The advisory board: Butteriss on human resources
An entrepreneur must be, first and foremost, self-reliant, but there are times when the best thing you can do for yourself is to find someone you trust and ask for advice. Sometimes the person approached is a mentor or a long-time friend in the same industry. In family businesses, you may consult with a parent or sibling who has had years of experience in the very position you currently hold. Small business operators are also likely to seek counsel from the same resource persons outside the firm who provide them with essential services, including accounting, insurance, legal support, banking, and investment management. In fact, many small business experts say that entrepreneurial success depends as much on the entrepreneur’s ability to develop a team of reliable advisers as it does on his or her individual qualities.
What are advisory boards?
One way to increase the benefit of such informal advice gathering is to organize the individuals you frequently consult into an advisory board.
An advisory board is a group set up to meet regularly to review business plans and new projects and also to give feedback, as needed, whenever special questions arise. Such an advisory board differs from a public company’s board of directors in a number of ways. First, an advisory board is not a legal requirement for a private company, while a board of directors is a legal requirement for a public company. Second, advisory board members do not assume any legal or financial responsibility, while members of a board of directors may be held accountable both for the company’s illegal actions and for its failures to meet financial obligations to employees and stockholders. Third, a board of directors’ responsibilities to the corporation are frequently set out in company statutes; this is rarely done with an advisory board.
Like members of a board of directors, advisory board members frequently are paid for their services. Many experts suggest that the board members should receive a monthly fee as a guarantee that timely expert advice is available when needed, perhaps even to avert a costly crisis intervention, and also as a way to match the expense with the company’s regular cash flow.
Statistics aren’t available, but small business counsellors, like Joan Berta of CAFE and Lynda Bowles of Deloitte and Touche, agree that advisory boards are increasingly popular among Canadian small businesses.
According to Jonathan Kovacheff of Kovacheff Consulting Group Inc.,“I’ve never seen a corporation that has properly formed an advisory board that has regretted the decision.” He identifies two services that advisory boards can provide for small and medium-size businesses:
- expertise not available in-house
- advice on governance issues—that is, questions arising from overseeing company growth and development
The five key questions
The discussion that follows examines five key questions about advisory boards:
- When Is It Time to Set Up an Advisory Board?
- What Is the Advisory Board Expected to Do?
- Who Should Sit on the Advisory Board?
- Should the Advisory Board Be Paid?
- What Is the Lifespan of an Advisory Board?
1. When Is It Time to Set Up an Advisory Board?
Advisory boards are most often formed when a start-up business begins to grow, and the operator wonders how to gain access to expert information on a range of subjects crucial to expansion such as how to raise capital, how to get good financial planning help, and who to approach for help in entering a new market.
2. What Is the Advisory Board Expected to Do?
An entrepreneur generally first considers forming an advisory board because of specific operational problems. The small business owner may want to expand into a new market or experiment with a new product line. The meetings of the board could include a review of the business plan, assistance on identifying alternative financing arrangements, assessing the marketing plan, and reviewing the cost structure with a view to controlling costs.
In addition, an advisory board can be a valuable tool in developing a long-term company strategy. Setting up an advisory board encourages the entrepreneur to spend time on planning rather than just putting out fires.
Setting up an advisory board can be a valuable aid to the entrepreneur whose firm is beginning to grow, especially if the advisory board is used to develop the ability to plan for the long term and to assess business decisions in light of their impact on the corporation as a whole—that is, if it is used to address governance issues.
Many small business operators, however, tend to push“global thinking” into the future, perhaps for the time when the company goes public and a board of directors with fiduciary responsibility will become a legal requirement. Until then, they feel, an informal board is less complicated to work with. Concerns about legal requirements, such as annual filings or audited statements, can be handled by a consulting corporate counsel.
But small businesses have governance issues. Stewarding the company often involves internal controls. Thus small, new firms need help on monitoring all the risks and opportunities in the organizations as a whole. They need to set up an overarching structure to take care of the corporation. Learning to work with an advisory board can help the entrepreneur with one of the biggest challenges of the job, which is to provide leadership and direction for the company. Setting up an advisory board early, with a mandate to comment both on operations and governance issues, has two other advantages for the entrepreneur. First, it can be a stepping stone towards the formation of the board of directors when the time comes to take the company public. Many advisory board members are likely to be suitable candidates for a directorship as well, and their familiarity with the firm from years of working with it will be an asset in future consultations. Second, an advisory board can help the entrepreneur with the difficult transition from thinking only as a business operator to thinking as a business owner. Entrepreneurs need to give up doing everything for themselves and start adding some rigour at the top of the organization. An advisory board is an excellent tool for adding structure to planning and decision making.
3. Who Should Sit on the Advisory Board?
An advisory board may grow directly from the informal advice-gathering network that most entrepreneurs instinctively develop or from a more formal search. The first step, however, is to treat the process as a business decision. Many small business experts suggest that a logical starting point is with the short list of those outside experts already familiar with your business: your bank manager, accountant, lawyer, perhaps a business consultant you have brought in fairly regularly. The value added of the advisory board structure is that these individual counsellors begin to share ideas.
The entrepreneur has other options in seeking members for an advisory board. There are a variety of mechanisms. The typical sole owner of a corporation will approach, through the networks they have, people who are usually wealthy individuals, or people who don’t have to work for a living, who really want to give
back to small businesses. They will make a list of people who might want to mentor them. They will often approach people who come from their industry—a retired CEO or a senior vice-president of operations or something, who is looking for some place to work and help out. There is a huge pool of people who have just retired.
Start by making a list of successful business people in your industry—people you respect and who appear to have achieved their goals. Tell them how much you respect what they have accomplished. Then ask if they would mind telling you who their key advisers are. If they view you as a direct competitor, they may choose not to share this information. But if they believe you are an up-and-comer, they may be flattered and willing to refer certain advisers to you.
4. Should the Advisory Board Be Paid?
Entrepreneurs may wonder why they should consider paying for what they might be able to get for free, especially from long-time friends and mentors. But many experts look at it another way: putting an expert on retainer probably means getting top-notch advice at a reduced fee; it also means spreading out the cost of consulting, which helps cash flow, and it means you have someone to call in case of an emergency who is already well versed in your business.
5. What Is the Lifespan of an Advisory Board?
A successful advisory board, one that has supplied expertise on operational questions and also given direction on governance issues, should grow in the direction of a public company’s board of directors. As the advisory board grows, it should adapt not only by bringing in new experts, possibly attracting them with higher fees, but also by bringing in some of that governance discipline to a truly fiduciary board or stewardship board.
Family-run businesses and advisory boards
Small family businesses need the same sort of advisers that other small businesses do: financial consultants, experts in opening up new markets, veteran managers, and so on. In addition, their advisory boards should probably include family lawyers and tax planners. Family businesses routinely face special problems in two areas: having family members working closely together and providing for an orderly management succession.
Copyright© 1999 by Margaret Butteriss. All rights reserved. Published by John Wiley& Sons Canada, Inc.
Butteriss, M. (1999).Help Wanted: The Complete Guide to Human Resources for Canadian Entrepreneurs.Toronto: John Wiley& Sons. pp.195-205