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Reprinted from www.companyfounder.com. See the original post here.
By Paul Morin
In the small business world, there is a lot of talk about whether a company should have a Board of Advisors (a/k/a Advisory Board), and if yes, what the composition of such a group should be. In my time in the small and medium enterprise (SME) world, I have been exposed to and worked with thousands of companies, a small percentage of which have had a Board of Advisors. Whether having such an advisory group makes sense depends a lot on the business and more importantly, the CEO and senior management team of the business.
First, let’s talk about the key ways a Board of Advisors differs from a Board of Directors. The most important difference is that having a Board of Directors is a legal requirement, whereas having a Board of Advisors is completely optional. A related point is that the members of the Board of Directors have fiduciary duties to the shareholders of the corporation, whereas the members of the Advisory Board do not have those duties. I won’t go into the distinction between a Board of Directors (Corporation) and a Board of Managers (LLC) here, but if LLC structure is relevant to you, it’s something you should go over with your attorney. My discussion here will focus on the Board of Advisors, with some references to what differentiates it from a Board of Directors.
So, if a Board of Advisors has no fiduciary duties to the shareholders, what is its purpose and who does it “serve”? The Board of Advisors typically is put in place to provide guidance and support to the CEO and the remainder of the senior management team of a company. In contrast to the Board of Directors that has responsibility for and major focus on “corporate governance,” the Advisory Board often supports the senior management team as it tries to navigate through functional and technical business issues. For example, if a company is trying to grow from $5 million in sales to $25 million in sales, it can be useful to the CEO and other senior management team members to have an Advisory Board at least in part comprised of people, including entrepreneurs and business functional area professionals, who have already “made that journey”. Such guidance can help to understand “best practices” and avoid major pitfalls en route.
If the primary role of most Boards of Advisors is to provide functional and technical guidance to the company’s leadership, what should the composition of the group look like? Well, to give an example, and to provide further contrast to the role of a Board of Directors, let’s talk about the notion of including a “financial expert” as part of the Advisory Board. In the case of a Board of Directors, at least for publicly-traded companies, pursuant to Sarbanes-Oxley, there is a requirement to have a member who qualifies as a “financial expert”. On a Board of Advisors, however, inclusion of financial experts, or any other kind of expert for that matter, is completely optional. As the leader of your company, you have complete flexibility to include (or exclude) whomever you’d like on your Advisory Board. Your decision about whom you’d like to include should be based on what kind of support you think you and your senior management team will need as you move your business forward. Those needs may change over time, of course.
How about compensation? The members of the Board of Directors of a for-profit corporation almost always receive some form of compensation. If not, why would they take the significant risks inherent in assuming fiduciary duties? The members of a Board of Advisors, on the other hand, frequently do not receive compensation, at least not in the form of cash. Often times the Advisory Board members are willing to join based on their relationship with one or more members of the company’s senior management team, and the realization that by being a “friend of the company” they will get frequent opportunities to interact and “network” with other accomplished professionals and entrepreneurs. They may also receive other compensation, which can come in many forms, including restricted stock and stock options. If you are thinking of going that route, be sure to speak with capable legal and tax counsel first, and recommend that the Advisory Board member do so as well.
In terms of the frequency of Advisory Board meetings, again, it is up to your discretion. Whereas a Board of Directors will me quarterly, then as needed for special or “emergency” issues that arise, an Advisory Board can meet with greater or lesser frequency, depending on your needs. It is advisable to have a set schedule, as the persons you’re likely to want to have on your Advisory Board, typically will have very busy schedules and will need advance notice. You will also need to determine whether, and if yes, how frequently, members may attend the Board of Advisors meetings via phone. It is almost always more productive to have people able to look each other in the eye when they’re discussing important topics, but just as with Board of Directors meetings, given geographic and scheduling realities, sometimes it’s not possible to have everyone in the same physical location. Unlike with Board of Director meetings, you will not have the formality of having to reach a “quorum” to have valid votes, but nonetheless you will want to set guidelines, so that you can get as many of the members to attend, as frequently as possible, and preferably, be together in the same physical place.
In my opinion, if you can construct a Board of Advisors with diverse experience across various functional and entrepreneurial areas, and you can do so at a financial and other resource cost that makes sense in your situation, it will be worth the effort. This assumes a couple things though: 1.) You can be very disciplined and organized in putting issues in front of the Advisory Board and facilitating their input and advice. In other words, if you’re just going to get together, with no agenda or objectives, to have coffee and lunch every couple of months with a group of “friends,” that too is worthwhile, but it’s not an Advisory Board. Rather, you need to proactively seek their advice, in the appropriate forum, with a stated agenda, on issues that can help you take your company to the next level; 2.) You are not going to put together a group of your “buddies” who are “yes people,” just because you like to hear people agree with your ideas. The value in such a scenario, except to your ego perhaps, is marginal at best. Ask difficult questions about tough issues, and be willing to hear the Board’s honest responses, if you want to get the most out of your Board of Advisors.
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