October 2003
Traditional board oversight and management controls are no
longer sufficient for monitoring the current state of an organization.The widespread adoption of Information
Technology over the last two decades has generated significant consequences for
corporate governance. As a result, entirely new risks, challenges and opportunities are overlooked, potentially
leading to a disruption of operations and or sizable losses.Companies can realize immediate benefits by
following a ten-point action plan that modernizes corporate governance for
success in the New Economy.
A majority of the $15 billion dollars in IT related damages to corporate America in 2001 could have been avoided
as they were largely
attributable to gaps in corporate oversight.To make matters worse, IT losses are increasingly not covered
by conventional business insurance policies.More significantly, many companies are rapidly building a
geographically dispersed workforce that requires sensitive information assets be moved from behind the
protected walls of the company and distributed electronically throughout the world. The risk associated
with this trend is enormous – with no better example than the unfortunate incident in 2000 where
Qualcomm’s Irwin Jacobs had his laptop stolen from under his nose - and with it, ten years of corporate
secrets!
Arrival of the Knowledge Economy
The root cause of this disparity in oversight is a fundamental economic shift -- where the rules of the game
have changed
dramatically. For centuries, production has been largely a function of labor and capital. Today, information
and knowledge are replacing these as the primary wealth-creating assets, just as the latter two replaced
land and labor centuries earlier. In addition, technological developments in the 20
th century
have transformed the majority of production from “physical-based to knowledge-based”.With increased mobility
of information and the global work force, knowledge and expertise can be transported instantaneously around
the world. The primary comparative advantage a company will enjoy will be its process of innovation – combining
market and technology know-how with the creative talents of knowledge workers to solve a constant stream
of competitive issues – and its ability to derive value from information.Industries that create, manage,
process and distribute information include: telecom, media, banking, insurance, advertising, law,
medicine, government, education and technology.More than half of this country’s GDP is now generated
from companies whose primary business is producing or managing information.Knowledge has become the growth
engine for the future! Qualcomm and SAIC are excellent examples of local firms on the cutting edge of the
Knowledge Economy.
Modernize Corporate Governance
When one of a company’s primary components of production is not physical but INTANGIBLE in nature, many of
the traditional means of asset stewardship are no longer applicable.In such cases, where knowledge has become a
key component of commerce, it is referred to as Intellectual Property (IP) or Intellectual Assets (IA). IP can
span a broad range of intangibles from product designs and drug formulae to music and customer databases. Unlike
the past where valuable assets were locked in vaults or behind fences -- today they often reside in many places
at once in both physical and electronic forms.For example, it’s not uncommon that a piece of software
under development may simultaneously exist on paper in a file cabinet, on a server’s hard disk, in an
email attachment in cyberspace, and in he head of the programmer –usually without any formal corporate
controls.
According to a December 2001 study by the National Association of Corporate Directors, most companies have been
slow to recognize the implications of the Knowledge Economy and therefore the need for broad changes in
management controls and board oversight. Strategies and systems designed to manage industrial operations and
tangible assets have limited application in organizations where substantial value is held as intangible assets.
As a result, a corporate board’s duty to safeguard shareholder value has become increasingly complex in
the digital world. Threats and opportunities alike have proliferated in the last decade. Unfortunately, a
majority of boards have yet to put these issues on the agenda and exercise proactive leadership. The
following ten-point action plan should prove helpful in evaluating how a board and its management team might
better prepare for the challenges of the Knowledge Economy.
Action Plan
- Place IP oversight on the board agenda.
- Assign IP issues to a separate board committee.
- Create an IP policy and an annual review process.
- Identify IP leaders at all levels of the organization and hold them accountable.
- Create a strategic plan for maximizing the value of intellectual assets.
- Regularly review the balance between risk exposure and insurance coverage for all IT
and IP related matters. Consider retaining an insurance consultant to identify appropriate coverage.
- Create an organizational culture of respect for Intellectual Property.
Have all employees sign Invention agreements and partners sign
non-disclosure agreements. Incentivize employees to formally disclose inventions. Publish policies on
privacy, piracy and
handling of corporate materials and trade secrets.
- Place key IP assets on the balance sheet with a fair market value. Investors and lenders often require IP
be pledged as collateral.
- Create and oversee a proactive approach to IP security and control.
Retain a consultant to conduct a Comprehensive Security Assessment. There is no Silver Bullet.
- Publish a policy and ensure adherence to a life-cycle management process for key documents
(paper and digital) regarding the creation, organization, storage, distribution and destruction
of IP bearing materials.
Mr. Benson has been chief executive for several computer companies over the last 20 years.He is an expert
in information security and co-inventor of several patents. He is currently a member of the Board of Directors
of the Corporate Directors Forum.Mr. Benson can be reached at 760-301-8056 or GregB15@FamilyProsperity.org.
The views shared in this article are those of the author and do not necessarily reflect those of the
Corporate Directors Forum.
Provided By DLA Piper
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