Business Transformation: Change Is an Opportunity to Reposition for Growth
This article originally appeared on the NACD Boardtalk blog on January 10, 2023. Reprinted with permission.
For better or worse, the COVID-19 pandemic has served as an incredible catalyst for business change. All businesses have been forced to transform to a greater or lesser extent to meet new market realities. As the economy recovers from crisis, the rationale for transformation is shifting.
Boards of directors have played a much more active role in many organizations of late, given the rapidly changing requirements that these conditions have necessitated. Board members are now asking the following questions: What’s the right role for us to play going forward in support of continued business transformation? How active should we be? These are important questions to entertain as the “new normal” ensues.
A business transformation includes four key steps:
Set an outsized vision.
Design a strategy.
Develop the operational plan to ensure delivery.
Align the organization’s people to perform.
It sounds simple, but this requires certain organizational capabilities that the board can, and should, help oversee in support of management. To ascertain whether these capabilities are in place, directors can ask themselves the following questions.
Is the right CEO in place? One of the most critical actions of the board is selecting the CEO. When major transformation is required to achieve an ambitious growth goal, the question the board must address is, Do we have the right CEO in place with the right mind-set to ask the right questions, push for the right change, and rally the organization to deliver? When big change is required, it’s important to have a CEO who questions the status quo, outlines a clear vision, and implements a plan to achieve that vision. Incumbent CEOs can be reticent to take bold action and if that is the case, the board should act. Analysis of successful transformations indicates that those companies that were best able to transform had a new CEO. As an example, when a recent CEO transition was required for an international cruise line, the board reflected on the changes in skill and experience required as a result of the pandemic’s impact on the business’s financial requirements, which became the key rationale for promoting the chief financial officer to the CEO role.
Is the strategy sound? And just as important, is the board confident that the organization can execute the plan? Aligning on the strategic direction of the business is the second most important role the board plays. Playing an active role with healthy skepticism to inquire, test, and provide experienced views are all important actions the board should take to ensure the strategy designed by management is ambitious enough to achieve and sustain long-term success and create value. Gone are the days where the board simply ratifies the strategy that management brings to the boardroom. In addition, board members can and should explore how realistic it is that the plan can deliver on the strategy. Is there focus on the critical few initiatives that will make a difference? Are the metrics right to tell the story of performance? Has the management team ensured that the right talent is in place and the culture is one that supports truth telling so that when challenges arise, they are transparent?
Consistent dialogue with management about “how it’s going” is important to sustain an understanding of progress against the plan. When the dynamic between the board and management is healthy, board members are deeply versed in the strategy and operational performance of the business while maintaining the appropriate oversight role and avoiding “running the business.” Prior to the pandemic, boards had struck a balance between these two critical business domains. That said, boards would rely on senior management to deliver both the strategy and execution planning. While still true that that is senior management’s role, what the pandemic taught us is that to remain too distant from strategy design and execution planning means that the board risks losing the opportunity to provide valuable counsel and avoid business risks. To take advantage of this opportunity, board members must be better informed and more active in understanding the business they support.
Have we identified the risks? Big change implies the possibility of new risks. The board needs to be prepared to help identify, understand, and plan to mitigate new risks as part of the change process.
The chair of a board of a leading hospitality company made a conscious decision to recruit new board members with well-defined disciplines. These new recruits were high-powered people; one was an existing CEO, and others were in finance and marketing. They brought both experience and healthy skepticism. The chair knew these were critical disciplines for what the business was going to face and the talent internally that had to grow. These experts knew the right questions to ask senior management to design a strategy that minimized risks and maximized growth.
Will people have the ability and willingness to align with the change? If these last two years have taught us anything, it is that people vote with their feet. If they do not align with the vision or participate in the change because they don’t see themselves in it and feel successful in the execution, they will move on. The board should ensure that there is a strong plan for change and a relevant plan for talent. This builds confidence and the likelihood that the right people are in place and can be encouraged to stay in place when it matters.
Boards have traditionally paid attention to talent at the top. But employee engagement and culture—and its implications on talent and retention—require the board to be engaged on what management is planning in this regard. Many organizations are woefully weak on how they report this to the board, mostly because it’s been considered management’s sole responsibility.
The pendulum of power is swinging back to the employer, thanks to recent layoffs and remote jobs shrinking. While this will have a positive impact on employee retention, the challenge becomes keeping the talent that will make a real difference in your business plan. This retention will be determined by the environment senior leaders are creating. The board can have an impact by asking the following questions:
What specifically is our transformation?
What do we want the culture to look like?
What behavior changes are taking place, and does this pose a talent risk?
How is the senior leadership team going to put in place a plan to mitigate risks?
While delicate, these issues must be explored by the board. A business transformation marks a fundamental change in how the business operates.
It’s important to recognize that the board’s role in transformation should be active, thoughtful, and ongoing in support of long-term value creation. Being clear and aligned as a board and with management on these key activities will ensure constructive and productive board engagement.