The boards of directors of for-profit and non-profit organizations have the same fiduciary responsibilities: duty of care, duty of loyalty and duty of good faith. While similar to fiduciary boards, advisory boards are not the same. The purpose and function of a board of advisors is usually not as broad as a fiduciary board, but outside advisors should conduct themselves with the same duties in mind.
Advisory boards are the manifestation of each company’s needs. The breadth of subjects and depth of discussion varies based on those needs. Advisory boards are usually formed when critical matters are too difficult for ownership to handle on its own. Ownership must then solicit outside advice.
There is one key difference when establishing an advisory board versus a board of directors. There is no regulatory oversight required of advisory board members. In other words, there is no fiduciary duty to the company. This allows for some flexibility in assigning board members.
[Editor’s Note: You can read more about board strategy with Bruce Werner’s article, “Effective Private Company Board Strategies Drive Goals to Completion.”]
Over the years, I have seen advisory boards cluster into three styles:
These boards meet one or two days per year (e.g. when there is a pressing issue). The owners buy a day of consulting time from the outside advisors to focus on the issue of the day. Businesses with $20-$50 million in revenue may start with a consulting board before moving up. Businesses under $10 million typically do not have functioning boards.
As businesses grow, junior advisory boards pay more attention to the following issues:
Advisors are raising important questions and helping to solve existential problems. However, the discussions often tiptoe around delicate issues like management performance, compensation and succession planning.
This type of board is most comparable to a fiduciary board. Outsiders are actively engaged in succession planning, management compensation, and management performance evaluation. This is more common with companies that bring in several hundred million dollars in revenue, because the complexity forces ownership to seek outside help.
At this size, ownership is keenly aware of succession issues. Since there is likely a mix of family and professional management, or a transition towards professional managers, succession planning and management training and development are time-consuming subjects for the board.
So, how do you know which style is most appropriate? In addition to the needs of the business, the board becomes a reflection of the owners’ needs and personalities.
If the outside advisors are diligent before accepting, they will understand these constraints before the first meeting. Additionally, as the board’s charter expands, so does the drive to seek more professional advisors, instead of golf buddies, lawyers and bankers.
Advisory boards are usually formed when critical matters are too difficult for ownership to handle on its own.
[Editor’s Note: Learn how to build a strong independent board with our webinar from the Board of Directors Boot Camp 2018 series.]
While most businesses strive to grow, their growth rate is typically not so fast that the demands on the board change quickly. (Venture stage businesses are the obvious exception to this statement.) Absent a major change in the business, the type of advisory board is unlikely to change. This catalyst is likely to be a capital event, change in key executives or exogenous industry event that creates a shockwave or trauma that must urgently be addressed.
Newton’s first law of motion states that a body stays in motion unless acted upon by another force. In the same way, owners tend to stay on the same path until the pain of conflict forces them to make a change. The greater the pain, the greater the need for outside advisors. Therefore outside advisors should be selected with the experience and judgement proportionate to the need. Businesses in transition need a high-functioning board.
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Bruce Werner is the Managing Director of Kona Advisors LLC and served as an outside director on private company boards for the last three decades. Kona Advisors LLC provides advisory services to the owners, investors and CEOs of private and family-owned businesses. With deep experience in governance, succession planning, finance, strategy and management issues, Kona…
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