THE TECHNOLOGY COMMITTEE OF THE BOARD OF DIRECTORS:
The Next Wave in Corporate Governance
By Spencer G. Feldman and Constantine S. Potamianos*
††††††††††† The Technology Committee is a relative newcomer to the corporate governance scene.† Although it has been adopted at some large publicly-held computer and medical device companies in recent years, Technology Committees did not exist 20 years ago.† A survey of hundreds of publicly-held companies shows that few have established such a committee.† Where money and director talent have been available to form an effective Technology Committee, these committees have been given the function of overseeing the development of the companyís technology and considering how external technological developments may affect the company.
††††††††††† The role of Technology Committees Ė whether in technology-based or non-technology-based companies Ė is gradually evolving.† Typically, these committees have spent a significant portion of their time finding their own identity and purpose.† Some were formed to address genuine concerns by corporations to resolve problems with their infrastructure, technology or intellectual property subsequent to a crisis.† In other cases, they were primarily attempts to improve the level of understanding of technology issues among board members.† Since the enactment of the Sarbanes-Oxley Act in 2002, some companies have integrated their information technology strategy within other corporate governance and compliance processes.† For example, public companies invested heavily in IT systems and spent considerable time during 2004 working to meet the deadline to comply with Section 404 of the Sarbanes-Oxley Act, which requires these companies to verify that their financial reporting systems have appropriate controls, such as ensuring that revenue is recognized correctly.
††††††††††† Despite the slow adoption, for some companies the Technology Committee meets an important need in the interface between the corporation, as embodied by the board of directors, and its internal technology staff.† Furthermore, the Technology Committee can help the corporation define and evaluate its technology strategy.† This article briefly sets forth some suggestions on the organization and responsibilities of a Technology Committee and recommends the adoption of such a committee in appropriate circumstances.
The Roles of the Committee
††††††††††† A Technology Committee can serve at least three important roles.† It can serve to ensure effective and secure utilization of technology within the corporation, a broad area with a number of sub-responsibilities.† It can also evaluate, and advise with respect to, the direction of the corporationís technological evolution Ė something distinct from the technology management role previously noted and, within a technology-based corporation, a role that dovetails with the overall role of the board of directors in guiding corporate direction Ė and it can, in the process, oversee effective protection of the corporationís intellectual property.† Finally, the Technology Committee can recommend technology and procedures to meet the corporationís financial and regulatory obligations with respect to privacy, data retention and data protection.
††††††††††† The membership of the Technology Committee should be a cross-section of the board.† Although most other board committees are composed solely of outside directors, it may be desirable to have a balance between inside and outside directors with appropriate expertise on the Technology Committee, including the chief technology officer or another senior technology officer.† Like any other committee reporting to the board, the Technology Committee should be viewed as a working committee, and have the authority to meet directly with independent consultants, university researchers, technology companies, and with members of management in discharging its responsibilities.
††††††††††† From among the three roles noted, the objectives of Technology Committees differ from company to company and industry to industry; it is important for each corporation to define the role of its own committee.† This is particularly true since the mandates of these committees are more likely to vary than those of an audit or compensation committee.† Unlike an audit or compensation committee, which is required by stock exchange and SEC rules and therefore has clearly delineated functions and responsibilities, a Technology Committee may be structured and tasked in any way a board of directors sees fit.† A corporation in the computer networking industry may have its Technology Committee emphasize the development, impact and influence of particular networking standards (e.g., the IEEEís 802.11g Wi-Fi wireless communications standard) in conjunction with evaluating strategic product development goals set for the corporation.† The Technology Committee of a biotechnology corporation may focus on emerging political efforts to regulate GMOís (genetically modified organisms) and how this impacts the ability of the corporation to complete research and development, and introduce new products.† A non technology-based corporation may center its Technology Committeeís efforts on e-mail and Web security.† Despite these differences from industry to industry, certain technology issues should be considered by the board of directors and particularly the Technology Committee.† The possibility of a computer virus halting business is a major threat in todayís world, and it should be one of the responsibilities of the board to direct appropriate precautions so it never happens.†
Key Areas of the Committee
††††††††††† Below are some of the key areas where a Technology Committee can help the board fulfill its monitoring and supervisory responsibilities:
A.††††††† Staying abreast of new basic technologies and emerging technologies within and outside of the corporationís specific industry.
††††††††††† ††††††††††† A corporation will often have its own technology staff, but such staff is often focused, by default, on monitoring technology that directly impacts the corporationís current operations or that is integral to the corporationís current product development.† As such, a Technology Committee can serve an important role by looking at the impact of new basic technologies and, in life sciences companies, emerging clinical concepts, with potential application to the corporation from a strategic, high-level and long-term perspective.† While the corporationís technology staff is busy fixing the technology ďbugĒ of the moment at the operational and managerial level, a Technology Committee can evaluate the long-term impact of various technologies on the corporation.† For this function, it is often very effective for a Technology Committee to contain a mix of senior in-house technologists, as well as respected outside authorities who have a broader focus than the in-house technologists and a more dispassionate perspective on a corporationís existing technology and direction.
B.††††††† Understanding e-mail, Web and other security threats.
††††††††††† An increasing reliance on the public Internet and wireless access has accelerated the need for improved security technology.† Companies are today faced with important technology decisions such as creating a back-up communications network in the event of a major Internet outage and improving security for electronic controls used in mission critical systems.† At the same time, companies are experiencing economic drain caused by the sharp rise in hacker and cyber-crime attacks such as DOS (denial of service) attempts to close down websites, and Internet-related financial fraud such as identity theft and "phishing" attacks in which imposters use bogus e-mail and Web pages to steal personal financial information.† These issues will not be solved soon.† In a February 2005 report, ďCybersecurity: A Crisis of Prioritization,Ē a subcommittee of the Presidentís Information Technology Advisory Committee, a group of industry and university experts, criticized the federal governmentís inadequate financing of research on computer network security and questioned the Bush administrationís commitment to cybersecurity as a homeland security priority.† Managementís policies and practices with respect to a corporationís readiness in the event of a catastrophic failure of its computer and communications systems, and spending on security procedures, software and hardware, are of such importance to the corporation and its personnel, customers and suppliers that they may warrant oversight and monitoring by a Technology Committee.
C.††††††† Advising on long-term strategic goals of the corporationís science and technology investments.
††††††††††† Technology projects have become some of a companyís most expensive initiatives and should be managed with an overall business purpose and financial budget.† By assessing a companyís corporate strategies, assigning a strategic value to each project, and enforcing strict budgetary guidelines, a Technology Committee (especially when composed of financially sophisticated directors) can treat science and technology projects as financial assets.† For small and mid-sized companies, ranking a portfolio of technology projects by a set of financial metrics, and then demanding a return from each project approved, is an organized way to deal with technology investment within a constrained financial environment.† In addition to imposing financial discipline, taking this calculation out of the internal technology department should help those executives to prioritize and rank projects to better support the organizationís overall strategic direction.† For a variety of reasons, technology executives and managers are often not the best decision-makers with respect to ranking such projects or assessing their cost-effectiveness.† For senior management, sharing responsibility with a Technology Committee in selecting projects, and establishing and maintaining the necessary corporate discipline, is also a vote of confidence for the companyís strategic direction.
D.††††††† Evaluating the corporationís technology position in a competitive environment.
††††††††††† ††††††††††† A Technology Committee is ideally suited to evaluate a corporationís competitive standing from a technology standpoint.† Once again, in this context, the Technology Committee should be composed of a mix of senior in-house technologists and respected outside authorities.† Such a mixed perspective should seek to provide a balanced and dispassionate ongoing evaluation of where a corporation stands in the industry playing field.† For a technology-based corporation, are the corporationís products ahead of its competitors on the technology curve, or do they offer some other competitive advantage?† Are its products compliant with emerging standards in the industry?† Is the corporationís product development program congruent with basic industry trends and changing market requirements on the technology horizon?† These are all the types of big-picture questions that a Technology Committee can work to answer.
E.†††††††† Acquiring and maintaining technology positions, including contracts, grants, collaborative efforts, strategic alliances, mergers and acquisitions.
††††††††††† ††††††††††† For a Technology Committee with the right technical and business expertise and industry relationships, it can play an important role in assisting management to identify, assess, protect and leverage intellectual property assets through each of these activities.† By acquiring, licensing or partnering to develop new technologies and proprietary intellectual property, the Committee can help the company to both enhance its new product pipeline and procure add-ons for existing products consistent with the companyís strategic direction.† The Technology Committee can also help management to independently evaluate the commercial prospects and risks of specific technology acquisition opportunities.† In life sciences companies, the Technology Committee can further assist the company to establish strategic alliances and sponsored research agreements with universities, medical centers and federal research laboratories in order to gain early access to innovative technologies.† Due to its importance, successfully acquiring and maintaining a corporationís technology positions are appropriate for regular review by the Board of Directors and its Technology Committee.
F.†††††††† Finding a future chief technology officer and staff.
††††††††††† A Technology Committee can also be responsible for evaluating the performance of the chief technology officer of the company and reviewing succession plans for that officer.† It is sometimes overlooked that a tremendous amount of a companyís technological know-how resides with these executives and has not been reduced to writing.† Therefore, a Technology Committee should also develop procedures and policies to ensure that the existing chief technology officer documents knowledge and delegates responsibilities effectively, thereby avoiding significant business disruptions in the event of the loss of that officer, and providing for a smooth succession to a new chief technology officer as appropriate.†
G.††††††† Protecting the corporationís intellectual property.
††††††††††† ††††††††††† A Technology Committee can develop strategies and priorities for protecting the corporationís intellectual property.† This role is especially important in a technology-based business.† For example, in a company with a prolific research and development department, the corporationís scientists may be spinning out numerous technologies and inventions that they may seek to patent, and this can be a laborious and expensive process. †A Technology Committee can review such patentable technologies and, based on their fit into the corporationís strategic direction, recommend which merit the time and expense of patenting at the corporationís expense.† In this role, a Technology Committee would work hand-in-hand with corporate counsel to evaluate and prioritize a corporationís effective protection of its intellectual property.
H.††††††† Providing guidance for data retention, privacy and regulatory-mandated recordkeeping.
††††††††††† This brief list of the potential responsibilities of a Technology Committee indicates some of its purposes.† Such a committee is not appropriate for all companies.† Some of the indicated responsibilities may be handled by the full board or by other committees, or by appropriately qualified management.† Each board, of course, must devise the charter of its Technology Committee and tailor it to the companyís particular needs.† The above list merely touches on the potential list of responsibilities that a Technology Committee can fill.† Nevertheless, it does illustrate the beneficial and growing role that a Technology Committee, serving as a professional working committee of the board of directors, can and should fill in the modern corporate governance environment.
*†††††††††††††† Spencer G. Feldman is a corporate shareholder and Constantine S. Potamianos is counsel with Greenberg Traurig, LLP in New York (www.gtlaw.com), where they advise emerging and established technology companies in financing, business and governance matters.