Business leaders who create advisory boards are following mankind's long tradition of seeking advice and counsel. In ancient times, tribal leaders regularly convened a gathering of elders to benefit from their wisdom and experience.
In today's fast-changing business environment, corporate leaders and CEOs are certainly in need of helpful guidance. Too often, they're isolated in their decision-making process and suffer from a lack of seasoned advice. One solution is to create a board of knowledgeable, well-connected peers to help their business grow and prosper.
Advisory board or board of directors?
The decision whether to create an advisory board or a board of directors depends on the company's individual situation.
A formal board of directors has legally defined responsibilities, the foremost of which is to represent a corporation's shareholders.
A board of advisors can have a more flexible mandate, offering assistance and management advice to the owner/CEO without any binding legal authority.
Why have an advisory board?
What prompts an entrepreneur to make the leap to having a board of advisors? The reasons are many and varied, including:
- window dressing (public relations)
- shareholders or stakeholders wanting to be involved
- networking (access to targeted markets)
- strategic planning
- getting independent evaluations and specialised expertise
- arbitration, especially in business or partner disputes
- management succession.
At the same time, owners of private companies often find reasons not to put together a board. These include the following:
- They fear relinquishing control of the company.
- The liability risk is too great.
- Legal counsel advises against it.
- They don't know whom to put on the board.
- They aren't organised enough to run a board.
- They don't like making presentations.
- They believe outsiders would never understand their business.
- Outside directors would be a bureaucratic encumbrance.
When an advisory board becomes a necessity
Sometimes the decision to create an advisory board makes itself. In the normal evolution of business, three things happen:
- You outrun your people.
- You outrun your systems.
- You outrun your money.
It becomes very difficult for any one individual – especially one as hard pressed for time as a CEO – to make sense of this situation. A board of advisors brings much-needed focus and helps keep the company moving in the right direction.
Filling your skills gaps
The real value lies in bringing in men and women who have skills that the company's management team lacks. Look at your present corporate make-up. What's missing? Would it help to have more input in marketing, technology or finance? What about seeking assistance from people in other industries who have faced and overcome obstacles similar to your own?
Owners and CEOs who go to the trouble and expense of forming an advisory board should be absolutely committed to consulting it on important issues. It may be hard at first to listen to objective feedback on your business decisions, but in the long run this is preferable to blind allegiance from family members or employees.
Other tips for an effective advisory board
- Keep the board small. Start with one or two insiders, the CEO, and three "outsiders" (people not otherwise connected to your business). For most private companies, an advisory board of five to seven individuals is considered the right size. More than that only complicates the opportunity for worthwhile give-and-take. You can even start with just two outside advisory board members and the owner/CEO.
- Plan quarterly advisory board meetings. We recommend having quarterly meetings at a minimum. Bimonthly or monthly is usually better. Schedule these meetings up to a year in advance to ensure they're on advisory board members' calendars.
- Choose local candidates, if possible. Recruiting advisory board members from the local business community helps keep down travel expenses and makes it easier to convene both formal meetings and individual sessions.
Who's who on the board
Traditional advisory boards have consisted of insiders – current and former high-ranking company officials, joined by family members of the family-owned business. Others who frequently serve as advisory board members include company lawyers, bankers or management consultants who supply services to the organisation.
Recent trends favour opening up advisory board membership to knowledgeable, experienced outsiders, while limiting in-house representation to the CEO and, perhaps, the COO. It's still fairly common to have the CFO attend board meetings but have no voting privileges.
Selecting your advisory board
Experience, contacts and the desire to devote time and energy to the company are qualities you should look for when selecting directors or advisors. The goal is to create a board that works together as a team to build strategic value for the company.
We offer the following action steps for constructing an advisory board.
- Admit you don't know everything. This is generally the most difficult first step for CEOs. You're an expert when it comes to your own business, but sooner or later you see there's a great deal you don't know about trends and market forces in the larger business world. That's where other people come in – men and women whose skills and talents complement your own.
- Develop a candidate profile. Create a profile of the individual you're looking for, particularly the expertise and knowledge base you feel are needed to address your company's challenges in coming years.
- Ask for help. You may or may not have a database full of qualified potential advisory board candidates. Don't be afraid to ask others for recommendations. Solicit names from your lawyer, accountant or other professional advisors.
- Look for a good mix. A healthy board of directors/advisors often includes a legal expert, an accountant, a management consultant, a marketing professional and a financial advisor. Other good candidates are successful entrepreneurs from industries completely different from your own, who have "been through the mill" and can look at your business with a fresh eye. Target ex-CEOs who have substantial strategic skills.
- Be clear about what you want. Take time to talk with prospective advisory board members. Let them know what your goals are. Make it clear that you don't want people to rubber-stamp your decisions – that you're looking for individuals who can challenge you and help your business grow.
Think hard about the type of director or advisory board member you need. For example, if you're planning to expand overseas, seek out individuals with experience in international markets. Make phone calls. Start collecting names. Look for people whose achievements are perhaps a few years ahead of your own. They'll be extremely useful in helping you get to where you want to be.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.