What business needs an advisory board? Maybe yours. Any business owner can benefit from bouncing ideas off smart, experienced people who are not employees. If you want honest commentary and critical judgment, seek feedback from knowledgeable outsiders. The boss can never be sure that employees will be candid with advice. An advisory board can provide that in a structured setting.
Corporations already have boards of directors, and limited liability companies and even limited partnerships may have bodies that serve a similar function. But boards of closely held businesses usually consist entirely of individuals who own the business and their family members. They may not be sufficiently independent to give constructive views about the future of the enterprise.
How can owners who are also managers and have the most at stake gather intelligence with respect to trends that may affect their business? How can they gain perspective on what other businesses are experiencing, broaden their knowledge of such concerns as financing or outsourcing, and have a confidential forum in which to test their ideas with independent minds?
The answer iswith assistance froma group of experienced business people who know something about the business world and perhaps about the company’s industry. Thus, creating an advisory board (or brain trust or kitchen cabinet, call it what you wish) to fulfill some or all of these objectives may be an idea whose time has come for a particular business.
To be most helpful, the advisory board should have sufficient formality to be objective without being so stuffy as to stifle an easy exchange of ideas. The group should have regular meetings, with an agenda for each meeting that is circulated in advance. Although on occasion the agenda may address specific questions, usually topics will be broadly stated so that discussion can be open and creative. This is not a decision-making group, not a “board” in the formal sense. It’s strictly an advisory group – a forum without a decision-making role.
In creating an advisory board, several matters should be considered.
Size of Board. The advisory board should be small enough to be informal. It should be of minimum size at first and can be expanded at any time as the owners’ comfort level grows and the subjects covered increase. There should probably be a minimum of three outsiders even at the outset.
Inside Members. Only the most substantial owner/managers should be on the advisory board. One of the purposes of the group is to serve as a sounding board for long-range planning, which, important as the board’s functions mature, may involve consideration of shifts of ownership interests.
OutsideMembers. No one who is a customer or vendor or competitor should be a member, nor should anyone who may have a stake in the relationship outside of serving on the advisory board. If there is more than one owner/manager, they should agree on each outside member and invitations should be made jointly. Outsiders should not have inside constituencies that pose potential conflicts. The original outside members are likely a good source of suggestions for other outside members. In most instances there should not be family members on the advisory board who are not substantial owner/managers.
Letters of Appointment. Each member should sign a letter of appointment from the company setting forth many of the matters described below, including term, compensation, the obligation to attend meetings and undertakings of confidentiality. The letter should also contain a provision prohibiting members from inducing employees away and non-interference covenants protecting the company’s customer and vendor relationships. The letter of appointment should make clear that the member has no decision-making authority and is not an agent of the company for any purpose.
Terms of Office. Members should be selected annually for a one-year term, but should serve at the pleasure of the owner/managers, who should be able to remove them. Having that agreed upon at the outset makes it easier to rotate people off the advisory board when that is appropriate.
Compensation. Members should be paid if they are to take the job seriously. Pay should be enough to justify putting in the time, but should be tempered by the absence of any decision-making responsibilities. Pay might be structured as an annual retainer (consideration for the covenants in the letter of appointment) plus a fee for attendance at each meeting.
Regular Meetings. Having regular meetings (perhaps quarterly, perhaps every four months) is important to maintain continuity of interest and to permit questions to be addressed over longer, rather than immediate, time horizons. Meetings should be scheduled so that attendance is assured. That will be easier if all members live within driving distance. Special meetings can be called but should be rare, since the advisory board has no decision-making responsibilities.
Telephone and Video Meetings. Meetings should be face-to-face. There is no substitute for being in the same room speaking personally to one another. Speakerphones and video conferences are poor alternatives and lead to distracted participants.
Location of Meetings. Meetings should probably be away from the place of business for privacy reasons and to avoid having to explain why the meeting is taking place. However, each board member should receive a tour of the place(s) of business.
Other Attendees. Meetings should be confined to the advisory board and the owner/managers. These are not management meetings; they are informal discussions among a peer group intended to help the owner/manager think through problems and generate ideas.
Confidentiality Undertakings. The letter of appointment described above should obligate each member signing it to keep information received strictly confidential and to not use such information for any purpose except service on the advisory board.
Indemnification. Advisory board members are not likely to be liable to third parties, because they will have no power or authority over the company or its management. Nevertheless, some candidates may want an indemnity agreement from the company. This is a request that may be granted, but only after a check with the company’s insurance provider to see what the cost of insurance might be.
Board Procedures.Minutes are not necessary. There will be no motions or votes to record. Members should be encouraged to speak candidly and should not be inhibited by existence of a permanent record.
Review. The owner/managers should regularly review how the advisory board is functioning. If the meetings are not living up to expectations, the causes, including unrealistic expectations, should be examined, perhaps with the board or in informal conversations with individual members. It is possible that one member makes it difficult for the board to function properly, and if so, that individual should be replaced.
A well-functioning board is worth all the time and thought and money that are put into its operation. It will help solve short-term challenges and plan for the future.