Boards of Advisors vs. Boards of Directors
The two choices (Advisors and Directors) are different from several perspectives. For openers, a Board of Directors is selected to represent the interests of the shareholders of the company in a fiduciary capacity. Directors can fire officers. Directors are personally liable for errors and omissions of corporate management, whether they know about them. Directors make decisions by majority vote. By contrast, the Board of Advisors does not have any fiduciary responsibilities, serves at the pleasure of the CEO, and acts strictly in an advisory capacity.
In many smaller enterprises, the CEO is the majority shareholder. In those instances, Boards of Directors are hardly independent and aren't really Directors. Indeed, if the majority owner/CEO does not like the votes of the Directors, he/she may simply suspend the Board meeting and call an emergency meeting of the shareholders, who promptly remove the impediments to what the CEO wants by firing the recalcitrant Directors. The real way to discover whether you have a Board of Directors or if it is a Board of Advisors is to ask the question:
"Does the Board have the power to fire the CEO?" If the answer is "no", it really isn't a Board of Directors.
Competent, business-savvy outside Directors are becoming increasingly harder to acquire for even modest-sized businesses of all kinds because of the threat of litigation. Although Directors do fulfill an important function, their lack of control in a closely-held company and the cost of Director liability insurance, among other factors, make it increasingly difficult to get outside Directors to serve and satisfy the legal responsibilities of the corporate Board.
The Advisory Board
An Advisory Board isn't a substitute for a Board of Directors. Properly constituted, it's a group appointed to advise, counsel and assist the owner/leader/CEO in the personal leadership of the business. Its specific purpose is to develop advice and information, relying on the Board's collective experience. The process permits in-depth discussion and consideration by Advisors to arrive at better decisions.
The Advisory Board's role is to:
- Help develop policies, not just individual case decisions.
- Provide objective, non-shareholder viewpoints concerning financial and other investments in the business.
- Give advice on major decisions, including large capital appropriations, hiring/firing key people, compensation, extensive financing, strategic plans and long range commitments, as well as input into corporate strategies and tactics.
- Assist in the transition of the owner or manager from fully active to inactive, and in training intracorporate/family successors.
While Advisory Boards may fulfill other duties, these are usually the major purposes for the establishment of such Boards. I have seen heroic performance by Advisory Boards in providing emergency leadership and even interim management upon the tragic loss of the owner. This performance doesn't seem to be a "contractual" service of Boards, but rather an unspoken commitment.
Advisors vs Consultants
How does the Advisory Board differ from the use of consultants? The Advisory Board usually has a more long-term role in the future of the business, particularly if consultants are used on a confined project basis. Consultants and Advisors both provide recommendations, but the Advisory Board is usually around long enough to see the fall-out of the recommendations.
A Board of Advisors can't ignore the consequences of their recommendations on behalf of the CEO any more than the Board of Directors can. A Board of Advisors is a long-term commitment that necessitates concern for the long-range prosperity of the business. Unlike consultants, Advisors may know the outcome of past decisions and may have a better knowledge of the CEO's performance and personal goals.
Composition of Advisory Boards
Advisory Boards that are designed only to assist the sole shareholder or CEO should be comprised only of outsiders. The outside-only Board provides freedom for the CEO to confide in people and to discuss sensitive issues, including compensation, management performance, promotions, organizational structure, divestitures, acquisitions and his or her own personal goals.
For other purposes, it may make sense to include key management personnel in at least some of the Advisory Board discussions, especially if training successors is a critical focus of the Board. It's a useful way for the Board to help evaluate key personnel in the company.
If the company is small, two or three outside advisors may be sufficient. For a larger company, seven is about the maximum to permit free and useful exchange. A smaller company anticipating growth, or one making significant changes in marketing or other strategic directions, might keep positions available to add members as needed.
Who Should Be on the Board?
Although not absolutely essential, advisors should possess marketing skills, strategic skills, financial and analytical skills, multi-business experience and a positive interest in the success and future of the business. It is hard, if not almost impossible, to find all of those characteristics stated in the sentence above in a single individual, so individuals should be sought who have demonstrable skills collectively in those areas. People who possess these types of skills and interests can be found in all types of business (within or outside the particular industry). The best Advisors are typically other CEOs, bankers, business attorneys, accountants (usually at the partnership level), consultants and even university professors if they have practical experience. Retired CEOs and owners of businesses in the same industry who are not competitors shouldn't be overlooked when search for suitable candidates.
Perhaps an equally important question to ask is, "Who should not be on the Advisory Board?" Poor choices are personal attorneys, suppliers, customers, competitors, friends (if all they bring to the board is their friendship), your banker, and non-contributors (family or not) unless they are specifically being trained for succession. The corporation should have its own attorney; the personal attorney shouldn't double for the business.
That does not preclude anyone, including the personal attorney or the banker, from attending meetings or portions of meetings where the agenda is designed to include their perspectives in planning the future of the firm.
Some Board Mechanics
A frank, open discussion between the CEO and the prospective member of the Advisory Board should be held before extending an invitation to join. Chemistry between the CEO and each Board member and between and among Board members is critical. The CEO generally is responsible for selection, keeping that chemistry in mind. I have helped several Boards to arrive at chemistry by also interviewing prospective candidates. Some Boards even "try out" prospective members to test chemistry between and among Board members and the CEO. One Advisory Board I helped create chose a very senior accountant to serve with the explicit understanding that his firm would never be allowed to bid for the firm's accounting/consulting needs as long as he served on the Board.
On Boards on which I serve, no one has "tenure" and resignations (undated)—for cause or no cause—are tendered upon acceptance of the invitation to join. As a practical matter, it usually takes a year or more for Board members to become fully acquainted with the problems and prospects of a firm. That's why members are given at least a year or so to "prove" themselves.
As they like to say, "What goes on in Las Vegas, stays in Las Vegas.” The same must be true for the interactions, discussions, and information sharing in doing Board business. Several Boards on which I have served have a mandatory "confidentiality" statement signed by each Board member.
The number of meetings varies as a function of the needs of the CEO and the firm. Advisory groups in rapidly moving companies tend to meet more often than groups in companies having more stable environments. Meetings should occur at least quarterly, and meeting as many as eight times a year isn't uncommon in more turbulent environments, especially in companies experiencing rapid growth. Less than four meetings a year doesn't permit sufficient Board continuity and familiarization with the important issues of the business.
While some Advisors serve gratis, the more typical arrangement is to pay the equivalent of an hourly rate for professionals used by the firm. This pay is therefore, normally in the $200 to $300/hour range. That translates into about $500 to $750 per meeting. While most Board members appreciate getting paid, they rarely rank remuneration at the top of their lists explaining why they serve on Boards. It is nice, however, to provide the Board honorarium at the end of the meeting rather than having the Board members wait for the check. That is a further reinforcement that the CEO values the Board's efforts and time. Payment reinforces the "contractual" nature of the mutual business expectations. The CEO has the right to expect Advisors to prepare for meetings. The CEO has the right to expect regular attendance at meetings. Pay also normally entitles the CEO to expect that an occasional between meetings phone call and/or a lunch are welcomed by the Advisors.
Future meeting dates/times should always be the last item on the current meeting agenda. Many Boards on which I have served do a rolling year, scheduling the four (or sometimes more) meetings for the year at or before the first Board meeting and then extending the schedule so that meetings are on everyone's calendars a year in advance. Does that mean the scheduled meetings always take place at the original date/time? Of course not. But advance scheduling with all present dramatically increases the chances that the Board meets regularly because all Board members have the meetings on their schedules and can usually hold the dates firm.
Effective Use of Advisors
Using Advisors effectively is important, particularly if they have accepted the roles outlined above. The CEO has an obligation to plan the meeting agenda, with a summary of background information to be discussed in a clear and brief manner. Agendas and supporting materials (including financial statements) should be sent to all Advisors at least a week prior to the meeting.
Agendas should clearly indicate the time to be allocated for discussion of a topic. This cues the Advisors as to the relative importance of an agenda item in the CEO's mind and helps the Advisors organize their own preparation for the meeting. The CEO's preparation leads to better preparation by the Board. Often the CEO's preparation is worth as much as the meeting itself. One Board on which I served almost always represented a "second opinion" on issues the CEO wanted to discuss because he found in preparing the agenda, he usually arrived at a conclusion on the issues about which the Board members frequently (but not always) concurred.
Meetings should always start at the scheduled time. The meeting should also have a target ending time, which should be respected so Advisors can plan the rest of their day. Meetings lasting more than three hours are rarely as productive as meetings which are scheduled for two to three hours. Mental (and fanny) fatigue increases much past a couple of hours. Think about how you typically spend your business day and you will see that shorter meetings are generally more productive than longer meetings. That does not mean the occasional meeting will be scheduled for even all day or over a couple of days, but that's unusual and generally reserved for major issues where a lot of information gathering and analysis need to happen. If the meeting is scheduled for a normal meal time, food brought in is appropriate. Meals before or after an Advisory Board meeting are not necessary, but they may be useful as part of the socialization process. The key is to have a mutual respect for the time the CEO and the Advisors require of one another. A meeting should move at a good pace with someone other than the CEO acting as secretary.
I have encouraged CEOs to sit down within a couple of weeks after a Board meeting to write the Board a brief report concerning what information and discussion from the meeting was helpful. This feedback cues the Board as to their value and helps the CEO to crystallize his or her thoughts and follow-on actions.
1. Boards of Advisors are not for everyone. I know many entrepreneurs who do not accept criticism well and while they do use advisors, they do so one-on-one. That misses the point of bringing collective experience and expertise together to assist CEO decision making.
2. Choose Board members for the expertise they bring to the table. If the CEO is weak in a critical area, finding strong talent in that area is paramount to Board success. Likewise, if most of the Board members have talents/expertise similar to each other or similar to the CEO's expertise, the tendency will be to have "group think"outcomes in analysis and advice.
3. Preparation is key to Board success. Setting the agenda in advance, scheduling Board meetings several meetings in advance of the current meeting, allocating expected times to agenda items, starting and ending on time are really important. If you want to have a great Board, choose people who bring real expertise to the table and respect their time. Even really busy people will find the time to participate in Boards if the meetings are productive and are well paced.
4. Pay the Board honorarium at or shortly after the Board meeting. That tells the Board members you appreciate their time and thinking about the problems and opportunities the firm faces that you want their input on. Follow up shortly after the meeting with an after-report that tells the Board members what your own takeaways were from the meeting and what actions you are expecting to take as the result of the meeting.
5. Give your Board at least a year to learn about your business. However, just as you can usually quickly establish (30 to 60 days) that a newly hired employee isn't going to have a future with your firm (you made a bad hiring decision), you should be able to tell after the first two meetings which Board members you selected are going to be right for your needs. If you made a mistake, correct it earlier rather than later. That's partly why I recommend a resignation letter be submitted when the member is invited to join your Board. (Full disclosure: that goes both ways. I have fired myself from a couple of Boards because the chemistry simply wasn't there between me and other Board members).
Jeffrey C. Susbauer, Ph.D. is Associate Professor Emeritus at the Monte Ahuja College of Business, Cleveland State University where he has taught strategic management and entrepreneurship courses since 1970. A long-time consultant to scores of businesses, a member of the boards of advisors to over 60 companies, he co-founded and serves as the principal instructor for the COSE Strategic Planning/CEO Development Course for the past 36 years.
The course is concerned with providing entrepreneurs with education to guide their vision, strategic thinking and execution in their businesses. Learn more about the Strategic Planning/CEO Development course or contact Jeff via email.