Operational IT Failures, IT Value-Destruction, and Board-Level IT Governance Changes


Author Information : Michel Benaroch, Whitman School of Management, Syracuse University
Anna Chernobai, Whitman School of Management, Syracuse University

Year of Publication : MIS Quarterly (forthcoming)

Summary of Findings : When firms experience operational IT failures, the failures indicate ineffective board-level monitoring and control of IT resources, to which the stock market reacts negatively and firms, in turn, make board changes aimed at improving the IT competency level of their boards of directors.

Research Questions : Is the drop in equity value that firms suffer after experiencing operational IT failures a predictor of post-failure board changes firms institute to improve their boards’ IT competency level?

2. If so, what specific post-failure board changes are associated with improved IT competency?

What we know : Most firms that experience operational IT failures suffer a negative stock market reaction that results in a significant drop in their equity value.

The board-level IT governance literature documents an IT knowledge and attention deficit at the board level.

Novel Findings : Subsequent to experiencing operational IT failures firms improve their boards’ IT competency level, and the improvement is proportional to the magnitude of drop in firm equity returns measured around the IT failures.

Changes in boards’ IT competency level are lopsided and center on internal (executive) directors. The changes are dominated by an increase in the number of internal directors with IT experience and by turnover of CIOs/CTOs serving on the board. By contrast, no significant changes relating to independent directors are observed despite these directors being the chief body responsible for oversight and monitoring of IT resources.

More IT-intensive firms actually experience a lower turnover rate of CIOs serving on the board because such turnover could be more disruptive to these firms.

Implications for Practice : Boards ought to pay great attention to operational IT failures. The impact of operational IT failures on firm value is of comparable caliber to that of other adverse events boards and market investors care about, including frauds and financial restatements.

Firms should react strategically upon experiencing an IT failure. They should improve their board IT competency level in order to communicate to the market their serious intent to improve monitoring and control over IT resources, to remediate underlying IT deficiencies, and to prevent future operational IT failures. This signaling strategy helps to regain investors’ trust.

Implications for Policy: The lack of post-failure board changes involving independent directors should raise a serious question over the efficacy of these directors as the chief oversight and monitoring body on the board.

Implications on Research: Operational IT failures deserve greater attention in the IT literature. In particular, while market investors’ reactions to IT failures induce specific changes in board IT competency level, it remains to be seen what are the short- and long-term benefits of these changes to the firm and to market investors.

It is also possible that the negative market reaction to operational IT failures is sensitive to boards’ IT competency level at the time of the IT failures. If so, it is not clear if the market would be more surprised by IT failures in firms with superior board IT competency levels and, therefore, react more negatively to those IT failures? Addressing this question may provide the basis for a holistic theory of a reciprocal relationship between operational IT failures and boards’ IT competency level.

Full Citations : Benaroch Michel and Chernobai Anna, “Operational IT Failures, IT Value-Destruction, and Board-Level IT Governance Changes,” MIS Quarterly, forthcoming 2017.

Abstract : This paper presents an empirical study of changes that firms implement in their board-level IT governance (ITG) upon experiencing operational IT failures. Consistent with the separation of oversight from management decisions, board-level ITG is responsible for monitoring managerial IT decisions and policies for controlling IT resources. We expect that operational IT failures indicating inadequacies in board monitoring of controls over IT resources would result in a negative stock market reaction and, in turn, induce firms to improve their board-level ITG. Our expectation is confirmed based on a sample of 110 operational IT failures from U.S. public financial firms. Specifically, our results demonstrate that subsequent to experiencing operational IT failures, firms make improvements to the IT competency level of their boards, and the improvements are proportional to the degree of negative market reaction. However, those improvements are only on the executive side of the board, namely: an increase in the IT experience of internal (executive) directors and an increased turnover rate of CIOs serving on the board. Furthermore, the likelihood of CIO turnover is lower in IT intensive firms where such turnover could be more disruptive. Our results contribute to understanding the critical connection between operational IT failures and board-level ITG.

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This research finds when companies experience operational IT failures they make changes to their boards of directors to improve oversight of IT resources.

Michel Benaroch

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