Using Advisory Boards to Create a Business Advantage

June 15, 2008

Virtually every business can benefit from the wisdom, perspective, and contacts of an experienced group of outside advisors. Larger, public corporations fill this need by having a diversified Board of Directors. Smaller businesses can gain the same advantage by creating Advisory Boards to augment their formal Board of Directors. An Advisory Board can provide many of the advantages of a good Board of Directors, but without some of the risks to the individuals asked to serve.Advisory Board members can bring independent perspectives, experience, special skills, and connections to a company.

This can increase a company’s leverage and credibility in its industry and in the financial markets, and enhance its ability to plan, implement and evaluate its strategic direction and operating effectiveness. Advisory Boards can bring to a company the diverse talents of people who might not want to serve on a Board of Directors. A key distinction between a Board of Directors and an Advisory Board is that the Board of Directors is responsible for directing the affairs of the business, while an Advisory Board only makes non-binding recommendations. A Board of Directors is held to a higher standard of ‘fiduciary’ responsibility than a Board of Advisors. The Advisory Board members have neither the legal obligation nor authority to run the business. This makes it easier and less costly to recruit valuable and experienced people who are focused on helping the business succeed.

Here’s how he suggests that a small business use an Advisory Board to give them a competitive advantage:

Strategic Planning - An Advisory Board can help facilitate a strategic planning process, serve as a sounding board or discussion stimulator, and add to the range and quality of the ideas considered and recommendations reached.
Advice/Policy Forum — Because of the experience of members of the Advisory Boards, they can improve a company’s decision-making on operational matters such as difficult customer or distributor decisions, product development, marketing and pricing questions, and personnel and compensation issues.
Evaluation - An Advisory Board can be an excellent, objective, and non-threatening evaluator of management performance, business process implementation, and/or product and marketing strategy.
Influence - The reputation and contacts of individual Advisory Board members can add significantly to the credibility, reach and clout of the business with sources of financing, potential strategic partners, and
prospective customers/distributors.
Leverage - Knowledgeable and experienced Advisory Board members can extend the range of management skills in areas key to next-stage growth, and fill gaps in industry savvy, especially for companies who cannot yet afford to
hire all the talent they need for future growth.
Transitions - Members of an Advisory Board could be selected to help during periods of transition (ownership and/or management). They can be an important resource for planning, communications, reducing and resolving
conflicts, and providing a sense of continuity.

How does a small business create an Advisory Board?

They start by determining the Advisory Board’s mission and the role it will play. Next, the company needs to determine the best structure to implement the mission. This includes deciding on the size of the board, the types of members, frequency of meetings, method of appointing and removing members,and member compensation. "It is advisable to document the Advisory Board’s mission and structure and to have these documents approved by resolution of the company’s Board of Directors.
Then there is the matter of compensation for members. I suggest that there be a per-meeting stipend, with reimbursement of reasonable travel and living expenses. Advisory Board members can also be offered stock options (non-qualified only) or minimal fringe benefits as a form of payment.
Next are some policy decisions. "Most companies wisely insist that each Advisory Board member enter into a non-disclosure agreement to protect the company’s confidential information. Some also have a formal conflict of interest policy to prevent members from having competitive interests or participating in competitive enterprises. The
company should also consider whether it wishes to indemnify Advisory Board members from suits related to their service in the same manner as directors and officers are indemnified.
In the next step, companies need to determine the initial composition of the Advisory Board. Pick involved, knowledgeable, experienced and committed people. Don’t use Advisory Boards as a place for "honorary" appointments. When looking at the make-up of the Advisory Board, companies should look at qualifications and special skills, commitment to the business, and industry and financial connections. In some transition situations, members also might be chosen to represent different constituencies of the business.
I suggests getting recommendations for potential members from management contacts, the company’s professional advisors and bankers, industry sources, and even from professional recruitment firms.
Finally, the company must establish and foster a good working relationship between the members of the Advisory Board and the management. They should provide members with well thought-out meeting agendas and deliver well-orchestrated meetings.

A key to this is to provide sufficient and timely information to Advisory Board members. Companies should keep meeting minutes and document specific recommendations. Management should honestly seek the Advisory Board’s counsel on matters within its chartered role, and be willing to communicate management’s views with respect to the advice and recommendations obtained from the Advisory Board.

A Board of Advisors can be a powerful asset in a changing business environment, provided there is a clear mission, the Advisory Board has the right composition of member to meet its goals and are supported properly by the company. They allow smaller companies to compete with larger institutions by bringing in talent that might not otherwise be available to such companies.

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