This guide explains what an advisory board is and why you should seriously consider creating one.
Growing a business is challenging and sometimes lonely for the business owner. It often helps to have a group of experienced business advisors to test ideas, challenge assumptions and support the business in a multitude of areas.
Advisory boards are essential for the success of businesses of all sizes. Advisors working as a team can provide guidance that those working independently cannot hope to obtain. Advisory board members can play many roles within the business:
- Help fill gaps in management capability
- Provide valuable insight into challenges you may be experiencing
- Add years of experience that can accelerate growth
What is an Advisory Board?
An advisory board is a group of individuals, typically outsiders to the business, who possess knowledge and expertise they share with the business owner to help guide, grow and manage the business. Advisory boards can span the full spectrum of being a sounding board for the business owner, to filling the gaps in expertise that exist. The advisory board can offer assistance in anything from sales and marketing, to finance, to human resources, to operations, to steering the business towards achievement of original objectives and goals.
Advisory boards can be very helpful in directing operations and in keeping business owners informed of industry and financial trends. If the business does not have a legal advisor or an accountant, these should be the first roles to fill on an advisory board.
Why Have an Advisory Board?
The first thing the business owner must do when creating an advisory board is to answer these two questions.
- Why is this advisory board being created?
- What is the end result desired from having an advisory board?
Answering these questions ensures the correct mix of skills and expertise are represented on the advisory board, thus maximizing the benefit of the board to the business.
For many business owners / entrepreneurs, the decision to involve outsiders in their business may be a difficult one. Some owners fear diluting their control of the business. The introduction of an advisory board can help some come to terms with this decision, by enabling the business owner to feel comfortable providing information to, and accepting advice from, an external group. This can pave the way for an effective relationship with a formal board of directors.
Stepping stone to a board of directors
The creation and implementation of a formal board of directors is a long-term project. Rather than jumping into a formal board of directors, an advisory board comprised of individuals with the appropriate skills can be a great interim step. In some cases, members of an advisory board can effectively transition to the formal board of directors. The good thing is the business owner can get to know the individuals, how they contribute and how they communicate while on the advisory board before asking them to become a member of the formal board of directors.
A smaller advisory board can work more effectively than a larger, formal board of directors. The proper size of a board of directors is debatable, but the size is mostly based on the lifecycle stage of the company. All companies face limitations on the size of their formal boards. Advice and counsel can be acquired from an advisory board for a defined period of time rather than creating or growing the formal board of directors to an unmanageable size.
Why work with an advisory board?
Advice and Counsel
There are many reasons why business owners feel isolated. Oftentimes, it is difficult to identify and build relationships with trusted advisors who can provide effective and meaningful advice and counsel. Sometimes the business itself is very complex and the speed at which the industry is changing makes it even more difficult to find the right individual or mix of individuals who can provide advice and counsel. An advisory board can provide consistency, longevity and background knowledge that enables them to provide reliable, effective advice and counsel. Having an advisory board that is being properly compensated (monetarily or through other means) helps to ensure requests for help are taken seriously and that the forthcoming advice is not given in a cavalier manner.
No Judgement Zone
Advisory boards can provide a no judgement zone for a business owner to try out new ideas and options before presenting them to the formal board of directors. When presenting to a board of directors, the business owner must be forceful, definitive and assertive. Presenting new ideas – even partially defined ideas – before an advisory board gives the business owner an audience that can be challenging and helpful, because their sole purpose is to provide advice and counsel. The advisory board can act as a sounding board. Many times, ideas presented before the advisory board morph into bigger and more well-defined plans that can transform the company.
There may be a very specific aspect of a business that the business owner feels unprepared or unable to address on their own. Among others, this oftentimes involves areas such as marketing, sales, product management and finance. An advisory board can be created to address only the specific issue with a laser-like focus. The advisory board need not be involved in any other aspects of the business. This can free the advisory board and the business owner to become extra creative in problem solving.
To this end, having successful entrepreneurs from outside the industry on the advisory board can expand the business owner’s vision as these advisory board members will look at the business with a fresh perspective.
Formal board directors expose themselves to a variety of liabilities (responsibility for unpaid wages, unpaid taxes, environmental damage, etc.) and to fiduciary and other duties that can lead to liability. An advisory board would need to take a very active role in company management (strategically and operationally) before realistic risk that liability could be attached to the advisory board members. Because of the fiduciary responsibilities that go hand in hand with a formal board of directors, individuals who do not want to expose themselves to such potential liability may be better suited as advisory board members.
Operating an Advisory Board
To be successful, it is essential to understand what the advisory board’s objectives are and how the advisory board will be operated to achieve those objectives.
Objectives of the Advisory Board
The business owner and the advisory board must understand exactly what is expected from the advisory board on the whole and from its individual members. In smaller businesses, advisory boards advise the business owner directly. In larger businesses, the advisory board may be created to advise specific subgroups. For example, marketing, sales, manufacturing operations, finance, and so forth. Who is receiving the advice and counsel of the advisory board will determine the skills required by advisory board members.
Not understanding objectives and expectations is likely to lead to a disorganized and ineffective advisory board. At the worst it will create frustration for the business owner and the advisory board members alike.
If the business already has a formal board of directors, care must be taken to avoid confusion over the boundaries between activities and responsibilities of the advisory board and the board of directors. The advisory board provides guidance, but has no formal authority over decisions made. That authority rests with the business owner and the board of directors.
How big should an Advisory Board be?
There is no right answer to this question. The advisory board must be the “right” size. It should be built with the current, short term and long term goals of the business in mind. Company culture should also play a role in selection of advisory board members and the size of the advisory board. If the culture is more informal, the advisory board must work well within that culture. The opposite is also true.
An advisory board with too many members provides challenges in delivering information required to enable it to be effective and for organizing meetings. It is often best to begin with one or two advisory board members and grow from there to the appropriate size over time as the business owner becomes more experienced in managing the advisory board. Group dynamics suggest a maximum size of eight.
How often should the Advisory Board meet?
By definition this is a group and the effectiveness of a group is directly related to how well the group’s activities are organized and managed.
Advisory board members are recruited because they possess expertise needed by the business. Most advisory board members are actively involved their own businesses. Meetings should be scheduled well in advance and on a fixed schedule. Quarterly or semi-annual meetings work very well. It all depends on the objectives the advisory board is addressing. It is important to get the meetings scheduled far enough in advance to be sure all members will be in attendance.
Advisory board members typically are not continuously involved in the business and must be provided enough information prior to meetings to use the meeting time as effectively and efficiently as possible. Distributing information in advance can make all the difference in a well-functioning advisory board and an ineffective one. If information is not provided beforehand, a large portion of the meeting will be taken up going over background details. Advisory boards can be most effective if given time to reflect and digest information about the issues at hand before providing valuable feedback. Be sure to get confidentiality agreements executed and on file so sharing of confidential materials won’t become a roadblock to having an effective advisory board.
Do you need a meeting agenda?
Yes! Effective meetings require a well-thought-out agenda. The business owner should think about the biggest unanswered question or challenge facing the company. This can then form the basis of the next meeting.
The agenda must be prepared and distributed in advance with the background materials. Topics should focus on a few core strategic matters so that you can have the right people at the meeting and keep the meetings productive. Managing the advisory board members’ time is crucial.
How Long Should Members Serve?
Recruiting advisory board members can be difficult. However, it can be more difficult to terminate advisory board membership. Setting the objectives of the advisory board will help this situation. For example, if an advisory board is formed to help address several specific issues, when those issues are resolved or solidly underway towards resolution, it is good to decide if a different set of skills is now needed to address new issues. Briefing advisory board members of this intention at the beginning will help make these transitions easier.
Do Advisory Board members get compensation?
Advisory board members choose to serve for a variety of reasons ranging from personal ties to direct compensation to equity in the business. It is entirely up to the business owner to determine how to appropriately compensate advisory board members to reflect the value anticipated from participation. No single formula exists. The best way to calculate compensation is based on the anticipated benefit received from having an outside source to provide advice and counsel.
Business Owners Must Be Committed
Remember, an advisory board is set up to provide advice and counsel to the business. Previously discussed was the importance of defining objectives, recruiting the proper members, organizing and managing meetings effectively and compensating members accordingly. At the end of the day, if the business owner creates an advisory board, but doesn’t take into consideration the advice and counsel provided by advisory board members, those advisory board members will know there is a lack of commitment and may well become ineffective, cancel participation in scheduled meetings, or not apply the quality advice and counsel they believe they were recruited to provide.
In the end, the business owner will get out of an advisory board exactly what they put into the creation, development and operation.
Nobody can build a great business alone. It is a lonely job. The most common complaint from business owners is the feeling of isolation. An advisory board, put together thoughtfully and purposefully can alleviate some of that isolation and help make the business even more successful.
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