples of disruptions that will be caused by self-driving vehicles. “People say, well, the technology’s going to disrupt insurance and surely it will,” Jones said. “But it’s also going to disrupt hospitals. The number one reason people go to the emergency room is car wrecks. We’re not going to have car wrecks anymore. It’s going to disrupt hotels. You’ll just stay in the car and sleep while it drives. It’s going to disrupt police—we won’t need traffic tickets.”
Extend Jones’ last point about a decrease in traffic tickets to red light cameras and then consider that in 2015, municipalities collected more than $6 billion in revenue from speeding tickets alone. Self-driving cars could bankrupt whole cities that do not have the foresight to create new revenue sources.
The increasing level of cooperation between companies across verticals is changing the very nature of industries themselves. The acquisition of Whole Foods Market by Amazon.com has fueled anxiety across industries and driven once unlikely bedfellows to team up, spawning, among other things, a new partnership between Wal-Mart and Google. Part of the urgency behind the Google–Wal-Mart partnership is the dual realization that voice-enabled shopping is the future of retail, and that Amazon now has a significant advantage over both companies in that space. Amazon is forecast to have 70 percent of the voice-enabled speaker market this year.
As noted at CES, the increasing amount of technology in vehicles has effectively transformed cars into giant computer on wheels, forcing companies from Ford to Honda Motor Co. into an identity crisis. When considering the question, “Are we a technology or a car company,” increasingly the answer is “yes.”
At our Master Class in August, Bonny Simi, a director of Red Lion Hotels and the head of ventures for Jet Blue, explained how the airline missed an early opportunity to partner with and invest in a small car ridesharing startup that eight years later has a valuation nearly ten times that of the airline’s market cap. “At the time when the startup approached us, we didn’t think it was relevant to our business because we saw ourselves as an airline,” Simi noted. “We’ve realized we need to think of ourselves as a travel company.”
The next generation of disruption is about more than technology. Don’t underestimate social and demographic shifts in the market, and the power of changing attitudes and norms to create new competition. Younger consumers have different ideas when it comes to everything from privacy to shopping. The rise of companies like Lyft and Airbnb was enabled by mobile technology, but it was also made possible by a generation of younger people who didn’t hold traditional, sometimes negative attitudes about sharing a home, a car, or even a dress, with a stranger.
At last year’s spring Master Class, Peter H. Coors, former chair of the Molson Coors Brewing Co. and chair of MillerCoors, talked about how millennials’ distaste for big brands and an embrace of the small and bespoke was driving sales away from MillerCoors towards smaller, local craft beers. Younger consumers’ preference of supporting local and small businesses presents a threat to larger food and beverage producers.
Younger people are also turning to alternative payment methods. This year at another Master Class session, Jones shared a story about his 20-something, newly married daughter. Since she and her husband had not yet merged their finances, they were sharing money via online payment platforms. When they went into their local branch of a Fortune 500 bank to get a loan, “the loan officer demanded to know who this guy Venmo was that they had been sending so much money to.” The message, especially to more established companies, is that “the way you’ve always done it” isn’t going to win the day moving forward. Don’t overestimate the long-term viability of legacy products and systems.
The complexity of risk will continue to grow exponentially. Acclaimed technology guru Shelly Palmer focused on this concept heavily both at CES and when he addressed our members at the NACD Technology Symposium in Silicon Valley this past July. “The velocity of data is increasing and will always increase, then the value of that data is going to decrease because there’s just too much of it,” Palmer said. “You’re going to have to sort this out in some way.”
To illustrate his point, Palmer then showed a pond half full of lily pads. He asked the audience the following: if the growth doubled every day until day 30, what day was shown on the slide with the pond half full? The answer was day 29. “Human beings do not think exponentially,” Palmer pointed out. “We think in a linear way. The question is, when is it day 29 for any of the things you’re working on? That’s the speed with which technology is coming at you… You don’t need to manage change. You need to be in a mode of continuous improvement and adaptation.”
When you consider the risk side of so much interconnected data, it raises the stakes for everything from privacy to cyber-risk oversight. Companies that don’t have their eye firmly on the ball face consequences with increasingly higher-stakes implications for their business.
Questions to Ask Management
Directors would be wise to begin pressing their management team for briefings on their strategic plans. Below are several questions you could pose at your next board meeting.
Have we considered how these forces can provide a strategic advantage to us, either by creating new revenue streams or new efficiencies?
Have we considered the risks to our business, including how we could be disintermediated or how a particular disruptive force might create competition including from unlikely or unforeseen sources?
How are we thinking about innovation? Are we good at fostering it in house or should we look to outside partnerships to supercharge our efficiencies, products, and capabilities?
What are we doing internally, including review of compensation and incentive plans, to ensure new ideas get an open and fair hearing and aren’t killed off internally by managers who may not want to upset the status quo?
Are you ready to attend NACD’s CES Experience in January? Register now to be considered for a place in this exclusive tour that will highlight exciting disruptive innovations.
Lorrie Norrington has over 35 years of operating experience in technology, software, and Internet businesses. Norrington is currently an Operating Partner at Lead Edge Capital, and serves on the boards of Autodesk, Colgate-Palmolive Co., HubSpot, BigCommerce, and Eventbrite. She lives in Silicon Valley. This blog is part of the2017 NACD Global Board Leaders’ Summitseries.
A company’s board sets the tone from the top and oversees long-term strategy. However, now more than ever, boards also must actively work to understand technology trends and encourage a culture of innovation that drives long-term growth. The development of an innovation mindset has become an imperative for directors.
The pace of technological change is forcing governance needs to evolve faster than anticipated. As a result, the inability to innovate has become one of the biggest business risks in most enterprise risk management assessments. It is useful to understand that both evolutionary innovation (or the combination of small ideas into bigger change) and discontinuous innovation (which is disruptive to companies and industries) can render companies uncompetitive in months and years—not decades.
Below are some of the techniques I’ve used over the past decade as a director to keep current on my knowledge and help boards embrace technology and innovation.
Take It Personally
You don’t have to live in Silicon Valley or be a technologist to possess a solid working knowledge of innovation and technology trends. In our previous roles as executives, we were forced to keep current on business and technology changes. The same holds for board directors. It is up to you. Annual updates through events like the NACD Global Board Leaders’ Summit are essential to learn about key trends and best practices from other boards. However, given the rate of change, you cannot rely solely on annual updates. Every year, at a minimum, I read the top three business technology books on Amazon’s bestseller list, attend one technology conference (Mary Meeker’s annual pitch is a must), and read my favorite tech-focused publications (i.e., Recode and TechCrunch) daily. This routine enables me to engage in the boardroom with an informed perspective.
Go Beyond the CEO
With today’s rate of change, it isn’t realistic to expect the CEO to have all the answers regarding innovation efforts and how teams are applying technology. If your board has a technology and innovation committee, take time to understand executives’ areas of focus and ensure the agenda is balanced to include both the risks and opportunities technology change can create. If your board does not have one, ensure one of your board members is designated to engage regularly with the chief technology officer or chief product officer about their mid-and long-term innovation and technology plans.
Create an “Innovation System” for Your Board
A technology and innovation review should be part of your annual, board-level strategy or product review. Examining current technologies and innovations, as well as early-stage technologies and innovations that management believes to be part of the future, are two key behaviors to build as a part of your board’s robust “innovation system.” Last, by including technology and technical product skills as part of the criteria for new board members, you will ensure the board has the right skills long-term to encourage and challenge management.
In sum, boards set the tone for the entire organization. If you embrace technology and innovation, this empowers everyone throughout the company to do the same. In a world where the rate of technology and innovation will determine long-term success or failure, directors must embrace the changes needed to encourage and challenge management to accelerate their understanding of technology and the pace of innovation.
To learn more about technology and innovation, attend the 2017 Global Board Leaders’ Summit, Oct. 1–4, 2017, in National Harbor, MD. For the full Summit agenda, please visit the Summit website.
In April 2017, the U.S. Securities and Exchange Commission’s (SEC’s) Division of Corporate Finance announced it will not recommend enforcement action for companies that disclose, but do not further investigate usage of conflict minerals which may be from the Democratic Republic of Congo (DRC). Any company manufacturing or contracting to manufacture products using such minerals had previously been required to conduct extensive due diligence on its supply chain and make this diligence publicly known with a note that its products contained minerals which “have not been found to be ‘DRC conflict free.’” However, following a series of partial losses in court, the SEC appears to be backing off the rule—for now.
The Conflict Minerals Rule and Disclosure Requirements
A provision in the Dodd-Frank Act aims to cut off funding sources for armed rebel groups in the DRC and surrounding countries in central Africa. It requires companies manufacturing products containing certain minerals to conduct supply chain audits and disclose if those minerals were known to have originated in the DRC or adjoining countries. The SEC, as the enforcer of this provision, issued a rule requiring issuers of securities who filed reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 and who manufactured or contracted to manufacture a product in which the defined conflict minerals were a necessary part, to file a separate special disclosure form, Form SD. Although these obligations were placed on manufacturing issuers, in practice, the diligence requirement was imposed on others in the supply chain because many manufacturers required their supply chain partners to certify origin of minerals and compliance with the rule.
When Form SD was first issued, items 101(a) and (b) required companies using conflict minerals to attempt to identify the country of origin of those minerals. If after conducting a “reasonable country of origin inquiry” the company determined that the country of origin was neither the DRC nor an adjacent country, it had to disclose this finding (and a description of the country of origin inquiry conducted) on its website as well as to the SEC. Per item 101(c) of Form SD, if a company’s minerals may have originated in either the DRC or its neighboring countries, the company was required to conduct additional, more extensive due diligence, and then file and publish a conflict minerals report. This report had to include a description of the company’s due diligence efforts, certified results of an independent private audit, and a list of planned changes as a result of the audit. In the report and on its website, companies also had to describe which products had “not been found to be ‘DRC conflict free,’” although for the first two years of enforcement they could use the label “DRC conflict undeterminable.”
The National Association for Manufacturers challenged these regulations on both procedural and constitutional grounds. After the district court granted the SEC summary judgment, the Association appealed to the DC Circuit of Appeals. Ultimately, the appeals court found that forcing companies to note whether or not their products are DRC conflict free was unconstitutional under the First Amendment. The case was remanded to the U.S. District Court for the District of Columbia, which issued its final judgment in April 2017 and set aside the part of the rule that requires companies to add language that their products are “DRC conflict free” or “have not been found to be ‘DRC conflict free.’” Citing both the court decision and the unclear efficacy of the rule, SEC Chair Michael Piwowar reopened comments and the SEC stayed the compliance portions of the rule pending the conclusion of litigation. The SEC announced it would not pursue enforcement actions against companies who only complete Form SD items 101(a) and (b) and do not pursue more extensive diligence on sourcing or secure an independent audit. The SEC has taken the view that the purpose of item 101(c) of Form SD and the related conflict minerals reports was to determine the status of conflict minerals by requiring the “conflict free” or “not conflict free” labels, and that these measures and the requirements for more detailed due diligence are in need of re-evaluation and clarification given recent court rulings on this matter.
Although companies are not currently expected to conduct the extensive due diligence envisioned by item 101(c) of Form SD, they are still expected to conduct in good faith a reasonable country of origin inquiry and disclose this information to the SEC and the public. Companies and boards still need to ensure there are effective diligence programs in place that allow reasonable inquiry into supply chain partners and components, particularly if conflict minerals are necessary to any product the company manufactures. By statute, the SEC is required to issue a rule relating to due diligence for conflict minerals. Although the “conflict free” labeling requirement has been eliminated, the question remains whether conflict minerals reports, in their current form, are otherwise valid. The SEC is currently developing its future enforcement recommendations with respect to the rule.
In the interim, companies should continue to ensure effective supply chain diligence mechanisms are in place that allow them to confirm where components, particularly conflict minerals, are sourced. To the extent that auditing or diligence measures had already been put into place prior to the final judgment and SEC announcement, companies may want to continue to implement these measures given the lingering uncertainty about future application of the rule. Companies also have the ability to submit comments on the rule to the SEC and should make their views known to influence future enforcement on this issue.
At Baker & McKenzie, Joan Meyer is a partner and chairs the North America Compliance, Investigations & Government Enforcement Practice Group. Reagan Demas is a partner and Maria McMahon is a professional support lawyer in the North America Compliance, Investigations & Government Enforcement Practice Group in Washington, DC.
To learn more about strategy and risk, attend the 2017 Global Board Leaders’ Summit where you will have the opportunity to explore emerging risk issues with peers. A detailed agenda of NACD and Marsh & McLennan’s Board Committee Forum on strategy and risk, can be found here.