Thought Leadership

A Practical Guide to Advisory Boards

While working with private companies (of all sizes) it has become clear that many don’t have proper governance/support structures for their CEOs. Growing an organization profitably is a challenge at the best of times. For private companies, setting up an Advisory Board both formalizes the planning process and provides the benefits of review and accountability.

In this white paper, we give context and practical advice to the entrepreneurial executive on Advisory Boards: what they are, how to set one up, and how they operate.

Notes from the Field:

A Practical Guide to Advisory Boards

Every business is unique, but consider the following scenarios:

  • Sales have gone through the roof, but your business is straining under the load.
  • You are constantly in need of financing.
  • You’ve jumped into a new business area, and you’re not sure whether you are fully exploiting the opportunity.
  • You’re being bullied by one of your customers, competitors, or suppliers.
  • You’re considering either acquiring another company, or selling yours.

Consider: every leader has his or her strengths. Some are more sales-oriented, others are financial gurus, while others may bring technology skills to the table. But most managers also work best (and feel most comfortable) in organizations of a particular size. A manager who is best at start-ups rarely would choose to work in a very large organization, and vice-versa. From the perspective of the business, the skills required to set up a business from scratch, are different than the skills used in managing a 20-person organization. And these skills are different than for a company of 100 or 1000.

So while different sized organizations need managers with different skills, they also need business processes, organizational structures and systems appropriate for their scale. And with growth, comes more complex relationships with customers, suppliers, and sources of financing.

The smartest managers are constantly learning, and constantly “re-inventing” themselves. When faced with one of these scenarios, a smart manager is equipped to make a decision, and then run with it.

Where does this learning come from? From reading, attending management education courses, and certainly from the school of hard knocks. Employees help, and paying specialized consultants for their experience helps as well. More mature managers collect informal networks of people to bounce around ideas.

There is another very productive way to address the challenges of a growing business: forming an Advisory Board. In essence, the Advisory Board is a group of five to seven people who meet with the CEO in a “Board-style” meeting, usually quarterly. This whitepaper gives context and practical advice to the entrepreneurial executive on Advisory Boards: what they are, how to set one up, and how they operate.

The Advisory Board

All incorporated entities are required to have a Board of Directors. Small and medium sized private companies often do have a “Board”, but it often doesn’t do much more than approve financial statements, if at all. The Advisory Board in our context takes on some of the functions of a “Public Company” Board, tailored to the special requirements of the entrepreneurial executive.

What is it?

What is the difference between a Director and an Advisor? A Director is usually a shareholder, has numerous fiduciary duties, and can be held personally liable (depending upon jurisdiction) for environmental damages, payroll, and certain unpaid taxes. The Director (and by extension, the board) is the primary mechanism to effect corporate governance. Whether a director is an inside or independent director, a majority or minority shareholder, their primary duty is to represent the best interests of all of the shareholders. Much of the structure of Board meetings, and the committees that are formed by the Board, exist to serve these ends.

An Advisor may or may not be a shareholder; in fact, the Advisor wouldn’t have any duties to other shareholders. An Advisory Board doesn’t replace a formal Board of Directors, but rather supplements it. For efficiency, Advisory Boards usually are comprised of all of the Directors, and the Advisors. The advisory board doesn’t usually deal with governance issues: it advises the entrepreneurial executive (or the executive team) on issues of strategy, and in areas for which an external perspective would be helpful. Like their board member colleagues, each Advisor is bound by a strict confidentiality agreement.

One of the primary goals of the Advisory Board is to…

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Advisory Boards by 108Ideaspace