Trend: CIOs in the Boardroom

By Bill Birchard  |  Posted 06-16-2003

Trend: CIOs in the Boardroom

It was an unusual step driven by an extraordinary flop. Hershey Foods Corp.'s $112 million SAP implementation in July 1999 had failed so miserably that by the following March, then-chairman Kenneth Wolfe felt he had to address the pain felt by employees and customers. "It has not been the easiest journey," he wrote in the company's proxy statement. "Time will give us perspective. As we resolve our problems, the frustrations will fade."

Hershey's board of directors wasn't so sanguine; the board was stunned as profits fell by $32 million in the second half of 1999, owing to the SAP mess. The board's nominating committee recruited Allan Loren, then CIO of American Express Co., to stand for election to the board in 1999. Loren became the board's only IT veteran.

Was the courtship of Loren, now CEO of Dun & Bradstreet Corp., spurred by the SAP difficulties? "It sure was," says John Pietruski, who retired as chairman of the Hershey board's nominating committee in April 2003. "It's become a much more technology-driven world, and the board felt it needed to have someone with particular competence in that area."

Pietruski, former CEO of Sterling Drug Inc. and now chairman of Texas Biotechnology Corp. in Bellaire, Texas, notes that several CEO directors at Hershey had overseen SAP projects at their own companies. "The board was not blind in this area," he says. Still, he adds: "There's a difference between being a CEO overseeing the implementation and being a CIO having direct operating experience."

If ever there was a signal to the boards of corporate America that information technology expertise might be climbing within the portfolio of skills that directors at non-IT companies need, consider IT meltdowns in recent years at companies from Hershey and Kmart Corp. to Oxford Health Plans and Nike Inc. Oxford, for example, lost 70 percent of its market valuation after failures of its electronic billing and receivables systems. Supply-chain software problems cost Nike $100 million in sales.

At Hershey, Y2K fears had executives rushing to implement its SAP program before New Year's Day 2000, but Hershey cut too many corners, failing to first adequately smooth the wrinkles from customer service, warehousing and order fulfillment systems. Over the critical back-to-school/Halloween/Christmas period in 1999, warehouses were chock full of Kisses and Bites—and they stayed that way: Due to system problems, Hershey couldn't get enough candy to retail stores. In the third quarter, the company's year-over-year sales fell a staggering 12.4 percent, followed by a fourth-quarter decrease of 10.8 percent. In all, the fiasco accounted for $285 million in lost sales.

To be sure, the Hershey meltdown didn't create a mad rush to recruit CIOs for board duty. But that incident and others reinforced the notion that nominating committees should consider filling at least one board seat with an IT-wise executive. Business and technology analysts also say last summer's passage by Congress of the Sarbanes-Oxley Act, which calls for companies to cough up more timely, accurate and detailed accountings of their financial health, presents another reason to have IT representation on the governing board. "The trend of CIOs joining boards is not yet what I'd call a full-fledged revolution, but I think Sarbanes-Oxley has put some additional fuel behind it," says Harriet Edelman, CIO of Avon Products Inc., and a member of Hershey's board. Adds Vaughan Merlyn, vice president of Kingwood, Texas-based Concours Group, a management consulting company: "Why should corporate boards care about IT? Because IT is at the heart of business performance, differentiation and value. It's hard to find a major business process initiative these days that does not involve IT."

Indeed, with up to 50 percent of a company's capital expenditures being spent on information technology, shouldn't a board include a technology maven who can provide the kind of expertise, front-line IT experience and insight that most business-trained board members lack? "It's a progressive board that understands they need some IT talent around the table," says Cinda Hallman, the ex-CIO of DuPont and now president and CEO of Fort Lauderdale, Fla.-based recruiting firm Spherion Corp. Mark Polansky, senior client partner in recruiter Korn/Ferry International's IT sector in New York, notes: "The concept of having a technologist on the board is becoming more widely accepted."

Sure, some non-tech boards are still more interested in finding financial experts than technology insiders to meet Sarbanes-Oxley's provisions—despite the act's direct potential impact on corporations' information accountability and financial reporting systems. "Most boards are fairly focused on looking for financial executives for the audit committee," says Julie Daum, practice leader for Spencer Stuart's North American Board Services in New York.

But Daum says CIO recruiting "is a trend I think we're going to see more of." About 3 percent of Daum's director searches last year ended up putting a CIO or CTO in a board seat; just three years ago, that number was was closer to zero. One reason for the change: The pool of CEO-level candidates is shrinking, leading board recruiters to look at other C-level executives, Daum and others say. Second, institutional investors are pushing boards to acquire IT expertise. "Technology is tremendously important to every company, and we want to see that expertise on the board," says Nell Minow, a leading advocate of corporate governance reform and cofounder of The Corporate Library, a Portland, Maine-based research organization on corporate governance. Says Patrick McGurn, senior vice president of Institutional Shareholder Services Inc., a corporate governance services firm: "A lot of companies ignored [technology] issues altogether" when the technology downturn hit—until costly information technology failures convinced them they couldn't ignore IT issues any longer, raising the profile of those with IT expertise.


Trend Watch: Infographic

IT on the Agenda

IT on the Agenda

How can CIOs expect to demonstrate their value as board members? Governance experts and recruiters suggest CIOs might want to ask themselves a few questions when they consider pursuing a board seat: How and when do boards handle IT issues? What role do CIO directors play in board discussions? What skills qualify CIOs for board positions? How do CIO directors work with the CIOs in the companies they oversee? And how do CIOs get director jobs, anyway?

One company chairman with a clear vision of how a CIO can add value to a board is Bob Eckert, chairman and CEO of Mattel Inc., the toy company based in El Segundo, Calif. Eckert says his board first reviews three- to five-year plans for business strategy. Then, it looks at separate plans for IT, operations and human resources. As he and other executives execute against those plans, the board signs off on specific IT projects and reviews key milestones. "It's really no different than how the IT group runs project management," he says.

The leading technology voice on Mattel's board is Kathy Brittain White, the recently retired CIO of Cardinal Health Inc. Eckert says White works with Mattel CIO Joe Eckroth and CFO Kevin Farr, who are spearheading a "global transformation" of Mattel's operations. The company is playing catch-up to raise its IT systems to world-class standards: For instance, Eckert complains that Mattel recently ran payroll 50 times a year, even though it issues checks biweekly, because backroom operations at Mattel's Fisher-Price, Pleasant Company and corporate units remain separate.

White, a Mattel director since 2001, advises not only CIO Eckroth but also his staff. Before presenting IT plans to the board, White reviews them with Eckroth. Given her experience integrating the back offices of Cardinal and Allegiance Corp., which merged on her watch, she has had hands-on experience hammering out the global systems, tools and technology that Mattel now desires. CEO Eckert counts on her input toward his "One Mattel" approach to reduce redundancy, underscored by the opening of the company's first shared services center for North America in October 2002.

CIOs who become directors at other firms may work far less intensively with information chiefs. White notes that, in contrast to Mattel, she rarely interacts with the CIO of Certegy, formerly Equifax Payment Services, where she also serves as a director. Avon CIO Edelman says that as a member of the governing board of the Blair Corp., a Warren, Pa.-based direct-mail fashion company, "there have been times I've offered assistance [to the CIO] via a phone call," and on one occasion, she recalls, the CIO of Blair met with her for a couple of hours in New York to discuss strategy.

Edelman said she also facilitated a session of a senior management team and the CIO on aligning IT and business strategy. "They took the concept and ran with it," she says. In addition, Edelman suggested the team use portfolio management for IT, which the team accepted, and she discussed with the team the governance process of project approval.

Each time, though, Edelman says, she took her cues from the president of the business. "I believe I can be an effective second set of eyes, a counselor and collaborate a little," she says. "But at the same time you need to stay in position as a board member, too." (See Viewpoint.)

The Business CIO

The Business CIO

But far and away the most valuable contribution offered by CIOs on boards of directors, say recruiters, directors and CEOs, is general business counsel. As CEO Eckert says, when the board starts a search for a new member, it first looks for the "best athlete," or all-around expert businessperson. "The lucky-strike extra" with White, he says, "is that she is uniquely qualified in an area where we're making strategic investments."

Recruiters repeatedly echo this sentiment. "People don't want just a CIO," says Andrea Redmond, co-head of the board practice at recruiter Russell Reynolds Associates in Chicago. "They want someone with broad-based business skills and leadership. It's no different than a CFO. If they're going to be on the board, they have to know more than finance."

All ten CIO board members interviewed for this story had such broad-based skills. (This is also true of most CIOs who join tech-company boards.) Spherion's Cinda Hallman, former CIO at DuPont, built a $1 billion service business inside her long-time employer in the 1990s. Hallman went on to serve on other boards, and has just joined the board of Toys "R" Us Inc. "It's extremely important that CIOs first aim to do something of substantial benefit to their own company," she says. "If they do not do that, I think they're going to have some difficulty getting on boards of other companies."

For Hallman and others, building broad-based management skills requires spending time outside the company, particularly serving on nonprofit boards. Hallman began doing that in the 1980s, and in 1996 she chaired Delaware's United Way campaign. In 1998, she joined the Christiana Health Care board and also co-chaired Delaware's IT Initiative.

Hallman says her biggest contribution on the Spherion board came in strategy making. At the time, the interim-staffing company was growing rapidly. It acquired 35 companies during the 1990s. At first, the board leaned on Hallman to vet two technology firms the company had bought. By 2000, she took an active role in the most important job directors handle: crafting a strategy to secure the future of the entire company.

In an unusual move, the Spherion board asked Hallman, rather than the CEO, to lead strategy development. At the time, Hallman believed that Spherion's business had lost focus. Its mission had blurred into what Hallman believed was an "everything to everybody" approach that was hampering company profitability and earnings predictability. So she scrapped it. Instead, she carved out three clear lines of business: administrative/professional staffing, technology staffing and outsourcing.

The board admired Hallman's efforts: It hired her as CEO in 2001. She is now try- ing to boost the profitability of an embattled $2.1 billion company, selling off units and rededicating the firm to a narrower mission.

But not all CIO board members get to influence strategy so greatly. In some cases, tactical know-how is the plus that a CIO can bring to the table. A good example comes from United Stationers Inc., the $3.7 billion distributor of office and janitorial supplies in Des Plaines, Ill. Chairman Fred Hegi had a unique vision: Recruit one director who was expert in big-company IT, and a second who was expert in startup IT. "We specifically went after two people," he says.

Max Hopper, legendary former chairman of the Sabre Group and CIO at AMR Corp., the parent company to American Airlines, filled the big-company director role. Hopper was familiar with the scale of United Stationers, which stocks 40,000 office and janitorial products for 15,000 resellers that have pre-sold the items, such as mops, desks and calculators, to their own customers. Hegi says Hopper contributed ample advice about the long-term management of an IT operation in a company whose whole being depends on IT. "Initially, I was asked to look at the existing technology and people and give some broad assessment" of how effectively the company was using information technology, recalls Hopper, who joined the board in 1998. For example, he urged the company to figure out how to increase revenues and earnings using software tools such as activity-based costing, which allocates costs based on actual work under way, and margin analysis, which examines ways to increase profit margins by using IT to help analyze costs, compile all cost-related information, and see how all cost data interacts.

Alex Zoghlin, CTO of Orbitz until April 2003 and founder of both Sportsgear.com and Neoglyphics Media Corp., a Web-development company, became United Stationers' "startup IT" director. Zoghlin was familiar with small-company culture and with hiring and motivating entrepreneurial IT workers. Hegi lauds Zoghlin for his experience in running his own company, attracting IT workers, and understanding the compensation and motivation schemes for making a strong IT organization. "We have a very strong camaraderie within our IT group, and Alex has been instrumental in creating it," says Hegi.

Zoghlin joined the United Stationers board in 2000 as the company was launching a semi-autonomous customer service subsidiary called The Order People, which offers third-party fulfillment services, mostly to dot-coms. "They didn't have a lot of people in the company familiar with the startup environment," says Zoghlin. So he advised the management team on hiring and compensation programs to attract high-tech workers and give employees deeper in the organization a sense of ownership. He also advised the IT team on how to integrate Siebel Systems software into internal distribution systems. Says Hegi: "His fingerprints were very much on that subsidiary."

For his part, Zoghlin says he advocated measuring perfomance with an ROI metric and paying bonuses in restricted stock instead of options. Through such moves, he says, "I think and hope the technology organization thinks it has an advocate on the board."

Another Set of Eyes

Another Set of Eyes

Two other key ways CIOs add value to boards are by helping hire the CIO and conducting capital investment reviews. Hopper and Zoghlin both interviewed United Stationer's new CIO; similarly, technology veteran Richard Nolan, professor of management of technology at Harvard Business School, helped hire a new CIO at the Great Atlantic & Pacific Tea Co. Nolan, the former chairman of Nolan, Norton & Co., was recruited to A&P's board by a former vice chairman, now retired, who wanted him to help choose the vendors and monitor the execution of the $350 million replacement of A&P's legacy technology systems. Nolan says he also was asked to monitor the project's three-year implementation.

A financial expert, Nolan also chairs A&P's audit committee, overseeing not just accounting practices but information systems related to financial and operational controls. Nolan shares the view of a number of CIOs who believe the audit committee is the logical overseer of corporate IT, given that the IT department and the audit committee are both charged with responsibilities such as internal control systems, disaster recovery planning and business continuity planning.

What does it take to convince a recruiter that a CIO is ready to step into the boardroom? Jeri Lose, CIO of St. Jude Medical in St. Paul, Minn., wondered the same thing when Thomas McLane, vice chairman of the Directorship Search Group in Greenwich, Conn., called her about joining the board at Apria Healthcare Group Inc., a $1.3 billion home healthcare firm based in Lake Forest, Calif. McLane says that his recruiter spec sheet called for a high-ranking executive from either the healthcare or pharmaceuticals industry, integrity, a high level of intellect, ability to make the time commitment, judgment and common sense. Also required: demonstrated leadership outside his or her day job.

Lose says her breadth of skills was most appealing to Apria. She had worked in IT at Ernst & Young, in accounting and IT at General Mills, and ran a small business until 1984. She could bring to bear both her finance and IT expertise, and in fact has since participated on the Apria audit committee and helped frame a broad IT risk assessment. She also reviews IT documentation procedures and the top ten business initiatives that involve IT services. Of other CIOs looking for similar positions, she says, "They're going to need to be focused 80 percent on the business the company's in and 20 percent on the technology."

But you can bet a CIO on a non-tech company board will always be called upon for the "lucky-strike" extra of IT expertise. Back at Hershey Foods, when the board set out to replace director Allan Loren, who resigned owing to his workload as CEO of Dun & Bradstreet, the nominating committee didn't bring in just any business generalist. It tapped Avon CIO Edelman.

To be sure, Edelman, elected to the Hershey board in April, wasn't wooed strictly as an IT troubleshooter. After all, she rose through the ranks at Avon in marketing, operations and customer service, and in 1998 was named head of global operations at Avon. Edelman has also served on the Blair Corp. board since 2001.

Still, though, no one had forgotten the 1999 SAP implementation fiasco that triggered the first CIO board appointment. After the SAP foul-up, says retired director Pietruski, the Hershey board made a decision about the importance of technology expertise that has carried through to this day: "[IT] understanding and ability is needed on the board."

Bill Birchard, a freelance journalist based in Amherst, N.H., writes about business, the environment and healthcare. His work has appeared in Chief Executive, CFO, Fast Company and Strategy + Business. His 1999 book, Counting What Counts, written with Marc Epstein, lays out a plan for companies to boost performance through accountability. Please send comments about this story to editors@cioinsight-ziffdavis.com.

Boardroom Imperative

Boardroom Imperative

Ten questions boards should ask about the business performance of IT

1. Is the company leveraging IT in our most important business initiatives?

2. Is our management and shareholder information of the highest accuracy and integrity?

3. Are we leveraging technology to ensure business continuity?

4. Are we getting the best return on our technology expenditures?

5. Are our business people capable of using and managing information and technology effectively?

6. Are we leveraging IT for business innovation and learning?

7. Are we capitalizing on the business potential of the Internet?

8. Are we optimizing the supply and delivery of IT services?

9. Do we have the right IT partners?

10. What do we expect from the CIO and IT organization?

Source: Infosys and the Concours Group

The Role of the

CIO Director">

The Role of the CIO Director

When CIOs join boards, they will find their peers leaning on their IT expertise when talk turns to:

  • Evaluating the fit of strategy and IT
  • Understanding new technologies in lay terms
  • Translating IT plans into business vocabulary
  • Interviewing and hiring a new CIO
  • Vetting IT risks/opportunities in acquisitions
  • Monitoring large IT investments
  • Auditing IT infrastructure for risks, reliability
  • Counseling IT staff on selected strategic issues

SOURCE: CIO Insight research, company and governance sources

Resources

Resources

Books:

Corporate Governance
Edited by Robert A. Monks and Nell Minow
Blackwell Publishing, 2001

Corporate Boards: New Strategies for Adding Value at the Top
By Jay A. Conger, Edward Lawler III and David Finegold
Jossey-Bass, 2001

Reports:

"Boardroom Imperative: Ten Questions Boards Should Ask About the Business Performance of Information Technology"
By Infosys and The Concours Group
www.infosys.com/knowledge_capital/view_points/BoardRoomImperativesforIT-overview.pdf

Web Sites:

www.nacdonline.org
The National Association of Corporate Directors