How boards support transactions in an unpredictable deal market

Boards play an important role in overseeing transactions that achieve strategic business outcomes.

In brief

• Despite market complexities, transactions remain vital for companies to deploy capital efficiently and drive long-term strategic advantage.
• Board oversight across the deal lifecycle is crucial for navigating risks and opportunities, especially in an uncertain operating environment.
• Strategically distributing responsibilities across various board committees enhances comprehensive evaluation and oversight of transactions.

Strategic transactions can be catalysts for innovation and growth. Whether through acquisitions, joint ventures or other deals, transactions can ignite fresh ideas, unlock new talent and redefine the future trajectory of a company. Savvy companies seize opportunities during market downturns, while others stay ahead by meticulously planning their transaction strategies and identifying key execution triggers.

However, the path to transformation is fraught with risks, especially in our complex and uncertain environment. This is where boards play a pivotal role. With nearly half of transaction leaders admitting they often miss the mark on delivering intended value, the need for robust board oversight has never been greater. Boards have the unique ability to steer companies through these challenges and drive superior business outcomes through their oversight.

To support boards in this critical role during uncertain times, the EY Center for Board Matters team engaged with directors, subject matter experts, and relied on research and survey data from across its network. Our work uncovered important considerations for directors as they guide management through the risks and opportunities at each stage of deal making, including various types of transactions companies may pursue, such as mergers and acquisitions (M&A), joint ventures, strategic partnerships, divestments and corporate venture building. What follows are strategies that can help integrate transaction oversight responsibilities across board committees and deepen the board’s engagement in all phases of the strategic deal lifecycle.

Leveraging committees to deepen oversight of transactions

Boards can leverage their committee structure to deepen oversight of transaction activities by strategically distributing responsibilities across various committees. This supports comprehensive evaluation and oversight of the deal, while addressing specific risks and opportunities associated with the transaction.

For many boards, the audit committee plays a pivotal role in overseeing financial due diligence and the accuracy of financial statements, evaluating liabilities, and assessing the overall financial health of a target company. By focusing on these areas, the audit committee helps to mitigate financial risks and provide a solid foundation for transactions.

Some boards have additional committees that can take on some aspects of transaction-related oversight and reduce the burden on the audit committee. For example, some S&P 500 boards (31%) have finance committees that may assess transaction financing options and evaluate impacts on the balance sheet, cash flows and overall financial stability. Similarly, some have technology (13%) or risk (11%) committees that may oversee transaction-related cybersecurity and other technology risks.

The compensation committee can assess any potential impacts of a transaction on employee compensation, benefits and morale, overseeing talent retention and smooth integration of key personnel from the target company. Addressing these talent concerns is vital to transaction success, which we explore in more detail later in this article.

The nominating and governance committee may review how the governance structure of a target company aligns with the acquiring company’s practices. Additionally, given that most S&P 500 nominating and governance committees (68%) now oversee sustainability, they may also evaluate how a transaction supports the company’s long-term sustainability objectives and initiatives. 

Many boards form a temporary independent committee to provide an unbiased evaluation of potential deals and confirm the independence of advisors, enhancing the credibility of the transaction process. An independent board leader facilitates communication across committees, supporting seamless information flow and fostering collaboration and transparency.

Effective use of committees requires that board and committee leaders:

• Review board and committee responsibilities in the transaction process to determine whether committee resources are optimized and well coordinated.
• Clearly articulate committee roles to board members and management to ensure that everyone knows their responsibilities.
• Evaluate board information flows to provide that transaction details reach the board and its committees effectively.

Preparation: Build agility and make no-regret moves 

Board oversight of strategic portfolio reviews and capital allocation can help management prepare and build the agility to act when the time is right, while making no-regret moves in the meantime. This proactive approach sets the stage for a transaction well before a target is within sights. Boards can focus on four areas:

Finally, the board can guide management in evaluating the benefits of different approaches, given the strategic intent. The form of the transaction should follow its function. For example, a company seeking to grow its core business or enter an adjacent business might pursue M&A, whereas a company integrating generative AI into its operations and offerings may seek to create a partner ecosystem to access technology and talent. Through its oversight, the board can continually ground the discussion in strategy and what the company is trying to accomplish.

Deal evaluation and execution: Overcome common pitfalls

Once a company has identified a strategically-aligned target, the board supervises a comprehensive due diligence process to identify and assess any risks associated with the target company.

The board may define the negotiation strategy and provide management with guidance on key terms and conditions, ultimately approving the final contract to ensure alignment with company objectives. Our research found that directors are increasingly less deferential to management regarding due diligence findings than they may have been in the past and are asking more probing questions.

Many directors, and the management teams they oversee, have significant experience in the deal process — often from the perspective of both the acquiring and the acquired company. Yet, this experience does not guarantee deal success. When a deal fails or the implementation is rocky, it can be easy to look back and see where the hiccups occurred. However, these issues are often difficult to see in the moment. Leading boards are improving their oversight in four areas:

Post-deal: Monitor integration and change management

The reality is that many transactions fail to deliver their intended value. According to EY research, less than half (46%) of transactions achieve their innovation key performance indicators (KPIs).

A successful deal boosts the combined enterprise beyond its purchase price, aiming for strategic benefits and transformation. Leading boards focus on how management achieves strategic value by requesting key financial and nonfinancial performance indicators and regularly reviewing related performance.

Often those strategic value levers depend on cultural integration and leadership quality — the human side of transactions. The global EY organization’s recent research in collaboration with the University of Oxford’s Saïd Business School seemed to confirm that prioritizing the human elements of the deal alongside the strategic rationale is key to increasing transaction value.

The research revealed that addressing six key human drivers — leadership, vision, emotional support, technology, process and culture — more than doubles the chance for transformation success (73% vs. 28%). This focus helps avoid the negative cultural, interpersonal and team dynamics that can plague companies long after a failed transformation.

Through its oversight, the board can play a critical role in guiding management to focus on the human element. This should be part of the board’s due diligence prior to the transaction (e.g., considering organizational structure, strength of leadership teams, culture and ways of working) as well its oversight after close, holding leaders accountable for the challenging and important work of change management.

Importantly, boards should guide management to focus on long-term transaction success. Initial milestones often do not capture full benefits, which can take years to realize. Rather than returning to business as usual (which can stifle innovation and growth), ongoing board oversight can foster the investment and dedication needed for the intended transformation. Continued board oversight can also support regular consideration of how assumptions and conditions may have changed, enabling strategic pivots and ongoing agility as needed.

In conclusion

Transactions remain a critical tool for companies to drive innovation, access new capabilities, and achieve long-term growth despite market complexities. By leveraging the work of their committees, boards can provide comprehensive evaluation and oversight of transactions, addressing specific risks and opportunities more proactively. Robust oversight by the board across the full transaction lifecycle is vital to support agility and diligence, surface and address problems quickly, and provide that the intended value is realized.