Thinking about creating a board for your business? – Part 2 of 3
Considerations for having an Advisory Board
Historically, advisory boards were first used by the biotech sector when it was in need of very specific expertise or fundraising assistance. Over time, its use was expanded to include tech start-ups, and since then has been more widely used for start-ups generally. Advisory boards can be an attractive alternative to boards of directors, as it offers more flexibility and less liability exposure.
The term ‘Advisory Board’ is used interchangeably with ‘advisory committee’. The advisory board/committee could be constructed to advise the family owners, the CEO, a subsidiary president, or any other executive. It could also be constructed to serve as a specialized expert group for product development, manufacturing efficiency, research & development, enterprise risk, or any other aspects of the business. There is complete flexibility in how to use an advisory board, and there are no requirements to have independent members.
While advisory boards can provide the needed expertise for a specific situation and be highly effective and valuable; they can also be a complete waste of effort and money. The adage ‘You get out of them what you put in’ is highly relevant, and in order to derive the benefits, you must demonstrate your commitment.
In a nutshell, while an advisory board has a great deal of flexibility in how it is structured, you will need to commit to building the infrastructure to make it function effectively – consider the following:
- Spend the time to determine what the mandate of the board is.
- Ensure the mandate clearly defines the role, expectations, and responsibility, and describes exactly who and what areas of the business are being advised.
- Develop policies for how the business of the advisory board should be conducted.
- Ensure that the person(s) receiving the advice are 100% onside and committed to having advisors, and their commitment is obvious and consistent.
- Keep minutes of advisory board meetings in order to have records showing that the advisory board was acting in the capacity of what the mandate describes.
- Ensure the members do not involve themselves in the day-to-day operations of the business, as this will change their role of ‘advisor’ and has the potential to impact liability.
- Companies should disclose their relationship with advisory board members on the company website.
- Many advisory board members are composed of people who are known to the owners or CEO. For this reason, it can be difficult to terminate their membership. Hire members for a specific term, ideally 2 to 3 years so you have a built-in renewal mechanism. However, when the advisory board is being established for the first time, implement a one-year term to allow you the opportunity to assess the individual’s contribution and fit.
- Diversity; look outside your immediate networks to find qualified and diverse candidates. Diversity of experience and thought is proven to result in better decision-making, and can be translated into a competitive advantage for your business.
- Send out materials with plenty of time to be read and contemplated prior to the meetings. When circulating agendas, include proposed times for each agenda item.
- The advisory board package should be of an appropriate length, well organized and informative, but not be so detailed that members simply skim the information.
- In any written documentation, don’t allow the advisory board to be referred to as “the board.” This can be misconstrued to mean the board of directors. If using abbreviated terms, ensure it is clear i.e. ‘The AB’.
- Due diligence – It is critical to conduct rigorous referencing of all prospective advisory board members.
- Ensure the company has written agreements with each advisory board member that encompass, but are not limited to: confidentiality agreements, being affiliated with a competitive business, and conflicts of interest etc.
Lansdowne Board Intelligence
This is not a guide to set up a board. Rather, it is meant to be a helpful overview for business owners who are considering whether or not they should have a board for the first time. Business owners are advised to retain experts to guide them when setting up a board.