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Your Next Director Should Be a Geek

Imagine that you were a major investor in a leading company, and its board of directors had no members with independent, world-class financial expertise. Who would look after your interests? You could probably coach the directors to ask good questions, but they would lack the competence to judge the answers. The board would not be able to engage management in robust conversations about the complexities of capital structure, mergers and acquisitions, financial accounting, reporting, regulatory compliance or risk management. Most investors and regulators would deem such a board unfit to carry out its fiduciary guidance and governance responsibilities.

Yet that’s precisely where many companies are when it comes to information technology. Digitally driven change is becoming as critical an issue to most companies as finance. Companies are being called on to reimagine and reconstruct every aspect of their business; customers, suppliers and markets expect no less. Consider the rapidly expanding use of mobile phones in retail and banking. Or the changes foreseen in the transportation industry due to car-hailing algorithms and driverless vehicles. Already, one MIT study has found that digitally adept companies are, on average, as much as 26% more profitable than their competitors. And that advantage is only likely to increase.

The boards of many large companies are ill-equipped for these shifts. That was the conclusion of our 2015 study of more than 1,000 nonexecutive and executive directors at 112 of the largest publicly traded companies in the U.S. and Europe. By analyzing company filings and public information, we found that all too many boards lacked the expertise needed to understand how technology informs strategy and affects execution. In Europe, for example, 95% of the companies we assessed, excluding technology and telecommunications companies, still had no non-executive directors with deep technology fluency. In the U.S., almost half of the surveyed companies had no technology expertise on their boards. These included major financial-services, insurance, industrial and consumer products companies. Yet each of those industries is grappling with complex strategic questions that hinge on technology.

See Also: How Leadership Will Look in 20 Years

Even boards with world-class technology expertise can have blind spots in areas of strategic importance; these include analytics, cybersecurity and digital fabrication. And even experts who keep up with particular technologies may miss the general effects of rapid technologically driven change on core products, business models and customer preferences.

Many board members are aware of these deficiencies. They know that their companies will either embrace technological change and claim the markets of the future or be put out of business. In 2015, a PwC global survey of large-company directors found that 85% of the respondents were dissatisfied with the way their companies were “anticipating the competitive advantages enabled by technology.” Almost as many, 79%, said their boards did not sufficiently understand technology.

The pervasiveness of the problem is troubling for anyone who cares about these companies — but it also represents an enormous opportunity. At the board level, there is a need for knowledgeable, incisive “geeks”: independent directors with experience and perspective in putting technology to use. In the past, many boards have compensated by relying on management or external consultants for strategic advice. But the stakes are now too high to take that approach.

Boards can no longer duck the responsibility for the company’s digital transformation. They must take real ownership by ensuring that they are equipped to fully understand this part of the board agenda. Otherwise, how can they adequately oversee their company’s strategy, investments and expense base? How can they guide profitability, manage risk, assess management performance and ensure proper talent supply? Below are three critical steps you can take to better prepare your company for these challenges.

1. Hold out for sufficiently broad and deep expertise. Although company leaders agree on the need to attract technology-fluent directors, they often approach the undertaking as an exercise in diversity. They “check the box” by bringing in one person to stand for the full technological field, rather than seeking multiple directors with relevant experience and insight.

To assess the severity of this deficiency in the companies we studied, we analyzed the resumes of their nonexecutive directors on four distinct aspects of technology: pure-play disruptive digital business, enterprise-level IT, cybersecurity and the digital transformation of Fortune 500–sized enterprises. Each is critical to boards’ oversight responsibilities, and fluency in each requires a distinct body of knowledge and experience. Few experts in enterprise-level value-chain IT could offer expert guidance on building disruptive digital business, and vice versa. We found that more than 90% of the companies, including technology and telecommunications firms, lacked expertise in one or more of these critical technology areas. Our research revealed only two companies that addressed all areas: Google and Wells Fargo.

To address the gap, you must open multiple board seats for people with technological experience. Just as having only one woman on a board has proven to be insufficient, having just one IT-savvy member is problematic. To fill these seats, you may have to reach beyond the traditional search targets of former CEOs and CFOs. Tap into recent CIOs, CTOs and other C-level leaders at successful information-intensive companies; retired military officers with large information-technology commands; and senior consulting and private equity partners with deep cross-industry expertise in enterprise technology transformations. Resist the urge to rely solely on Silicon Valley experience. Start-up experience is valuable, but addresses just a small part of the large enterprise technology challenge. Likewise, the “move fast and break things” attitude in Silicon Valley often does not translate well to other industries.

When recruiting these board members, be wary of candidates without fresh experience; in fast-moving fields such as cybersecurity or disruptive digital technology, people who are no longer active don’t always keep up with the latest trends. If executives in the business sector are scarce, look elsewhere; other sectors may be surprisingly relevant. In financial services, for example, understanding sophisticated process control is increasingly important. The best prospective board member may come from the logistics industry — from, say, FedEx or UPS.

2. Support robust discussions of technology with the right kinds of practices and management structures. There are two possible mechanisms for accomplishing suitably robust discussions. The first is to establish a formal technology-focused subcommittee of the full board, on par with other oversight functions such as audit or compensation. This can be helpful in raising critical issues and promoting deep discussion of complex topics. It also creates a mechanism for engaging external advisers.

Alternatively, set up a technology advisory committee that meets regularly with top management and periodically reports to the board. AT&T does this. It may be easier, with such a committee, to attract best-in-class expertise, given that the time commitment is low and there are no full fiduciary responsibilities. Typically, advisory committees can also rotate members more frequently than a board can. It must be remembered, however, that an advisory committee reports to management, not the board. This will color its advice.

Whatever the structure, 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. FedEx, which is as much a technology company as a transportation icon, has used such a board to great effect for many years.

3. Set the right context. Alan Kay, one of the foremost pioneers in personal computer conception and design, once said, “Point of view is worth 80 IQ points.” The context with which your board of directors views technology is a critical element for enterprise success. They must collectively understand the 10 to 15 drivers of technology that have taken quantum leaps in the past decade — for example, big data and analytics, cloud computing, mobile technology, artificial intelligence, the Internet of Things and autonomous transportation — and the potential implications each has for the company.

They must also have a clear view of their own company’s IT landscape: their existing hardware and software, including estimates of redundancy, age, robustness, any risk of obsolescence and costs. For example, how many marketing systems, customer databases and human resource systems does the company have? How interoperable are those systems? The need to ask these types of questions about a factory or back-office footprint would be obvious, but boards have generally neglected such inquiries regarding technology. The board must also understand risks related to technology, the defenses currently in play and any weaknesses in those defenses. Most important, the board must understand how the company’s IT systems relate to the company’s overall strategy, and what capabilities are needed to support it.

It falls to the board to ensure that the company has a multiyear plan to address technology needs while reducing costs and risk. Boards need not grant a license to spend. On the contrary, the hallmark of computers and networks is that they continually get faster, better and cheaper. These benefits accrue only to those with modern gear, however, so frequent upgrades are essential.

Finally, the board must incorporate its expanded technology context into larger deliberations. Talent recruiting and leadership development should be designed to fill gaps in technological fields. The criticality of IT should inform the review of proposed mergers and acquisitions. A close link to the audit committee is important because technology affects regulatory compliance and ethical issues. And the relationship to full board strategy discussions is critical.

Of course, placing someone with world-class technology expertise on a board does not guarantee success. Many technically proficient companies have lost to upstarts with a better product or service. But without this expertise, boards cannot play their most important role: intervening with substantive conversations about strategic decisions early enough to make a difference. And without these focused conversations about technological investments and decisions, boards cannot fulfill their fiduciary responsibilities.

Today, 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.

A version of this article appeared in the Summer 2016 issue of strategy+business.

industries

Outsiders Retreat From Insurance

Cargill, Monsanto, Wells Fargo and John Deere are officially out of the crop insurance business, according to a recent article from Bloomberg. Large companies like these expanded into different aspects of the agriculture industry over the past few years, and their debut in the insurance industry made quite an impact. With their newly acquired insurance operations, they were the market players to watch – and now we’re watching them leave the industry.

Behind this exodus is the matter of profit. Large companies, especially those that are publicly traded like Monsanto and John Deere, have a different perspective on risk and profit than the typical insurer.

Let’s take crop insurance profit and loss over the past couple years, which is driven by fluctuations in crop prices. As Bloomberg explained, “Bumper harvests have sent corn, the biggest U.S. crop, to less than half its 2012 peak, ratcheting down the premiums farmers pay to insure against loss. Other crops have also seen steep price declines.” At the same time, the broader insurance industry has been seeing lackluster results. The most recent numbers from the Congressional Research Service indicate an underwriting loss of $1.3 billion in 2012 and profit of $657 million in 2013. For insurers, although these are not welcome results, the reality is that there will be challenging years – and insurers are accustomed to anticipating them. They are in for the long haul. But large, diversified commercial companies such as Cargill, John Deere and Monsanto have a much harder time adjusting to these financial results.

So, were these big external players a collective blip on the map, or a real disruption? A pattern visible across many industries offers a possible answer. Large companies diversify around their current offerings, and, if the results are disappointing, they realize the expanded offerings are not core to their business. Google has been extremely successful in most of its diversification, but Google+, its social network offering, never became the powerhouse the compay had hoped would challenge Facebook. If these large companies are unsuccessful, they often leave the new industry.

This is not to downplay the role that new entrants have in the insurance ecosystem. They push our thinking and ways of doing business in directions that might otherwise have taken years for the industry to adopt. New players like Haven Life and Google are not attempting to be the same old insurer, only better. Their goal is to disrupt the business of insurance and to create something in a niche that the industry had not perceived. The disruption they cause can take many forms, from new solutions to new distribution channels. They can go after these markets without owning the entire process – and, in doing so, they create real changes in how the insurance industry has to operate.

Driverless cars will present similar challenges. Volvo and Ford have both mentioned the possibility of covering product liability insurance. How will this affect the insurance industry? Will automakers really cover the liability, or will they front it? Autonomous vehicles will change the insurance landscape by opening doors for these new thinkers. But will the insurance industry need to step in to present new insurance products that provide the necessary coverage? What role will insurers play in the new auto world?

Disrupters like Monsanto, Cargill and John Deere were not in the market for a long time, but they do have an impact. They invested in changing the claims process, and they applied data, analytics and automation in areas that were previously very manual – which causes us to rethink other processes. We can hope that their new ways of doing business opened some eyes in the industry. They did not change the game so much as establish that the game needs to be changed.

Blockchain Technology and Insurance

What if there was a technological advancement so powerful that it transforms the very way the insurance industry operates?

What if there was a technology that could fundamentally alter the way that the economics, the governance systems and the business functions operate in insurance and could change the way the entire industry postulates in terms of trade, ownership and trust?

This technology is here, and it’s called the blockchain, best known as the force that drives Bitcoin.

Bitcoin has gotten a pretty bad rap over the years for good reason. From the collapse of Mt. Gox and the loss of millions –  to being the de facto currency for pedophilia peddlers, drug dealers and gun sellers on Silk Road and the darling of the anarcho-capitalist community – Bitcoin is not doing well in the public eye. Its price has also fluctuated wildly, allowing for insane speculation, and, with the majority of Bitcoins being owned by the small group that started promoting it, it ‘s sometimes been compared to a Ponzi scheme.

Vivek Wadhwa writes in the Washington Post that Chinese Bitcoin miners control more than 50% of the currency-creation capacity and are connected to the rest of the Bitcoin ecosystem through the Great Firewall of China, which slows down the entire system because it is the equivalent of a bad hotel Wi-Fi connection. And the control gives the People’s Army a strategic vantage point over a global currency.

Consequently, the Bitcoin brand has been decimated and is thought by too many to be a kind of dodgy currency on the Internet for dodgy people.

The blockchain, a core technology behind what drives Bitcoin, has been slow to enter the Zeitgeist because of this attachment to Bitcoin, the bête noire of the establishment.

But that is changing fast. Blockchain as a tool for disintermediation is simply too powerful to ignore.

People are now beginning to really look at the blockchain as an infrastructure for more than monetary transactions and what it has done for Bitcoin. Just as Bitcoin makes certain financial intermediaries unnecessary, innovations on the blockchain remove the need for gatekeepers from a number of processes, which can really grease the wheels of any business, including insurance companies.

How blockchain works and can work for the insurance industry

Because of the way it distributes consensus, the blockchain routes around many of the challenges that typically arise with distributed forms of organization and issues such as how to cooperate, scale and collectively invest in shared resources and infrastructures.

In the blockchain, all transactions are logged, including information on the date, time and participants, as well as the amount of every single transaction in an immutable record.

Each trust agent in the network owns a full copy of the blockchain, and, in the case of a private consortium blockchain (more relevant to the insurance industry), the transactions are verified using advanced cryptographic algorithms, and the “Genesis Block” sits within the control of the consortium.

The mathematical principles also ensure that these trust agents automatically and continuously agree about the current state of the blockchain and every transaction in it. If anyone attempts to corrupt a transaction, the trust agents will not arrive at a consensus and therefore will refuse to incorporate the transaction in the blockchain.

Imagine there’s a notary present at each transaction. This way, everyone has access to a shared, single source of truth. This is why we can always trust the blockchain.

Imagine a healthcare insurance policy that can only be used to pay for healthcare at certified parties. In this case, whether someone actually follows the rules is no longer verified in the bureaucratic process afterward. You simply program these rules into the blockchain.

Compliance in advance.

Automation through the use of smart contracts also leads to a considerable decrease in bureaucracy, which can save accountants, controllers and insurance organizations in general an incredible amount of time.

While the global bankers are far out of the blocks when it comes to learning, understanding and now embracing blockchain technology, the insurance industry is lagging. Between 2010 and 2015, a mere 13% of innovation investments by insurers were actually in insurance technology companies.

There are some efforts to tap innovation, as the Financial Times in the UK recently wrote. European insurers such as Axa, Aviva and Allianz, along with MassMutual and American Family in the U.S. and Ping An in Asia are setting up specialist venture capital funds dedicated to investing in start-ups that may be relevant for their core businesses.

Aviva recently announced a “digital garage’ in Singapore, a dedicated space where technical specialists, creative designers and commercial teams explore, develop and test new insurance ideas and services that make financial services more tailored and accessible for customers.

And others are sure to follow in the insurance industry, particularly because both the banking industry and capital markets are bullish on investing in innovation for their own sectors – and particularly because they are doing a lot of investment in and around blockchain.

Still, the bankers and capital markets are currently miles ahead of the insurance industry when it comes to investing in blockchain research and startups.

Competitors in the capital markets and banking industries in terms of blockchain solutions include: the Open Ledger Project, backed by Accenture, ANZ Bank, Cisco, CLS, Credits, Deutsche Börse, Digital Asset Holdings, DTCC, Fujitsu Limited, IC3, IBM, Intel, J.P. Morgan, London Stock Exchange Group, Mitsubishi UFJ Financial Group (MUFG), R3, State Street, SWIFT, VMware and Wells Fargo; and the R3 Blockchain Group, whose members include the likes of Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street and UBS.

Then there are start-ups like Ripple and Digital Asset Holdings, led by ex-JPMorgan exec Blythe Masters, who turned down a job as head of Barclays’ investment bank to build her blockchain solution for banking.

There are others in the start-up world moving even faster in the same direction, some actually operating in the market, such as Billoncash in Poland, which is the world’s first blockchain cryptocash backed by fiat currency and which passed through the harsh EU and national regulatory systems with flying colors. Tunisia is replacing its current digital currency eDinar with a blockchain solution via a Swiss startup called Monetas.

There are both threats and opportunities for the bankers… so what about the global insurance industry?

Every insurance company’s core computer system is, at heart, a big, fat centralized transaction ledger, and if the insurance industry does not begin to learn about, evaluate, build with and eventually embrace blockchain technology, the industry will leave itself naked and open to the next Uber, Netflix,  AirBnB or wanna-be unicorn that comes along and disrupts the space completely.

Blockchain more than deserves to be evaluated by insurers as a potential replacement for today’s central database model.

Where should the insurance industry start?

Companies need to start to experiment, like the bankers and stock markets, by not only working with existing blockchain technologies out there but by beginning to experiment within their own organizations. They need to work with blockchain-focused accelerators and incubators like outlierventures.io in the UK or Digital Currency Group in the U.S. and tap into the latest start-ups and technologies. They need to think about running hackathons and start to build developer communities – to start thinking about crowdsourcing innovation rather than trying to do everything in-house.

Apple, Google, Facebook and Twitter have hundreds of thousands of innovators creating products on spec via their massive developer communities. Insurance companies that don’t start lowering their walls might very well find themselves unable to innovate as quickly as emerging companies that embrace more open models in the future and therefore find themselves moot. Kodak meet Instagram.

The first step for insurance companies with blockchain technology will likely be to look at smart contracts, followed by looking for identity validation and building new structural mechanisms where parties no longer need to know or trust each other to participate in exchanges of value.

Blockchain technology, for instance, can also allow for accident or health records to be stored and recorded in a decentralized way, which can open the door for insurance companies to reduce friction in the current systems in which they operate.

Currently, the industry is highly centralized, and the introduction of new blockchain-fueled structures such as mutual insurance and peer-to-peer models based on the blockchain could fundamentally affect the status quo.

As comedian and writer Dominic Frisby once penned, “The revolution will not be televised. It will be cryptographically time stamped on the blockchain.”

Some of the many questions that the industry should explore:

  • What kind of effect will blockchain technology adoption in markets have on the the public’s perception of risk?
  • Today, the insurance industry is centralized, but what could it look like if it were decentralized?
  • How could that affect how insurance companies mutualize?
  • Can the blockchain improve customer relations and confidence?
  • Can smart contracts built on the blockchain automate parts of the process in how business is done in the insurance industry?

If you want to explore further, sign up to express interest here about our coming event in London: Chain Summit Blockchain Event for Insurance.

A Call to Action on Mental Health

The 6th US/Canada Forum on Workplace, Mental Health and Productivity, held in Denver, produced a call to action on how employers can make suicide prevention a health and safety priority.

Almost 70 CEOs and community influencers participated in the five-hour forum, including senior representatives from RK Mechanical, the U.S. Postal Service, Wells Fargo, Bank of the West, Denver Fire Department and Level (3).

Colorado Gov. John Hickenlooper welcomed the guests and applauded their efforts to expand their knowledge and their willingness to take what they learn back to their networks. “Suicide affects three families per day in Colorado, and Colorado is consistently one of the 10 highest states in suicide rates,” the governor said. “The first step in prevention is creating an environment where people can talk about it, including the workplace. Our goal is to build support, and the workplace provides a huge opportunity for prevention efforts.”

Larissa Herda, the host and CEO of tw telecom, shared her own experience around family members whose struggles with mental health illnesses have led to suicide. She also echoed the governor’s hope in seeing the workplace as a safe environment for people to feel like they have support and can access help. “Through sharing my own story, I have opened the doors for others in our company to share theirs.”

Participants discussed both the human and economic costs of suicide deaths and attempts. International mental health and suicide prevention experts from the U.S., Canada and Australia shared several leadership and programmatic tactics that have helped, such as strategic communication, skill training and mental health resources.

“We need to promote the human dignity of people living with mental health conditions. The opposite of isolation is connectedness. The opposite of despair is hope. As leaders and organizations, you can help create these protective factors in the workplace,” said Eduardo Vega, executive director, Mental Health Association of San Francisco.

Joel Bosch, chief operating officer of eCD Market, said, “Why do we not talk about mental health in the workplace? Myths and stigma. Business leaders are our community gatekeepers but are often not trained appropriately. There is no way to break stigma through silence. Business leaders are often champions of a cause, and have the ability to create significant change.”