The Board–CEO Partnership in a Transformation

Many executives have opinions about transformation, but only a few have succeeded at multiple transformation initiatives across a range of companies and industries. Raj Gupta is one of them. Over three decades, Gupta has served as CEO, chair, and director at several companies undergoing transformations that unlocked significant value. Currently, he is chair at two companies: Aptiv, a supplier of auto parts and technology, and Avantor, a manufacturer of specialty materials and equipment for the health care industry. He has a wealth of insights that CEOs, board directors, and chairs at other organizations can apply.

“Successful transformations require more than just running operations leaner and incrementally raising profit margins,” says Gupta. “Companies need to align around a clear point of view and take more ambitious steps—innovation, reshaping the portfolio, and repositioning how the company goes to market. That’s a different mindset, and it requires a different style of leadership.” His experience points to five strategic imperatives for companies that want to design and implement a successful transformation.

Ensure Board and Executive Team Alignment

The board has a critical role in growth transformations. First, it needs to ensure that the right CEO is in place—someone who can question the status quo, outline a vision for the future, and implement a program to get there. If any of these elements is missing, the board may need to replace the top person. “Selecting a new CEO is the most critical thing the board does,” says Gupta. “You need someone who’s curious and challenges the status quo, someone who’s open-minded, listens to and engages with the board, communicates candidly, and doesn’t feel like they already have all the answers. Complacency and arrogance can really limit successful companies—and successful individuals.”

BCG research has found that new CEOs tend to have better long-term results in transformations, measured by long-term total shareholder return, but companies with new CEOS also show a bigger spread between top performers and laggards. That reinforces a similar, earlier analysis, which found that a new CEO is one of three factors that correlate with long-term transformation success. (See “The Transformations That Work—and Why.”)

The Transformations That Work—and Why

A BCG analysis of transformations identified three critical factors that can improve a company’s odds of success. (See the exhibit below.)

• A strategic orientation, with sufficient investment in the critical areas of capex and R&D
• A new CEO, with a slight improvement in performance for new CEOs hired from outside the organization rather than promoted from within
• A formal transformation program that the company invests in sufficiently (measured by restructuring costs as a percentage of revenue)

“Boards sometimes get it wrong and hire the wrong CEO,” says Gupta. “In those cases, it’s important not to linger. Realize the problem, fix it, and move on.” (See “Choosing the Right CEO at Avantor.”)

Focus on Execution

The second major strategic imperative is execution, starting with prioritization of change efforts. Some organizations have 30 or more initiatives running at the same time. Each may be worthy in its own right, but senior leaders—not to mention the company’s workforce—cannot possibly focus on such a broad mandate. Instead, companies must narrow down the list of strategic priorities to the three or four that are most important, coordinate them through a single transformation program, and then allocate the capital, talent, and other resources—such as marketing and R&D investment—needed to succeed.

In addition, companies need to relentlessly track results, with clear metrics and a timeline of key milestones and objectives. Tracking of results should happen on a shorter timeline than some leadership teams might like. Rather than monthly or quarterly, leaders need to see results weekly—or even daily in some cases. (Many companies’ response to the COVID-19 pandemic featured this kind of close oversight, with good results.) Some leaders develop a medium-term vision and then break that into a series of short-term targets, the idea being that you have to win in the short term in order to win in the medium term. Quick wins early on can build credibility—among both internal and external stakeholders—and generate momentum for bolder measures later on in the transformation. “People can handle a lot of volatility if they know that you’re focused on a long-term goal,” says Gupta.

Hand in hand with tracking results goes real candor. Organizations need a culture in which people are empowered to speak the truth, particularly when something isn’t working.

Actively Manage the Portfolio

As noted above, growth doesn’t simply mean doing the same thing more efficiently. It means identifying promising markets to exploit and contracting markets to exit. “You have to be brutal about getting out of businesses that are commoditized or where you just don’t have a future,” says Gupta.

In addition to simplifying the portfolio of products and services, companies can focus on a different customer segment, a different geographic market, or a different business model. The decision to sell off a particular business unit or product line can be particularly challenging if it is performing well but no longer fits with the transformation agenda. In those cases, companies need to be disciplined about how the components come together to unlock value and which pieces no longer fit. (See “Reshaping the Portfolio at Rohm and Haas.”)

Identify and Mitigate Risks

Any transformation raises the risk profile of the company, both during the initiative and afterward. Changes in business units, talent, digitization, and other aspects of the organization all potentially introduce new risks that the board must identify and mitigate. That is an ongoing process. As Gupta notes, “Things rarely play out according to the plan, so you’ll likely have to pivot at key junctures, all while reassuring key stakeholders, including investors.”

During the transformation, directors and chairs need to work with management to ensure that the implementation process stays on schedule and the organization hits its key milestones: cost reductions, synergies, growth, or other metrics. And in the post-transformation state, the board needs to understand the company’s new risk profile and ensure that leaders are addressing manageable risks. (See “Identifying Market Risks at Aptiv.”)

Engage Key Stakeholders

Transformations require a consistent vision and the willingness to ride out short-term disruptions. Without a long-term objective that the board and leadership team can communicate, analysts, investors, employees, and other stakeholders may see their faith shaken.

In addition, boards and leadership teams need enough flexibility in the short term to adjust how the company will achieve its vision. “This is not a straight-line journey, and there’s no single path,” says Gupta. “If you have a short-term mindset and you only think about what analysts say and what’s going to move the stock price tomorrow, you’re not going to make it. You need the confidence of your board and investors to ride out the ups and downs over a time period of at least two to three years. For them to stick with you, you need to be clear in your communications and focus on the long term.”

Finally, organizations increasingly need to consider environmental, social, and governance factors as part of their performance metrics. ESG issues are getting more attention from shareholders—an advantage for companies that take a proactive approach but a disadvantage for those that drag their feet. In fact, BCG research has found that total societal impact—which incorporates both societal and business value—can be a better lens for strategy than traditional shareholder return.

Transformation is not easy, but boards—in partnership with the CEO—can play a critical role in the process. By following the principles described here, boards can effectively partner with management teams and flip the odds of successful transformation decisively in a company’s favor.

The authors appreciate the contributions of Raj Gupta to this article. In addition to his current roles at Aptiv and Avantor, Gupta is former chairman, CEO, and president of Rohm and Haas and has served on the boards of DuPont, Hewlett-Packard, Vanguard, and Tyco International.