Week 6 – Benaroch and Chernobai 2017 – Joe

Benaroch, Michael and Chernobai, Anna. 2017. “Operational IT Failures, IT Value Destruction, and Board-Level IT Governance Changes,” MIS Quarterly, (41: 3) pp.729-762.

The literature on operational IT failures is sparse and focused on their value relevance to the firm. This work is among those that touch upon an important gap in the literature: the connection between operational IT failures and board-level IT governance. The goal of this work is to address two questions: 1) whether the negative impact of operational IT failures on firms’ market value a predictor of post-failure changes in the level of board IT competency, and 2) what are the specific determinants of board IT competency associated with these changes.

With a concept-intensive but well-organized literature review and hypothesis development, the authors narrow down the research scope to empirically examine effects of the market value drop around recent operational IT failures on the change in the board IT competency level, specifically, a) increase in the ratio of independent directors with IT experience; (b) increase in the ratio of executive directors with IT experience; (c) turnover of a CIO serving on the board; and, (d) establishment of board IT committees. Utilizing data of 110 operational IT failures from U.S. public financial firms from Financial Institutions Risk Scenario Trends (FIRST), the 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.

This work not only contributes to IT government literature by exploring the critical connection between operational IT failures and board-level ITG, but also offer the industry with grounded managerial operation guidance.