Governance Lessons from Silicon Valley

The tech world is light years ahead in dealing with rapid global change, immigration issues, engineering education, and online business

With its tradition of having a highly international workforce and its role as a pioneer in collaborating with India and China, Silicon Valley can rightly claim to have a special perspective on global issues. The intense competition among Silicon Valley companies forces them to be inventive and flexible in everything from governance to product development to partnering. As a result, the Valley is a laboratory for global management and board governance best practices.

In Spencer Stuart's work with Valley companies to find both board directors and senior executive leadership, we have identified four lessons that any business building new capabilities or working in multiple countries and cultures would do well to heed.

Lesson 1: Boards are for more than oversight. Companies in Silicon Valley are often called on to transform themselves or realign their businesses quickly to keep pace with changes in technology, and Valley CEOs expect board members to be able to counsel them about a market or sector in which the company has little or no experience. This stems from a long history of having venture capitalists sit on the boards of startups that have not yet gone public and of the VCs being deeply involved in running the businesses. Silicon Valley CEOs have learned to rely on directors for more than oversight. They are looking for day-to-day advice and for connections to markets into which their companies are moving.

While companies outside Silicon Valley also look for expert board members, the difference is the speed with which tech companies often have to adapt and how much they look to board members to assist in the process. There is no reason companies outside of Silicon Valley shouldn't be thinking about future direction when looking for new board members.

Lesson 2: Look for a multicultural perspective. Silicon Valley companies usually seek managers with prior multinational operating experience and at least one language besides English. What multicultural executives bring to companies is the same skill set needed in multicultural directors: strategic foresight into global and local markets, plus an understanding of trends in supply-chain management, outsourcing, and the state of technological development and acceptance outside the U.S. When executives and directors combine these insights, business opportunities are created.

There is a caveat when it comes to recruiting multicultural directors, however. Directors need to understand the regulatory standards under which U.S. companies operate, particularly the strictures of Sarbanes-Oxley. Many countries are not nearly as constrained by regulation, and foreign directors might not grasp that what is allowed in home markets is prohibited here. This makes the search for multinational directors more difficult, and it usually requires looking at senior executives of multinationals who have multimarket experience or for Valley entrepreneurs who were brought up overseas and have successfully built a U.S. business.

Lesson 3. Companies should address societal problems that affect the bottom line. One of the biggest competitive issues facing Silicon Valley executives is a lack of focus on American engineering education. Silicon Valley first addressed this by recruiting foreigners who studied engineering in the U.S. This thrust Valley executives and boards into the heart of immigration issues, leading at first to expansion in the Valley and eventually to a crisis.

In the 1980s and '90s, many foreign students got work permits or became citizens—thanks in no small part to efforts made by Valley executives for more enlightened immigration policies—and founded their own startups in Silicon Valley. However, after September 11 and the clampdown on H1-B visas, many talented foreign students have been forced to study elsewhere. Plus, many Indians and Chinese who emigrated to the U.S. and gained valuable expertise here are returning home because opportunities for wealth creation are now greater there than in the U.S.

Silicon Valley executives and boards understand that emerging economies have the same aspirations the U.S. had 50 years ago, when it promoted math, engineering, and sciences during the Cold War and space race. In 2006, 1.3 million students graduated from college in the U.S. A total of 70,000 were engineers. In the same year, India graduated 3.1 million students, of whom 465,000 were engineers. China graduated 3.3 million students, 600,000 of whom were engineers.

Silicon Valley CEOs have stressed that the U.S. needs to improve education, or it will become a second-class citizen globally. Valley companies are investing heavily to bring staffs up to global standards. However, high-quality talent will continue to emerge elsewhere. And as more high-skilled jobs leave the U.S., greater political and societal pressure will be placed on U.S. companies and boards, and they must be prepared to respond. When shareholder interests entwine with society's, boards cannot stay neutral.

Lesson 4. The Internet is the primary business model; not just a tool. Internet networks and applications are the foundation for business, regardless of sector, and connectivity and information are available to all.

The current generation of senior corporate executives focused on building proprietary networks to connect computers. However, young managers today don't think about technological plumbing. To them, the Internet is a new business paradigm, not just a tool they have had at their command since high school. The difference between having seen the transformation of the Internet from a tool to the primary business model vs. viewing the Internet as something one takes for granted is key.

While it is unconventional to think of placing a thirtysomething Internet entrepreneur on a board, there could be tremendous benefits gained from such a person's perspective. This, of course, assumes the thirtysomething brings other skills of being a good director, such as business experience and judgment. What a young manager can help boards and executives understand is how markets have changed dramatically since 2000 and how business models have shifted.

There are few niches left where one can thrive or even survive without the Internet. Boards need a sense of urgency and understanding of how companies are developing and deploying Internet business models.

Moreover, they need to know how the Internet is evolving and what companies must do to keep pace. The lessons of Dell (DELL), eBay (EBAY), Google (GOOG), and (AMZN) are well-known. The Internet has changed the core of manufacturing, distribution, publishing, and retailing. Discussions of Web strategies should be front and center in the boardroom.

Business opportunities, societal issues, cultures, and management strategies collide in Silicon Valley boardrooms in a way not seen in most other industries. However, as the world continues to globalize, all companies increasingly will feel this pressure, if they have not already, and they could be well-served to heed the lessons of Silicon Valley.

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