Board composition Technology

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1 December 2016 Board composition Technology Do technology company directors have the right skills and expertise for the future? The technology industry is undergoing drastic change. Technology is transforming consumer activity and attitudes, driving a shift in focus from sales to experience. New companies are entering the tech space, and the threat of shareholder activism is growing. Board refreshment is critical as companies in this industry adapt to these changes. pwc.com/us/governanceinsightscenter

2 Becoming less mature Five trends driving change The technology sector has to get young again. A new wave of emerging technology is impacting all types of industries even the technology industry itself. Everyone wants to be closer to the end consumer, and with the low barriers to entry, more and more software growth is coming from outside the tech sector. This trend presents a host of strategic questions for tech companies: Do you invest in leading intellectual property or acquire it? Is your business better served via an open or closed system? Do you have the human capital to handle the operational complexity and understand the business return-on-investment born from megatrends such as virtual reality, artificial intelligence, robotics, social media, and the internet of things (IoT), among others? Legacy tech companies must reorient themselves for today s mobile- and social-first digital world. But the tech landscape is littered with examples of companies whose extreme success has ultimately sowed the seeds of their failure. Now is not the time to play it safe. Now is the time to take risks and experiment. Companies must develop new strategic initiatives that embrace emerging technologies. Or else they risk going from disrupter to disruptee. There are five technology trends that are forcing tech companies to reconsider their market position: pervasive computing, cloud computing, data growth and exploitation, mobility, and social media. These trends have resulted in higher customer expectations, changing production technology and low cost competition. Consumers are now demanding a one-stop shop for a suite of services that are provided by many different vendors. This kind of blurring of traditional segments can be seen in Amazon s move into the home via the Echo, Fire, and Prime devices and services and in strategic combinations like AT&T-DirecTV-Time Warner (assuming the Time Warner announced transaction is approved). Five technology trends facing tech companies Pervasive computing Cloud computing Data growth and exploitation Mobility Social media Board composition - Technology 1

3 Cross-sector convergence (X-tech) will be a key growth theme for technology companies, allowing them to enter non-traditional markets and diversify their revenue streams. But X-tech trends can also be a threat as companies from other sectors can develop their own technology solutions and experiences for their customers. That means that tech companies have to think differently about their technology, processes, talent, and customer experience. And they also need the strategic flexibility to analyze their asset portfolio and seize acquisition and divestiture opportunities. Cybersecurity and regulation concerns With the growth in cloud computing also comes an increase in cyber risks. Tech companies must balance heightened security measures like advanced authentication with business outcomes. This is especially challenging given the global, mobile and social nature of a digitized world. Consider the internet of things. While IoT represents a tremendous commercial opportunity, it has implications for trade and tax policies, as well as national security. Mobile data, smart car data and voice interfaces on appliances require navigating government agencies ranging from commerce to tax to military, among others, both domestically and abroad depending on where that data is generated and collected. Cybersecurity in the tech sector In 2016 Security incidents felled in % after more than doubling in % BUT of tech company respondents cited phishing attacks the top type of incident Source: PwC, CIO and CSO, The Global State of Information Security Survey 2017, October 5, Beyond cyberattacks and data security, technology companies are facing increasing regulatory pressure from various government agencies to share data. They have to manage a delicate balance between maintaining personal privacy and protecting national security. And companies in the tech industry may face more uncertainty than any other industry, given anticipated regulatory and agendadriven changes that are expected to be made by the incoming US administration. Board composition - Technology 2

4 The talent equation Growth headwinds and activism In the 10 years PwC has been conducting the Digital IQ Survey, one thing has remained constant: Tech executives are worried they don t have the right talent in place to handle the rapid pace of technological disruption. Human capital is the missing variable in the business + technology equation. There is an increasing shortage of qualified science, technology, engineering, and math skills, as well as IT talent. Tech companies also face headwinds from a sluggish macro environment, uneven IT spending and maturation in certain products such as PCs. Add to that the entrance of new competition, an increase in activist shareholders, and shortened product cycles, and technology executives are facing unprecedented pressure to reduce costs. In fact, tech companies have faced increasing pressure from activists in recent years to boost capital efficiency and enhance profitability. Tech CEOs rank the availability of key skills as the top challenge Activists targeting tech? 58% 76% 64% 64% 83% 68% 67% 56% 65% 80% 76% 68% From 2010 through September 2016 More than 300 campaigns against tech companies 53% 48% 49% 42% Availability of key skills New market entrants Cyber threats Activists have won more than 100 board seats Source: PwC, 19th Annual Global CEO Survey, January Base: Techonoly CEOs (2016=167; 2015=176; 2014=117; 2013=154; 2012=115; 2011=59; 2010=59) What we ve seen is that companies that focus more on human capital have stronger financial performance than their peers. In the coming decade, as an on-demand workforce, automation, and artificial intelligence become more prominent, having properly skilled human talent in place will be critical. Source: FactSet with PwC analysis, as of September Board composition - Technology 3

5 As a result, they are looking to reinvent their business models to take advantage of convergence trends and new tech innovations to drive ancillary revenue opportunities. Continued growth in cloud computing and subscription-based sales models will further move the tech industry towards an anything/everything as a service model. Such a model would be in keeping with the move towards owning the customer relationship, allowing tech companies to innovate faster by virtue of having a direct connection to the consumer. We analyzed the board demographics of 16 of the largest technology companies by revenue. We combined these companies into our peer group and compared the group s demographics to those of the S&P 500. Here s what we found. The technology board of the future Change will be a constant as technology companies deal with the many changes and challenges in their industry. Companies that can see around corners from a strategy and risk perspective have a competitive advantage. Board oversight of both strategy and risk are critical elements of navigating this fluid environment. And board oversight starts with board composition. Directors and C-suite executives need to ask themselves, do we have the right mix of expertise, experience, and diversity on the board to meet these transforming needs? And, if not, what steps need to be taken to refresh the board? Technology companies need to be strategic when adding new board members. Those directors need to have the skills and experiences that align with the risks and opportunities in the race to stay relevant. Board composition - Technology 4

6 Take a strategic approach Technology companies need to be strategic when adding board members. Directors need to have skills and experience that align with the risks and opportunities of the transforming industry. When considering potential directors, some skills, experience, and attributes that may strengthen this alignment include: Diverse experience in vertical sectors Technology boards may benefit by having directors with different industry experience and expertise; those directors can help advise on cross-sector convergence trends. Strategic technology expertise As companies in the technology sector deal with internal transformation, board members with deep technology expertise would be able to offer advice and help identify new growth opportunities from innovation and disruption. Regulatory expertise Executives with experience handling privacy issues and government involvement in data ownership would be helpful. Financial expertise A board member with financial expertise could advise on potential changes in business models, optimizing cost structure, and ways to increase profitability in order to fund investment in innovation and emerging tech markets. Innovative mindset Innovative thinking is critical as companies prioritize an innovation culture and balance it with efficiency. Directors that can effectively challenge management and have demonstrated the ability to act independently can be especially helpful as companies navigate an increasingly complicated business landscape. Sitting on a board today is no easy task. It requires a lot of time and dedication. So it s important to choose directors who will make the time commitment required to oversee the company s activities appropriately. Board composition - Technology 5

7 Focus on diversity Gender diversity on our tech peer group boards: getting the balance right Diversity of gender, ethnicity, experience, and skills is a key element to any board composition discussion. When it comes to gender diversity, female directors make up 23% of all directors in our technology peer group, slightly above the S&P 500. And that percentage is growing faster than that of other S&P 500 companies: our proxy analysis showed that 41% of new directors to our tech peer group were women, compared to 31% in the S&P 500. Women on our tech peer group boards: a snapshot Percentage of Female directors and 19% 69% have 30% or more of our peer group companies BUT have boards with 20% or more female directors 19% have only one female director 23% 20% Female directors added in latest proxy 41% 31% Technology peer group S&P 500 Sources: PwC analysis of 16 of the largest technology companies by revenue that are also US SEC registrants, May 2016; Spencer Stuart, U.S. Board Index 2015, November Board composition - Technology 6

8 Consider mandatory retirement and term limits Mandatory retirement does not seem to be high on the radar of any of our technology peer group companies. Only about one-third (31%) have a mandatory retirement age for their boards, compared to 73% of the S&P 500. It can be difficult to refresh the board when directors don t have to retire. A mandatory retirement age is a relatively easy tool boards can use to drive board refreshment. One factor that may contribute to the lack of focus on mandatory retirement is that the average age of directors in our technology peer group is younger than the average age of directors in the S&P 500 as a whole. Close to 40% of our technology peer group have an average age in their 50s. The average director age in the S&P 500 is 63.¹ A look inside our tech peer group boardrooms Director tenure 10 years* 8 years No company in our technology peer group has a term limit for their directors, either. But that s pretty much in line with the S&P 500, where only 3% of companies have them. Still, adopting term limits has been a recent trend that may continue. Investors increasingly believe that it is a useful tool to enhance refreshment. For example, in 2016, the California Public Employees Retirement System pension fund (CalPERS) indicated that it believes that director independence can be compromised after 12 years of board service. In these situations, CalPERS says a company should carry out rigorous evaluations to either classify the director as non-independent or provide a detailed annual explanation of why the director can continue to be classified as independent. ² Board turnover in our tech peer group was modest at 9%,³ compared to 7% turnover on S&P 500 boards. 4 Digging deeper: how old are our technology peer group board members? The average age is 61 The average age among our peer group companies ranged from 54 to 67 0% 3% Term limit 31% Technology peer group S&P % Mandatory retirement age Sources: PwC analysis of 16 of the largest technology companies by revenue that are also US SEC registrants, May 2016; Spencer Stuart, U.S. Board Index 2015, November *Analysis excludes two companies that are newer spinoffs. 33% the company with the average age of 54 has three of its nine directors in their 40s 54% the one with the average age of 67 has seven of its 13 board members in their 70s Sources: PwC analysis of 16 of the largest technology companies by revenue that are also US SEC registrants, May 2016; Spencer Stuart, U.S. Board Index 2015, November Board composition - Technology 7

9 How long do our tech peer group directors serve? Average director tenure is 10 years* But the average director tenure among the companies in our peer group ranged from 5 1 year to 15 years companies have average board tenures that exceed 12 years 2companies average more than 14 years The company with an average tenure of 1 year is a result of significant new directors because of an activist campaign Sources: PwC analysis of 16 of the largest technology companies by revenue that are also US SEC registrants, May 2016; Spencer Stuart, U.S. Board Index 2015, November *Analysis excludes two companies that are newer spinoffs. Investor pressure hits the boardroom Look at board leadership structure Over the past decade, many companies have evaluated their leadership structure and split the chair and chief executive officer (CEO) roles. Our technology peer group is ahead of the curve when it comes to this trend: 27% of the group has a combined chair and CEO roles, compared to 52% of the S&P However, 77% of tech directors who responded to PwC s 2015 Annual Corporate Directors Survey and serve on boards that combine the chair and CEO role indicated that they are not considering or discussing separating those roles. 6 This may be an issue for institutional investors. Some don t support companies with a combined chair and CEO role and may submit shareholder proposals to separate it. All of our peer group companies have an independent lead or presiding director when there is a combined chair/ceo role. Having an independent lead director may help satisfy proxy advisory firms and corporate governance advocates that typically support having an independent board chair. In response to pressure from investors: 30% of tech company directors say they added an activist board member compared to 17% of all directors surveyed 74% 32% removed a board member with a long tenure compared to 15% of all directors surveyed Leadership on technology boards in our peer group Combined chair/ceo role 27%** 52% Independent lead or presiding director when chair is not independent 100% 98% Technology peer group S&P 500 Source: PwC, 2016 Annual Corporate Directors Survey, October Sources: PwC analysis of 16 of the largest technology companies by revenue that are also US SEC registrants, May 2016; Spencer Stuart, U.S. Board Index 2015, November **Analysis excludes one company that does not combine or Board composition - Technology separate the roles. 8

10 Reevaluate committee structure Changes in committee structure can help match the right directors with matters they are best equipped to address. While our technology peer group is in line with S&P 500 companies with an average of four committees, there is some variation between companies. The number of committees ranges from three to five. While each company has an audit, compensation, and nominating/governance committee, some have separate committees that focus on specific areas, such as acquisitions and regulatory and public policy. While no board in our technology peer group has a separate risk committee, some companies in other industries have been considering forming new risk oversight committees. One-quarter of directors responding to our 2016 Annual Corporate Directors Survey say their board has a separate committee tasked with risk oversight. All of those directors say such committees are at least somewhat effective. A board with the right balance of diversity, skills, expertise, and experience can help the company deliver on its strategy and stay ahead of the threats to the technology industry. Evaluating board composition and refreshing the board may be challenging at times, but it s critical to the board s ability to stay current, effective, and focused on enhancing long-term shareholder value. For more on this issue, read our Director- Shareholder Insights: Board composition key trends and developments. Board composition - Technology 9

11 Appendix How does our technology peer group stack up to the S&P 500? Making this evaluation can be a good way to begin determining whether your board has the right balance in terms of board composition. Director information Technology peer group S&P 500 Average Director age Director tenure 10* 8 (number of years) Percentage of all directors Female directors 23% 20% Female directors added in 41% 31% latest proxy Other board information Average Number of directors Number of committees 4 4 Percentage of boards with: Standalone risk committee 0% 12% Combined chair and CEO role 27%** 52% Independent lead director 100% 98% when chair is not independent Mandatory retirement age 31% 73% Term limit 0% 3% Sources: PwC analysis of 16 of the largest technology companies by revenue that are also US SEC registrants, May 2016; Spencer Stuart, U.S. Board Index 2015, November, *Analysis excludes two companies that are newer spinoffs. **Analysis excludes one company that does not combine or separate the roles. 1 Spencer Stuart U.S. Board Index 2015, November The California Public Employees Retirement System, Global Governance Principles, March 14, Analysis excludes two companies that are newer spinoffs. 4 Spencer Stuart, 2015 U.S. Board Index, November Analysis excludes one company that does not combine or separate the roles. 6 Responses from technology, semiconductor, and software/internet solutions company directors.

12 How PwC can help To have a deeper discussion about how this topic might impact your business, please contact your engagement partner or a member of PwC s Governance Insights Center or Technology group. Paula Loop Leader Governance Insights Center (646) paula.loop@pwc.com Terry Ward Partner Governance Insights Center (612) terrence.j.ward@pwc.com Pierre-Alain Sur US Technology, Entertainment, Media & Communications Leader pierre-alain.sur@pwc.com Emmanuelle Rivet Partner US Technology Sector emmanuelle.s.rivet@pwc.com Project team Elizabeth Strott Research Fellow US Thought Leadership Institute Christine Wendin Senior Research Fellow US Thought Leadership Institute Christine Carey Marketing Governance Insights Center Shelley Wilson Marketing Leader Governance Insights Center Daniel Graffe Design Creative Team Delijeh Snyder Marketing Director US Technology Sector delijeh.k.snyder@pwc.com pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details DG