June 16, 2015
Ten Steps to Build an Effective Advisory Board
June 16, 2015
Private company CEOs often try to achieve their business visions with minimal resources. Although those CEOs may want to take the pivotal step of having a corps of experts on tap to help grow the business, the company may not yet be ready to add independent members to its fiduciary board of directors, either because of the expense involved or for personal reasons. For these CEOs, a properly comprised and structured advisory board may be the right vehicle to provide needed expertise and outside perspectives. Advisory boards can be a cost effective way to gain critical skills in areas outside of management’s core competencies and to gain objective and unbiased counsel. In addition to providing informed, non-binding guidance, an advisory board can provide a safe place for a CEO to develop new ideas, and it can help foster a spirit of innovation that will take a business through the next stages of growth.
Here are ten steps you can take to establish an effective advisory board:
- Focus on purpose. Think about why you want an advisory board. This sets the tone for the board building process. Reasons typically include wanting to hear independent and objective opinions, using board members’ skills and experiences to bring new perspectives on problems and discussions, increasing credibility with lenders and the public, or increasing accountability (sometimes called the “nudge factor”). Furthermore, if a private company is also a family business, the board may serve as a mediator when business matters and family matters are in conflict.
- Analyze intellectual capital. Performing a self-assessment helps you decide what skills and experience to look for when assembling an advisory board. Review your company’s strategic plan. If there’s not a written strategic plan, consider the company’s growth opportunities and your vision for the future. Ask: What strengths already exist within the management team that will help realize the company’s goals? What experience is lacking that might prevent success?
- Determine readiness. A formal advisory board is a good idea for any company, but the CEO must be willing to spend time forming the board, preparing for board meetings, and debriefing after meetings. The five stages of a private company board are: the kitchen table board; an informal board of advisors;a formal advisory board; an advisory board that operates similar to a board of directors; adding independent directors to the statutory board.
- Define roles. The advisory board provides independent perspectives and unbiased advice to the CEO, acts as a sounding board on current issues and strategy helps to avoid groupthink, and provides objectivity when the advocates for a decision are involved in its justification or are its beneficiaries. The advisory board is not family, not friends, not management, not paid accountants, lawyers or bankers. It is also important to establish guidelines for how the board, management, outside experts, and family interact, if at all.
- Establish a recruiting method. Finding great candidates begins with identifying the skills that would best complement the management teams’ skills—and in turn help to generate shareholder value. Also consider other attributes that may be helpful, e.g. whether or not past positions held is important, if community involvement or a specific education degree would be beneficial. Finally, think about who you know that has these attributes. Ask trusted advisors such as your lawyer or accountant for referrals. When it comes time to interview candidates, prepare by determining who you want to be involved in the interview process, and when.
- Document operating procedures. Although an advisory board is not a formal entity with decision-making authority, it does require some formally established operating procedures to ensure that everyone is on the same page. Meeting dates need to be calendared in advance, agendas need to be set, advance meeting materials should be sent to the board members, and the CEO needs to schedule time to debrief after the meeting. These operating standards, sometimes called governance guidelines or a statement of purpose, should be distributed to advisory board members during orientation. These guidelines should also cover topics such as advisor responsibilities, terms, and confidentiality.
- Decide on compensation. Advisory boards prepare for meetings and share their time and experiences and therefore should be paid. Typically, compensation is minimal, but members don’t accept an advisory board appointment because of the pay. Compensation does, however, demonstrate that the company values that member’s time, talent, and contributions.
- Orient and launch. Prior to the first meeting, it is important to have an orientation session with all of the members of the board, together to ensure that everyone understands the business and its objectives. Furthermore, an orientation session serves the purpose of establishing a boardroom culture and sets the tone for future meetings.
- Evaluate effectiveness. Just as CEOs evaluate the usefulness of strategies and tools, the effectiveness of the advisory board must be evaluated each year. Assessing performance helps the board to adjust its practices so that it can best help the CEO increase stakeholder value.
- Coordinate terms.Setting term limits up front is a good practice to ensure that the professional perspectives represented on the board remain fresh and objective. While the number of years that equals a term varies, a three-year term limit is often used. Terms should be staggered so that every member doesn’t depart in the same year. This minimizes disruption and ensures that some continuity in thought leadership is maintained.
Though it might not be an easy decision, seeking out outsider perspectives is a great boon to any business. Using this board building process will allow the formation of an effective advisory board that is tailored to your company will create a stronger, more viable business.
Denise Kuprionis is president of The Governance Solutions Group, a board advisory practice, and is an NACD Board Leadership Fellow. She serves as a trustee of the Cincinnati Children’s Hospital Medical Center and the SC Ministry Foundation, and is on the board of advisors at Best Upon Request.