The Value of an Advisory Board
May 26, 2010
Contributed by mentor Michael J. Berthelot, CEO, Cito Capital Corporation
Most small business don’t think they need a Board because the owner thinks a) their company is too small, b) they are private not public, and c) no one would be interested in serving on it because of a and b. My experience tells me that such an attitude is not only incorrect, but may deprive the business of a tremendous competitive advantage.
Generally, when we think of Boards we think of the board of directors of a public company such as General Motors where the Board not only has substantial fiduciary responsibilities under the law but great authority over the business (they can fire the CEO). Public company Boards today spend much of their time performing compliance checks and various administrative duties such as dealing with Sarbannes-Oxley and microscopic reviews of incentive compensation systems which seemingly present little value to the small business owner. For all of these reasons, formal boards of directors in the public company mold seldom make sense to the smaller private enterprise.
Advisory Boards, however, are a completely different story. Imagine the value a small business owner would derive from being able to pick the brains of industry and technical specialists, academics, legal, accounting, and tax professionals, and a host of experienced active and retired executives a couple of times a year at a relatively low cost. Bounce ideas off them, ask for their experiences in tough situations, use their connections to reach customers, suppliers, financing sources or regulators.
Advisory Boards differ from Boards of Directors in that Advisory Boards do not have any fiduciary duties to the company (aside from contractual ones such as a confidentiality agreement) and therefore face almost no liability exposure. Advisory Boards also have no authority relative to the company – they cannot hire or fire the CEO and the CEO does not need their approval before taking significant actions. The role of the Advisory Board is just that – purely advisory.
Advisory Boards also differ in that a single company can have more than one Advisory Board. It is not unusual, especially in the science based industries, to have both a Scientific Advisory Board comprised of leading scientists and industry experts and a Business Advisory Board that deals with business matters, such as strategic planning and significant operational issues. The two boards have nothing to do with each other and offer the business owner a wealth of knowledge, expertise, and experience that would otherwise be unavailable.
Because an Advisory Board spends the bulk of its time addressing the major issues facing the business, such as strategic planning, product or project development, financing, potential acquisitions (or sales), succession planning, and similar meaty issues, Advisory Board members are much more inclined to feel that they add value to the enterprise. Most Board members do not enjoy spending the bulk of their time discussing regulatory and compliance issues – they are neither fun nor stimulating. Board members like to talk about action items – how can we do this better, faster, cheaper and good Board members have plenty of pertinent experiences to share. For these reasons, many valuable Board members are more inclined to serve as Advisory Board members than as members of a Board of Directors.
Afraid your small company won’t be found worthy of the time of those you ask? You won’t know unless you try. Consider dropping down a notch on the management hierarchy. Instead of recruiting an industry leading CEO to your Advisory Board, target instead the head of marketing, finance, or operations. They may be more likely to accept and will almost certainly have more time available to actually serve and contribute (and may actually have more valuable information to share). And don’t limit your potential Board members to locals – everyone loves to come to San Diego in the winter. For the cost of a plane ticket, hotel room, a small honorarium and perhaps a round of golf, you would be surprised not only at who will be interested, but just how valuable your Advisory Board becomes to you.
There are, of course, a myriad of details involved in building a truly valuable Advisory Board. We hope to delve more deeply into the subject in future articles.
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Michael J. Berthelot is CEO of Cito Capital Corporation, a San Diego strategic and financial advisory firm and is the Chairman of San Diego’s Corporate Directors Forum. Mike is the retired CEO of an NYSE listed multinational manufacturing company, currently serves on the board of directors of two publicly traded companies and on several private company advisory boards and has served on more than 30 boards around the world. Mike teaches corporate governance at the UCSD’s Rady School of Management and writes and speaks on corporate governance on a national basis.
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Great advice Mike!
Comment by Holly Green — May 29, 2010 @ 3:57 pm
Very insightful and plenty of valuable advice.
Comment by Ake Persson — June 13, 2010 @ 9:01 am