established business, having access to high-quality advice increases an organization’s odds of success.
Owners seeking advice can obtain it from consultants, attorneys or accountants. Increasingly, though, attention is being given to “advisory boards.”
The benefits of an advisory board include setting aside time to think strategically; obtaining feedback and insights from outside the company; and gathering information and expertise from peers who have knowledge and experience in areas different than your own.
The advisory board can provide advice from marketing to product development, to operations, to manufacturing, to identifying acquisitions or potential buyers for your company. Typically, business owners seek experts in technology, sales and marketing, operations, finance, and the financial services industry. Thinking carefully about an advisory board’s role and composition will maximize its contribution to the organization’s success.
An advisory board is an informal group. It is not a corporate board of directors. It is a group of mentors. This is a group of outside advisers/experts who share their knowledge to help you be more competitive, help you think strategically and offer specific advice.
When forming an advisory board, first determine what skill sets you are seeking. You may want to include industry experts if you are expanding in new markets, or people who will introduce you to potential investors. Choosing the right people is critical. I recommend that you do not accept any member to an advisory board who is unwilling to sign a nondisclosure agreement and a noncompete agreement.
Normally, advisory boards have from four to seven members, meet quarterly and can serve indefinitely or for a limited term – from two to three years.
Advisory boards provide “safe harbors” for executives to “test-drive” or brainstorm ideas before taking them to the board of directors or investors.
Also, advisory boards may be needed, as a practical matter, in certain deal or ownership structures. For example, investors in limited partnerships may require a voice in business operations, but may not wish to lose the benefits of limited liability by participating in the management of the business directly. Advisory boards are used frequently to avoid that potential risk.
Advisory boards can help address fiduciary duties and other liability concerns. Corporate boards of directors potentially expose themselves to a variety of legislated liabilities (responsibility for unpaid wages, unpaid taxes, environmental damage, etc.), and are subject to fiduciary and other legal duties that can lead to civil or regulatory liability. It is unlikely that advisory board members could be subject to these potential exposures. While I have heard concerns expressed about potential liabilities of advisory board members, I am unaware of any situation in which that liability actually has come home to roost. The legislated duties and responsibilities apply only to corporate directors pursuant to applicable entity law. Accordingly, qualified individuals who may not be prepared to assume board of director responsibilities might well be encouraged to assist business owners as advisory board members.
Choosing among potential advisory board candidates is much more than evaluating their résumés and accomplishments. Strong advisory board candidates are objective and honest. They have knowledge and expertise outside your skill sets, and have a genuine interest in helping you/your business succeed. They are good problem-solvers, communicators, have diverse skills and are well-respected in their respective fields. Strong advisory board candidates are well connected with networks that might be leveraged to assist you.
I do not believe in “cosmetic” advisory boards. These are individuals you post on your website because their résumés are filled with many accomplishments or they have high “personal brand” recognition. More often than not, the reality is they do little to genuinely give their time or expertise necessary for you to be mentored by them.
I am often asked about advisory board compensation. Depending on the stage of the business (startup to mature), I believe that the compensation can range from providing food for each meeting to covering expenses, to providing stock options, to making cash payments, or a combination of these. Advisory board compensation is a matter of agreement. Since advisory board members have less time commitments and no fiduciary responsibilities, they should be paid less than the board of directors.
Note, however, an advisory board member is expected to contribute substantively – and not just paid a fee for showing up or answering email/the phone from time to time.
Gary Miller is the managing director of the Consulting Division of SDR Ventures, a Denver-based investment banking firm. Gary advises business owners on strategic business planning, M&A and raising capital. Gary often speaks at conferences on M&A matters. Contact: 720-221-9220 or email@example.com.