Last week, Southwest Airlines gave hundreds of thousands of customers a holiday experience they won’t soon forget.
Starting Dec. 22, the company canceled more than 15,000 flights as it tried to recover from a winter storm, leaving thousands of people stranded. In all, some estimate that 1 million customers may have been affected.
The airline blamed its outdated crew scheduling software for the chaos, reporting that the digital infrastructure became overwhelmed by the volume of changes it had to process, which forced staff to painstakingly find and reassign crews manually.
This debacle raises an obvious question: How did the Southwest board overlook such a technological time bomb that may eventually cost the company $300 to $700 million?
One possibility is that Southwest directors and executives have been focused on the wrong metric—its short-term stock price—over the past few years. As Zeynep Tufekci writes for the New York Times, it’s not uncommon for CEOs to practice willful denial when pressed to upgrade old software. Instead, they may look for cheap fixes, kicking the cost of a tech revamp down the road so the company doesn’t take a short-term financial hit, which could dent the stock price and CEO pay.
Gianvito Lanzolla, a professor of business strategy at Bayes Business School in London, tells Fortune that boards are sometimes complicit in this digital shortcoming, often by being too controlling or simply unaware of a company’s tech deficiencies. His recent research offers takeaways for corporate boards that want to avoid Southwest’s fate.
In a study published last year, Lanzolla and two other researchers examined the board’s impact on digital transformation by analyzing S&P 500 data and the language used in shareholder letters. They found that investors value companies most when a CEO plans to invest in digital technology that exceeds that of competitors. Secondly, investors know that CEOs need board support for such expenditures, even if the payoff won’t materialize soon. As a result, investors also assess whether the board is thinking strategically.
Companies in the study were rewarded with higher valuations when their boards allowed and supported experimentation with new technologies. In other words, boards that are too focused on monitoring a company's cash flow are not always positively perceived.
Lanzolla notes that the most effective boards have a diversity of knowledge and independent directors with digital expertise that complement and support the CEO’s vision. Investors typically see such boards as less likely to fall victim to groupthink and more likely to enable meaningful tech adoption.
Southwest’s corporate board falls short of the knowledge diversity measure. As Michael Hiltzik of the LA Times writes, concerning their occupational background and perspectives, “The board is as homogeneous as they come.” It includes CEO Bob Jordan, chairman and former CEO Greg Kelly, a former chief legal officer for the airline, and two ex-CEOs of other companies. No board members are obvious tech leaders, Shivaram Rajgopal of Columbia Business School writes in Forbes. He and other academics suggest that boards need a new type of committee dedicated solely to technology and innovation and staffed by directors with the right expertise to guard against a Southwest-style failure.
To be sure, it’s possible that Southwest got its priorities wrong. The airline told Fortune in a statement that it has an annual capital spending plan that includes funds for tech investments. In recent years, the company has upgraded its reservations, ground operations, and maintenance technology. “The tools we use to recover from disruptions serve us well outside of extreme circumstances,” a spokesperson said. “But Southwest will remain vigilant to continue already existing plans to strengthen processes and systems.”
That brings us to another truism about technology that Lanzolla says many boards do not take to heart. “Digital transformation is not a destination.” Rather it’s “a set of choices within a set of possibilities enabled by technology.” Finding solutions, Lanzolla adds, is a journey.
The board’s job is to ensure that trip is not interrupted.
Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan
