What is an Advisory Board?

Written by on November 21, 2013 in Advisory Boards with 3 Comments

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Reasons for an Advisory Board

A good board should spend 80% of its time as a think-tank, 20% cross-checking.  Eighty percent strategy, aspiration, creative thinking, horizon-scanning; 20% overseeing risk and compliance.

Based on the 80-20 Pareto Principle, the idea of an advisory board is to take that 80% think-tank function to a group of wise heads who are (mostly) not involved in running the company.  In a small company, the 20% compliance and risk work can be done by the company’s shareholder-manager(s).  Sounds good; how does it work out?

I’ve known companies attract very high-calibre, experienced business brains onto an advisory board, getting the value of their knowledge and contacts — and these are people who would not normally accept the time commitment and personal liability risk of joining the actual board of a small company.

How do you, a small business owner-manager, make use of an advisory board?  Unless you are very lucky and charismatic indeed, the people you need will want a fee for advisory board work; although probably not as much as they would want for sitting on an actual board.  Indeed, it may be quite a modest fee: people are often happy to extend a helping hand to a sound, ambitious business that’s being well run.  It’s a good feeling to be associated with success.

The Advisory Board Dilemma

But you have a dilemma.

On the one hand, you have engaged and perhaps paid high-octane business talent for your company, and you want them to help you not only with ideas, but with making sure ideas are implemented.  You want them to hold you accountable on strategy, targets, the business plan, markets and “must do’s”.  That’s where a lot of the value of advisory boards comes from, and anyhow they are likely to lose interest very quickly if you just invite them to a periodic talk-fest from which nothing much results.

On the other hand, they may inadvertently become de-facto directors.  What’s that?  Section 9 of the Corporations Act, our main statute, defines a director as (paraphrasing):

  1. A person who is appointed to the the position of director, regardless of what that position is called;
  2. A person who acts as a director, or in accord with whose instructions or wishes the directors are accustomed to act.

In other words, your advisory board might be viewed by a court as your actual board, and your advisors might find themselves with the responsibilities and liabilities of actual directors of your company.  And of course, this is only likely to come to light if something bad happens.

How do you resolve this dilemma?  I suggest you draw up a charter for your advisory board (you should anyway), and make it clear that the actual directors are under no obligation to follow the advisors’ advice.  Have it checked by a lawyer.  Then minute everything, so that the paper trail shows occasions on which the actual board rejected or modified advice from the advisory board, and why.

Alternatively, bite the bullet and start building an actual board with independent directors; a board with the knowledge, experience and networks you need.

Resources

Here’s proof of the value of advisory boards: Does a Board Make Money?

 



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