You just can’t know everything you need to know to run your business effectively, so you may want to form an Advisory Board. A well-crafted and well-nurtured Advisory Board can be your source for high-quality expertise. Even if you are mandated by your corporate structure to have a Board of Directors, you may still want to consider forming an Advisory Board to guide you on specific management issues.
The Possible Roles of the Advisory Board
There are many reasons for forming an Advisory Board. The owner of a private company may do so gain expertise and guidance without giving up the amount of control required by a Board of Directors. The latter is a legal corporate entity that carries fiduciary and liability responsibilities for your company’s performance. Advisory Board members have no such legal obligations.
According to attorney Barry Reiter, an entrepreneur may form an Advisory Board as a preparatory step to forming a Board of Directors, because it forces him or her to learn how to be open to receiving advice. The Advisory Board can also be formed as a feeder to the Board of Directors, because it allows time for advisors to become familiar with the company, develop chemistry with other advisors and management, and to demonstrate their commitment. He also explains that the Advisory Board can be helpful if you have to solve problems that customers might be upset by, and you have one or more customers on your Board of Directors.
An advisory Board can create conflict with your Board of Directors if you ask it to take on problems that the Board of Directors already has the expertise to handle. So, it behooves you to carefully define roles, responsibilities, and the boundaries between the Advisory Board’s advice-giving and the Board of Director’s management functions. If you are thoughtful about this step, your Board of Directors may come to see the Advisory Board as a valuable resource for its own decision-making.
Most Advisory Boards are formed to deal with a specific objective, such as how to handle a growth or downsizing problem, how to enter a new market, or how to develop a succession plan. Access to quality advice can be a huge relief from the loneliness many entrepreneurs experience in having to make so many critical decisions every day. If you choose the right experts and manage the Advisory Board well, it can also help you test out changes in direction before having to commit publicly to crucial decisions. According to Reiter, sometimes just the presence of the Advisory Board helps you advance changes in the organization that, if proposed by the Board of Directors, might be seen as criticism of you and your management team.
Steps to Creating Your Advisory Board
Here are the basic steps to follow as you develop your own Advisory Board:
1. Carefully define the Advisory Board’s objective and the expertise required. Create a written charter that details specific problem(s) you want the Advisory Board to help with, the responsibilities and logistics, expected time commitment, and any compensation offered. Think carefully as you do this about exactly what expertise and experience you’re looking for in your advisors.
2. Identify the obligations, terms, and compensation of Advisory Board members. While your advisors do not carry the legal obligations of a Board of Directors, you want to make it clear that you are asking your Advisors for a commitment.
- Define the work in advance. Many Advisory Boards meet once or twice a year, although some may meet more often. Publish an 18- or 24-month schedule of meetings. Your Advisors should commit to attend these meetings, to review background documents in advance of each meeting, and to provide thoughtful advice on the areas being discussed.
- You may want to define a term of one, two, or three years, with options to renew. This will also make it easier if you need to get someone off of the Advisory Board at some point.
- Require each advisor to sign a confidentiality agreement, renewable annually, to ensure that they remain sensitive to the proprietary information you will be sharing with them.
- Many companies compensate advisors for their work. Be clear in advance what you are prepared to offer. Sometimes advisors get paid only for the cost of traveling to meetings, sometimes with an added stipend for bringing their spouses along and providing some entertainment during the time they’re there. Some business owners provide compensation to their advisors in the form of cash stipends or stock. Some offer consulting contracts. But not all advisors are paid. If you know your Advisors well, they may take on the work as a personal favor to you. In some cases, advisors may agree because being on your Advisory Board offers networking value or prestige.
- Investigate whether to provide indemnification insurance. An article in The New York Times quote Bob Arciniaga of Advisory Board Architects as cautioning that even though Advisory Board members have no fiduciary duty, they can open themselves up to potential liability. “If someone wants to sue the bigger names and wallets, they can be dragged in,” he said, “especially if you list your advisors on your Web site.
3. Select Advisors with care. This critical step will make or break the success of your Advisory Board. Armed with the clear statement of objectives and functions you defined for the Board, you now have to find the people who can bring the right expertise for the problems you face today. Be thoughtful about issues of personality and chemistry too. You want to choose people who are not going to be afraid to challenge you. Give some thought to how each individual you are considering will work with the others. If you don’t know enough people with the expertise you seek, you may need to tap consultants or other entrepreneurs. They may be people you already know well from within your network, or people who are recommended to you by others. Be as thoughtful about this selection as with any critical hire in your firm.
Put the Time In
Just as with the Board of Directors, you’ll have to invest time to get the full value out of your Advisory Board. Provide them with well-organized and detailed information far enough in advance of your meetings that they will be able to prepare thoughtful responses. Ask the Advisory Board to appoint a chairperson skilled in keeping the group on track and moving through each meeting’s agenda. A secretary will also be valuable for documenting decisions and action items for follow-up between meetings.
 The Role and Value of an Effective Advisory Board, Ivey Business Journal,
 How to Create an Advisory Board, The New York Times, 2/17/10.
REGISTERED EVE BUSINESS MENTORS & PROFESSIONALS
- Raimondo Archibald, Mgmt Consultant, Investment Banker
- Stephanie Cogan, Entrepreneur’s Organization Albany Chapter
- Robert Hayes, Accountant, Serial Entrepreneur