Transformation is a challenge at every level of the organization—up to and including the board.
But too often, boards are not at the center of the transformation discussion. And in practice, boards sometimes fall short of the level of collaboration that successful transformation demands.
Our experience shows that transformations are a difficult and uncertain challenge—and not all of them succeed. Board engagement and leadership is critical during times of transition. Many boards are not collaborating deeply enough with CEOs and leadership teams. And that can create significant problems.
An engaged, collaborative board, on the other hand, can play a decisive role in guiding the transformation and keeping it on track. When boards are fully involved in the transformation and play a hands-on role instead of confining themselves to oversight, the chances of success go up. No matter how gifted the CEO and the leadership team, strategic transformation needs the board’s full attention.
Boards must take a more hands-on role
To transform successfully, companies need to align around a clear point of view and take more ambitious steps. They must focus on innovation, reshaping the portfolio and repositioning how the company goes to market. That is a different mindset than many leaders have. The board has a critical role to play in such growth transformations, starting with selecting the CEO and then guiding the leadership team.
The coauthor of this article has first-hand experience that has led him to call for boards to be more intimately involved in transformations. Over three decades, Raj Gupta has served as CEO, chair and director at several companies undergoing transformations that unlocked significant value. He’s currently chair of two companies: Aptiv, a supplier of auto parts and technology, and Avantor, a manufacturer of specialty materials and equipment for the health care industry. With BCG, Raj is diligent about driving home to clients and colleagues how transformation success hinges on the boards’ investment in the process – an involvement that starts with picking the right leader.
How the board and the CEO made a decisive difference at Avantor
The story of Avantor is very instructive. A series of acquisitions led to the company’s rapid growth and put the board and leadership team to the test. Founded in 2010, Avantor went through two CEOs in its first few years before the board recruited Michael Stubblefield in the spring of 2014. Stubblefield, in collaboration with the board, moved forward with three transformative initiatives:
• Accelerating growth by pivoting to the attractive biopharma market and increasing R&D investments.
• Enhancing profitability by improving pricing, reducing the product line and scaling back the manufacturing footprint, among other measures.
• Expanding into Europe and Asia to capitalize on scale efficiencies and gain new capabilities.
Within two years, Avantor’s revenue began to grow at double-digit rates, and profit margins doubled. In May 2019 the company went public on the New York Stock Exchange at $14 per share—the largest healthcare IPO in U.S. history. By April 2021 it was trading in the $33 per share range. Avantor’s market capitalization has risen to $19 billion, and the company recently joined the Fortune 500. It also recently announced the acquisition of a German company, Rickett, for over $1 billion to continue its growth trajectory.
Both Stubblefield and the board could rightly celebrate those results. They were due to the leadership of an effective CEO—who was in place because the board took decisive steps to put him in place and collaborate with him.
Five imperatives for board leadership
In reflecting on the Avantor story and others like it, we have identified five board-specific strategic imperatives for companies that know they must transform and do it right:
• Ensure board and executive team alignment. As the Avantor example shows, the board’s critical transformation role begins with ensuring there’s a CEO in place who can question the status quo, and outline a vision for the future and a program to realize it. Selecting a new CEO is the most critical thing the board does. The organization needs someone who is curious and open-minded—who listens to and engages with the board, communicates candidly and does not feel like they already have all the answers.
BCG research shows that new CEOs tend to have better long-term results in transformations, measured by long-term total shareholder returns. But missteps are possible—those companies also show a bigger spread between winners and losers. Boards sometimes hire the wrong CEO—in those cases, it is important not to linger, but to fix the problem and move on.
• Focus on execution. Once the CEO is in place and the CEO and board are aligned, the board can help the leadership team execute by setting priorities. Some organizations have 30 or more initiatives running at the same time. Each may be worthy in its own right, but senior leaders cannot possibly focus on such a broad mandate. Companies must narrow down the list of strategic priorities to the three or four that are most important and then allocate the capital, talent and other resources needed to succeed.
Boards should also work with leaders to track results, with clear metrics and a timeline of key milestones and objectives. Reporting needs to happen more often than either the leadership team or the board might really want—because it pays off. Leaders need to see results weekly—or even daily in some cases. Many did this as part of their Covid-19 response; it needs to be an everyday practice.
The truth counts, too. Tracking and reporting are useless without candor. A culture of truth-telling needs the board’s backing.
• Actively manage the portfolio. Growth doesn’t come from doing the same thing more efficiently. It happens when the company identifies promising markets to exploit—and exits unpromising ones. Simplifying the portfolio, focusing on different customer segments or geographies, adopting a new business model or selling off business units are all part of the picture. The chances of success go up when boards, CEOs and leadership teams are aligned on portfolio decisions.
• Identify and mitigate risks. A transformation rarely plays out according to plan, so it will likely be necessary to pivot at key junctures while reassuring stakeholders, including investors. During the transformation, the board should work with management to mitigate risk by keeping the process on track. Post transformation, the board needs to understand the company’s new risk profile and ensure that leaders are taking on—and addressing—manageable risk.
• Engage key stakeholders. Transformations require a consistent vision, clear messages and the willingness to ride out short-term disruptions. When disruptions happen, analysts, investors, employees and other constituents may have their faith shaken—unless the board and the leadership team can reassure them and re-focus them on long-term objectives. Transformation is not a straight-line journey, and there is no single path.
Finally, as transformation efforts increasingly encompass environmental social, and governance factors and metrics, it falls to the board to make sure they’re a priority – and to make the case to investors that such farther-reaching metrics as total societal impact are a better lens for strategy than, say, total shareholder return (TSR).
As shown by Avantor—and other transformations that really worked—transformation is never going to be easy. But boards can and should play an active role that makes the process more effective. By following key principles, boards can effectively partner with management teams and flip the odds of a successful transformation decisively in a company’s favor.