An SMB advisory board is simply a group of experts who provide non-binding advice to the business owner and management.
The major advantage ... it increases the chance of business success.
All SMB's lack a full range of business skills and resources and a well structured advisory board can fill a lot of these gaps.
Small business entrepreneurs may not want to dilute the control of their business by establishing a board of directors with formal responsibilities and authorities. So the alternative is a less formal advisory board which provides greater flexibility in structure and management. And still providing the business with access to high-quality independent advice and industry networks.
Unlike the board of directors, the advisory board does not have authority to vote on corporate matters. Neither do the members bear legal fiduciary responsibilities.
More and more SMB owners are recognising the significant advantages of having an Advisory Board. Getting the benefits from the knowledge of others, without the expense or formality of a board of directors.
The function of these boards is to offer specialist knowledge and advice to the business. In any area from marketing to human resources to influencing the direction of regulators. They consist of accomplished experts offering innovative advice and dynamic perspectives.
Meeting regularly the board can provide strategic direction, operational advice and, the often missing, owner accountability.
Roles and responsibilities of advisory board members
The range of advice and skills of s board of advisors can include:
- Provide “wise counsel” on issues raised by owners or management.
- Provide unbiased insights and ideas from a third party point-of-view.
- Develop the understanding of the business, the market and industry trends.
- Act as a resource for executives.
- Expand the social networking platform for the company.
- Support the development of a governance framework.
- Enable a sustainable and compliant company.
- Keep track of business performance.
- Present challenges to directors and management that could improve the business.
- Hold the owner accountable for agreed action.
- Encourage and support the exploration of new business ideas.
Reasons for creating an advisory board
The main reason is to increase the skill and resource base of the company. Leading to the increased probability of business success.
The owner should appoint members whose qualities complement his own. Their skills filling any gaps in his or the other executive management.
The board members should provide the company with diverse knowledge, understanding and strategic thinking. About both the industry and the internal functions of the company.
The former editor of The Economist, also an advisory board member, once said about advisory boards;
“They give focus to or sometimes challenge …. work being done in the company, avoiding groupthink and giving direction on big picture issues”.
Creating and operating an advisory board
There are two key questions to be answered when creating and operating an advisory board.
- What is the purpose of the advisory board?
- How should the business of the board be conducted?
To answer these questions the following issues need to be addressed.
The Advisory Board Mandate
What are the skills required to fill the gaps? These should be obvious after completing an accountability chart for the company.
What are the defined responsibilities of the members?
Board members should have specialist knowledge in different business functions. The important ones including marketing and sales, human resources and finance.
This selection process is crucial. A lack of definition in “what is the purpose of the advisory board” or “what is the needed advice” can lead to an ineffective board. With a resultant waste of resources and time for both the enterprise and the board members.
The business owner must determine the focus of the committee. Whether it should be internal or external or both.
Individuals in a board should share the common business goal or vision.
The board can have anything from 1 to 5 members.As any more than 5 make it more difficult to manage.
Group dynamics suggests the maximum size for an advisory board is eight members. Although it may be necessary to expand the board to address specific issues.
It is recommended that the board starts with an advisory board leader, and grows from there.
Organization and frequency of meetings
The board of advisors should meet at least monthly. All members should commit to attending ALL meetings.
The management of the group will impact the benefits of an advisory board. All meetings should have a structured agenda and a fixed time limit.
Provide concise and clear guidelines to the advisory board members. While being concise, they should provide enough detail to provide advisory board members with a suitable base for them to add value to the business.
Board members must understand that all issues discussed in the meeting are confidential.
To conduct productive meetings appoint a skilled meeting leader. They will ensure the meeting organisation and discipline. The leader will provide a schedule of meetings, organising the agendas and meeting materials. In addition the leader should encourage contributions and commit to meeting time limits.
Click Here to get a sample of a structured meeting agenda.
Advisory Board term of membership
Appoint advisory board members for specific terms i.e. one to three years.
A fixed-term ensures they are committed to the company. It may also prevent them from getting too comfortable with their position.
Term of membership ensures that the size of the advisory board remains efficient and manageable. It also allows for flexibility to reflect the changing business requirements.
Members of the board should receive compensation for committing to their positions. Being paid incentivises them to provide quality advice and take requests for help seriously. Also, it reflects the business arrangement they have with the company.
In rare cases, there may be members who provide gratuitous services.
Advantages and Disadvantages of a SMB Advisory Board
The advantages of having an SMB board of advisors include the following:
Source of expert advice
The board members provide independent advice based on the business requirements and their particular knowledge and skill. This advice is trusted based on the consistency, longevity and background of the members.
The complexity and growth of an enterprise can make it difficult to find reliable advice on particular topics.
Enterprises may find difficulty building trust in any person or group to provide on-going and meaningful guidance.
An advisory board provides accountability to keep the owner and management on track with the business vision and goals.
They work on building a business rhythm. Where executive members are required to commit to agreed action and regularly report on progress.
Enterprises need support in critical aspects of their business. Most SMB’s do not have a full complement of marketing, strategy, human resources and financial experts. The board members or their networks can provide the required expertise.
An advisory board is flexible and nimble. With focus and urgency, they make decisions and can get agreed action implemented quickly.
Reduce pressure on the executive management
Executive management can consult the board on ideas or views for guidance and advice. This allows them to test and weigh-up ideas in a supportive environment.
With a board of directors, there is more pressure on senior executives. As they determine pay packages this could become a barrier for executive managers seeking advice from the board.
Thus, an advisory board could be a ‘safe harbour’ for senior executives to seek advice and test business options.
Flexibility and effectiveness
A small, skilled board, will be more effective than a board of directors. They are not encumbered by statute, status and formality.
Preparation for the board of directors
Companies may choose to have an advisory board before they have a board of directors.
An effective board of directors requires individuals with the right values. Also, the combination of appropriate skills to advance the business. The advisory board can be a stepping stone to appointing a board of directors.
Advisory board member vs. Non-executive director
An advisory board member has a different role from board director. A director has more statutory oversight and legal obligation. However, a well-constituted and skilled advisory board can have a material impact on business success.
In general, advisory board members are not compensated at the level of the non-executive directors.
Compensation for advisory board members will depend on various factors. These can include return on investment, time and business size.
Fiduciary duty/ liability issues
Board members are not subjected to fiduciary duties or liabilities. There is less potential liability when providing advice.
Whereas a company director is subject to legislated liabilities, fiduciary responsibilities and other duties.
Liabilities can include unpaid wages, unpaid taxes and environmental damage. As a result, directors will tend to make decisions and establish policies to minimise risks. These decisions may be a compromise and not in the best interest of the company.
Despite their advantages a board of advisors is an overlooked element of many SMB’s. They are a cost-effective addition to any business. Increasing the chance of success. While also reducing the owner’s stress with improved executive decision making.
With the right quality of members, the business has a complete mix of essential skills. It can face challenges and opportunities with confidence.
Can you afford not to have an SMB Advisory Board or Board of Advisors in your business?