October 31

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The Why’s and How’s of Setting up an Advisory Board

By Patrick Millerd


An SMB advisory board is simply a group of experts who provide non-binding advice to the business owner and management.

With its major advantage being that it increases the chance of business success.

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The advisory board is more informal than the board of directors. Giving it greater flexibility in structure and management.

Unlike the board of directors, the advisory board does not have authority to vote on corporate matters. Neither do the members bear legal fiduciaryresponsibilities.

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, an advisory board may be a more suitable solution. Providing access to high-quality independent advice and access to industry networks.

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.

Function

The function of an advisory board is to offer specialist knowledge and advice to the business. In any area from marketing to human resources to influencing the direction of regulators.

Advisory boards consist of accomplished experts offering innovative advice and dynamic perspectives.

Meeting monthly the board can provide strategic direction, operational advice and accountability.

Roles and responsibilities of advisory board members

A board of advisors will:

1. Provide “wise counsel” on issues raised by owners or management

2. Provide unbiased insights and ideas from a third point-of-view (not involved in the operation of the business)

3. Encourage and support the exploration of new business ideas

4. Develop the understanding of the business, the market and industry trends

5. Act as a resource for executives

6. Expand the social networking platform for the company

7. Support the development of a governance framework. Enabling a sustainable and compliant company.

8. Keep track of business performance

9. Present challenges to directors and management that could improve the business

10. Hold the owner and management accountable for agreed action.

Reasons for creating a board

The main reason to create one is to increase the skill and resource base of the company. Increasing the probability of the business succeeding.

Advisory board members should provide the company with knowledge, understanding and strategic thinking. About both the industry and the internal functions of the company.

The owner should appoint advisory board members whose qualities complement his own. Their skills filling any gaps in his or the other executive management.

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.

  1. What is the purpose of the advisory board?
  2. How should the business of the board be conducted?

To answer these questions the following issues need to be addressed.

The Board Mandate

What are the skills required to fill the gaps? What are the defined responsibilities of the members?

Gaps should be obvious after completing an accountability chart for the company.

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.

Focus

The business owner must determine the focus of the committee. Whether it should be internal or external or both.

Individuals in an advisory board should share a common business goal or vision.

Size

The board should have anything from 1 to 5 members.

Any more than that can make it 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.

Meeting organization and frequency

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. Providing a schedule of meetings, organising the agendas and meeting materials. 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.

Compensation

Advisory board members 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 an Advisory Board

The advantages of having an SMB board of advisors include the following:

Source of expert advice

The board provides 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.

Deliver accountability

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 report weekly on progress.

Focused input

An enterprise may need support in a critical aspect of its 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

Less compensation

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 factor. These can include return on investment, time and business size.

Fiduciary duty/ liability issues

An advisory board is not subjected to fiduciary duties or liabilities. There is a less potential liability when providing advice.

Whereas a company director is subject to legislated liabilities, fiduciary responsibilities and other duties.

Liability 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.

Conclusion

Despite their advantages a board of advisors is a neglected 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?

Patrick Millerd

About the author

I help small and medium size business owners achieve success through managing the financial health of their business. By applying focussed goals for cash and profit and customer management.

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