An advisory board has some specific roles in an organization. Unlike a board of directors or managers, it does not have official duties or make binding decisions. Its role is to aid an organization in making strategic decisions, and also to provide it with expertise, especially in areas the organization may be lacking. The advice is non-binding on the organization’s management or its board of directors.
Additionally, it is typically rather informal, and tends to have a more narrow and focused scope than a board of directors. It also has no formal legal responsibilities or fiduciary duties to the company or its shareholders, nor is it associated with issues of corporate governance.
While the board and its activities are rather informal, forming one should not be taken lightly as the board’s composition and its contributions can be deeply impactful. There are several steps and issues to consider in forming an advisory board. These are imperative to maximizing the value of such a board and for protecting both the company and its advisors. Keep in mind that these are general guidelines, and that there are many more details to consider.
What’s the Board’s Purpose
Advisory boards can serve a variety of purposes. They can be very focused involving very few or even a single discipline or assignment. They can also be broad with their members coming from all walks of life with entirely different expertise. They can also be for long-term projects – a standing board – or for short-term projects – an ad hoc board.
Due to this breadth of compositions and purposes, before assembling the board or even speaking to any potential candidates, it is important to determine the purpose of the board and specific goals that are to be accomplished.
Advisory boards are particularly useful for startups and small businesses. Due to the lack of resources, both financial and human, these tend to have essential knowledge gaps. As such, the entrepreneur or owners should carefully consider where they are lacking in skill and expertise. Additionally, advisors can bring with them not only their expertise, but if properly selected, a network that they can deploy to aid the business.
But advisory boards are not just for startups and small businesses. Virtually any business of any size, means, or maturity can benefit greatly from advisory boards. Such a board can allow a CEO to have a group for mentorship, or to use as a sounding board in assessing various aspects of the business and to evaluate and find solutions to problems and failures. It is important to be very strategic and purposeful about the formation of a board in order to derive maximum benefit from them.
Advisory boards can aid in a wide variety of areas, among them:
- To aid management and/or a board in refining, or altering a business plan or a product idea or roadmap;
- To aid management and/or a board by providing technical expertise and second opinions in assessing products, their viability, and roadmap;
- Provide much needed expertise in areas an organization is lacking without adding to the overhead of the organization or causing dilution of equity;
- Provide competitive insight to management, such as the competitive landscape within an industry or knowledge regarding competitors;
- Provide technical and real world expertise regarding products and services in order to avoid mistakes or negative consequences;
- Provide insight regarding operations, including profitability and viability of business units;
- Provide credibility for a business, its management, and/or its products;
- Act as advocates for the business, especially in obtaining investors and capital;
- Create potential business partnerships.
Again, advisory boards can be hugely beneficial to an organization in a very wide array of ways. It is therefore very important to be purposeful and specific about its purpose when it comes to forming one.
There are general criteria that apply to virtually any board. There are also more specific ones that are applicable to certain types of boards, certain types of industries or businesses, or which are specific to your business. Regardless, the criteria that you use for selecting your board members are critically important to the value the board may bring, and to the success of your business.
Among the criteria that you would want from most board members are the following:
- Knowledge and expertise with the subject matter and outside of or different from your particular expertise;
- Honest and unafraid to pose and stick to contradicting views;
- Objective and able to put aside emotions in favor of honest, thoughtful advice;
- Board members should be as diverse as possible coming from different walks of life and backgrounds;
- Good communicators who are able to not only get their points across, but do so in a positive, productive manner;
- Problem solvers or can-do people, who are not just naysayers, but are looking for solutions;
- Substantial networks which can be leveraged in favor of the business;
- Well-respected in their field;
- Are interested in helping the business;
Legal Issues and Rules
As with most business matters, it is important to make sure that you are crossing the T’s and dotting the I’s. There are a number of legal issues and ground rules to address. To begin with, you should consider any conflicts of interest. By nature of their duties, advisory members are likely to be involved in businesses that may be competitors in some fashion or otherwise, which could create a conflict. Additionally, they may be involved in other boards that may present issues.
Once a decision has been made to offer them the advisory position, it is important to obtain some agreements as the member will be privy to a variety of confidential matters. Therefore, it is imperative to obtain a non-disclosure agreement in order to assure against disclosure of confidential information. It is also crucial to obtain a non-compete agreement.
Members should be provided with specific information regarding the help that is being sought from them. You should also make sure that you set expectations regarding the time commitment they would be making, such as the number of times a year the board is expected to meet, or how often each member may expect to be consulted.
An advisory board can be greatly beneficial in the success of an organization, but only if its purpose is specifically spelled out, it is properly recruited, and the legalities and ground rules are set. They bring important advice, expertise, and can open a number of doors for an organization while being very light on the budget. What is best for your organization will also depend on the specifics of your industry and your business.