Establishing an Advisory Board

Have you reached a business crossroads and are not sure about your next steps? It may be time for you to consider establishing an Advisory Board.

Researched and prepared by Denise Aldous, Professional Company Director (denise@aldous.com.au) from various sources including material compiled by the Australian Institute of Company Directors www.companydirectors.com.au 

What is an Advisory Board?

Simply put it is a grouping of industry executives and professionals that are appointed to your company to offer objective and strategic advice and support on a wide range of issues – most often giving fresh insights and thinking on emerging or unfamiliar issues. Their real value to you lies with them providing skills and expertise that your current management team lacks or that you might feel the need to buy in, often at a high cost.

When might you need an Advisory Board?

  • You are experiencing rapid growth and feel like you are running on the spot and going nowhere fast
  • You want to develop a new product
  • You are expanding into a new segment of the market
  • You need to expand geographically – interstate and/or off shore
  • You need more capital and want to move towards listing your business
  • You might want to downsize and restructure your business to better survive in changing market conditions
  • The business has developed to the point that you need to implement major technological change
  • You are being squeezed by competitor forces
  • You want to merge or acquire another business
  • You know you need ongoing technical support but can’t afford the costs of consultants
  • Your family business may have reached the point it would get some value from outside input 

How do you decide you need an Advisory Board?

The first thing you need to do is to assess where your information gaps are. What help do you think you need; what challenges can you see coming up that you need to find solutions for. The best way to do this is through the development of a business plan which will help you define what sort of professional help is required. You may then be faced with a number of options:

  • Continue as you are and bring the expertise you need into the business
  • Buy in the consulting skills as you need them
  • Consider forming an advisory board
  • Combination of one or more of the above

All of these options bring in skills and experience you don’t currently have and the option you decide on will depend upon what makes the most sense for your business.

It is outside perspective you are looking for so if you have a family business and want to form an Advisory Board, keep the family involved at a management level and look for expertise beyond the family for the board to get the most value. In all cases you will want to have people who are problem solvers, have strong communication skills and who are open-minded and willing to give you thoughtful advice and guidance.

How might an Advisory Board help you?

Sharing ideas, thoughts, and information with people who respect you and are committed to your success is valuable for your business. They can give advice, help you network, and enhance your company's reputation and legitimacy in the community. This, in turn may lead to easier access to finance and improved consumer and investor confidence and assist you in attracting good employees.

An Advisory Board may also give you the opportunity to “test” future main board members. Their longer term knowledge of your business, its strategic objectives and key people will mean they will provide greater value very quickly to a formal Board of Directors.

For the family business, advisors can be invaluable in expanding the inputs beyond family members, bringing objectivity to the table and developing a mindset that allows “outsiders” to contribute to the business.

A good Advisory Board can play a number of important roles:

  • Objective brainstorming. They can bring a fresh perspective and insight even though many of their ideas may be naïve, already in use, previously discarded, or impractical. But, there may be a few gems of ideas that emerge simply because they are not involved in day-to-day operations.
  • Devil’s advocates. Many outsiders are by definition naysayers. They may poke holes in all of the things you are excited about. Defending your position and making sure that their negatives are not real issues can be of great value.
  • Course correctors. Advisors can raise issues that you missed, didn’t think were important, or skimmed over. They can question both your strategies and tactics with very critical eyes, picking up things you may have missed.
  • Analysts. When you are involved in a variety of day-to-day tasks, you may think that you are monitoring the most important issues and working through them, but an Advisory Board can really make you think through the issues in ways that may not have occurred to you.
  • Brutal honesty. A properly selected Advisory Board will have no hidden agendas and will tell you things that you may be glossing over or don’t want to hear. They will be polite, but will not sugar coat the basic facts. You may need a tough skin to listen to them, but if you are open and really listen they can give you great insight.

How might you form an Advisory Board?

So what sort of people might you need?.....Perhaps you are planning an expansion into a new product line, or looking to expand geographically in which case you might want someone with knowledge and experience in those areas. You may need legal support or perhaps you have found yourself in need of specialist financial structuring support. Typically advisory board members will include:

  • Lawyers
  • Accountants
  • Specialist financial advisors – eg: mergers and acquisitions specialists
  • Marketers and public relations experts
  • Industry specialists
  • Human resources specialists

Sometimes those people who have helped you in the past – your lawyer or accountant – may also be interested in playing a role for you on an Advisory Board. Their value add to you is that they already know your business and for them it is a useful way to gain governance experience.

So how many people should be on the board? …..The ideal size for a Board of Advisors depends on the stage of development, strategic goals, existing resources, investors, complexity of the business, number of products, external partnerships, and the company's technology. In most cases, an Advisory Board of around four to six members is appropriate. If it is larger, it can become difficult to manage the relationships.

Where will I find these people?.......often they will already be professionals you know or you could get outside help from organisations who specialize in the area of establishing boards. Other organisations have websites that you might be able to advertise on to seek suitable candidates such as Women on Boards www.womenonboards.org.au

How is an Advisory Board different to a Board of Directors?

Advisory Boards are informal, give non-binding advice and are generally created to focus on strategic issues and industry and market trends. They have no definition in the Corporations Act and so have no legal liability to the company or its shareholders.

On the other hand, a Board of Directors formally constituted under the Corporations Act has a fiduciary duty to the company to act in good faith in the best interests of the company and to act for a proper purpose. They are responsible for company performance and conformance with legal and regulatory requirements and can be held legally liable for not fulfilling these duties.

While there are no legal liabilities for Advisory Boards, it is wise to draw up a formal charter outlining duties and responsibilities particularly if your company already has a main board.

How does an Advisory Board operate?

For individual board members…..when establishing the board make sure the expectations of the members are very clear.

  • How long will they be appointed for – eg: 12 months, 24 months?
  • What specific contribution you are seeking from them
  • What sort of time commitment do you expect from them eg: how often you plan to meet and for how long.

Make sure this is formally offered in a Letter of Appointment.

For the board as a whole….. Each Board of Advisers operates differently but certain practices are usually followed. The Advisory Board should meet monthly initially to get attuned to the business and then perhaps every two months or quarter after that. More regular meetings could occur for specific matters. An outside member should assume chairperson responsibilities so that the CEO can listen and participate. Each meeting should have a special focus (strategy, financials, human resources) with presentations made by different members of the management team as appropriate. The goal is to establish specific action items for the CEO/business owner.

Get the most out of Advisory Board meetings by preparing well in advance. Solicit input from the board when developing the agenda and distribute important information ahead of time. Attach copies of materials sent to the agenda for easy reference.

Set reasonable limits on discussion. Suggested lengths of time can be built into the agenda, with the understanding that more time can be taken if necessary. Review critical organisational activities during the meeting, these may include capital projects, strategic plans, personnel and structural changes, competition and industry activities, and information technology.

Any number of items can require formal board approval, but do not merit much discussion. Send these issues to board members ahead of time and have them approved more quickly at the meeting.

The minutes should be written up and circulated to top management with notes that include recommendations regarding key issues. A formal record can also serve as a useful way of confirming that the Advisory Board’s role is purely advisory and that they are not acting on behalf of the company or making decisions. They can also be used to monitor the value creation the Advisory Board provides over time.

Should advisory board members be paid?

There are no hard and fast rules about compensation but you need to compensate the board members in some way for their time. Some organisations may reimburse members for out of pocket expenses; some may provide a good lunch; others may pay per meeting attended; others may pay a retainer. Some companies such as start ups may offer options in the company. At the very least, expenses to attend meetings should be covered.

Advisory Board members will benefit in non-financial ways from their involvement. They will become exposed to new ideas, expand their networks, use their skills and knowledge in new ways without the burden of fiduciary duties, and possibly enhance their credibility if associated with influential people on an Advisory Board.