Beyond managing the challenges that organizations face every day, most leaders strive to be transformative—to find new ways to deliver substantial impact and leave the company stronger than they found it. Yet only 30 percent of transformations deliver the value their leaders expect.
There are many possible explanations for this statistic, among them unexpected market conditions, tough new competitors, technological disruptions, and a volatile geopolitical landscape.
Such external factors are easy to understand. Less appreciated are the internal dynamics in organizations that can thwart even the most ambitious and well-intentioned leaders. Chief among these are “collective-action problems”—situations in which an organization’s leaders identify a shared goal but individuals or groups in the organization have conflicting interests that undermine the achievement of an otherwise possible (and positive) collective outcome, leading to suboptimal outcomes.
The presence of collective-action problems in organizations doesn’t usually mean there are bad actors or that people are intentionally doing bad things. Collective-action problems are deeply rooted in human instincts and behaviors, and, paradoxically, they are often the result of individuals trying to do the right things. The problems emerge when actions taken in isolation aren’t managed holistically and end up creating negative consequences for the whole. Not surprisingly, collective-action problems become even more acute during periods of dramatic and transformational change.
CEOs play a critical, “undelegatable” role in tackling collective-action problems, especially in high-stakes, transformational contexts. In these situations, CEOs must set the conditions for impact, establishing the organization’s intent, pace, and scope of change. Other executives play vital roles in augmenting the CEO’s stewardship of transformations, including the chief transformation officer, CFO, chief human resources officer (CHRO), and business unit leaders—but they cannot replace the unique insights and mandate that the CEO brings to this process.
Across industries and sectors, successful transformation journeys tend to follow a similar arc: Organizations set a stretch aspiration, execute rigorously against their plans, and introduce clear mechanisms for sustaining change. By contrast, our previous research demonstrates how organizations that do not succeed lose value at each of these three stages. In such cases, we see five collective-action problems that often get in the way and limit the potential of otherwise well-intentioned organizations.
The negotiated settlement, the first collective action problem, prevents organizations from establishing high aspirations for the transformation as teams and individuals set goals lower than they should. The next two problems—the hoarding habit and the lure of local—undermine information management, knowledge sharing, collaboration, and performance tracking, thereby stalling the execution of transformations. And the last two collective-action problems—relying on the trustworthy few and pursuing the finite program—thwart leaders’ ability to create substantial differences in how organizations operate and sustain meaningful change.
The CEO’s unique role in transformations is in large part about addressing these collective-action problems. Each poses its own singular challenges—but all of them can be addressed with the CEO’s active leadership, as we’ll outline in this article.
The negotiated settlement
“The risk is not that we aim too high and fail, but that we aim too low and succeed.”
The potential effects of any organization’s transformation are often limited at the outset by the aspirations that are set—especially when those aspirations are defined by what feels probable rather than what is possible. An organization is best served by an aspiration that leans into its full potential and requires the whole organization to stretch its capabilities and creativity, often in ways the group initially believes to be impossible but ultimately discovers are achievable in pursuit of that aspiration.
Often, however, organizations treat ambition setting as what we call a negotiated settlement—a process in which a group of executives share what they think they can achieve and, after some back and forth, the CEO largely relies on the original perspective. Such settlements occur not because of an outright lack of ambition but because organizations tend to equate goal setting with guaranteed outcomes that are strongly tied to performance incentives and reputations.
Negotiated settlements are further reinforced by institutional memories of past failures or strategic missteps; individuals understandably seek to hedge against these risks. As a result, they negotiate personal targets down to what is clearly achievable and underpromise with the intent to overdeliver. What the organization could have achieved with a new way of working is often left unrealized.
To move beyond negotiated settlements, CEOs can lead in the following ways.
Commit to a full-potential mindset
When setting an aspiration for transformation, the CEO should ensure that it reflects the full potential of the organization and that it is grounded in current facts, rigorous analyses, and first principles—not historical levels of goal setting or outcomes. This is a critical first step in guarding against the negotiated settlement, and integral to the CEO cultivating a full-potential mindset in the organization.
Such a commitment can yield big benefits: On average, successful transformations deliver more than twice the value that senior executives initially thought possible.1 Consider the situation at Google: Founders Sergey Brin and Larry Page were clear about their outsized ambitions for the business—ideas that often left Google’s employees scratching their heads, at least at first. As Google CEO Sundar Pichai noted: “Larry and Sergey were very good at taking what looked like irrational positions that led people to ask, ‘Why are you doing that?’ But by the magnitude of their aspiration, they did bend the organization.”2 They helped set the standard for the industry with their commitment to breaking through organizational inertia and encouraging employees to take risks and innovate.
Set both clearly achievable and stretch goals
CEOs should set two types of goals at the onset of a transformation—ones that are viewed as achievable, and that may even already have a clear execution plan; and ones that are stretch goals. By highlighting both types of objectives, the CEO can create constructive tension and encourage greater creativity not just in the early stages of transformation but also during implementation and after the first wave of initiatives. Goals that are viewed as achievable are often sourced from the bottom up in an organization, and they form an important but incomplete part of the overall ambition. Bottom-up goals should be complemented by a top-down view of the aspiration that is grounded in current facts, analyses, and first principles, which stretch these goals to full potential. CEOs play a vital role in ensuring that stretch goals are part of the process.
Craft incentives that encourage people to go after stretch targets
Most incentive plans are tied to budget-based targets. And there are usually negative consequences for those who miss those targets, regardless of other improvements or achievements that they realize. One-dimensional incentive plans end up perpetuating a cycle in which managers underpromise and overdeliver. CEOs can help break this cycle by resetting incentives so that they reward those who exceed standards as well as those who pursue “noble failures.” And those who narrowly miss full-potential targets should be rewarded more than those who exceed modest aspirations. So long as employees are striving for full potential and meeting qualitative thresholds and markers that reflect commitment and learning, they should be well compensated for both wide successes and narrow misses.
CEOs should work with CHROs and business unit leaders to create incentive structures with steeper payouts as individuals surpass successive milestones. And they should be clear about what constitutes base performance versus a stretch goal. As JPMorgan Chase’s Jamie Dimon shared in a 2018 letter to shareholders, “All companies are subject to inertia … which must be eradicated. If a company isn’t staying on edge, maintaining a fire in its belly, and pushing forward, it will eventually fail.”3
The hoarding habit
“Information is power and people don’t always share it.”
A transformation’s success depends on making high quality decisions at scale, which can only be done with a shared and real-time fact base of what is happening across the organization. Everyone benefits from a “single source of truth”—a centralized repository with the company’s most up-to-date view of impact, resourcing, execution, and risk. When all individuals and teams have access to the same body of information, organizations can allocate resources more effectively, gain greater alignment among teams, and improve employee engagement and satisfaction.
The problem in many transformations, however, is that individuals withhold information when they aren’t sure how and when that data will be used. This hoarding habit is our second collective-action problem. It can happen when people are overworked and don’t have time to share information or when there is internal competition (a zero-sum mindset) or a lack of trust in the workplace. The hoarding habit can also occur among individuals who are anxious about being viewed as less than competent and are reluctant to ask for help when they need it. In all these cases, this collective-action problem can end up limiting the organization’s progress and potential.
Given the increased pressure and scrutiny associated with transformational moments, it is not surprising that individuals feel the need to guard information, especially if they are unclear about how success will be measured or how their individual efforts will contribute to the organization’s broader goals. But when there is limited transparency, decisions are slowed, signals may be missed, and what may have been small problems initially are left to grow. Teams burn their time debating perceptions instead of facts, and the transformation loses momentum because no one definitively knows how things are progressing. A single source of truth does not exist.
To counter the hoarding habit and ensure that everyone in the organization is aligned and openly sharing information, CEOs can lead by taking the following actions.
Encourage teams to ask for help
CEOs should actively seek ways to celebrate leaders who ask for help, even before they really need it. It is important for CEOs to be role models and emphasize the importance of learning and continuous improvement as a means for personal and professional growth. Ford CEO Alan Mulally offers a good example: He was engaged in an end-to-end corporate transformation at Ford, encompassing talent, culture, governance, and process changes. On the cultural front, Mulally realized that few in the company felt comfortable bringing problems to him unless they had the immediate fix for them. The end result was that teams would deem every project a “green light,” regardless of issues, because asking for help was considered a weakness. But when the chief of Ford’s Americas operation finally flagged a project as “red light” given some emerging issues, Mullaly stood up and applauded. The team began to discuss the project dispassionately, and it turned out that managers in another location had faced similar issues. After more conversation and collaboration, the team came up with a possible solution. Ford’s culture began to shift, with more leaders willing to flag problematic projects and ask for help.
Set an expectation of ‘radical transparency’
CEOs should insist on a common, always-on view of the transformation—a single source of truth—that integrates initiative-level execution, financial impact, operational data, and a forward-looking view of how that impact links to the profit and loss (P&L). This typically takes the form of a live dashboard where every initiative is tracked against a clearly defined target, a time-phased glide path, and a robust set of execution metrics. Little to no energy is expended on deciding what to report or when. Everyone operates within a system where progress, delays, and requests for help are visible by design.
The thing that distinguishes effective transformations from all others is not more reporting but a focus, instead, on standardized and outcome-oriented reporting. That is, there is a shared language and taxonomy of stage gates in these transformations, a consistent definition of value creation, and explicit execution metrics that reveal emerging issues that require attention. A shared fact base can be seen and accessed across the organization, and because the information is tracked in a consistent way, teams can see patterns more clearly—for instance, opportunities to work more quickly, tasks that are being duplicated, or competing demand for resources.
Radical transparency such as this allows the CEO and senior team to see around corners, intervene accordingly, and reallocate resources dynamically toward the highest-impact opportunities. Insisting on a single, always-on source of truth is one of the most important steps a CEO can take to help ensure transformational success.
The lure of local
“The orchestra is full of soloists, each loyal to their own section.”
To succeed with and sustain transformations, the whole organization needs to work toward a collective goal. But even when the organization has set a stretch aspiration and created full transparency on progress (the first two collective-action problems), individuals and teams can default to their own priorities, creating fragmented efforts.
This behavior is not entirely irrational. The performance incentives and cultures in many organizations often overemphasize “star quality” or the actions of individual overachievers relative to those working behind the scenes to further the organization’s goals. The lure of the local is the third collective-action problem that CEOs and their organizations must overcome.
An orchestra provides a great analogy; it is full of top-tier soloists, each accomplished, each loyal to their own section—strings with strings, percussion with percussion, horns with horns. But unless they all play their parts together under the orchestration of a conductor skilled at integrating these instruments, the resulting sound will be hollow and incomplete.
In many transformation settings, we see teams taking actions that benefit their KPIs, their budget, or their visibility — sometimes at the expense of the broader transformation. On the surface, everyone appears busy but collectively the company is not achieving its full potential. Warning signs of fragmented efforts include teams that push for their own KPIs rather than enterprise-wide outcomes, and teams in different parts of the organization solving the same problem in parallel because they’re not sharing information or coordinating. Individuals will refer to “my team,” “my budget,” and “my goals” rather than “our goals.” A concept of ownership, instead of stewardship, prevails. And teams will often fail to follow through on cross-functional initiatives.
Such signals should be the CEO’s cue to step in and realign incentives, reconnect people to the shared ambition, and reinforce why the work matters beyond any one team.
To overcome the lure of the local, counter fragmentation, and reinforce collective action, CEOs can lead in several meaningful ways.
Highlight sources of meaning at work
When employees think their work is meaningful, their performance improves by 33 percent, and they are 75 percent more committed to their organization. No two employees derive meaning from work in precisely the same way. Rather than adopt a one-size-fits-all approach to motivating employees, effective CEOs understand that multiple strategies are necessary to catalyze purpose across large populations and that individual groups are often a composite of discrete segments. We find in our transformation work that “five sizes fit most” in terms of tapping underlying motivations for members of the organization: They will be motivated principally by benefits to society, company, customers, team, and personal success.
CEOs should work to engage these five sources of meaning as they build the case for change and communicate with critical stakeholders. In a town hall with employees, for instance, the CEO can provide financial overviews of the transformation but also talk about its impact on clients and the broader community. How will the transformation make the company a more collegial place to work? What benefits do employees stand to gain—financial, career growth, and so on—if they embrace the transformation? Enlightened CEOs find ways to proactively address these and other questions to create more buy-in and engagement for transformation.
Tailor incentives to the organization’s culture and transformation goals
Incentive programs should reflect each organization’s distinct strategy and culture; no two companies’ incentive programs look exactly alike. That said, the most effective designs share a few common principles: They are simple yet precise, are closely linked to transformation outcomes, and incorporate both financial and nonfinancial goals. Indeed, in a McKinsey analysis of 60 global organizations, the transformations in which incentives were linked to financial goals were associated with a 24 percent outperformance in total shareholder returns (TSR). This outperformance rose to 31 percent when nonfinancial goals were incorporated, reflecting the ability of CEOs to mobilize the organization toward achieving a holistic set of outcomes by tapping into multiple sources of meaning. In addition, the most successful incentive structures explicitly rewarded cross-functional collaboration, reserving a significant portion of the incentive pool for joint, enterprise-wide outcomes. Through transformation incentives such as these, CEOs can help move everyone beyond a focus on individual or team goals and mobilize the entire organization to go after a common, shared ambition.
The trustworthy few
“A small circle is stretched across the organization’s entire agenda.”
Given the high stakes associated with transformation efforts, CEOs often default to relying on a small group of people they trust the most—the trustworthy few. Like other collective-action problems, relying on the trustworthy few is not irrational and, in fact, is entirely understandable. When things are uncertain, leaders naturally gravitate toward those who have consistently delivered for them in the past and proven their ability to take on more with quality results. Most organizations have 20 to 40 people whom they trust with a broad range of assignments—general-purpose leaders who have shown the judgment, maturity, and leadership skills required to change the odds for initiatives and outcomes. The trustworthy few is the fourth collective-action problem. The challenge for CEOs is growing this group so it is a larger share of executive leaders in a sustainable way, as both an accelerant to execution and an investment in human capital and employee value propositions for the entire company.
These trustworthy few may be highly capable, but because their time and attention are deployed across the entire agenda, there is less room for others to help, and the organization fails to build broader capacity. The rest of the organization becomes less developed, and the company misses one of the biggest opportunities of a transformation: using it as a leadership factory to build the next generation of talent.
It’s incumbent upon the CEO to ensure that ownership of the transformation is distributed and to intentionally widen the circle. To achieve these goals, the CEO can take the following steps.
Deliberately cultivate the next generation of leaders
Transformations are one of the most powerful opportunities a CEO has to build leadership capacity and capability at scale. Instead of relying on a small group of proven performers only, CEOs and senior teams should identify high-potential but less-tested leaders and give them stretch responsibilities. These roles can become proving grounds for emerging leaders and can offer individuals a chance to develop, hone, and demonstrate problem-solving, financial, and relationship-building skills. In addition, the CEO and senior management team should actively invest in skill-building programs for the organization; this is especially critical given that transformations with effective capability-building programs are, in our experience, 20 times more likely to succeed. Intentionally cultivating the next generation of leaders not only relieves pressure on the inner circle; it creates organizational leverage, expands the organization’s execution muscle, strengthens the leadership pipeline for the long term, and helps attract and retain talent.
Activate a much broader portion of the organization
McKinsey research shows that the average transformation involves only 2 percent of employees. The most successful transformations, by contrast, activate at least 20 to 30 percent of the organization. In fact, our research shows the total shareholder returns from a transformation are directly correlated with employee involvement. The vision and direction of a transformation are set at the top, but creating lasting change requires full organizational engagement to deliver.
CEOs should set the expectation that nearly all employees will be involved in the transformation over time and encourage them to look for big and small opportunities to improve the business. To this end, the CEO and senior management team should design transformations in a way that encourages employees to engage at even micro levels—what is often referred to as the pebbles and sand of a transformation. These smaller initiatives may be less visible across the organization, but our experience shows that they can account for half of a transformation’s total impact. Additionally, these smaller initiatives provide more learning opportunities for employees at all levels, often cost less to implement, and demonstrate impact more quickly. By installing a system to engage and deploy leaders across the organization in a coordinated way, CEOs shift ownership of the transformation from a trustworthy few to a broad coalition, increasing both the organization’s capacity, its leadership quotient, and its ability to deliver on the transformation.
The finite program
“Transformation is seen as a finite project, so new ways of working stop at the program’s edge.”
Organizations can sometimes pursue transformations as a set of discrete initiatives run by a separate group as a side effort, rather than integrated into the day-to-day business. For many leaders, separating the transformation may feel like a way to maintain stability: They can keep the core business moving while a small group focuses on change. It can seem less disruptive and more manageable in the short term.
However, this leads to a fifth collective-action problem: While the transformation team may become fluent in new ways of working, new disciplines, and new expectations, the rest of the organization doesn’t change its operating rhythm. As a result, the transformation never directly affects how the company does its work. It becomes the finite program—visible while it exists but fading over time without reshaping the business in a sustainable way. This collective-action problem ends up limiting the transformation’s full potential for the company.
Organizations can end up with transformations that appear successful on paper but never fully materialize in the P&L. Costs may come down in one area while creating issues in another; growth initiatives may stall because day-to-day operations don’t shift; and new ways of working can dissipate as soon as the transformation program recedes. The company makes progress—but fundamentally not much changes.
The CEO’s role here is to break down silos and align the “run” and “change” sides of the business, not allowing the transformation to become a program of finite duration.
To prevent a transformation from becoming a finite program, and to ensure that change is integrated into how the business operates every day, CEOs can lead in the following ways.
Establish a unified operating rhythm for the organization
Historically, organizations have treated transformations as finite programs with a clear beginning and end, so they build project management offices to drive change without disrupting the core business. This model, however, doesn’t translate well to the kind of change companies face today. The pace of disruption is continuous, and the capabilities needed to transform are the same ones required to run the business. When transformation lives “off to the side,” even the best-designed initiatives struggle to take hold.
CEOs should ensure that the same leaders who run the business also own the transformation, with assistance from a strong transformation capability. They should align “run” and “change” tightly around a common operating rhythm with five core elements: clear targets for performance, ownership of those outcomes, a shared view of the trajectory required to achieve them, incentives aligned to execution, and full transparency on progress. Together, these create a single management system for driving performance and delivering outcomes.
For example, when they are defining performance targets, they can prioritize a small set of value drivers and make them consistent across day-to-day and transformation initiatives. Each value driver should have an accountable owner, with delivery requiring coordinated action across core business activities and transformation initiatives. When performance is off track, the conversation is not whether the issue sits in “run” or “change,” but which actions will close the gap. In this way, the CEO can create more clarity and accountability and ensure that the transformation doesn’t drift or become elective.
Embed transformation disciplines directly into core business routines
Transformation requires execution rigor—fact-based perspectives, rapid decision-making, closed-loop accountability, transparency on performance, and clear accountability. Too often, however, these disciplines remain confined to the transformation team while the core business continues to operate with a different cadence and level of rigor. Most organizations believe they already have execution rigor in their core businesses. After all, they have operating reviews, forecasts, and performance discussions. But in many cases, these routines remain backward-looking, fragmented, and disconnected from the actions required to change outcomes.
The CEO can play a central role in embedding these disciplines into the organization’s muscle memory, infusing transformation behaviors into everyday business rhythms, and insisting that they are mutually reinforcing. For instance, CEOs can shift operating reviews from “explaining variances” to “managing forward-looking gaps.” Their forecasts can use real-time data on both core business activities and transformation initiatives, so instead of reporting on what happened, their performance discussions can focus on what needs to happen next. When these practices show up in daily, weekly, and monthly routines, the transformation stops being a separate and finite program and becomes how the company runs the business.
The right moment to merge the transformation and the core business is when the disciplines, routines, and leadership behaviors have become stable enough that they don’t rely on a separate structure to survive. This means senior leaders and front-line colleagues alike are using the same approaches and philosophies, whether the topic is performance or transformation.
At this point, the organization is no longer transitioning from transformation; it has absorbed the transformation into the core business and will carry it on as part of its operating model and culture.
Without CEO leadership, organizations can aim too low, withhold information, prioritize their own objectives over organization-wide goals, overburden a few key performers, and keep change confined to finite rather than sustained initiatives. These outcomes occur when collective-action problems take hold, and they can prevent organizations from achieving their full potential and thwart transformations before they get a chance to take off.
It is entirely reasonable for these outcomes to occur. It is entirely rational for teams and individuals to act in what they perceive to be their own best interests. But this is where strong leaders must step in: As the most senior integrating officers of the organization, CEOs are uniquely positioned to resolve such problems. Indeed, there is a significant payoff for those CEOs who set high aspirations for transformations and deliver transparent, collaborative learning environments that empower leaders across their companies. They can lift financial performance, build leadership capacity, improve employee value propositions, establish a culture of continuous improvement, and promote competitive differentiation.
CEOs are not the only ones who deliver on transformations done well; other leaders play vital roles, too. But CEOs do play an undelegatable role in setting and reinforcing the conditions for sustained impact from the transformations they champion. Chief among these conditions is overcoming organizational barriers that otherwise limit the full potential of their companies.
