Board of Advisors Guidelines

Wed, 03 Sep 2008 18:54:49 -0400

Board of Advisors Guidelines

How to help smaller companies determine why a Board of Advisors (BOA) is appropriate, how to construct a BOA, and how to manage it.

Over 80 percent of all private companies are operating without a board of advisors or board of directors. Odds are your competitors do not have one. Thus, developing a board of advisors can give your company a distinct advantage over your competition; particularly for start-ups and family run businesses. There is tremendous value in receiving objective, knowledgeable advice from a board of advisors who share in the financial and equity growth of your business.

What is a Board of Advisors?

A BOA is a group of outsiders (to the company) that is formally organized to provide business owners and corporate leaders with support, advice and assistance. While Boards of Directors have legally defined responsibilities, control and fiduciary duties; advisory boards have no formal power or binding legal authority, other than what you give them. They serve at the pleasure of the business owner or CEO.

There are several reasons for creating an advisory board:

Unbiased outside perspectives on many issues.

Increased corporate accountability and discipline.

Enhanced CEO and management team effectiveness.

Greater credibility with investors, vendors and customers.

Help in avoiding costly mistakes.

A sounding board for evaluating new business ideas and opportunities.

Enhanced community and public relations.

Improved marketing results and effectiveness.

Strategic planning assistance and input.

Centers of influence for networking introductions, ex. potential customers, investors, vendors.

Help anticipating market changes and trends.

Crisis and transition leadership in the event of the death or resignation of the CEO.

…. and …

Gives the Owner / CEO trusted businessmen / women he / she can confide in! (Helps prevent the ‘lonely-at-the-top-syndrome’!)

Here are a few additional objectives and nuances:

- Access to industry or technical competence to augment your management team. (Using "technical" in a broad sense to include not only technology but also functions such as HR, finance, marketing, etc., where it may not make sense to have expertise on staff or retainer but you want access to people with knowledge and ability.)

- To create excitement and interest in your activities for purposes of recruiting, marketing or fundraising.

- Creating a structure designed to supplement your management team, create credibility or assist in dealing with regulatory matters (ex. medical, bio-med and medical device fields).

- In rare cases advisory boards are used to repay favors; take care of friends, family or early supporters (ALL wrong unless this member is truly an asset to the company); or find a way to provide consideration to someone who is providing a service to the company where one or both parties prefer not to formalize the relationship. (The person must possess the characteristics above.)

- Use them as ambassadors of your firm. This can result in lead-referral, free PR, and added credibility of the firm when widely respected BOA members are recruited.

The critical issue with a BOA is to figure out what you want to accomplish with them and how best to develop one!

Steps to Creating an Effective Board of Advisors

Analyze the strength and weaknesses of your current management team

CEO and a few key senior managers should sit down and ask some of the following questions in advance of configuring the BOA:

What are the main areas we need advice and guidance in?

What specifically do we need the board members to do for us?

How will these BOA objectives change over time?

Who are a few potential candidates for board membership?

How do we avoid giving away too much control to outsiders?

What will be the powers and limitations of the board?

What will setting-up the board cost initially? Annually? Will it be worth the cost?

How will we structure the invitation so that BOA members may resign and/or be replaced?

Look for critical areas of expertise and knowledge that your company could use help with such as marketing, legal, finance, eCommerce, R&D, or information technology. A big example: if your company is planning on going public within the next few years, seek out advisors who have successfully taken companies public.

Set clear, written goals and objectives for your board of advisors

Getting maximum value from a board of advisors begins with clear objectives and goals and ends with consistent, succinct, relevant, regular communication. Board members must know why they have been asked to serve and what is expected of them. Clearly explain and set out in the letter inviting someone onto the advisory board what expectations you have. This can range from the highly formal (ex. four meetings per year, each lasting a full day, plus prep time and a monthly one hour conference call) to the informal (be willing to take a call if we want to pick your brain). Note, signing of Non-Disclosure Agreements by the BOA members is not unusual in this context.

Determine the size and structure of your board

Advisory boards range in size from one member to over thirty. The right size depends on many factors, such as your company’s size, complexity, stage of development and skill sets needed. Experience shows that for most small to mid-sized companies or start-ups, a 5 to 7 member advisory board is an ideal size. Smaller firms can start with just one or two members and add new members as they grow.

Lessons learned in structuring a written BOA charter:

Clearly lay out the compensation plan, the period covered and when the compensation is deemed earned. You should be willing to reimburse reasonable out of pocket expenses, which are pre-approved by the company.

Make explicit that this is not an employment relationship, does not entitle the advisor to employee benefits and that advisory board members do not have authorization to commit the company in any way.

Ensure they know you are collecting and tracking appropriate tax information and make certain you report any taxable income information to the IRS and applicable states.

Consider setting explicit start and end dates of their term of engagement; your BOA needs will likely change with time.

Consider the extent to which you want an Advisor to disclose to other parties their role with your company.

The complement to the above is to be allowed to promote their presence on your BOA. A small biographical reference on your web site and theirs can tie back to you in a Google search so make sure you discuss and agree the conditions and locations under which you can use the advisor's name.

If they are an employee for another firm make sure they are permitted to have a relationship like this with you. For example, many universities have policies about what their faculty may do or must disclose, brokerage firms often require their employees to get permission for these relationships and law or accounting firms may have conflict of interest rules which need to be addressed.

Be careful and slow to add folks to an advisory board unless you have a specific plan for how you will use it and the bandwidth to make it effective.

You don't get many chances to ‘buy’ nearly immediate knowledge and experience. A small grant of shares or options can often create a lot of goodwill with someone who can be very helpful.

Recruiting Candidates

Determining whom you invite to join your board is one of the most critical decisions in setting up a Board of Advisors. It is usually a mistake to ask friends, family members or professional advisors to sit on the BOA, unless your friend or family member is a recognized authority in an area of expertise lacking by your management team or a highly successful entrepreneur. Family or friends can often lack objectivity; they may sugar coat advice/criticism to protect relationships. Professional advisors such as your lawyer, banker or accountant, are already working for you, may not be as objective as you need due to having an interest in generating future business from your company. As mentioned, they may have conflicts of interest as well.

Finding expertise where you have none:

Ask your professional Advisors, respected vendors and customers for referrals.

Vendors and customers can often make great BOA members.

Key employees inside the company that have good outside experience might also be a good source of referrals.

Online services, often for a fee, will help you with the structure of the BOA, how it should perform and seek sources of names that may be useful.

Go direct: Cold call the person (s) you want.

Board Compensation

Board members often expect and certainly deserve to be compensated for their time, efforts and advice. Typical advisory board compensation includes a stipend from a few hundred dollars to $25,000 per member, per year. Some companies pay their board members per meeting, with payment ranging from $100 to $3,000 per meeting, with a monthly retainer of $100 to $2,500. You should also cover transportation, meals and lodging for members when attending meetings. Many successful boards also give or require members to buy stock or some form of equity in the company. This gives the board members equity participation and a vested interest in the growth of the company.

Having said all this, very early stage companies often can get great BOAs without any money. As they mature compensation can be added. For many members the honor of being asked and serving is reward enough when the company cannot easily afford the expense. Be careful not to abuse this goodwill.

Keys to Board Effectiveness

Many small companies do not have the time or energy to use advisory boards well. The majority of the members are rarely or never contacted and the shares they receive give no benefit to the other owners of the business.

If you build it, use it. Owners and CEOs who invest the time and money in creating a board should be committed to soliciting and using its advice on important issues and decisions.

Be careful of logistics. Don’t solicit BOA members that are located a long way from where you intend to meet, are exceptionally busy in their own business or a developing conflict of interest can reasonably be foreseen.

Value their input, even when they disagree with what you want to do. Sometimes a board is at its most valuable when it recommends against a course of action the CEO wants to take. If you recruit a good board, often they have already been down the path you are on, and their experience (and past failures!) can help you to avoid costly mistakes.

Communicate with your advisors. Keep the members of your board informed about what is happening in your company and industry. Counsel with individual members on the phone at least monthly and send them information well in advance of your meetings, to help them prepare and keep the meetings productive.

Hold regular meetings. Most boards meet once per quarter. However, boards should meet more often during times of rapid growth or if company needs merit additional oversight and guidance.

Have an objective for each meeting. Your board members are busy people and their time is valuable. Make the most out of your meetings with them, by having a clear agenda and objectives for each meeting. Make sure to cover the most important items of business first, in case the discussions take longer than planned or some members have to leave early.

Annual assessment of board performance

Periodically assessing the board’s effectiveness is a critical factor in ensuring a good return on investment. Each year you and the BOA should set performance goals and define their criteria for success. (You might involve your key managers to agree or at least comment on these objectives.) At the end of the year the CEO and the board should assess its performance compared to its goals and criteria for success. Be rigorous as a BOA is like any other performance entity—it can continuously improve if measured and managed properly.

Pitfalls to Avoid

Members missing meetings. Board members should be made aware that attendance of board meetings is important and expected; specify minimum attendance criteria per year. If a member is chronically absent, the value of their membership on the board should be reviewed.

Insecurity of senior managers. Some of your managers may feel intimidated or threatened by the involvement of experienced outsiders. You as owner or CEO must make every effort to communicate to your staff the benefits and importance of having a board of advisors. You must also continue this internal communication throughout the life of the BOA.

Incompatible personalities. This is a challenging situation, because most members of your board will be strong willed, achiever types, who have gotten where they are by taking charge. Many will have strong convictions about their opinions and may find it hard to defer to the decision making model you use. You must determine when a member’s personality is “too strong” and becoming disruptive. Try to be objective about the quality of their input versus their aggressive/annoying means of delivering it.

Excessive number of board members. Because of their strong personalities, if you have too many members on your board, the more assertive members often dominate the debates, depriving you of the contributions the quieter members may have made.

Lack of CEO communication. Withholding company information or not regularly communicating with the members of your board of advisors can destroy trust and effectiveness. Regular communication between meetings is essential to maintaining an effective, and engaged, BOA.

Inadequate compensation. You do not want compensation to be the determining factor in a candidate’s membership; however successful individuals of the caliber you seek often expect to be fairly compensated for their time and knowledge.

Concluding remarks:

Access to outside perspective and experience is an asset that every CEO must have in order to avoid being trapped by blind spots, prejudices, and myopia. Most CEO’s need help to identify emotional stumbling blocks, will benefit from objective questions/challenges, and can use ideas that experienced outsiders are uniquely equipped to provide. Outside perspective can help to avoid costly mistakes on the big decisions, make faster work in resolving the most difficult challenges and enable you to capitalize on opportunities that might not be recognize in time. A BOA provides these benefits together with a trusted, confidential, objective sounding board that doesn’t (and often shouldn’t) exist within the company or at home.

-- Mr. Steve Garner

President and CEO

Effective Marketing Associates

Published Works | Effective Marketing Associates | Stephen Garner

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