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When Does It Make Sense to Build an Advisory Board?

Jan 13, 2022

In the later part of 2020, just as the nation saw a brief lull in the pandemic, Kevin’s CPA let him know that his company was going to have a banner year. Because of his strong business relationships and his company’s ability to quickly pivot to providing much needed medical equipment, his firm would end the year profitable and strong. Yet, he had a few nagging doubts as to whether he was leading the company in the right direction.

What would happen when the need for these products began to diminish once the pandemic was under control? He had recently lost a few good people to the shifting world of work, and he hadn’t replaced them yet because he wasn’t sure what his company structure should look like in the future. The business was also struggling with a few supply chain issues and a lack of new markets for the products he had developed prior to the pandemic.

These were tricky issues, and he wasn’t sure where he might get the help and advice he needed, when he needed it. There were times when he felt he was running the company in a bit of a vacuum, despite a happy CFO and revenues being well above $30 million.

This is the perfect time to consider an advisory board. Advisory boards can add significant depth of knowledge and experience to the management and oversight of a business. They can be used to:

  • Provide guidance or expertise about areas of business management that are currently not well understood or practiced effectively in the organization.
  • Serve as mentors or coaches to current management team members and to younger members of the company.
  • Act as a sounding board for new ideas and strategic initiatives.
  • Minimize the risk associated with new ventures by providing insight and additional expertise.
  • Provide a stronger link with the local community or an identified target market.
  • Increase the accountability of reporting managers.

Advisory boards differ from a traditional board of directors. The advisory board rarely consists of shareholders, other than owners who represent the business or who are in a senior management position. The advisory board members do not have the same legal or fiduciary responsibilities as a board of directors because their role is to provide advice only, not oversight. Any decisions made by the management team or company directors because of a recommendation by the advisory board still need to follow the protocol for such decisions as described in the company’s operating agreement.

In addition, professional company advisors (e.g., bank manager, CPA or attorney) should not be members of the advisory board. These professionals are often represented on the board of directors of large companies, but because their professional interests are often very different from the issues that the advisory board would address, this is not the best use of their time or skills.

The most effective way to utilize an advisory board is to follow these basic steps:

  1. Identify gaps in the company’s knowledge base. For example, perhaps the business needs guidance on marketing or strategic HR issues. Using the company’s strategic plan as a guide, determine the areas that are opportunities for growth, particularly with experienced direction and advice.
  2. Identify potential advisors with expertise in the gap areas.
  3. Interview (subtly) potential advisors. If they are a good fit, invite them to join your board for a limited time—generally two years.
  4. Determine if and how much you will compensate your advisors and cover their participation expenses.
  5. Prepare your advisors by sharing the company’s strategic plan and any other documents that will help them make well-informed recommendations.
  6. Prior to each meeting, send the advisors a set of four to six strategic questions for which you are seeking information or answers. This will help them to come prepared spend the time productively.
  7. Consider utilizing an external facilitator, trained to guide strategic discussions.
  8. Be careful about using all the time to simply share leading indicators such as financial information. If getting guidance on your finances is why you invited some advisors to your board, then that is a good use of time. If that is not what you need, then save your financial questions for your accountant, and use this time to focus on the key strategic growth areas of the business.
  9. Always thank your advisors for their input and let them know how you are utilizing their suggestions and recommendations. Even if you decide not to move in their recommended direction, let them know what you are doing a why. The number one reason that advisory board members decide to leave is the feeling that they are not adding value and/or the CEO is not listening to their advice.

After a board member’s term is up, thank them and let them go—unless you both mutually agree that more time on the board is in both your best interests. Board members are often reluctant to agree to a board position for fear that it is a never-ending commitment, and they have other priorities in their lives. Ultimately, an advisory board can be one of the most rewarding and cost-effective ways to grow a business, remain strategic and learn new skills along the way.

RISE (Real Ideas to Stimulate Engagement) - Q1 2022

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