If you were to ask me to list the best practice management tools that are most useful to both startup companies and decades-old businesses, it would be a pretty short list. After all, their money needs are far different, and their tools and capabilities for serving customers and managing their businesses are very different as well. Even a coronavirus outbreak affects them very differently. But if we talked about the most valuable tools that are typically ignored by both entrepreneurial and enduring businesses, my list would drop to a single entry — the advisory board.
An advisory board is a group of experienced and influential business leaders who are willing to help the CEO become more successful by providing access to experience and resources that the CEO typically would never have the time, money, or network to develop alone. Yet they come at a fraction of the cost of accessing those resources in the open market.
A good advisory board can combine the benefits of a team of consultants, a focus group of your customers, and the leading knowledge experts in your industry, all in one room at the same time. All you need to do is assemble them, get them familiar with your business, ask the right questions, and be prepared to implement the best of their ideas.
Reasons for an advisory board
If your company has a formal board of directors chosen from outside the company and/or family, you may already have much of the benefit of an advisory board. And yours would also be a rarity among privately owned companies. Nonpublic companies, especially family-owned companies, often rely on the family or the management team to sort of “guide themselves”. The result is often a “can’t see the forest for the trees” management style that can have serious flaws.
An advisory board can give a company and its management team a priceless opportunity to gain valuable insight, knowledge, and advice without having to learn the hard way, set aside time for outside training, or risk making costly mistakes that could have been avoided if the team had more relevant experience. Introducing the CFO to the best source for debt refinancing is just one example that can bring dollars to a company’s bottom line.
Advisory boards help management scout the marketplace, gauge future trends, and seek new strategic positions, as well as provide a catalyst in the company’s efforts to build repeat, quality customers. American Express, Molson Coors Brewing, and Toyota are among those large companies that have assembled committees of key customers and valued experts to introduce profitable connections and possible partnerships and, in some cases, to help benchmark. And they have very active boards of directors as you can imagine.
Unlike a board of directors, your advisory board has no authority over the CEO or the management of your company. Your organisational filings have no requirements to have or listen to advisory boards. Thus, there is no risk in ignoring their advice, except losing the benefit that might come from taking it. Similarly, your advisory board members have no legal exposure or fiduciary responsibility to your company, which can make it easier to attract the people you want to hear from.
Drawbacks: Reasons not to have one
There are also reasons why you might not want an advisory board.
For one, it takes time and effort to launch one, to select the right people to invite, and to manage the entire relationship. While not so demanding once the board is in place, it still takes time away from the thousand other things your business demands of you. And time is precious.
To have an effective board, you may need to share privileged information about your company, expose its strengths and weaknesses, and answer questions that may delve far more deeply into issues you’ve only shared previously with trusted employees and family members.
There is a cost in dollars. It’s not a large one, but there will be some cost in maintaining an advisory board, eg, travel costs for out-of-town members, meeting attendance compensation, meals during meetings, etc. Of course, if you hold these meetings online only, many of those costs disappear. However, some payment is important both as recognition of their time spent preparing for and attending meetings and as a demonstration that the company places value on their participation.
Case study: A tool for succession planning
Here’s an actual example of an advisory board at work, and the benefits one company gained from this practice. The scenario: A 35-year-old company run by its founder, who grew it into a profitable, multi-location, $100 million business, and who was approaching his desired retirement age. He wanted to turn the company over to his son, who had been involved in the company in roles that did not adequately prepare him for the CEO role. The company grew thanks to the daily attention of a magnanimous founder who earned strong loyalty from nearly everyone in the company who knew him. The challenge for his son was to learn how to run a successful company and keep it growing, all the while preserving as much as possible the loyalty his father’s personal charisma had created.
Having been a management coach to the company’s CFO for several years, I saw first-hand the need for the company to get ideas from outside the small management team, many of whom had grown with the company for years, with little outside experience to rely on. Along with other advisers to the company, we convinced the CEO to form an advisory board to guide the company in creating management practices that could help smooth the management transition. The board consisted of the top management team — including the heir apparent — and three outside advisers, including me. Changes made during the first year included:
- Appointment of an interim CEO, at the time the second-ranking executive in the company, to assist the founder in stepping back from daily responsibilities, while still enabling him to be as involved as he wanted to be;
- A strategic plan and financial forecast for the next five years, outlining the goals the company wanted to achieve over that time period, estimated to equal or exceed the timeframe needed for the management transition;
- Performance metrics that combined the intimate knowledge of company operations that the management team possessed with the best practice methods of monitoring progress that the outside advisers brought to the board;
- The first-ever performance evaluation system for all levels of the management team, helping the company to grow new leaders and strengthen those already in place; and
- Revived growth that could see net income nearly triple within the timeframe of the strategic plan.
How to get started
If you can see the value for your company, here are some thoughts to consider in getting one formed and up and running:
1. How large should your board be? Many experts recommend boards as small as three members and as large as ten to 12 members. Advisory boards in large companies often function effectively with as many as 15 members. However, I believe a beginning effort should limit the total board size to four or five members. The company can always add more seats later, if desired, once the concept has been proven in use.
2. How do you choose members to invite? Look at what your company needs most that outside expertise could provide. Then look at your industry and your marketplace. That will help you define the kinds of leaders you want on your board. Notice the word expertise and not just experience. You have experience. You want to invite people who can add new knowledge, new connections, and new insights that your experience alone doesn’t provide. What are some areas of expertise from which you might choose potential members? Here are a few ideas:
- Your most important customers, to find out first-hand how they feel and what they want, and will want, and to let them know — and mean it — that you value their opinions;
- Management icons in your industry to help you open doors you can’t open alone;
- A senior finance executive to advise on financial issues and open their contact list of financial resources that might benefit the company;
- Leading researchers in your industry to assist your product development efforts;
- An intellectual property attorney to guide you through protecting your technology advances;
- A senior business consultant to help your decision-making and your internal processes to evolve as your business grows; or
- A key executive in your industry’s professional or trade association, who may know people and have access to resources just because that’s their day job in supporting your industry.
3. How do you approach them?
- Call each candidate personally. If they don’t know you by name, tell them what your company does and how you think it’s having an impact on the industry. Tell them your idea — gathering a small group of very successful executives (it’s OK to use a bit of puffery here) to help your company get better. (Key: This is not the time to tout your company’s image but rather your belief about how they could help you.)
- Explain the kind of value you think they could bring, such as the opportunity to interact with other key industry leaders in a mutually cooperative environment and the chance to make a real difference and be able to tell others their expertise was valued enough that they serve on an advisory board. That kind of appreciation is often highly valued by business leaders who have always focused exclusively on their company and now have time to be appreciated by others in their industry but have never been asked.
- The objective is to reduce the list to four or five individuals who are available and whose backgrounds satisfy the organisation’s most critical needs, and who want to help. Offer them a one-year term, so there is no long-term commitment unless it works for both.
4. How often to meet and how to prepare them for each meeting? Membership would include the advisory board members and the key officers in the company. Meetings would normally be scheduled three or four times a year. Additional meetings and/or time with individual board members could be scheduled as needs and availability dictate. Individual contact by online meetings, phone, or email can be used as needed.
In preparation for each meeting, brief materials describing the status of the organisation should be distributed in advance, preferably accompanied by a proposed agenda. At the meeting, which could be a half-day in the afternoon or an evening, the CEO would make a presentation regarding the status, progress, and needs of the organisation with discussion following. Ideally, some good suggestions or ideas will be raised, or perhaps even an offer to make a key phone call or set up a meeting afterwards. Then it’s time to sort out the discussion takeaways and choose a course of action.
Is it time for your company to think about the value of an advisory board?
— Gene Siciliano is a former CFO, COO, controller, and treasurer with over 30 years of experience in private practice, consulting, and corporate management. He is based in the US. To comment on this article or to suggest an idea for another article, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.