By Patrick Dailey and Joel Koblentz
Transformation is one of the most challenging competencies a board must master. McKinsey & Co. estimates that 70 percent of transformations fail to achieve their objectives. Yet board and management teams instinctively know, change is unavoidable and transformation is compulsory.
Companies including Macy’s, JC Penney, The Limited, Yahoo, Hewlett-Packard, Yellow Taxi, and many, many others have “failed” transformation while “out of nowhere” disrupters advance. Playing catch up is rarely successful and typically leaves a wake of dispirited leadership teams, disillusioned investors, and eager activists.
It seems too few boards take seriously the role of proactively “making over” their companies. Except for responding to major crises, transformation has been largely left to senior management to strategize and implement. Other than performing an advisory or approval role, boards have often taken the “back bench” in critical transformational decisions.
Why? Perhaps, French novelist Proust captured it: “The real voyage of discovery consists not in seeking new landscapes but in having new eyes.” Based upon our observations, boards, in their role of protecting their companies, too highly value “historians” around the board table while comparatively placing less value on “futurist” who focus on market movements, who are curious, flush with fresh, insightful questions, a taste for prudent risk, and wide-ranging contacts across sectors. These “corporate explorers” have traditionally been viewed as outliers. Yet, as we have observed in advising our clients, overseeing and engaging in the exploration, decision making and execution of strategy are becoming increasingly central to the board’s role of enhancing shareholder value.
Prescriptions for Improving a Board’s Transformation Competency
Wisdom must be refreshed. Consequently, continuing education of directors must be viewed as more than an annual board retreat, but include activities to intensify directors’ curiosity about marketplace, R&D investment, flows of capital, and digital innovation. Equally important is a director’s willingness to invest in their knowledge base and refresh their instincts.
Boards should better understand their role in each phase of a transformation cycle. The transformation cycle begins with ideation and instigation. This leads to project implementation with operational re-engineering, and cultural resets. The transformational change cycle concludes with measurement to assess the achievement of targets along with ongoing monitoring activities to ensure that change sticks.
Board guidance is valuable across the entire spectrum of transformation but boards are typically less engaged in the front-end phases. Oftentimes, they are late in triggering instigation for change, tending to be convinced by management rather than as a collaborative partner with management in the design and game plan for transformational renewal. They are rarely resistors. But they are not fully engaged partners either, particularly at the early stages of transformation.
Improvement in their transformational oversight competency begins with a board better able to see the future, then collaboratively overseeing implementation by management, and in the end, insuring shareholders are protected and rewarded for the journey.
We offer prescriptions for successfully governing strategic transformations while continuing to operate with a “nose in but fingers out” philosophy.
- Assemble a board with diverse experiences and varying perspectives. Board diversity requires the assembly of differing business experiences, perspectives, and paths to approach winning and change among fellow directors. Diversity is essential when directors must lead a pivot to a future different than the past and where transformational success depends upon their breadth of experience, insights and open mindedness–all essential elements.
This translates to boards breaking ranks with the past while beginning to consider thinking about their business differently and laterally in the quest of enhancing their platforms to value. “Historians” often lead transformations toward familiar choices and game plans. In contrast, the corporate explorer may be more adept in charting paths based on adaptable and informed foresight. A board needs directors that bring a “crystal ball” along with the courage to make a transformational leap and the persistence to complete the transformational journey.
A change-out of directors who are geared as historians and less as future-focused thought leaders may be required to ensure the requisite diversity of thought about the company’s future. Staff your board with futurists—not just one, but a cadre.
- Read the faint signals in the marketplace Research suggests setting only a short-term course results in lower shareholder value than betting on the long term.
For boards, this translates into being judicious and being fully engaged in transformation recognizing that even small changes of course, can set a path to sustainable future value. As “small steps” matter and have consequences, each should be evaluated outside of the internal corporate bubble of leadership, power and corporate bureaucracy.
To govern, boards who are competent in navigating transformation define their role as continually, perceiving, interpreting, testing and assessing contradictory “faint signals” to fully assess the scale and scope of threat or opportunity to foster new, novel, and accelerated courses…not just accept nor bless the perceptions of management. Accordingly, directors must develop “big ears” in listening to both familiar and unfamiliar “channels”, extracting insight from broader and varied sources to decipher emerging threats and opportunity. These will often be unfamiliar skills for mature leaders to learn.
- Gauge if executive leadership is up to managing transformational change
An astute board must be deeply involved and reach a consensus with the CEO on a path forward. The board’s role is to govern while evaluating the pace and effectiveness of its CEO recognizing, of course, that changes are never smooth or linear. The CEO’s role is to be transparent with the board about execution and the application of resources. In these cases, we have observed that if the parties respect one another and keep their discussions professional, alternative paths can be brought forward for a candid debate and open exchange of views from which agreements can be reached. This is especially important in evaluating alternatives of many small steps.
The board must judge whether its CEO and its top team have the will and a game plan, along with adaptability to account for asymmetrical events and black swans, that can be executed. Too often, executing a transformation begins with conceptual ideas to pivot value and more times than not, it fails to deliver. It’s the board’s role to continually assess whether the transformation process is sound and truly advancing and whether the CEO and its top team are applying the necessary leadership to make it a continuing reality.
To offset the risk of failure, clear lines of communication between the directors and the board committees with the CEO must be heightened. If directors aren’t committed to this level of involvement of delivering and guiding strategic foresight, the chair should consider replacing directors who aren’t qualified or so committed, and nominate those that will be.
Bottom line: Successful transformations require an open and candid partnership between the board and its CEO. If the partnership falters, it is a given that that continuing transformation, and all its intertwined connections to stakeholders and the investment of resources, will fall short and create many more issues than it will resolve.
And, if the board assesses that the management team is unlikely to successfully start, manage, and land the transformation, we suggest a board does not muddle into the process believing that it can compensate for the lack of managerial competency.
Make Certain Change Sticks
Anxiety and dysfunction tend to emerge when transformation momentum dwindles and adjustments are too slow. Disgruntled shareholders become vocal and eager activists begin to circle.
Boards must be vigilant and demanding of themselves while holding their CEOs responsible. Benchmarks must be agreed upon, established and monitored through a common vision jointly held by the board and management. Board wisdom is a critical advantage for transformational success.
Transformations, while some are bolder than others, are a process which CEOs must deliver and boards must monitor, consistently and with vigor. For boards to keep a transformation on track while managing the risks thereof, requires more than deep data analytics. It requires wisdom and awareness to know when the change plan is slipping backwards and losing its sponsorship and appeal.
Committee or Competency?
Many experts call for new board committees to address acute governance issues such as risk, cybersecurity, and strategy. Transformation could be included.
However, the development of a board’s transformation competency—staffing for curious director talent, building insightful “futurists,” equipping directors with a transformational skill set most likely rests within the governance committee’s purview.
Challenge: A Chairman’s Leadership of Transformation
As transformations are tricky and often translate differently from company to company and the imperative of change may vary among sectors, so must the qualities of board chairs. Yet, we believe that there are commonalities of governing competencies that chairs must demonstrate in today’s accelerating pace of change.
Most importantly, successful chairs must lead by, and insist on, full director inclusion. And, the chair must be exceptionally skilled at communicating and influencing without being perceived as having a predetermined agenda, favoring internal board alliances.
As such, there is little appetite by directors to be “back-benchers” where their contributions are rarely offered, taken seriously or marginalized. Constructive conflict is treated as an asset.
We have observed that this new standard presents a major power challenge for chairs who are comfortable with a more traditional role of leading without embracing full inclusion and thereby avoid the conflicts of debates and differing points of views. The best way to govern and to account for differing director viewpoints, however wise or off base, is to assure inclusion and open discussion with the chair skillfully navigating the path forward regardless of strong views and disagreements.
The stakes are high. If transformation goes well, as chair, you and your directors are heroes. If transformation fails to gain traction, recovery is painful and unlikely with blame assigned to the board and specifically to you. So, govern with emotional intelligence and inclusion and gear your board to address each strategic challenge as if it’s the norm because today, it is.
Patrick Dailey, Ph.D.. is an industrial psychologist. He co-founded BoardQuest, a board governance and C-Suite management consultancy. He has been a corporate officer and senior human resources executive for Herbalife, Hewlett-Packard and PepisCo. Joel M. Koblentz is the founder of The Koblentz Group, a “Sensitive Matters Firm,” that advises corporate boards on governance matters and recruits corporate directors. His organization has conducted several hundred for publicly traded companies over the years.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board or the Governance Center.