The CFO'S Perspective

Understanding the Role of Advisory Boards

Understanding-the-Role-of-Advisory-Boards

The purpose of human life is to serve, and to show compassion and the will to help others.” - Nobel Peace Prize winner Albert Schweitzer

Entrepreneurs and CEOs quickly learn how lonely it can be at the top. In many cases, you may be the sole employee when your venture is first created. When it grows, and you have a more complex organization with a sizeable staff, accountability for success still rests mainly on your shoulders. 

As your company’s leader, employees look to you for guidance and vision. Investors expect you to successfully manage the company and provide them with an excellent return on their investment. When dealing with a difficult situation or approaching uncharted territory, the CEO has no peers in the organization. 

It is for these reasons that CEOs form a board of advisors to give them guidance or expertise. An increasing number of organizations are forming advisory boards. But how can you best define the role of your board and its members?

What is an Advisory Board?

Your board of advisors is not a substitute for a statutory board of directors. If you do have an existing board, your advisors should complement and strengthen the BOD’s role. 

A strong advisory board is made up of subject matter specialists that can help with gaps in knowledge. They are not responsible for the governance of the company or represent its shareholders. Rather, the board of advisors exists to deliver advice to the CEO and key management of the organization. 

As the CEO’s and top management’s sounding vehicle, the company’s board of advisors can provide several services:

  • Expertise - Your board can deliver expert contacts or insight in areas that might be lacking internally. For example, your company might be exploring a disruptive technology and need expertise and contacts in this sector. 
  • Guidance - Board members can provide advice in a variety of areas, such as international business expansion and the political climate. They can also help you develop and grow your business by making introductions. 
  • Business Insight - Advisory board members might have decades of experience in business and be able to give the CEO and top management insight into the potential implications of various strategies and business decisions. 

The main takeaway from this is that an advisory board is what you make it. You have the opportunity to shape your board and its focus so that you get the services and benefits your company needs the most.  

How Are Advisory Boards Formed?

Most CEOs choose to create an advisory board when it is clear that there are areas where outside experts can supplement the understanding, knowledge, and strategies of the current management team and board of directors. Advisory boards aren’t as formal in their structure as a BOD. 

In terms of formation and process, a board of advisors has more of a “light” touch, meaning no one need be elected or be subject to term limits. As you define the goals for your advisory board, you’ll begin to get a clearer picture of the professionals you’d like to invite as members. Some of the resources you can tap for board members include:

  • Your professional network
  • Your attorneys, accountants, and other existing professional advisors

Choosing the Right People for Your Board

The priorities you set for your advisory board should drive its composition. For instance, if your company is focused on expanding overseas, you’ll want to find some people with experience and expertise in those areas. 

As you think about the composition of your advisory board, it’s absolutely vital that you have a clear picture of the role you wish the board to fulfill. Do you want them to help you develop new business? Are they meant to fill in knowledge gaps in your main BOD’s knowledge? Or do you have another particular challenge that you’d like the board to help you address? 

When you choose professionals for your board, here are a few of the criteria you can use to create a list:

  • Experts in their field - The advisory board members you choose should have distinguished themselves by their deep knowledge in a given subject and have developed some industry credibility. 
  • Business leaders - Having current and former business leaders serve on your board can be invaluable. When you successfully recruit these members, you can receive sage advice and input born from years of experience. 
  • Outspoken people - You need board members that will participate in the process with enthusiasm. These should be professionals that are willing to be part of a team that works towards a common goal. 
  • Valuable skills - Particularly when one of your goals is to fill a knowledge gap, you’ll want to find a board member that can fulfill this need. Other valuable attributes that you might want to target include being tech-savvy, well-connected, and even “likable.”
  • Honest and candid feedback - Most CEOs and executives enter a situation with some bias. It would perfect if your board told you what you want to hear. But wouldn’t you rather have the truth? Aim for members that won’t sugarcoat the facts. 
  • Diverse in composition - Imagine that your entire board was made up of financial analysts, attorneys, or IT experts. Or, what about all men, women, or Baby Boomers? Even cultural and ethnic distinctions can make a difference in how information and insight are filtered and formulated. Studies show that diversity in the workplace pays off, so, as you create your advisory board, aim for some diversity in its composition. 

Why Would Someone Want to Serve on an Advisory Board?

In today’s business environment, directors that serve on fiduciary boards are forced to devote a substantial amount of time to internal controls, financial reports, and risk tolerance issues. While necessary, other guidance is needed to create value for the organization and help it achieve its goals. 

Advisory boards are free of the above obligations and get to focus on things such as product innovation, markets, developing leaders, and customer behavior. It’s an attractive prospect for business leaders that have “been there, done that” with respect to some of the governance matters. 

Some of the other reasons that professionals might choose to serve on your board include:

  • Passion for the business or industry - Some business leaders enjoy solving business problems and are passionate about their chosen field or industry. 
  • Desire to help you succeed - You may know a professional that wants to help your company succeed. 
  • Expand professional network - Serving on an advisory board can help members expand their professional networks by meeting other people in a variety of roles.
  • Keep knowledge and skills fresh - A professional might see serving on an advisory board as the perfect way to stay abreast of industry trends and keep their skills fresh. 

How Should You Structure Your Board?

As mentioned earlier, corporate advisory boards are informal entities. They can exist alongside a BOD, but you’ll want to establish a clear line between the two groups. Because an advisory board has no statutory responsibilities or governance authority, it can meet less frequently, focus on a narrow set of issues as required, or only meet on an ad hoc basis. 

But your advisory board is only going to be effective if you give them the information they require to offer its guidance and expertise. Your top management should keep board members informed by providing them with the latest financial statements and an update on the activities of the business. 

Are You Supposed to Pay Advisory Board Members?

Although your advisory board members likely aren’t giving their time and expertise solely for the cash, there’s nothing wrong with offering some form of meaningful compensation. There are no hard and fast rules surrounding compensation for a board of advisors.  For early stage investor backed startups it’s not uncommon to offer a mix of equity and cash. Privately held companies need to be more creative.  Cash, recognition of their key role, free product or inclusion in company activities are often ways advisors are compensated.

Whether paying cash or something else, you can also offer reimbursement of meals and travel expenses. Depending on the phase of growth that your company is in, as well as its industry and geography, some advisors are willing to forgo cash and take a long-term view with a small equity stake, such as 0.25%. Remember, those tiny equity stakes can pay off big!

Setting Expectations for Your Advisory Board

Once you’ve assembled your dream team of experts, you’ll need to set some expectations. Clearly setting and communicating the expectations and roles of individual advisors, as well as the overall mandate of the board, is vital. As a general rule, your advisory board should:

  • Help your company succeed - The primary purpose of your board is to help your business succeed by taking advantage of opportunities and weathering challenges. 
  • Provide expertise - Your advisory board should offer its individual and collective expertise to help fill knowledge gaps. 
  • Deliver honest, frank advice - Your advisory board should have your company’s best interests at heart, even if its recommendations contradict the thinking of company management. 
  • Identify pitfalls - Another job of advisory board members is to foresee and identify obstacles or pitfalls of the company’s current path or any strategic changes. 

How often your advisory board meets will depend on the needs of the business owner. However, the meetings should be frequent enough that the board stays involved with and informed about the business. 

Is an Agreement Necessary for an Advisor?

Fiduciary boards have ironclad legal agreements. Advisory boards are a bit more relaxed. While an agreement isn’t necessary, you can certainly draw something up. At a minimum, you should consider creating a written set of guidelines which should include your expectations of the advisor.  There is nothing worse than an advisor expecting to attend a few ad hoc meetings, while you are expecting more active participation and advance preparation.  A few agreements that you might want to consider are Non-Disclosure and Conflict of Interest agreements. 

Is your company considering the creation of an advisory board? At CFO Selections, our seasoned financial executives and consultants can help you evaluate the changing needs of your organization and provide you with the guidance necessary to achieve your goals. Contact us today to request an assessment, or let’s have a conversation about your needs. 

About the Author:

Tom-BroetjeTom Broetje was an early pioneer in outsourced CFO services, founding CFO2Go, Inc. in 1991 in Bothell, Washington.  From his days as a CPA, Tom saw that entrepreneurs and business founders needed seasoned, “been there” financial leadership —  but on a part-time basis, with the right amount of help available as companies grew. 

For 22 years Tom outsourced financial professionals in the greater Puget Sound area and eventually grew his practice to a dozen professionals. In October 2013, he joined forces with CFO Selections and is focusing primarily on business development in the northwest Washington region.

Tom has his accounting degree from the University of Washington.  He is active in the community through his involvement with Northshore Rotary, Seattle Executives, Northwest Entrepreneur Network, and the Cascadia Community College Foundation.  When he is not working or volunteering, Tom enjoys traveling with his wife, playing golf, and hiking.

Topics: Planning Leadership