Is Southwest Snafu signaling the need for a board innovation committee?

To succeed and compete, companies need three core assets: financial assets, human capital assets, and software and technology assets. Southwest and others may need board-level committees to manage and create such technology assets.

The following part of the Wall Street Journal article covering the turmoil in the Southwest caught my eye:

“It has been an open secret and shame within Southwest for some time that the company needed to modernize its scheduling system. Software flaws contributed to earlier minor meltdowns. In a message to members on Monday, Southwest Air Pilots Association trade union president Casey Murray said the company was “strengthening its operational processes and IT ( I was burying my head in the sand when it came to information technology.”

The New York Times view was related, but added the interesting concept of technical debt. This seems to be defined as overdue upgrades and maintenance of software and hardware systems.

“This is why we cannot continue to rely on outdated software and selfish executives to run more and more infrastructure and our lives. Technical debt is real debt. And unless we take steps to hold companies and executives accountable for preventable and foreseeable failures, it will be us, the people, who will continue to pay.”

Many solutions to this problem have been proposed, including my occasional rant about the abysmal state of technology spending companies expose to the public, both hardware and software. But let me suggest another governance fix that my colleagues Anthony Bay, Doug Maine, Alex Salkever and I have been working on over the last year or so. Essentially, all companies have become more or less technology companies. Therefore, all companies should have a technology and innovation committee on their board of directors.

What would such a committee be entrusted with? Standard board-level committees are the Audit Committee, Compensation Committee, Nominating and Governance Committee. Issues related to technology and innovation are usually incorporated into the audit committee’s charter. Our collective experience as board members, academics, and educators on corporate governance is that, frankly, we believe that audit committees fall short of their mandate.

The Audit Committee is usually chaired by a retired Audit Committee partner or CFO (Chief Financial Officer). CFOs are no doubt experts in financial statements, but they may not be “tech savvy” enough to understand technical debt (defined below) and ask management questions. The software and hardware upgrades that are essential to keeping your business competitive and the threat of technology cooking in someone’s garage that will ultimately keep your business “off Amazon”.

The concept of technical debt

The concept of “technical debt” is new to most board members and needs to be elaborated on. As my co-author Anthony Bay states: It often absorbs a significant portion of a company’s technical resources. Just keeping the system running means it becomes mission-critical and vulnerable, and adding new features makes it even more vulnerable. ”

In many cases, the skilled employees who built the original system may no longer be with the company. Besides, their code may not be well documented. Additionally, the state of software development is evolving rapidly, and most companies are limping in their inability to truly function at high levels of performance. This lack of software readiness and technical debt limits technical readiness and impacts customer experience, risk management, and ballooning costs. People inside the company (like Southwest) know about these issues, but the board is very likely unaware of these issues. Even CEOs may not be keeping up with speed.

Southwest has no technology leader on board

As a case study of technical debt issues, consider Southwest’s board of directors. Southwest’s board of directors is fairly standard and includes an audit committee, a compensation committee, an executive committee, a nominating and governance committee, and a safety and compliance committee.

Consider the following passage on Board Orientation and Continuing Education on the Southwest website:

“The Board shall receive an annual presentation of the Company’s long-term strategic plan by management. In addition, the Board shall receive presentations from the Company’s independent auditors, financial officer, chief legal officer, and outside experts. , in particular, shall be regularly informed of changes in accounting rules, other regulatory requirements, and laws applicable to the responsibilities of the Board.Members of the Board shall attend important company events. Board members are also encouraged to take advantage of materials and seminars provided by professionals in the fields of accounting and law to the extent applicable to their responsibilities as Board members.”

Surprisingly, nothing is said about the company’s core business, especially its tech readiness.

We also reviewed the proxy statement and assessed the backgrounds of the 13 directors on Southwest’s board. Beigler has a background in the energy field, Biggins ran a search company, Brooks casually his dining background, and Cunningham was premier or college at the University of Texas. Denison is Chief Financial Officer (CFO) with a background in air logistics, Gilligan is Chief Customer Officer of United Technologies Aerospace Division, Hess is CEO of Southwest, Kelly is former CEO of Southwest, and Loeffler is a non-profit organization. and philanthropic backgrounds, Montford and Ricks have lobbying backgrounds, and Reynolds is an attorney.

It is difficult to assess the expertise of the directors from these thumbnail CVs prepared in the proxy statement. That said, it’s not clear if any of these directors are technical leaders.

Our Vision for the Technology and Innovation Board

We believe that boards need software and technology experts to join the board.

A modern enterprise needs at least three core assets to remain viable and competitive: financial, human and software/technology assets. The Board has an Audit/Finance Committee that provides oversight and governance over its financial assets and strategy. They have Compensation/Human Resources (Human Resources) Committees to provide oversight and governance over human capital and strategy. Each committee works with and relies on third-party advisors who serve both the company and its board of directors to ensure the proper discharge of their duties.

With the exception of about 9% of Fortune 500 technology committees, boards lack formal structures to provide oversight and governance over technology and strategy. Many express very limited expertise in the subject matter of software and technology.

Given this, what should the board/company do? We recommend the following steps:

· Ensure the Board adds subject matter expertise from software and technology leaders.

If the board has at least two people with expertise in the areas of software and technology, consider setting up a technology and innovation committee that in principle reflects audit/finance and compensation/human resources responsibilities. Please give me. A committee cannot be staffed or led unless it has subject matter experts.

· Boards and technical committees should seek out and retain third-party advisory services to help assess the company’s technical systems, technical debt, and technical leadership.

The chief technology officer (CTO) and chief executive officer (CEO) should work with the board innovation committee to have the same engagement and oversight as the other two key committees. The company’s technology strategy, technical debt, and operational performance should be high on the board’s agenda.

· However, my co-author, Douglas Maine, reiterated the need to explicitly add innovation to the committee’s agenda, noting: Software must enable product and service differentiation and lead to new insights and discoveries. For example, don’t forget the possibilities of AI (artificial intelligence). Technology is now about innovation, not simple automation. Innovation remains customer-focused and requires more externally focused, technology-product style-oriented leadership and processes. ” Therefore, the board also needs strategic and innovative directors.

· Therefore, we believe that board committees should be called ‘technology and innovation’ rather than simply technical committees. Such committees need directors who have demonstrated an ability to find and nurture innovation in the companies they have worked with. A CTO (Chief Technology Officer) may be a better fit for this board role than a CIO.

These recommendations may have helped Southwest avoid unnecessary financial loss and damage to brand property, and potentially maintain its technological edge. More importantly, Southwest’s technical issues are now public and will be resolved in some way. A bigger concern is the high number of companies whose technical debt and lack of innovation go unnoticed by investors, constituting potential time bombs. A board-level technology and innovation committee can help mitigate such risks.